
[Federal Register Volume 76, Number 110 (Wednesday, June 8, 2011)]
[Proposed Rules]
[Pages 33420-33563]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-12659]



[[Page 33419]]

Vol. 76

Wednesday,

No. 110

June 8, 2011

Part II





Securities and Exchange Commission





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17 CFR Parts 232, 240, 249, et al.



Nationally Recognized Statistical Rating Organizations; Proposed Rule

  Federal Register / Vol. 76, No. 110 / Wednesday, June 8, 2011 / 
Proposed Rules  

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 232, 240, 249, and 249b

[Release No. 34-64514; File No. S7-18-11]
RIN 3235-AL15


Nationally Recognized Statistical Rating Organizations

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rules.

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SUMMARY: In accordance with the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (the ``Dodd-Frank Act'') and to enhance 
oversight, the Securities and Exchange Commission (``Commission'') is 
proposing amendments to existing rules and new rules that would apply 
to credit rating agencies registered with the Commission as nationally 
recognized statistical rating organizations (``NRSROs''). In addition, 
in accordance with the Dodd-Frank Act, the Commission is proposing a 
new rule and form that would apply to providers of third-party due 
diligence services for asset-backed securities. Finally, the Commission 
is proposing amendments to existing rules and a new rule that would 
implement a requirement added by the Dodd-Frank Act that issuers and 
underwriters of asset-backed securities make publicly available the 
findings and conclusions of any third-party due diligence report 
obtained by the issuer or underwriter. The Commission is requesting 
comment on the proposed rule amendments and new rules.

DATES: Comments should be received on or before August 8, 2011.

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number S7-18-11 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.
All submissions should refer to File Number S7-18-11. This file number 
should be included on the subject line if e-mail is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's Internet Web site (http://www.sec.gov/rules.shtml). 
Comments are also available for public inspection and copying in the 
Commission's Public Reference Room, 100 F Street NE., Washington, DC 
20549. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
publicly available.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate 
Director, at (202) 551-5525; Thomas K. McGowan, Deputy Associate 
Director, at (202) 551-5521; Randall W. Roy, Assistant Director, at 
(202) 551-5522; Raymond A. Lombardo, Branch Chief, at (202) 551-5755; 
Rose Russo Wells, Senior Counsel, at (202) 551-5527; Joseph I. 
Levinson, Special Counsel, at (202) 551-5598; or Timothy C. Fox, 
Special Counsel, at (202) 551-5687; Division of Trading and Markets; 
or, with respect to the proposals for issuers and underwriters of 
asset-backed securities, Eduardo A. Aleman, Special Counsel, Division 
of Corporation Finance at (202) 551-3430; Securities and Exchange 
Commission, 100 F Street NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commission, with respect to NRSROs, is 
proposing amendments to rules 17 CFR 232.101 (``Rule 101 of Regulation 
S-T''), 17 CFR 232.201 (``Rule 201 of Regulation S-T''), 17 CFR 
240.17g-1 (``Rule 17g-1''), 17 CFR 240.17g-2 (``Rule 17g-2''), 17 CFR 
240.17g-3 (``Rule 17g-3''), 17 CFR 240.17g-5 (``Rule 17g-5''), 17 CFR 
240.17g-6 (``Rule 17g-6''), 17 CFR 240.17g-7 (``Rule 17g-7''), 17 CFR 
249b.300 (``Form NRSRO''), and proposing new rules 17 CFR 240.17g-8 
(``Rule 17g-8'') and 17 CFR 240.17g-9 (``Rule 17g-9'').
    In addition, the Commission, with respect to providers of third-
party due diligence services for asset-backed securities, is proposing 
new rules 17 CFR 240.17g-10 (``Rule 17g-10'') and 17 CFR 249b.400 
(``Form ABS Due Diligence-15E'').
    Finally, the Commission, with respect to issuers and underwriters 
of asset-backed securities, is proposing amendments to 17 CFR 232.314 
(``Rule 314 of Regulation S-T'') and 17 CFR 249.1400 (``Form ABS 
15G''), and proposing new rule 17 CFR 240.15Ga-2 (``Rule 15Ga-2'').

I. Background

    Title IX, Subtitle C of the Dodd-Frank Act,\1\ ``Improvements to 
the Regulation of Credit Rating Agencies,'' among other things, 
establishes new self-executing requirements applicable to NRSROs, 
requires certain studies,\2\ and requires that the Commission adopt 
rules applicable to NRSROs in a number of areas.\3\ The NRSRO 
provisions in the

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Dodd-Frank Act augment the Credit Rating Agency Reform Act of 2006 (the 
``Rating Agency Act of 2006''), which established a registration and 
oversight program for NRSROs through self-executing provisions added to 
the Exchange Act and implementing rules adopted by the Commission under 
the Exchange Act as amended by the Rating Agency Act of 2006.\4\ Title 
IX, Subtitle C of the Dodd-Frank Act also provides that the Commission 
shall prescribe the format of a certification that providers of third-
party due diligence services would need to provide to each NRSRO 
producing a credit rating for an asset-backed security to which the due 
diligence services relate.\5\ Finally, Title IX, Subtitle C of the 
Dodd-Frank Act establishes a new requirement for issuers and 
underwriters of asset-backed securities to make publicly available the 
findings and conclusions of any third-party due diligence report 
obtained by the issuer or underwriter.\6\
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    \1\ Public Law 111-203, 124 Stat. 1376, H.R. 4173 (July 21, 
2010).
    \2\ See Public Law 111-203 Sec. Sec.  939, 939D-939F. On 
December 17, 2010, the Commission issued a request for comments to 
inform a required study on standardizing credit ratings terminology. 
See Credit Rating Standardization Study, Securities Exchange Act of 
1934 (``Exchange Act'') Release No. 34-63573 (December 17, 2010). On 
May 10, 2011, the Commission issued a request for comments to assist 
it in carrying out a required study on, among other matters, the 
feasibility of establishing a system in which a public or private 
utility or a self-regulatory organization assigns NRSROs to 
determine credit ratings for structured finance products. See 
Solicitation of Comment to Assist in Study on Assigned Credit 
Ratings, Exchange Act Release No. 64456 (May 10, 2011). The 
Commission also is required to conduct a study of the independence 
of NRSROs and how that independence affects the ratings issued by 
NRSROs. The Comptroller General of the United States is required to 
conduct a study on alternative means for compensating NRSROs in 
order to create incentives to provide more accurate credit ratings 
as well as a study on the feasibility and merits of creating an 
independent professional organization for rating analysts employed 
by NRSROs.
    \3\ See Public Law 111-203 Sec. Sec.  931-939H. In addition, 
Title IX, Subtitle D, ``Improvements to the Asset-Backed 
Securitization Process,'' contains Section 943, which provides that 
the Commission shall adopt rules, within 180 days, requiring an 
NRSRO to include in any report accompanying a credit rating of an 
asset-backed security a description of the representations, 
warranties, and enforcement mechanisms available to investors and 
how they differ from the representations, warranties, and 
enforcement mechanisms in issuances of similar securities. See 
Public Law 111-203 Sec.  943. On January 20, 2011, the Commission 
adopted Rule 17g- 7 to implement Section 943. See Disclosure for 
Asset-Backed Securities Required by Section 943 of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act, Securities Act of 
1933 (``Securities Act'') Release No. 9175 (Jan. 20, 2011), 76 FR 
4489 (Jan. 26, 2011) and 17 CFR 240.17g-7. Prior to enactment of the 
Dodd-Frank Act and the adoption of Rule 17g-7, the Commission 
proposed a different rule to be codified at 17 CFR 240.17g-7. See 
Proposed Rules for Nationally Recognized Statistical Rating 
Organizations, Exchange Act Release No. 57967 (June 16, 2008), 73 FR 
36212 (June 25, 2008). This proposed rule would have required an 
NRSRO to publish a report containing certain information with the 
publication of a credit rating for a structured finance product or, 
as an alternative, use ratings symbols for structured finance 
products that differentiate them from the credit ratings for other 
types of debt securities. Id. In November 2009, the Commission 
announced it was deferring consideration of action on the proposal 
and separately proposed a different rule to be codified at 17 CFR 
240.17g-7 that would have required an NRSRO to annually disclose 
certain information. See Proposed Rules for Nationally Recognized 
Statistical Rating Organizations Exchange Act Release No. 61051 
(Nov. 23, 2009), 74 FR 63866 (Dec. 4, 2009). Although the Commission 
adopted Rule 17g-7 on January 20, 2011 to implement Section 943 of 
the Dodd-Frank Act, the November 23, 2009 proposal remains 
outstanding.
    \4\ See Public Law 109-291 (2006). The Rating Agency Act of 
2006, among other things, amended Section 3 of the Exchange Act to 
add definitions, added Section 15E to the Exchange Act to establish 
self-executing requirements on NRSROs and provide the Commission 
with the authority to implement a registration and oversight program 
for NRSROs, amended Section 17 of the Exchange Act to provide the 
Commission with recordkeeping, reporting, and examination authority 
over NRSROs, and amended Section 21B(a) of the Exchange Act to 
provide the Commission with the authority to assess penalties in 
administrative proceedings instituted under Section 15E of the 
Exchange Act. See Public Law 109-291 Sec. Sec.  3 and 4 and 15 
U.S.C. 78c, 78o-7, 78q, and 78u-2. The Commission adopted rules to 
implement a registration and oversight program for NRSROs in June 
2007. See Oversight of Credit Rating Agencies Registered as 
Nationally Recognized Statistical Rating Organizations, Exchange Act 
Release No. 55857 (June 5, 2007), 72 FR 33564 (June 18, 2007). The 
implementing rules were Form NRSRO, Rule 17g-1, Rule 17g-2, Rule 
17g-3, Rule 17g-4, Rule 17g-5, and Rule 17g-6. The Commission has 
twice adopted amendments to some of these rules. See Amendments to 
Rules for Nationally Recognized Statistical Rating Organizations, 
Exchange Act Release No. 59342 (Feb. 2, 2009), 74 FR 6456 (Feb. 9, 
2009) and Amendments to Rules for Nationally Recognized Statistical 
Rating Organizations, Exchange Act Release No. 61050 (Nov. 23, 
2009), 74 FR 63832 (Dec. 4, 2009). The Commission also has proposed 
further amendments to these rules, which remain pending. See 
Proposed Rules for Nationally Recognized Statistical Rating 
Organizations, 74 FR 63866 (Dec. 4, 2009). In addition, as noted 
above, the Commission adopted Rule 17g-7 on January 20, 2011.
    \5\ See Public Law 111-203 Sec.  932(a)(8) adding new paragraph 
(s)(4)(C) to Section 15E of the Exchange Act. 15 U.S.C. 78o-
7(s)(4)(C).
    \6\ See Public Law 111-203 Sec.  932(a)(8) adding new paragraph 
(s)(4)(A) to Section 15E of the Exchange Act. 15 U.S.C. 78o-
7(s)(4)(A).
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II. The Proposed New Rules and Rule Amendments

    The Commission's proposed rule amendments and proposed new rules to 
implement Title IX, Subtitle C of the Dodd-Frank Act are described 
below.\7\
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    \7\ As used throughout this release, the term ``category'' of 
credit rating refers to a distinct level in a rating scale 
represented by a unique symbol, number, or score. For example, if a 
rating scale consists of symbols (e.g., AAA, AA, A, BBB, BB, B, CCC, 
CC, and C), each unique symbol would represent a category in the 
rating scale. Similarly, if a rating scale consists of numbers 
(e.g., 1, 2, 3, 4, 5, 6, 7, 8, and 9), each number would represent a 
category in the rating scale. Each category also represents a 
``notch'' in the rating scale. In addition, some NRSRO rating scales 
attach additional symbols or numbers to the symbols representing 
categories in order to denote gradations within a category. For 
example, a rating scale may indicate gradations within a category by 
attaching a plus or a minus or a number to a rating symbol. For 
example, AA+, AA, and AA- or AA1, AA2, and AA3 would be three 
gradations within the AA category. If a rating scale has gradations 
within a category, each category and gradation within a category 
would constitute a ``notch'' in the rating scale. For example, the 
following symbols would each represent a notch in the rating scale 
in descending order: AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-, 
BB+, BB, BB-, CCC+, CCC, CCC-, CC, C and D. Furthermore, for the 
purposes of this release, changing a credit rating (e.g., upgrading 
or downgrading the credit rating) means assigning a credit rating at 
a different notch in the rating scale (e.g., downgrading an obligor 
assigned an AA rating to an AA- rating or an A+ rating). A ``rating 
action'' for the purposes of this release does not necessarily mean 
changing a credit rating. A rating action is taken when an NRSRO 
issues an expected or preliminary credit rating before it issues an 
initial credit rating, issues an initial credit rating, upgrades an 
existing credit rating, downgrades an existing credit rating 
(including to a default category), places an existing credit rating 
on credit watch or review (meaning the NRSRO is actively evaluating 
whether to change the credit rating), affirms (or confirms) an 
existing credit rating (meaning the NRSRO announces that it will not 
change the credit rating), or withdraws a credit rating.
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A. Internal Control Structure

1. Self-Executing Requirement
    Section 932(a)(2)(B) of the Dodd-Frank Act added paragraph (3) to 
Section 15E(c) of the Exchange Act.\8\ Section 15E(c)(3)(A) requires an 
NRSRO to ``establish, maintain, enforce, and document an effective 
internal control structure governing the implementation of and 
adherence to policies, procedures, and methodologies for determining 
credit ratings, taking into consideration such factors as the 
Commission may prescribe, by rule.'' \9\ While Section 15E(c)(3)(A) 
provides that the Commission ``may'' prescribe factors an NRSRO would 
need to take into consideration with respect to an internal control 
structure governing the implementation of and adherence to policies, 
procedures, and methodologies for determining credit ratings (an 
``internal control structure''), the requirement that an NRSRO 
``establish, maintain, enforce, and document an effective internal 
control structure'' is self-executing.\10\ Consequently, an NRSRO must 
adhere to this self-executing provision irrespective of whether the 
Commission prescribes factors the NRSRO must take into 
consideration.\11\
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    \8\ See Public Law 111-203 Sec.  932(a)(2)(B) and 15 U.S.C. 78o-
7(c)(3)(A).
    \9\ Id.
    \10\ Id.
    \11\ Id.
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    The Commission preliminarily believes it would be appropriate at 
this time to defer prescribing factors an NRSRO must take into 
consideration with respect to its internal control structure. Deferring 
rulemaking would provide the Commission with the opportunity, through 
the NRSRO examination process and, as discussed below, the submission 
of annual reports by the NRSROs, to review how the NRSROs have complied 
with this self-executing requirement.\12\ This review could inform any 
future rulemaking the Commission may initiate. Nonetheless, the 
Commission is requesting extensive comment below on whether it would be 
appropriate as part of this rulemaking to prescribe factors. Based on 
the comments received, the Commission may decide to prescribe by rule 
or identify through guidance the factors an NRSRO would need to 
consider with respect to its internal control structure.
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    \12\ Section 923(a)(8) of the Dodd-Frank Act struck existing 
Section 15E(p) of the Exchange Act, which related to the date of 
applicability of the Rating Agency Act of 2006 and added new Section 
15E(p). See Public Law 111-203 Sec.  932(a)(8). New Section 
15E(p)(3) of the Exchange Act requires, among other things, the 
Commission staff to conduct an examination of each NRSRO at least 
annually. See 15 U.S.C. 78o-7(p)(3). The Commission staff intends to 
conduct such annual statutory examinations on a cycle based on the 
Commission's fiscal year. The staff intends to conduct the first 
annual statutory examination of a newly registered NRSRO in the 
annual cycle following its registration.
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Request for Comment
    The Commission generally requests comment on all aspects of Section 
15E(c)(3)(A) of the Exchange Act. The Commission also seeks comment on 
the following:
    1. Should the Commission, as part of this rulemaking initiative, 
prescribe factors that an NRSRO would need to take into consideration 
when establishing, maintaining, enforcing, and documenting an effective 
internal control structure governing the implementation of and 
adherence to policies, procedures, and methodologies for determining 
credit ratings? For example, can the objectives of the self-executing 
requirement in Section 15E(c)(3)(A) of the Exchange Act be adequately 
achieved by NRSROs if the Commission does not prescribe factors?

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    2. Alternatively, should the Commission defer rulemaking in order 
to review through examination and monitoring the effectiveness of the 
internal control structures each NRSRO establishes, maintains, 
enforces, and documents pursuant to Section 15E(c)(3)(A) of the 
Exchange Act? For example, would it be more appropriate for the 
Commission to evaluate through examination and the annual reports 
discussed below in Section II.A.3 of this release whether there is a 
need to prescribe factors and, if such a need is identified, 
incorporate in rulemaking or guidance best practices identified through 
examination and NRSRO reporting?
    3. If appropriate to prescribe factors now, should the factors 
address all elements of the self-executing requirement in Section 
15E(c)(3)(A) of the Exchange Act (i.e., the establishment, maintenance, 
enforcement, and documentation of the internal control structure) or 
should the factors focus on the design (i.e., establishment) of the 
internal control structure or one of the other elements or a 
combination of some of the elements?
    4. If appropriate to prescribe factors now for the establishment of 
an internal control structure, what should those factors be? For 
example, should the Commission prescribe any of the factors identified 
in the sub-paragraphs below? In analyzing these potential factors, 
commenters should address the potential advantages, disadvantages, 
benefits, and costs that could result if the Commission prescribed any 
of the factors, as well as the potential effectiveness of the controls 
and any practical issues related to implementing them.
    a. Controls reasonably designed to ensure that a newly developed 
methodology or proposed update to an in-use methodology for determining 
credit ratings is subject to an appropriate review process (e.g., by 
persons who are independent from the persons that developed the 
methodology or methodology update) and to management approval prior to 
the new or updated methodology being employed by the NRSRO to determine 
credit ratings; \13\
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    \13\ Section 15E(t)(3)(A) of the Exchange Act contains a self-
executing provision requiring that the board of directors of the 
NRSRO shall ``oversee'' the ``establishment, maintenance, and 
enforcement of policies and procedures for determining credit 
ratings.'' See 15 U.S.C. 78o-7(t)(3)(A). At the same time, Section 
15E(r) of the Exchange Act requires the Commission to adopt rules 
``to ensure that credit ratings are determined using procedures and 
methodologies, including qualitative and quantitative data and 
models'' that are approved by the board of the NRSRO. See 15 U.S.C. 
78o-7(r)(1)(A).
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    b. Controls reasonably designed to ensure that a newly developed 
methodology or update to an in-use methodology for determining credit 
ratings is disclosed to the public for consultation prior to the new or 
updated methodology being employed by the NRSRO to determine credit 
ratings, that the NRSRO makes comments received as part of the 
consultation publicly available, and that the NRSRO considers the 
comments before implementing the methodology;
    c. Controls reasonably designed to ensure that in-use methodologies 
for determining credit ratings are periodically reviewed (e.g., by 
persons who are independent from the persons who developed and/or use 
the methodology) in order to analyze whether the methodology should be 
updated;
    d. Controls reasonably designed to ensure that market participants 
have an opportunity to provide comment on whether in-use methodologies 
for determining credit ratings should be updated, that the NRSRO makes 
any such comments received publicly available, and that the NRSRO 
considers the comments;
    e. Controls reasonably designed to ensure that newly developed or 
updated quantitative models proposed to be incorporated into a credit 
rating methodology are evaluated and validated prior to being put into 
use;
    f. Controls reasonably designed to ensure that quantitative models 
incorporated into in-use credit rating methodologies are periodically 
reviewed and back-tested;
    g. Controls reasonably designed to ensure that an NRSRO engages in 
analysis before commencing the rating of a class of obligors, 
securities, or money market instruments the NRSRO has not previously 
rated to determine whether the NRSRO has sufficient competency, access 
to necessary information, and resources to rate the type of obligor, 
security, or money market instrument;
    h. Controls reasonably designed to ensure that an NRSRO engages in 
analysis before commencing the rating of an ``exotic'' or ``bespoke'' 
type of obligor, security, or money market instrument to review the 
feasibility of determining a credit rating;
    i. Controls reasonably designed to ensure that measures (e.g., 
statistics) are used to evaluate the performance of credit ratings as 
part of the review of in-use methodologies for determining credit 
ratings to analyze whether the methodologies should be updated or the 
work of the analysts employing the methodologies should be reviewed;
    j. Controls reasonably designed to ensure that, with respect to 
determining credit ratings, the work and conclusions of the lead credit 
analyst developing an initial credit rating or conducting surveillance 
on an existing credit rating is reviewed by other analysts, 
supervisors, or senior managers before a rating action is formally 
taken (e.g., having the work reviewed through a rating committee 
process);
    k. Controls reasonably designed to ensure that a credit analyst 
documents the steps taken in developing an initial credit rating or 
conducting surveillance on an existing credit rating with sufficient 
detail to permit an after-the-fact review or internal audit of the 
rating file to analyze whether the analyst adhered to the NRSRO's 
procedures and methodologies for determining credit ratings;
    l. Controls reasonably designed to ensure that the NRSRO conducts 
periodic reviews or internal audits of rating files to analyze whether 
analysts adhere to the NRSRO's procedures and methodologies for 
determining credit ratings; or
    m. Any other factors that commenters identify and explain.
    5. If appropriate to prescribe factors now for the maintenance of 
an internal control structure, what should those factors be? For 
example, should the Commission prescribe any of the factors identified 
in the sub-paragraphs below? In analyzing these potential factors, 
commenters should address the potential advantages, disadvantages, 
benefits, and costs that could result if the Commission prescribed any 
of the factors, as well as the potential effectiveness of the controls 
and any practical issues related to implementing them.
    a. Controls reasonably designed to ensure that the NRSRO conducts 
periodic reviews of whether it has devoted sufficient resources to 
implement and operate the documented internal control structure as 
designed;
    b. Controls reasonably designed to ensure that the NRSRO conducts 
periodic reviews or ongoing monitoring to evaluate the effectiveness of 
the internal control structure and whether it should be updated;
    c. Controls designed to ensure that any identified deficiencies in 
the internal control structure are assessed and addressed on a timely 
basis;
    d. Any other factors that commenters identify and explain.
    6. If appropriate to prescribe factors now for the enforcement of 
an internal

[[Page 33423]]

control structure, what should those factors be? For example, should 
the Commission prescribe any of the factors identified in the sub-
paragraphs below? In analyzing these potential factors, commenters 
should address the potential advantages, disadvantages, benefits, and 
costs that could result if the Commission prescribed any of the 
factors, as well as the potential effectiveness of the controls and any 
practical issues related to implementing them.
    a. Controls designed to ensure that additional training is provided 
or discipline taken with respect to employees who fail to adhere to 
requirements imposed by the internal control structure;
    b. Controls designed to ensure that a process is in place for 
employees to report failures to adhere to the internal control 
structure; or
    c. Any other factors that commenters identify and explain?
    7. If appropriate to prescribe factors now for the documentation of 
an internal control structure, what should those factors be? For 
example, should there be a factor relating to the level of written 
detail about the internal control structure that should be documented? 
Are there other factors that should be considered? What potential 
advantages, disadvantages, benefits, and costs would result if the 
Commission prescribed any such factors?
    8. Identify any other factors that an NRSRO should consider when 
establishing, maintaining, enforcing, and documenting an internal 
control structure. Explain the utility of any factors identified as 
well as the potential advantages, disadvantages, benefits, and costs 
that could result if the Commission prescribed any such factors.
2. Proposed Amendment to Rule 17g-2
    As noted above, Section 15E(c)(3)(A) of the Exchange Act requires 
an NRSRO, among other things, to document its internal control 
structure.\14\ Thus, the statute itself requires the NRSRO to make this 
record.\15\ However, the statute does not prescribe how an NRSRO would 
need to maintain this record.\16\ The Commission preliminarily believes 
this record should be subject to the same recordkeeping requirements 
applicable to other records an NRSRO is required to retain pursuant to 
the NRSRO recordkeeping rule--Rule 17g-2.\17\ Consequently, the 
Commission proposes adding new paragraph (b)(12) to Rule 17g-2 to 
identify the internal control structure an NRSRO, among other things, 
must document pursuant to Section 15E(c)(3)(A) of the Exchange Act as a 
record that must be retained.\18\ As a result, the various retention 
and production requirements of paragraphs (c), (d), (e), and (f) of 
Rule 17g-2 would apply to the documented internal control 
structure.\19\
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    \14\ See 15 U.S.C. 78o-7(c)(3)(A).
    \15\ Id.
    \16\ Id. For example, it does not prescribe how long the 
document must be retained.
    \17\ 17 CFR 240.17g-2(c), (d), (e), and (f). Section 17(a)(1) of 
the Exchange Act requires an NRSRO to make and keep such records, 
and make and disseminate such reports, as the Commission prescribes 
by rule as necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the Exchange 
Act. 15 U.S.C. 78q(a)(1). The Commission preliminarily believes it 
would be necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the Exchange 
Act to apply the record retention requirements of Rule 17g-2 to the 
internal control structure required pursuant to Section 15E(c)(3)(A) 
of the Exchange Act (15 U.S.C. 78o-7(c)(3)(A)). See Oversight of 
Credit Rating Agencies Registered as Nationally Recognized 
Statistical Rating Organizations, 72 FR at 33582 (June 18, 2007) 
(``The Commission designed [Rule 17g-2] based on its experience with 
recordkeeping rules for other regulated entities. These other books 
and records rules have proven integral to the Commission's investor 
protection function because the preserved records are the primary 
means of monitoring compliance with applicable securities laws. Rule 
17g-2 is designed to ensure that an NRSRO makes and retains records 
that will assist the Commission in monitoring, through its 
examination authority, whether an NRSRO is complying with the 
provisions of Section 15E of the Exchange Act and the rules 
thereunder.'') (footnotes omitted).
    \18\ See proposed new paragraph (b)(12) of Rule 17g-2.
    \19\ See 17 CFR 240.17g-2(c), (d), (e) and (f). Paragraph (c) of 
Rule 17g-2 requires an NRSRO to retain the records identified in 
paragraphs (a) and (b) for three years after the date the record is 
made or received. 17 CFR 240.17g-2(c). Paragraph (d) requires, among 
other things, that an NRSRO maintain each record identified in 
paragraphs (a) and (b) in a manner that makes the original record or 
copy easily accessible to the principal office of the NRSRO. 17 CFR 
240.17g-2(d). Paragraph (e) sets forth the requirements that apply 
when an NRSRO uses a third-party custodian to maintain its records. 
17 CFR 240.17g-2(e). Paragraph (f) requires an NRSRO to promptly 
furnish the Commission with legible, complete, and current copies, 
and, if specifically requested, English translations, of the records 
identified in paragraphs (a) and (b), or any other records of the 
NRSRO subject to examination under Section 17(b) of the Exchange 
Act. See 17 CFR 240.17g-2(f); see also 15 U.S.C. 78q(b).
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Request for Comment
    The Commission generally requests comment on all aspects of 
proposed new paragraph (b)(12) of Rule 17g-2.
3. Proposed Amendments to Rule 17g-3
    Section 15E(c)(3)(B) of the Exchange Act provides that the 
Commission shall prescribe rules requiring an NRSRO to ``submit'' an 
annual internal controls report to the Commission, which shall contain: 
(1) A description of the responsibility of management in establishing 
and maintaining an effective internal control structure; (2) an 
assessment of the effectiveness of the internal control structure; and 
(3) the attestation of the chief executive officer (``CEO'') or 
equivalent individual.\20\ Rule 17g-3 requires an NRSRO to furnish 
annual reports to the Commission.\21\ In particular, paragraph (a) of 
Rule 17g-3 requires an NRSRO to furnish five or, in some cases, six 
separate reports within 90 days after the end of the NRSRO's fiscal 
year and identifies the reports that must be furnished.\22\ The first 
report--the NRSRO's financial statements--must be audited; the 
remaining reports may be unaudited.\23\ Paragraph (b) of Rule 17g-3 
provides that the NRSRO must attach to the reports a signed statement 
by a duly authorized person that the person has responsibility for the 
reports and, to the best knowledge of the person, the reports fairly 
present, in all material respects, the information contained in the 
reports.\24\
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    \20\ See 15 U.S.C. 78o-7(c)(3)(B)(i)-(iii).
    \21\ See 17 CFR 240.17g-3.
    \22\ See 17 CFR 240.17g-3(a)(1)-(6).
    \23\ Id.
    \24\ See 17 CFR 240.17g-3(b).
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    The Commission proposes amending paragraphs (a) and (b) of Rule 
17g-3 to implement the rulemaking mandated by Section 15E(c)(3)(B) of 
the Exchange Act.\25\ The proposed amendment would add a new paragraph 
(a)(7) to require an NRSRO to file an additional report--the report on 
the NRSRO's internal control structure--with its annual submission of 
reports pursuant to Rule 17g-3.\26\ As discussed above in Section 
II.A.1 of this release, the Commission preliminarily believes it would 
be appropriate at this time to defer prescribing factors an NRSRO must 
take into consideration with respect to its internal control

[[Page 33424]]

structure. For similar reasons, the Commission preliminarily believes 
it would be appropriate at this time to implement Sections 
15E(c)(3)(B)(i) and (ii) of the Exchange Act through rule text that 
closely mirrors the statute.\27\ Consequently, proposed new paragraph 
(a)(7) would require that the internal control report contain: (1) a 
description of the responsibility of management in establishing and 
maintaining an effective internal control structure; and (2) an 
assessment by management of the effectiveness of the internal control 
structure.\28\ As is the case with the reports currently identified in 
paragraphs (a)(2) through (a)(6) of Rule 17g-3, the report identified 
in new paragraph (a)(7) would be unaudited.\29\ While the proposed rule 
text closely mirrors the statutory text, the Commission is requesting 
extensive comment below on whether it would be appropriate as part of 
this rulemaking to provide more explanation in terms of the standards 
to use in preparing the internal controls report and providing 
information in the report. Based on the comments received, the 
Commission may decide to prescribe by rule or identify through guidance 
such standards.
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    \25\ See 15 U.S.C. 78o-7(c)(3)(B)(i)-(iii). In addition, as a 
technical amendment, the Commission proposes to amend the title of 
Rule 17g-3 to replace the words ``financial reports'' with the words 
``financial and other reports.'' The Commission notes that the 
report identified in paragraph (a)(6) of Rule 17g-3, the proposed 
internal control report, and the compliance report discussed below 
in Section II.K of this release are not financial in nature. The 
Commission also proposes to add the word ``filed'' in the title of 
Rule 17g-3. As discussed below in Section II.M.1 of this release, 
the Commission is proposing amendments to Rules 17g-1 and 17g-3 to 
treat certain submissions of Form NRSRO and the Rule 17g-3 annual 
reports as being ``filed'' as opposed to being ``furnished'' to 
conform to amendments the Dodd-Frank Act made to Section 15E of the 
Exchange Act. See Public Law 111-203 Sec.  932(a). Specifically, the 
reports identified in paragraphs (a)(1), (2), (3), (4), (5), (7) and 
(8) of Rule 17g-3 would be ``filed'' and the report identified in 
paragraph (a)(6) would be ``furnished.''
    \26\ See proposed new paragraph (a)(7) of Rule 17g-3.
    \27\ See 15 U.S.C. 78o-7(c)(3)(B)(i) and (ii).
    \28\ Compare 15 U.S.C. 78o-7(c)(3)(B)(i) and (ii) with proposed 
new paragraphs (a)(7)(i) and (ii) of Rule 17g-3.
    \29\ See proposed new paragraph (a)(7) of Rule 17g-3.
---------------------------------------------------------------------------

    Section 15E(c)(3)(B)(iii) of the Exchange Act provides that the 
annual internal controls report must contain an attestation of the 
NRSRO's CEO, or equivalent individual.\30\ Accordingly, the Commission 
proposes amending paragraph (b) of Rule 17g-3 to require that the 
NRSRO's chief executive officer, or, if the firm does not have a CEO, 
an individual performing similar functions, provide a signed statement 
that would need to be attached to the report.\31\
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    \30\ 15 U.S.C. 78o-7(c)(3)(B)(iii).
    \31\ See proposed amendments to paragraph (b) of Rule 17g-3. In 
particular, the Commission proposes re-organizing existing paragraph 
(b) of Rule 17g-3 into paragraphs (b)(1) and (b)(2). Paragraph 
(b)(1) would contain the current requirement that the NRSRO must 
attach to each of the annual reports required pursuant to paragraphs 
(a)(1)-(6) a signed statement by a duly authorized person associated 
with the NRSRO stating that the person has responsibility for the 
financial reports and, to the best knowledge of the person, the 
reports fairly present, in all material respects, the information 
required to be contained in the report. Paragraph (b)(2) of Rule 
17g-3 would require that the report on the NRSRO's internal control 
structure be attested to by the NRSRO's CEO or an individual 
performing similar functions. See proposed paragraph (b)(2) of Rule 
17g-3.
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Request for Comment
    The Commission generally requests comment on all aspects of these 
proposed amendments to paragraphs (a) and (b) of Rule 17g-3. The 
Commission also seeks comment on the following:
    1. Is the requirement to provide a description of the 
responsibility of management in establishing and maintaining an 
effective internal control structure sufficiently explicit? If not, how 
should the Commission modify proposed paragraph (a)(7) of Rule 17g-3 to 
make the requirement more understandable? For example, should the 
Commission provide guidance on how an NRSRO must describe the 
responsibility of management in establishing and maintaining an 
effective internal control structure? If so, what should that guidance 
be? For example, are there existing frameworks that such guidance could 
be modeled on?
    2. In terms of establishing an effective internal control 
structure, what level of NRSRO management should have primary 
responsibility for the design of the internal control structure and 
what level of management should supervise the design of the internal 
control structure? For example, should managers with direct 
responsibility for supervising the personnel who use the policies, 
procedures, and methodologies for determining credit ratings and the 
personnel who conduct compliance reviews for adherence to those 
policies, procedures, and methodologies design the internal control 
structure and a committee of the NRSRO's most senior managers supervise 
the design of the internal control structure? Should other management 
or non-management levels of the NRSRO have responsibility for either of 
these functions? In addition, Section 15E(t)(3)(C) of the Exchange Act 
provides that the board of directors of the NRSRO shall ``oversee'' the 
``effectiveness of the internal control system with respect to the 
policies and procedures for determining credit ratings.'' \32\ How 
should this statutorily mandated board responsibility be integrated 
with the responsibility of the NRSRO's management to establish an 
effective internal control structure?
---------------------------------------------------------------------------

    \32\ See 15 U.S.C. 78o-7(t)(3)(A).
---------------------------------------------------------------------------

    3. In terms of establishing an effective internal control 
structure, should the Commission define the term ``internal control 
structure governing the implementation of and adherence to policies, 
procedures, and methodologies for determining credit ratings''? In 
terms of establishing an effective internal control structure, should 
the Commission further define the term ``internal control structure 
governing the implementation of and adherence to policies, procedures, 
and methodologies for determining credit ratings''? If so, how should 
that term be further defined? \33\ Provide suggested rule text and 
supporting analysis.
---------------------------------------------------------------------------

    \33\ The term ``internal control'' has been defined in other 
contexts. For example, the Commission has defined internal control 
over financial reporting. See 17 CFR 240.13a-15(f).
---------------------------------------------------------------------------

    4. In terms of establishing an effective internal control 
structure, should the Commission prescribe a standard in terms of the 
design? If so, what standard would be appropriate? For example, should 
the internal control structure be ``reasonably designed'' to achieve 
its objectives (a standard required by Sections 15E(g) and (h) of the 
Exchange Act with respect to policies and procedures of an NRSRO to 
address, respectively, the misuse of material nonpublic information and 
conflicts of interest)? \34\ Conversely, is the proposed requirement 
that the internal control structure be ``effective'' a sufficient 
standard?
---------------------------------------------------------------------------

    \34\ See 15 U.S.C. 78o-7(g) and (h).
---------------------------------------------------------------------------

    5. In terms of maintaining an effective internal control structure, 
what level of NRSRO management should have primary responsibility for 
monitoring the operation of the internal control structure and the 
NRSRO's adherence to the internal control structure? For example, 
should managers with direct responsibility for supervising the 
personnel who use the policies, procedures, and methodologies for 
determining credit ratings and the personnel who conduct compliance 
reviews for adherence to those policies, procedures, and methodologies 
have day-to-day responsibility for monitoring the operation of the 
internal control structure and the NRSRO's adherence to the internal 
control structure? Should other management or non-management levels of 
the NRSRO have responsibility for either of these functions? For 
example, should the personnel responsible for monitoring the operation 
of the internal control structure and the NRSRO's adherence to the 
internal control structure generate periodic (weekly, monthly, 
quarterly, and/or annual) reports that are provided to the NRSRO's most 
senior managers and the board about the internal control structure? If 
so, what information should be contained in those reports? In addition, 
Section 15E(t)(3)(C) of the Exchange Act provides that the board of 
directors of the NRSRO shall ``oversee'' the ``effectiveness of the 
internal control system with respect to the policies and

[[Page 33425]]

procedures for determining credit ratings.'' \35\ How should this 
statutorily mandated board responsibility be integrated with the 
responsibility of the NRSRO's management to maintain an effective 
internal control structure?
---------------------------------------------------------------------------

    \35\ See 15 U.S.C. 78o-7(t)(3)(A).
---------------------------------------------------------------------------

    6. Is the requirement to provide an assessment by management of the 
effectiveness of the internal control structure sufficiently explicit? 
If not, how should the Commission modify proposed paragraph (a)(7) of 
Rule 17g-3 to make the requirement more understandable? For example, 
given that the NRSRO needs to maintain the internal control structure 
(i.e., keep it in operation), should the Commission clarify that the 
assessment should address the effectiveness of the internal control 
structure during the entire fiscal year covered by the report?
    7. In terms of reporting management's assessment of the 
effectiveness of the internal control structure, should the Commission 
provide guidance on how an NRSRO must assess the effectiveness of the 
internal control structure, such as evaluative criteria or standards? 
If so, what should those criteria or standards be? For example, should 
the Commission require that management's assessment of the 
effectiveness of the internal control structure be based on procedures 
sufficient to evaluate the design of the internal control structure and 
test its operating effectiveness?
    8. In terms of management's assessment of the effectiveness of the 
internal control structure, should the Commission define the conditions 
that preclude management from concluding that the internal control 
structure is effective? If so, how should an ineffective internal 
control structure be defined? For example, should management be 
precluded from concluding that the internal control structure is 
effective if there are one or more instances of ``material weaknesses'' 
in the internal control structure? If one or more instances of 
``material weaknesses'' should preclude management from concluding that 
its internal control structure is effective, then should the Commission 
define ``material weakness''? If so, how should the term ``material 
weakness'' be defined? If management cannot conclude that the internal 
control structure is effective, what corrective action or sanctions 
should be imposed on the NRSRO?
    9. In terms of reporting management's assessment of the 
effectiveness of the internal control structure, should the Commission 
provide guidance regarding the topics to be addressed in the report? If 
so, what should that guidance be? For example, if the Commission 
prescribes factors that an NRSRO should take into consideration in 
establishing, maintaining, enforcing, and documenting its internal 
control structure, should the report specifically reference those 
factors? In addition, should the report identify or describe the 
framework management used to conduct the evaluation of the 
effectiveness of the internal control structure? Moreover, should the 
report identify deficiencies found during the assessment process? If 
so, should all deficiencies be identified or only those which preclude 
management from concluding that the internal control structure is 
effective? Furthermore, should the Commission require that the report 
disclose whether there were any significant changes in the internal 
control structure or other factors that could significantly affect the 
internal control structure subsequent to the date of the evaluation, 
including any corrective actions in response to any material weaknesses 
found during the evaluation?
    10. In terms of reporting management's assessment of the 
effectiveness of the internal control structure, should the report 
identify any fraud, significant errors, or previously undisclosed 
conflicts of interest identified during the assessment of the 
effectiveness of the internal control structure that could have a 
material effect on the integrity of the NRSRO's procedures and 
methodologies for determining credit ratings? What other disclosures 
should the report contain?
    11. Should an NRSRO be required to maintain evidential matter, 
including documentation, to provide reasonable support for management's 
assessment of the effectiveness of the internal control structure that 
could be used by Commission examination staff to review the adequacy of 
the assessment? In this regard, should the Commission identify specific 
objectives of an internal control structure that the evidential matter 
would need to support? For example, should the evidential matter 
provide reasonable support for an assessment that the internal control 
structure is designed to effectively prevent or detect failures of the 
NRSRO to adhere to its policies, procedures, and methodologies for 
determining credit ratings? If such specific objectives should be 
identified, describe them and identify the evidential matter that could 
be retained to allow the Commission examination staff to review the 
adequacy of the NRSRO's assessment of the effectiveness of the internal 
control structure in achieving the objective.
    12. With respect to proposed paragraph (b)(2) of Rule 17g-3, should 
the Commission provide more guidance on the type of management 
responsibilities that would qualify an individual as one who performs 
functions similar to a CEO? If so, what are those types of 
responsibilities?
    13. Should the Commission require the internal control report to be 
filed separately from the Rule 17g-3 annual reports (which are kept 
confidential to the extent permitted by law) and, instead, require the 
internal control report to be disclosed to the public on, for example, 
the Commission's Electronic Data Gathering, Analysis, and Retrieval 
(``EDGAR'') system? What would be the benefits and costs of requiring 
the public disclosure of the report?
    14. If it would be appropriate to make the report public, should 
the Commission prescribe a form for the report? If so, what information 
should the form require the NRSRO to provide in the disclosure? What 
would the form look like? Could any of the Commission's current forms 
serve as a model? If so, identify the forms and explain how they could 
be tailored to require an NRSRO to provide information about its 
internal control structure.

B. Conflicts of Interest Relating to Sales and Marketing

    Section 932(a)(4) of the Dodd-Frank Act added new paragraph (3) to 
Section 15E(h) of the Exchange Act.\36\ Section 15E(h)(3)(A) of the 
Exchange Act provides that the Commission shall issue rules to prevent 
the sales and marketing considerations of an NRSRO from influencing the 
production of credit ratings by the NRSRO.\37\ Section 15E(h)(3)(B) of 
the Exchange Act provides that the Commission's rules must contain two 
additional provisions.\38\ First, Section 15E(h)(3)(B)(i) requires that 
the Commission's rules shall provide for exceptions for small NRSROs 
with respect to which the Commission determines that the separation of 
the production of ratings and sales and marketing activities is not 
appropriate.\39\ Second, Section 15E(h)(3)(B)(ii) requires that the 
Commission's rules shall provide for the suspension or revocation of 
the registration of an NRSRO if the Commission finds, on the record, 
after notice and opportunity for a hearing,

[[Page 33426]]

that: (1) The NRSRO has committed a violation of a rule issued under 
Section 15E(h) of the Exchange Act; and (2) the violation affected a 
rating.\40\
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    \36\ Public Law 111-203 Sec.  932(a)(4) and 15 U.S.C. 78o-
7(h)(3).
    \37\ 15 U.S.C. 78o-7(h)(3)(A).
    \38\ 15 U.S.C. 78o-7(h)(3)(B)(i) and (ii).
    \39\ 15 U.S.C. 78o-7(h)(3)(B)(i).
    \40\ 15 U.S.C. 78o-7(h)(3)(B)(ii).
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    The Commission proposes to implement Sections 15E(h)(3)(A), (B)(i), 
and (B)(ii) of the Exchange Act by amending the NRSRO conflict of 
interest rule--Rule 17g-5.\41\ The proposals would amend the rule by: 
(1) identifying a new prohibited conflict in paragraph (c) of the rule; 
(2) adding a new paragraph (f) setting forth the finding the Commission 
would need to make in order to grant a small NRSRO an exemption from 
the prohibition; and (3) adding a new paragraph (g) setting forth the 
standard for suspending or revoking an NRSRO's registration for 
violating a rule adopted under Section 15E(h) of the Exchange Act.
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    \41\ 17 CFR 240.17g-5. The Commission adopted and subsequently 
amended Rule 17g-5 pursuant, in part, to authority in Section 
15E(h)(2) of the Exchange Act (15 U.S.C. 78o-7(h)(2)). See Oversight 
of Credit Rating Agencies Registered as Nationally Recognized 
Statistical Rating Organizations, 72 FR at 33595-33599 (June 18, 
2007); Amendments to Rules for Nationally Recognized Statistical 
Rating Organizations, 74 FR at 6465-6469 (Feb. 9, 2009); Amendments 
to Rules for Nationally Recognized Statistical Rating Organizations, 
74 FR at 63842-63850 (Dec. 4, 2009).
---------------------------------------------------------------------------

1. Proposed New Prohibited Conflict
    As noted above, Section 15E(h)(3)(A) of the Exchange Act provides 
that the Commission shall issue rules to prevent the sales and 
marketing considerations of an NRSRO from influencing the production of 
ratings by the NRSRO.\42\ The Commission is proposing to implement this 
provision by identifying a new conflict of interest in paragraph (c) of 
Rule 17g-5.\43\ Paragraph (c) prohibits a person within an NRSRO (as 
well as the NRSRO itself) \44\ from having any of the conflicts of 
interest relating to the issuance or maintenance of a credit rating or 
credit rating agency identified in the paragraph under all 
circumstances (hereinafter the ``absolute prohibitions'').\45\ Proposed 
new paragraph (c)(8) of Rule 17g-5 would identify a new absolute 
prohibition; namely, one in which the NRSRO issues or maintains a 
credit rating where a person within the NRSRO who participates in the 
sales or marketing of a product or service of the NRSRO or a product or 
service of a person associated with the NRSRO also participates in 
determining or monitoring the credit rating, or developing or approving 
procedures or methodologies used for determining the credit rating, 
including qualitative or quantitative models.\46\
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78o-7(h)(3)(A).
    \43\ See proposed new paragraph (c)(8) of Rule 17g-5.
    \44\ See paragraph (d) of Rule 17g-5 defining ``person within an 
NRSRO'' for purposes of the rule. 17 CFR 240.17g-5(d).
    \45\ See 17 CFR 240.17g-5(c)(1)-(7). These absolute prohibitions 
are distinguished from the types of conflicts identified in 
paragraph (b) of Rule 17g-5, which are prohibited unless the NRSRO 
has taken the steps to address them set forth in paragraph (a) of 
Rule 17g-5. See 17 CFR 240.17g-5(a) and (b).
    \46\ See proposed new paragraph (c)(8) of Rule 17g-5.
---------------------------------------------------------------------------

    The proposed new absolute prohibition would be designed to address 
situations in which, for example, individuals within the NRSRO 
responsible for selling its products and services could seek to 
influence a specific credit rating to favor an existing or prospective 
client or the development of a credit rating methodology to favor a 
class of existing or prospective clients. With regard to methodologies, 
the Commission notes that its staff found as part of the examination of 
the activities of the three largest NRSROs in rating residential 
mortgage-backed securities (``RMBS'') and collateralized debt 
obligations (``CDOs'') linked to subprime mortgages that it appeared 
``employees responsible for obtaining ratings business would notify 
other employees, including those responsible for criteria development, 
about business concerns they had related to the criteria.'' \47\ The 
absolute prohibition in proposed paragraph (c)(8) of Rule 17g-5 would 
be designed to insulate individuals within the NRSRO responsible for 
the analytic function from such sales and marketing concerns and 
pressures.
---------------------------------------------------------------------------

    \47\ See Summary Report of Issues Identified in the Commission 
Staff's Examination of Select Credit Rating Agencies, Commission 
(July 2008), pp. 25-26.
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of 
proposed new paragraph (c)(8) of Rule 17g-5. The Commission also seeks 
comment on the following:
    1. Would the proposed amendment impact existing governance 
structures, reporting lines and internal organizations of NRSROs, 
particularly smaller NRSROs? If so, provide specific information about 
the nature and consequences of such impacts.
    2. Are there sales and marketing activities persons that 
participate in determining credit ratings or developing or approving 
procedures or methodologies used for determining credit ratings, 
including qualitative or quantitative models, could participate in 
without undermining the goal of proposed paragraph (a)(8) of Rule 17g-
5? If so, what types of activities? How could proposed new paragraph 
(a)(8) of Rule 17g-5 be modified to retain an absolute prohibition and 
at the same time not prohibit persons who participate in determining 
credit ratings or developing or approving procedures or methodologies 
used for determining credit ratings, including qualitative or 
quantitative models, to participate in sales and marketing activities 
that do not expose them to business concerns that could compromise 
their analytical integrity?
    3. Should the Commission provide guidance on what constitutes a 
sales and marketing activity? If so, how should the Commission define 
``sales and marketing activities''? In addition, should the Commission 
define what it means to ``participate in sales and marketing 
activities''? Similarly, should the Commission define what it means to 
``participate in developing or approving procedures and methodologies 
used for determining credit ratings''? If so, how should the Commission 
define these terms?
    4. Identify other requirements applicable to NRSROs that are 
designed to address this conflict of interest.
2. Proposed Exemption for ``Small'' NRSROs
    Section 15E(h)(3)(B)(i) of the Exchange Act requires that the 
Commission's rules under Section 15E(h)(3)(A) shall provide for 
exceptions for small NRSROs with respect to which the Commission 
determines that the separation of the production of ratings and sales 
and marketing activities is not appropriate.\48\ To implement this 
provision, the Commission is proposing to amend Rule 17g-5 by adding a 
new paragraph (f).\49\ Proposed paragraph (f) would provide a mechanism 
for a small NRSRO to apply in writing for an exemption from the 
absolute prohibition proposed in new paragraph (c)(8).\50\ In 
particular,

[[Page 33427]]

proposed new paragraph (f) of Rule 17g-5 would provide that upon 
written application by an NRSRO, the Commission may exempt, either 
conditionally or unconditionally or on specified terms and conditions, 
such NRSRO from the provisions of paragraph (c)(8) of Rule 17g-5 if the 
Commission finds that due to the small size of the NRSRO it is not 
appropriate to require the separation within the NRSRO of the 
production of credit ratings from sales and marketing activities and 
such exemption is in the public interest.\51\
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    \48\ See 15 U.S.C. 78o-7(h)(3)(B)(i).
    \49\ See proposed new paragraph (f) of Rule 17g-5.
    \50\ Section 36 of the Exchange Act provides that the 
Commission, by rule, regulation, or order, may conditionally or 
unconditionally exempt any person, security, or transaction, or any 
class or classes of persons, securities or transactions from any 
provision or provisions of the Exchange Act or any rule or 
regulation thereunder, to the extent that such exemption is 
necessary or appropriate in the public interest and is consistent 
with the protection of investors. 17 U.S.C. 78mm. Consequently, an 
NRSRO could request to be exempt from the proposed sales and 
marketing prohibition pursuant to this more general authority in 
Section 36. See id. Nonetheless, the Commission has adopted rules 
providing mechanisms for registrants--such as broker-dealers--to 
request an exemption from specific rule requirements. See, e.g., 17 
CFR 240.15c3-1(b)(3); 17 CFR 240.15c3-3(k)(3); and 17 CFR 240.17a-
5(m)(3). The Commission preliminarily believes proposed paragraph 
(f) of Rule 17g-5 should parallel such provisions.
    \51\ See proposed new paragraph (f) of Rule 17g-5.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the absolute prohibition 
should apply to all NRSROs. However, the Commission notes that in some 
cases the small size of an NRSRO could make a complete separation of 
the sales and marketing function from the credit rating analytical 
function inappropriate. For example, the NRSRO may not have enough 
staff (or the resources to hire additional staff) to establish separate 
functions. In such a case, the Commission would entertain requests for 
relief. In granting such relief, the Commission may impose conditions 
designed to preserve as much of the separation between these two 
functions as possible.
Request for Comment
    The Commission generally requests comment on all aspects of 
proposed new paragraph (f) of Rule 17g-5. The Commission also seeks 
comment on the following:
    1. The Commission notes that Section 15E(h)(3)(A) of the Exchange 
Act provides that the Commission shall issue rules to prevent the sales 
and marketing considerations of an NRSRO from influencing the 
production of credit ratings by the NRSRO. Section 15E(h)(3)(B)(i) 
requires that the Commission's rules shall provide for exceptions for 
small NRSROs with respect to which the Commission determines that the 
separation of the production of ratings and sales and marketing 
activities is not appropriate (emphasis added). Why would the 
separation of the production of ratings from sales and marketing 
activities be appropriate for NRSROs that are not small but might not 
be appropriate for NRSROs that are small? For example, does the small 
size of an NRSRO make the conflict less likely to influence ratings? If 
so, why? Alternatively, could the small size of an NRSRO make the 
application of the absolute prohibition impractical, thus preventing a 
small credit rating agency from seeking registration or a small NRSRO 
from maintaining its registration? If so, would the adverse impact on 
competition outweigh the benefit of applying the absolute prohibition 
to a small NRSRO? If so, explain how.
    2. Would the case-by-case approach proposed by the Commission 
appropriately implement Section 15E(h)(3)(B)(i) of the Exchange Act? If 
not, how should the proposal be modified? For example, should the 
Commission prescribe an objective self-executing exemption from the 
absolute prohibition in proposed paragraph (c)(8) of Rule 17g-5? For 
example, should the exemption be automatic for ``small'' NRSROs? If so, 
how should the Commission define a small NRSRO? For example, should the 
definition be based on the total assets of the NRSRO? In this regard, 
should the Commission adopt a rule that exempts any NRSRO that has 
total assets of $5 million or less from the absolute prohibition given 
that is how the Commission currently defines a small NRSRO for purposes 
of the Regulatory Flexibility Act? \52\ How would such an exemption 
work in practice? For example, would such a rule need to provide for a 
transition period for an NRSRO that crosses the total asset threshold 
to provide time to establish the separate sales and marketing function? 
How long should such a transition period be? For example, should it be 
90, 120, 180 or some other number of days after the required filing 
date of the NRSRO's audited financial statements indicating the 
threshold was crossed are required to be filed with the Commission?
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    \52\ See Section VII.C of this release; see also 5 U.S.C. 
603(a), Oversight of Credit Rating Agencies Registered as Nationally 
Recognized Statistical Rating Organizations, 72 FR 33618 (June 18, 
2007); Amendments to Rules for Nationally Recognized Statistical 
Rating Organizations, 74 FR at 6481 (Feb. 9, 2009); and Amendments 
to Rules for Nationally Recognized Statistical Rating Organizations, 
74 FR at 63863 (Dec. 4, 2009).
---------------------------------------------------------------------------

    3. What other factors should the Commission consider in analyzing 
whether the small size of an NRSRO makes it not appropriate to require 
the separation of the production of credit ratings from sales and 
marketing activities? Should the Commission consider the annual 
revenues of the NRSRO? Should the Commission consider the number of 
employees of the NRSRO? Would consideration of the number of employees 
create a disincentive to devote resources to adequately staff the 
NRSRO? Are there factors in addition to an NRSRO's size the Commission 
should consider in analyzing whether to grant an exemption under this 
proposal? If so, please describe any such factors.
    4. If the Commission granted relief to an NRSRO, should the 
Commission specify conditions for obtaining the relief? If so, what 
should those conditions be? For example, should the conditions limit 
the number of credit analysts that can participate in sales and 
marketing activities, limit the manner in which they can participate in 
such activities, require additional procedures to address the conflict, 
and require additional procedures to document how credit analysts 
participate in sales and marketing activities? If any of these 
conditions would be appropriate, describe how they could be implemented 
in practice.
3. Suspending or Revoking a Registration
    Section 15E(h)(3)(B)(ii) of the Exchange Act specifies that the 
Commission's rules under Section 15E(h) of the Exchange Act shall 
provide for suspension or revocation of the registration of an NRSRO if 
the Commission finds, on the record, after notice and opportunity for a 
hearing, that the NRSRO has committed a violation of ``a rule issued 
under this subsection'' and the violation of the rule affected a credit 
rating.\53\ While Section 15E(h)(3)(A) relates only to the conflict 
arising from sales and marketing activities, Section 15E(h)(3)(B)(ii)--
by using the term ``subsection''--has a broader scope in that it refers 
to all rules issued under Section 15E(h) of the Exchange Act.\54\ 
Consequently, the rule implementing Section 15E(h)(3)(B)(ii) must 
provide for the suspension or revocation of an NRSRO's registration for 
violations of any rule adopted under Section 15E(h).\55\ Moreover, the 
Commission notes that Section 15E(h)(3)(B)(ii) does not require that 
the violation of the rule be ``willful.'' \56\
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    \53\ 15 U.S.C. 78o-7(h)(3)(B)(ii).
    \54\ See id.
    \55\ Id.
    \56\ Id.
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    Currently, the Commission can seek to suspend or revoke the 
registration of an NRSRO, in addition to other potential sanctions, 
under Section 15E(d) of the Exchange Act.\57\ In particular, Section 
15E(d) provides that the Commission shall, by order, censure, place 
limitations on the activities, functions, or operations of, suspend for 
a period not exceeding 12 months, or revoke the registration of an 
NRSRO if the Commission finds, ``on the record after notice and 
opportunity for a hearing,'' that such sanction is

[[Page 33428]]

``necessary for the protection of investors and in the public 
interest'' and the NRSRO, or a person associated with the NRSRO, has 
engaged in one or more of six categories of conduct.\58\ The first 
category is that the NRSRO or an associated person has: committed or 
omitted any act, or has been subject to an order or finding, enumerated 
in subparagraphs (A), (D), (E), (G), or (H) of Section 15(b)(4) of the 
Exchange Act; has been convicted of any offense identified in Section 
15(b)(4)(B) of the Exchange Act; or has been enjoined from any action, 
conduct, or practice identified in Section 15(b)(4)(C) of the Exchange 
Act.\59\ The acts enumerated in Section 15(b)(4)(D) of the Exchange Act 
include that the person has willfully violated any provision of the 
Exchange Act or the rules or regulations under the Exchange Act.\60\ 
Therefore, the Commission has the ability, under Section 15E(d), to 
suspend or revoke the registration of an NRSRO for a willful violation 
of Rule 17g-5, but does not have the power to do so under Section 
15E(d) for violations of Rule 17g-5 that are not willful.\61\
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    \57\ See 15 U.S.C. 78o-7(d).
    \58\ 15 U.S.C. 78o-7(d).
    \59\ See 15 U.S.C. 78o-7(d)(1)(A); see also 15 U.S.C. 
78o(b)(4)(A), (B), (C), (D), (E), (G), and (H).
    \60\ 15 U.S.C. 78o(b)(4)(D).
    \61\ See 15 U.S.C. 78o-7(d)(1)(A) and 15 U.S.C. 78o(b)(4)(D).
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    The Commission preliminarily believes a rule implementing Section 
15E(h)(3)(B)(ii) of the Exchange Act should work in conjunction with 
Sections 15E(d) and 21C of the Exchange Act.\62\ Specifically, proposed 
new paragraph (g) of Rule 17g-5 would provide that in a proceeding 
pursuant to Section 15E(d) or Section 21C of the Exchange Act, the 
Commission shall suspend or revoke the registration of an NRSRO if the 
Commission finds in such proceeding that the NRSRO has violated a rule 
issued under Section 15E(h) of the Exchange Act, the violation affected 
a rating, and that suspension or revocation is necessary for the 
protection of investors and in the public interest.\63\ The Commission 
preliminarily believes this provision is appropriately placed in Rule 
17g-5 given that it is the predominant rule issued under Section 15E(h) 
of the Exchange Act.\64\
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    \62\ 15 U.S.C. 78o-7(d) and 15 U.S.C. 78u-3.
    \63\ See proposed new paragraph (g) of Rule 17g-5; see also 15 
U.S.C. 78o-7(d) and (h), and 78u-3. Section 21C of the Exchange Act 
provides the Commission with authority, among other things, to enter 
an order requiring, among other things, that a person cease-and-
desist from continuing to violate, or future violations of, a 
provision of the Exchange Act or any rule or regulation thereunder. 
Proposed paragraph (g) of Rule 17g-5 would provide that the 
Commission can issue an order in a cease-and-desist proceeding 
suspending or revoking the registration of an NRSRO. Id.
    \64\ See, e.g., Oversight of Credit Rating Agencies Registered 
as Nationally Recognized Statistical Rating Organizations, 72 FR at 
33595-33599 (June 18, 2007), Amendments to Rules for Nationally 
Recognized Statistical Rating Organizations, 74 FR at 6465-6469 
(Feb. 9, 2009), and Amendments to Rules for Nationally Recognized 
Statistical Rating Organizations, 74 FR 63842-63850 (Dec. 4, 2009).
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    The first two proposed findings in proposed paragraph (g) of Rule 
17g-5 would mirror the text of Section 15E(h)(3)(B)(ii) of the Exchange 
Act.\65\ The final finding--that the suspension or revocation is 
necessary for the protection of investors and in the public interest--
is a common finding that the Commission must make to take disciplinary 
action against a registered person or entity.\66\ It is not, however, a 
finding that the Commission must make in a proceeding under Section 
21C.\67\ Further, unlike Section 15E(d) of the Exchange Act, the 
Commission can take action under Section 21C for violations of the 
securities laws even if such violations are not willful.\68\ Moreover, 
Section 15E(h)(3)(B)(ii) of the Exchange Act does not prescribe the 
maximum amount of time for which an NRSRO could be suspended, whereas 
Section 15E(d) provides that a suspension shall not exceed 12 
months.\69\ Consequently, a proceeding pursuant to paragraph (g) of 
Rule 17g-5 brought under Section 21C could result in a suspension that 
exceeds 12 months. Given that Section 21C of the Exchange Act has a 
lower threshold for the intent to establish a violation, and given the 
substantial consequences of suspending or revoking a registration, the 
Commission preliminarily believes that the public interest finding 
would be an appropriate predicate to a suspension or revocation of an 
NRSRO's registration under Section 21C of the Exchange Act.
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    \65\ Compare the first two findings in proposed new paragraph 
(g) of Rule17g-5 (that the NRSRO has violated a rule issued under 
Section 15E(h) of the Act; and the violation affected a rating) with 
Sections 15E(h)(3)(B)(ii)(I) and (II) of the Exchange Act, 
respectively. 15 U.S.C. 78o-7(h)(3)(B)(ii)(I) and (II).
    \66\ For example, the Commission must make this finding to take 
action under Section 15E(d) of the Exchange Act. See 15 U.S.C. 78o-
7(d).
    \67\ See 15 U.S.C. 78u-3.
    \68\ Compare 15 U.S.C. 78o-7(d) and 15 U.S.C. 78u-3.
    \69\ Compare 15 U.S.C. 78o-7(h)(3)(B)(ii) and 15 U.S.C. 78o-
7(d).
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Request for Comment
    The Commission generally requests comment on all aspects of 
proposed new paragraph (g) of Rule 17g-5. The Commission also seeks 
comment on the following:
    1. Should the Commission propose, pursuant to Section 
15E(h)(3)(B)(ii) of the Exchange Act, an independent and alternative 
process for suspending or revoking an NRSRO's registration for a 
violation of a rule issued under Section 15E(h) (i.e., a proceeding 
that is not pursuant to Sections 15E(d) and 21C of the Exchange Act)? 
If so, how should such a separate proceeding operate? For example, 
should it require the same findings proposed above or alternative or 
additional findings?
    2. In terms of the finding that ``the violation affected a 
rating,'' what type of factual predicate should support such a finding? 
For example, would it be appropriate to make such a finding if the 
Commission determined that the violation caused the NRSRO to issue a 
credit rating that was not based solely on its documented procedures 
and methodologies for determining credit ratings (e.g., the Commission 
finds that undue influence impacted the credit rating assigned to the 
rated obligor, security, or money market instrument because strictly 
adhering to the procedures and methodologies would have resulted in the 
NRSRO issuing a credit rating at a lower or higher notch in the 
applicable rating scale)?
    3. With respect to proposed new paragraph (g) of Rule 17g-5, should 
the proposed rule include additional or alternative findings that the 
Commission would need to make to revoke or suspend the registration of 
an NRSRO in a proceeding under Sections 15E(d) or 21C? If so, what 
should those findings be? For example, should the Commission need to 
find that the violation harmed investors or other users of credit 
ratings?
    4. Should the Commission, as proposed, require a public interest 
finding in order to suspend or revoke an NRSRO's registration in a 
proceeding under paragraph (g) of Rule 17g-5 pursuant to Section 21C, 
or should the rule provide for the suspension or revocation of an 
NRSRO's registration solely based on a finding that a violation of a 
rule affected a rating?
    5. With respect to proposed new paragraph (g) of Rule 17g-5, should 
the rule incorporate only Section 15E(d) of the Exchange Act? If so, 
why? Alternatively, should it incorporate only Section 21C of the 
Exchange Act? If so, why?
    6. As noted above, there would be no limit on the amount of time 
for which the Commission could suspend the registration of an NRSRO in 
a proceeding under Section 21C of the Exchange Act and proposed 
paragraph (g) of Rule 17g-5. Should the Commission add such a time 
limit to be consistent with Section 15E(d) of the Exchange Act? 
Alternatively, does the

[[Page 33429]]

different standard provide the Commission with appropriate flexibility 
to seek longer suspensions?

C. ``Look-Back'' Review

    Section 932(a)(4) of the Dodd-Frank Act amended Section 15E(h) of 
the Exchange Act to add a new paragraph (4).\70\ The Commission is 
proposing to implement rulemaking required in Section 15E(h)(4)(A)(ii) 
of the Exchange Act through proposed paragraph (c) of new Rule 17g-
8.\71\ In addition, the Commission is proposing to amend Rule 17g-2 to 
apply that rule's record retention and production requirements to the 
policies and procedures required pursuant to the self-executing 
provisions in Section 15E(h)(4)(A) of the Exchange Act and pursuant to 
proposed paragraph (c) of new Rule 17g-8.\72\
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    \70\ See Public Law 111-203 Sec.  932(a)(4) and 15 U.S.C. 78o-
7(h)(4).
    \71\ New Rule 17g-8 would be codified at 17 CFR 240.17g-8, if 
adopted. In addition, new Rule 17g-8, as proposed, would consolidate 
requirements that NRSROs have policies and procedures in a number of 
areas. As discussed below in Section II.F.1 of this release, 
proposed paragraph (a) of new Rule 17g-8 would require an NRSRO to 
establish policies and procedures with respect to credit rating 
methodologies. In addition, as discussed below in Section II.J.1 of 
this release, proposed paragraph (b) of new Rule 17g-8 would require 
an NRSRO to establish policies and procedures with respect to the 
use of credit rating symbols, numbers, and scores. And, as discussed 
in this section of the release, the Commission is proposing to 
implement rulemaking specified in Section 15E(h)(4)(A)(ii) of the 
Exchange Act (15 U.S.C. 78o-7(h)(4)(A)(ii)), in part, by proposing 
paragraph (c) of new Rule 17g-8.
    \72\ See 15 U.S.C. 78o-7(h)(4)(A), proposed paragraph (c) of new 
Rule 17g-8, and proposed new paragraph (a)(9) of Rule 17g-2.
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1. Proposed Paragraph (c) of New Rule 17g-8
    Sections 15E(h)(4)(A)(i) and (ii) of the Exchange Act require an 
NRSRO to establish, maintain, and enforce policies and procedures 
reasonably designed to ensure that, in any case in which an employee of 
a person subject to a credit rating of the NRSRO or the issuer, 
underwriter, or sponsor of a security or money market instrument 
subject to a credit rating of the NRSRO, was employed by the NRSRO and 
participated in any capacity in determining credit ratings for the 
person or the securities or money market instruments during the 1-year 
period preceding the date an action was taken with respect to the 
credit rating, the NRSRO shall: (1) Conduct a review to determine 
whether any conflicts of interest of the employee influenced the credit 
rating (a ``look-back review''); and (2) take action to revise the 
rating if appropriate, in accordance with such rules as the Commission 
shall prescribe.\73\ Consequently, Section 15E(h)(4)(A)(i) of the 
Exchange Act contains a self-executing provision requiring an NRSRO to 
establish, maintain, and enforce policies and procedures as described 
above to conduct look-back reviews, and Section 15E(h)(4)(ii) contains 
a provision mandating Commission rulemaking with respect to 
requirements for an NRSRO to revise a credit rating in certain 
circumstances.\74\
---------------------------------------------------------------------------

    \73\ See 15 U.S.C. 78o-7(h)(4)(A)(i) and (ii) (emphasis added).
    \74\ Id.
---------------------------------------------------------------------------

    The Commission proposes to implement the rulemaking required in 
Section 15E(h)(4)(A)(ii) of the Exchange Act by proposing paragraph (c) 
of new Rule 17g-8.\75\ Proposed paragraph (c) would require that the 
policies and procedures the NRSRO establishes, maintains, and enforces 
pursuant to Section 15E(h)(4)(A) of the Exchange Act must address 
instances in which a review conducted pursuant to those policies and 
procedures determines that a conflict of interest influenced a credit 
rating assigned to an obligor, security, or money market instrument by 
including, at a minimum, procedures that are reasonably designed to 
ensure the NRSRO will: (1) Immediately place the credit rating on 
credit watch; (2) promptly determine whether the credit rating must be 
revised so it no longer is influenced by a conflict of interest and is 
solely the product of the NRSRO's documented procedures and 
methodologies for determining credit ratings; and (3) promptly publish 
a revised credit rating, if appropriate, or affirm the credit rating if 
appropriate.\76\
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    \75\ See proposed paragraph (c) of new Rule 17g-8 and 15 U.S.C. 
78o-7(h)(4)(A)(ii).
    \76\ See proposed paragraphs (c)(1), (2) and (3) of new Rule 
17g-8.
---------------------------------------------------------------------------

    The Commission acknowledges that Section 15E(c)(2) of the Exchange 
Act provides, in pertinent part, that the Commission may not regulate 
the substance of credit ratings or the procedures and methodologies by 
which an NRSRO determines credit ratings.\77\ The Commission 
preliminarily believes that the steps described above would not 
regulate the procedures and methodologies by which an NRSRO determines 
credit ratings because the NRSRO would apply its own procedures and 
methodologies to determine whether the credit rating should be revised. 
Moreover, the placement of a credit rating on credit watch is not a 
determination of a credit rating (i.e., it does not change the credit 
rating) but rather is a means of providing notice to users of the 
NRSRO's credit ratings that an active evaluation of the credit rating 
is underway. For these reasons, the Commission preliminarily believes 
that the approach in proposed paragraph (c) of new Rule 17g-8 
appropriately avoids regulating the substance of credit ratings or the 
procedures and methodologies an NRSRO uses to determine credit ratings 
but, at the same time, requires an NRSRO to have procedures reasonably 
designed to ensure that it immediately provides notification and 
promptly address a credit rating that is influenced by a conflict of 
interest.\78\ The Commission also preliminarily believes that the 
actions prescribed in proposed paragraph (c) of new Rule 17g-8 are 
steps a prudent NRSRO would take in the normal course when discovering 
a conflict of interest influenced the determination of a credit rating. 
Nonetheless, the Commission is soliciting comment on these issues 
below.
---------------------------------------------------------------------------

    \77\ 15 U.S.C. 78o-7(c)(2).
    \78\ The Commission also notes an NRSRO would, among other 
things, violate Section 15E(h)(1) of the Exchange Act and Rule 17g-
5, among other rules, if it continued to assign an obligor, 
security, or money, market instrument a credit rating that, absent 
the undue influence of the conflict of interest, would be different 
because the NRSRO could not be deemed to have policies and 
procedures reasonably designed to address and manage conflicts of 
interest that can arise from its business under such a circumstance. 
See 15 U.S.C. 78o-7(h) and 17 CFR 17g-5.
---------------------------------------------------------------------------

    Proposed paragraph (c)(1) of new Rule 17g-8 would require the NRSRO 
to have procedures reasonably designed to ensure that, upon the NRSRO's 
discovery of the conflict, it immediately publishes a rating action 
placing the applicable credit ratings of the obligor, security, or 
money market instrument on credit watch or review.\79\ When an NRSRO 
publishes a rating action indicating the current credit rating assigned 
to an obligor, security, or money market instrument (or a class of 
obligors, securities, or money market instruments) is on credit watch 
or under review, the purpose is to notify users of the NRSRO's credit 
ratings that the credit rating is undergoing a process of evaluation 
that may result in it being upgraded or downgraded.\80\ The Commission 
preliminarily believes an NRSRO should have policies and procedures 
reasonably designed to ensure that the users of its credit ratings are 
provided immediate notice of the discovery that a conflict influenced a 
credit rating assigned to an obligor, security, or money market 
instrument.

[[Page 33430]]

The Commission also preliminarily believes an effective means of 
providing such notice would be to place the obligor, security, or money 
market instrument on credit watch.
---------------------------------------------------------------------------

    \79\ See proposed paragraph (c)(1) of new Rule 17g-8.
    \80\ For example, an NRSRO may place a credit rating on negative 
credit watch, which means it is evaluating whether to downgrade the 
credit rating, or on positive credit watch, which means it is 
evaluating whether to upgrade the credit rating.
---------------------------------------------------------------------------

    Proposed paragraph (c)(1) of new Rule 17g-8 also would provide that 
the policies and procedures must be reasonably designed to ensure the 
NRSRO includes the information required by paragraph 
(a)(1)(ii)(J)(3)(i) of Rule 17g-7 with the publication of the rating 
action placing the credit rating of the obligor, security, or money 
market instrument on credit watch.\81\ As discussed below in Section 
II.G of this release, the Commission is proposing to implement Section 
15E(s) of the Exchange Act, in part, by requiring, in proposed new 
paragraph (a) of Rule 17g-7, that an NRSRO generate a form to be 
included with the publication of a credit rating.\82\ Proposed 
paragraph (a) of Rule 17g-7, among other things, would prescribe 
certain qualitative and quantitative information that must be disclosed 
in the form.\83\ The Commission is proposing that the qualitative 
information in the form include certain disclosures that would need to 
be made if the rating action results from a look-back review conducted 
pursuant to Section 15E(h)(4)(A)(i) of the Exchange Act and proposed 
paragraph (c) of new Rule 17g-8.\84\ Specifically, when a credit rating 
is placed on credit watch, proposed new paragraph (a)(1)(ii)(J)(3)(i) 
of Rule 17g-7 would require the NRSRO to provide in the form published 
with the rating action an explanation that the reason for the action is 
the discovery that a credit rating assigned to the obligor, security, 
or money market instrument in one or more prior rating actions was 
influenced by a conflict of interest and the date and associated credit 
rating of each prior rating action the NRSRO currently has determined 
was influenced by the conflict.\85\ This would alert users of the 
NRSRO's credit ratings that the credit rating assigned to the obligor, 
security, or money market instrument might be revised to address a 
conflict of interest and would identify the prior rating action or 
actions the NRSRO has determined were influenced by the conflict. With 
respect to identifying the prior rating actions, the Commission is 
proposing that the rule require the NRSRO to provide the date and 
associated credit rating of such actions the NRSRO ``currently has 
determined'' were influenced by the conflict.\86\ The Commission's 
proposed use of the term ``currently'' is designed to conform to the 
requirement of proposed paragraph (c)(1) of Rule 17g-8 that the NRSRO 
have procedures designed to place the credit rating of the obligor, 
security, or money market instrument on credit watch immediately upon 
the discovery that a conflict influenced a prior credit rating action 
(i.e., not wait until the NRSRO has determined whether additional 
credit ratings previously assigned to the obligor, security, or money 
market instrument also were influenced by the conflict). The Commission 
preliminarily believes that the best approach would be to alert users 
of the NRSRO's credit ratings as soon as possible after a conflict is 
discovered.
---------------------------------------------------------------------------

    \81\ Id.; see also proposed new paragraph (a)(1)(ii)(J)(3)(i) of 
Rule 17g-7.
    \82\ See 15 U.S.C. 78o-7(s) and proposed new paragraph (a) of 
Rule 17g-7.
    \83\ See proposed new paragraphs (a)(1)(ii)(A)-(N) of Rule 17g-
7.
    \84\ See proposed new paragraphs (a)(1)(ii)(J)(3)(i)-(iii) of 
Rule 17g-7 and related discussion below in Section II.G.3 of the 
release.
    \85\ See proposed new paragraph (a)(1)(ii)(J)(3)(i) of Rule 17g-
7.
    \86\ Id.
---------------------------------------------------------------------------

    Proposed paragraph (c)(2) of new Rule 17g-8 would require the NRSRO 
to have procedures reasonably designed to ensure it promptly determines 
whether the current credit rating assigned to the obligor, security, or 
money market instrument must be revised so that it no longer is 
influenced by a conflict of interest and is solely a product of the 
documented procedures and methodologies the NRSRO uses to determine 
credit ratings.\87\ The goal would be to ensure as quickly as possible 
that the credit rating assigned to the obligor, security, or money 
market instrument is solely a product of the NRSRO's procedures and 
methodologies for determining credit ratings (i.e., is in no way 
influenced by the conflict). With respect to making this determination, 
the Commission preliminarily believes one approach would be to apply de 
novo the NRSRO's procedures and methodologies for determining credit 
ratings to the rated obligor, security, or money market instrument and 
revise the current credit rating if the de novo application produces a 
credit rating at a different notch on the rating scale.
---------------------------------------------------------------------------

    \87\ See proposed paragraph (c)(2) of new Rule 17g-8.
---------------------------------------------------------------------------

    The Commission does not expect an NRSRO would revise a credit 
rating in every circumstance in which an earlier rating action was 
influenced by a conflict of interest. The Commission preliminarily 
notes that Section 15E(h)(4)(A)(ii) of the Exchange Act provides that 
the NRSRO's policies and procedures shall be reasonably designed to, 
among other things, ensure that the NRSRO takes action to revise the 
credit rating ``if appropriate.''\88\ It is possible, for example, that 
in the period since the NRSRO published the conflicted credit rating 
events unrelated to the conflict occurred that when factored into a de 
novo application of the NRSRO's procedures and methodologies for 
determining credit ratings would produce a credit rating at the same 
notch in the rating scale as the credit rating that was influenced by 
the conflict.\89\ The Commission preliminarily believes a requirement 
that the NRSRO nonetheless revise the credit rating could interfere 
with the NRSRO's procedures and methodologies for determining credit 
ratings in that it would force the NRSRO to change the credit rating 
assigned to the obligor, security, or money market instrument to a 
different notch in the rating scale than would be the case if the 
credit rating were solely a product of the NRSRO's procedures and 
methodologies. Consequently, a mandatory revision requirement could, in 
effect, require the NRSRO to publish a credit rating that was 
inaccurate from the perspective of those procedures and methodologies.
---------------------------------------------------------------------------

    \88\ 15 U.S.C. 78o-7(h)(4)(A)(ii).
    \89\ For example, assume that nine months ago an analyst 
upgraded the credit rating assigned to an issuer's securities from 
BBB to AA. The analyst leaves the NRSRO to work for the issuer. The 
analyst's new employment triggers a look-back review of the rating 
action upgrading the credit rating from BBB to AA pursuant to 
Section 15E(h)(4)(A)(i) of the Exchange Act. The look-back review 
determines the credit rating should not have been upgraded from BBB 
to AA at that point in time and the analyst's action in upgrading 
the credit rating was influenced by the prospect of employment with 
the issuer. The NRSRO performs a de novo review of the credit rating 
assigned to the issuer by applying its procedures and methodologies 
for determining credit ratings. This review--as required by the 
procedures and methodologies--takes into consideration favorable 
financial results the issuer reported three months ago. 
Consequently, the process of re-rating the issuer's securities 
determines the current credit rating should be AA.
---------------------------------------------------------------------------

    Proposed paragraph (c)(3) of new Rule 17g-8 would require that the 
NRSRO have procedures reasonably designed to ensure it promptly 
publishes a revised credit rating, if appropriate, or an affirmation of 
the credit rating, if appropriate, based on the determination of 
whether the current credit rating assigned to the obligor, security, or 
money market instrument must be revised.\90\ The Commission's intent is 
for the NRSRO to have procedures that are reasonably designed to notify 
users of the NRSRO's credit ratings as quickly as possible, whether the 
credit rating assigned to the obligor, security, or money market 
instrument will be

[[Page 33431]]

changed or remain the same.\91\ The goal would be to promptly remove 
the uncertainty surrounding the credit rating to limit the potential 
that investors and other users of credit ratings might make investment 
or other credit based decisions based on incomplete information.
---------------------------------------------------------------------------

    \90\ See proposed paragraphs (c)(3)(i) and (ii) of new Rule 17g-
8; see also proposed new paragraphs (a)(1)(ii)(J)(3)(ii) and (iii) 
of Rule 17g-7.
    \91\ The Commission notes that, in the case of an NRSRO that 
makes its rating actions available only to subscribers, former 
subscribers who made an investment or other credit based decision 
using the credit rating likely would not receive notice that the 
credit rating was influenced by a conflict of interest as well as 
any changes made to the credit rating as a result of the ``look-
back'' review.
---------------------------------------------------------------------------

    As with the placement of the credit rating on credit watch, 
proposed paragraph (c)(3) of new Rule 17g-8 would require that the 
NRSRO's procedures would need to be reasonably designed to ensure that 
information required pursuant to proposed new paragraph 
(a)(1)(ii)(J)(3)(ii) and (iii) of Rule 17g-7, respectively, is included 
with the publication of a revised or affirmed credit rating.\92\ In the 
case of a revised rating, proposed new paragraph (a)(1)(ii)(J)(3)(ii) 
of Rule 17g-7 would require the NRSRO to provide in the form published 
with the rating action an explanation that the reason for the action is 
the discovery that a credit rating assigned to the obligor, security, 
or money market instrument in one or more prior rating actions was 
influenced by a conflict of interest, the date and associated credit 
rating of each prior rating action the NRSRO has determined was 
influenced by the conflict, and an estimate of the impact the conflict 
had on each such prior rating action.\93\ Similarly, in the case of an 
affirmed rating, proposed new paragraph (a)(1)(ii)(J)(3)(iii) of Rule 
17g-7 would require the NRSRO to provide an explanation of why no 
rating action was taken to revise the credit rating notwithstanding the 
conflict, the date and associated credit rating of each prior rating 
action the NRSRO has determined was influenced by the conflict, and an 
estimate of the impact the conflict had on each such prior rating 
action.\94\
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    \92\ See proposed paragraphs (c)(3)(i) and (ii) of new Rule 17g-
8.
    \93\ See proposed new paragraph (a)(1)(ii)(J)(3)(ii) of Rule 
17g-7.
    \94\ See proposed new paragraph (a)(1)(ii)(J)(3)(iii) of Rule 
17g-7.
---------------------------------------------------------------------------

    As indicated in the proposed disclosures, the NRSRO would need to 
include an estimate of the impact the conflict had on each prior rating 
action influenced by the conflict.\95\ The Commission preliminarily 
believes one approach an NRSRO could take to making such an estimate 
would be to apply de novo its procedures and methodologies for 
determining credit ratings to the rated obligor, security, or money 
market instrument using information and inputs as of the time period 
for which it was determined that the credit rating was influenced. In 
other words, under this approach the NRSRO would reconstruct the past 
rating action through a ``conflict-free'' application of its procedures 
and methodologies for determining credit ratings. The NRSRO then could 
compare the credit ratings and disclose the difference between the 
rating action that was influenced by a conflict and the reconstructed 
rating action.
---------------------------------------------------------------------------

    \95\ See proposed paragraph (c)(2)(i) of new Rule 17g-8; see 
also proposed paragraph (c)(2)(ii) of Rule 17g-8.
---------------------------------------------------------------------------

    The disclosures required by proposed new paragraphs 
(a)(1)(ii)(J)(3)(i), (ii) and (iii) of Rule 17g-7 would alert users of 
the NRSRO's credit ratings that the rating action was taken because a 
conflict of interest had influenced one or more credit ratings assigned 
to the obligor, security, or money market instrument.\96\ In addition, 
the estimate of the impact of the conflict would provide users of the 
NRSRO's credit ratings with a sense of the magnitude of the variation 
between the credit rating influenced by the conflict and the credit 
rating that would have been determined had the conflict not existed. 
The users of the NRSRO's credit ratings could consider this information 
in evaluating the ability of the NRSRO to manage conflicts of interest 
in the production of credit ratings. Moreover, if the variation between 
the credit rating influenced by the conflict and the ``un-conflicted'' 
credit rating was large (e.g., 2 or 3 notches in the applicable rating 
scale), users of the NRSRO's credit ratings could consider the 
potential risk of using the NRSRO's credit ratings to make investment 
or other credit-based decisions (particularly if the revision 
downgraded the credit rating to a low category in the rating scale).
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    \96\ See proposed paragraphs (a)(1)(ii)(J)(3)(i), (ii) and (iii) 
of Rule 17g-7.
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Request for Comment
    The Commission generally requests comment on all aspects of 
proposed paragraph (c) of new Rule 17g-8. The Commission also seeks 
comment on the following:
    1. Would the requirements to have procedures reasonably designed to 
ensure the NRSRO takes the steps set forth in proposed paragraphs 
(c)(1), (2), and (3) of new Rule 17g-8 alter the procedures and 
methodologies an NRSRO uses to determine credit ratings? For example, 
would an NRSRO take materially different steps if a look-back review 
conducted pursuant to Section 15E(h)(4)(A) of the Exchange Act 
determined that a credit rating was influenced by a conflict of 
interest? If so, describe in detail how those steps would differ.
    2. Under Section 15E(h)(4)(A)(i) of the Exchange Act, an NRSRO 
must, in certain circumstances, conduct a review to determine whether 
any conflicts of interest of an employee influenced the credit rating. 
Should the Commission define what it means to have a conflict of 
interest ``influence'' a credit rating? If so, how should this term be 
defined? For example, should a credit rating be deemed ``influenced'' 
if the NRSRO would have taken a different rating action with respect to 
the credit rating in the absence of the conflict?
    3. How would an NRSRO determine whether this conflict influenced a 
credit rating? Describe the types of evidence that would support such a 
determination. What steps could an NRSRO take to analyze whether this 
conflict influenced a credit rating? Are there any practical issues 
with respect to making such a determination? If so, describe them.
    4. Is there any reason an NRSRO should not have procedures 
reasonably designed to ensure it immediately publishes a rating action 
placing the obligor, security, or money market instrument on credit 
watch based on the discovery of the conflict and include with the 
publication of the rating action the information required by proposed 
new paragraph (a)(1)(ii)(J)(3)(i) of Rule 17g-7 as would be required by 
proposed paragraph (c)(1) of Rule 17g-8? If so, please explain in 
detail the rationale for not disclosing this information immediately in 
this manner. In addition, if a commenter agrees with the objective of 
the requirement but not the manner of disclosure, describe any 
alternative means of disclosure that would achieve the objective.
    5. What practical issues should the Commission consider in 
implementing proposed paragraph (c)(1) of new Rule 17g-8? How could the 
proposal be modified to address any practical issues identified without 
undermining the objectives of the proposal?
    6. Would the information required by proposed new paragraph 
(a)(1)(ii)(J)(3)(i) of Rule 17g-7 to be included in the form published 
with a rating action placing the obligor, security, or money market 
instrument on credit watch be useful to the users of the NRSRO's credit 
ratings? Is there additional or alternative information that should be 
provided? If so, please describe such additional or alternative 
information.

[[Page 33432]]

    7. Is there any reason an NRSRO would not have procedures 
reasonably designed to ensure it promptly determines whether the 
current credit rating assigned to the obligor, security, or money 
market instrument must be revised so it no longer is influenced by a 
conflict of interest and is solely a product of the documented 
procedures and methodologies the NRSRO uses to determine credit ratings 
as would be required pursuant to proposed paragraph (c)(2) of new Rule 
17g-8? If so, please explain in detail the rationale for not promptly 
making such a determination. In addition, are there alternative 
approaches to addressing conflicts of interest influencing credit 
ratings that the Commission should consider? If so, please identify and 
describe them.
    8. What practical issues should the Commission consider in 
implementing proposed paragraph (c)(2) of new Rule 17g-8? How could the 
proposal be modified to address any practical issues identified without 
undermining the objectives of the proposal?
    9. Should the Commission be more prescriptive in terms of how an 
NRSRO would be required to determine whether the current credit rating 
assigned to the obligor, security, or money market instrument must be 
revised so it no longer is influenced by a conflict of interest and is 
solely a product of the documented procedures and methodologies the 
NRSRO uses to determine credit ratings? If so, what actions should the 
Commission require be included in the NRSRO's policies and procedures? 
For example, should the Commission specifically require the NRSRO to 
apply de novo its policies and procedures for determining credit 
ratings in the ways described above?
    10. Would a de novo application of the NRSRO's policies and 
procedures for determining credit ratings be sufficient to address the 
conflict of interest? Are there alternative or additional approaches to 
determining whether a credit rating influenced by a conflict of 
interest should be revised?
    11. Is there any reason an NRSRO should not have procedures 
reasonably designed to ensure that it promptly publishes, as 
applicable, a revised credit rating or an affirmation of the current 
credit rating based on the determination of whether the current credit 
rating assigned to the obligor, security, or money market instrument 
must be revised and include with the rating action the information 
required by proposed new paragraphs (a)(1)(ii)(J)(3)(ii) or (iii) of 
Rule 17g-7, as applicable, as would be required pursuant to paragraph 
(c)(3) of new Rule 17g-8? If so, please explain in detail the rationale 
for not promptly revising or affirming the current credit rating.
    12. What practical issues should the Commission consider in 
implementing proposed paragraph (c)(3) of new Rule 17g-8 that would 
require an NRSRO to have procedures reasonably designed to ensure that 
it promptly publishes, as appropriate, a revised credit rating or an 
affirmation of the current credit rating and includes with the rating 
action the information required by proposed new paragraphs 
(a)(1)(ii)(J)(3)(ii) and (iii) of Rule 17g-7? For example, would the 
requirement to estimate the impact the conflict had on the prior rating 
actions substantially prolong the time between placing the credit 
rating on credit watch and either publishing a revised credit rating or 
affirming the current credit rating? How could the proposal be modified 
to address any practical issues identified without undermining the 
objective of promptly addressing a credit rating influenced by a 
conflict of interest and at the same time providing investors and other 
users of credit ratings with the information about the conflict?
    13. In terms of estimating the impact of a conflict on a past 
rating action, would a feasible approach be to apply de novo the 
procedures and methodologies for determining credit ratings to the 
relevant obligor, security, or money market instrument using 
information and inputs as of the time period in which the conflicted 
credit rating was determined? Would this approach result in a 
meaningful estimate? Are there alternative or additional steps that 
could be taken to estimate the impact?
    14. Would the information required by proposed new paragraphs 
(a)(1)(ii)(J)(3)(ii) and (iii) of Rule 17g-7 to be included in the form 
published with a revised or affirmed credit rating, respectively, be 
useful to the users of the NRSRO's credit ratings? Is there additional 
or alternative information that should be provided? If so, please 
describe such additional or alternative information.
    15. How would the proposals impact obligors and issuers subject to 
a credit rating determined through the ``look-back'' review to be 
influenced by the conflict of interest?
    16. In the case of an NRSRO that only makes its rating actions 
available to subscribers, former subscribers likely would not receive 
the proposed notices. Does this raise a significant issue that the 
Commission should address? If so, describe alternatives that could be 
used to address this issue.
2. Proposed Amendment to Rule 17g-2
    Section 15E(h)(4)(A) of the Exchange Act requires an NRSRO ``to 
establish, maintain, and enforce policies and procedures'' but does not 
explicitly require an NRSRO to ``document'' such policies and 
procedures.\97\ Nonetheless, the Commission preliminarily believes that 
documenting these policies and procedures is necessary in order to 
carry out the statute's mandate. The Commission also preliminarily 
believes they should be documented because, among other reasons, it is 
a sound practice for any organization to document its policies and 
procedures to promote better understanding of them among the 
individuals within the organization and thereby to promote compliance 
with such policies and procedures. In addition, for the reasons 
discussed in Section II.A.2 of this release, the Commission 
preliminarily believes that the policies and procedures should be 
subject to the same recordkeeping requirements that apply to other 
records an NRSRO is required to retain pursuant to Rule 17g-2.\98\ For 
these reasons, the Commission proposes adding paragraph (a)(9) to Rule 
17g-2 to identify the policies and procedures an NRSRO is required to 
establish, maintain, and enforce pursuant to Section 15E(h)(4)(A) of 
the Exchange Act and paragraph (c) of Rule 17g-8 as a record an NRSRO 
must make and retain.\99\ As a result, the policies and procedures 
would need to be documented in writing and be subject to the record 
retention and production requirements in paragraphs (c) through (f) of 
Rule 17g-2.\100\
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    \97\ See 15 U.S.C. 78o-7(h)(4)(A).
    \98\ 17 CFR 240.17g-2.
    \99\ See proposed new paragraph (a)(9) to Rule 17g-2; see also 
Section 17(a)(1) of the Exchange Act, which requires an NRSRO to 
make and keep such records, and make and disseminate such reports, 
as the Commission prescribes by rule as necessary or appropriate in 
the public interest, for the protection of investors, or otherwise 
in furtherance of the Exchange Act. 15 U.S.C. 78q(a)(1).
    \100\ See 17 CFR 240.17g-2(c)-(f).
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Request for Comment
    The Commission generally requests comment on all aspects of 
proposed new paragraph (a)(9) of Rule 17g-2.

D. Fines and Other Penalties

    Section 932(a)(8) of the Dodd-Frank Act amended Section 15E of the 
Exchange Act to add new subsection (p), which contains four paragraphs: 
(1), (2), (3), and (4).\101\ Section 15E(p)(4)(A) provides that the 
Commission shall establish, by rule, fines and other penalties 
applicable to any NRSRO that

[[Page 33433]]

violates the requirements of Section 15E of the Exchange Act and the 
rules under the Exchange Act.\102\
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    \101\ See Public Law 111-203 Sec.  932(a)(8) and 15 U.S.C. 78o-
7(p)(1)-(4).
    \102\ See 15 U.S.C. 78o-7(p)(4)(A).
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    The Exchange Act already provides a wide range of fines, penalties, 
and other sanctions applicable to NRSROs for violations of any section 
of the Exchange Act (including Section 15E) and the rules under the 
Exchange Act (including the rules under Section 15E).\103\ For example, 
Section 15E(d)(1) of the Exchange Act provides that the Commission 
shall censure an NRSRO, place limitations on the activities, functions, 
or operations of an NRSRO, suspend an NRSRO for a period not exceeding 
12 months, or revoke the registration of an NRSRO if, among other 
reasons, the NRSRO violates Section 15E of the Exchange Act or the 
Commission's rules thereunder.\104\ In addition, Section 932(a)(3) of 
the Dodd-Frank Act amended Section 15E(d) to explicitly provide 
additional potential sanctions.\105\ First, it provided the Commission 
with the authority to seek sanctions against persons associated with, 
or seeking to become associated with, an NRSRO.\106\ Under these 
amendments, the Commission can censure such persons, place limitations 
on the activities or functions of such persons, suspend such persons 
for a period not exceeding 1 year, or bar such persons from being 
associated with an NRSRO.\107\ Second, Section 932(a)(3) of Dodd-Frank 
Act amended Section 15E(d) to provide the Commission with explicit 
authority to temporarily suspend or permanently revoke the registration 
of an NRSRO in a particular class or subclass of credit ratings if the 
NRSRO does not have adequate financial and managerial resources to 
consistently produce credit ratings with integrity.\108\
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    \103\ See 15 U.S.C. 78o-7(d), 15 U.S.C. 78u, 15 U.S.C. 78u-1, 15 
U.S.C. 78u-2, 15 U.S.C. 78u-3 and 15 U.S.C. 78ff.
    \104\ See Section 15E(d)(1)(A)-(F) of the Exchange Act (15 
U.S.C. 78o-7(d)(1)(A)-(F)), as amended by the Dodd-Frank Act.
    \105\ See Public Law 111-203 Sec.  932(a)(3) and 15 U.S.C. 78o-
7(d).
    \106\ 15 U.S.C. 78o-7(d)(1).
    \107\ Id.
    \108\ See Public Law 111-203 Sec.  932(a)(3) and 15 U.S.C. 78o-
7(d)(2). Prior to this amendment, the Commission already had 
authority to suspend or revoke the registration of an NRSRO if it 
failed to maintain adequate financial and managerial resources to 
consistently produce credit ratings with integrity. See Section 
15E(d)(5) of the Exchange Act (15 U.S.C. 78o-7(d)(5)) before being 
amended by the Dodd-Frank Act, which re-designated paragraph (d)(5) 
of Section 15E as paragraph (d)(1)(E) (15 U.S.C. 78o-7(d)(1)(E)). 
Section 15E(d)(2) of the Exchange Act, however, provides explicit 
authority to target a suspension or registration revocation to a 
specific class or subclass of security. See 15 U.S.C. 78o-7(d)(2).
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    Furthermore, Sections 21, 21A, 21B, 21C, and 32 of the Exchange Act 
provide additional means to sanction an NRSRO for violations of the 
provisions of the Exchange Act such as the self-executing provisions in 
Section 15E of the Exchange Act and the rules under the Exchange 
Act.\109\
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    \109\ See 15 U.S.C. 78o-7, 15 U.S.C. 78u, 15 U.S.C. 78u-1, 15 
U.S.C. 78u-2, 15 U.S.C. 78u-3 and 15 U.S.C. 78ff, respectively. In 
fact, the Dodd-Frank Act amended Section 21B of the Exchange Act (15 
U.S.C. 78u-2) to provide the Commission with the authority to assess 
money penalties in cease and desist proceedings under Section 21C 
(15 U.S.C. 78u-3). See Section 929P(a)(2) of the Dodd-Frank Act.
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    The Commission preliminarily believes these provisions of the 
Exchange Act, as amended by the Dodd-Frank Act, provide a sufficiently 
broad range of means to impose fines, penalties, and other sanctions on 
an NRSRO for violations of Section 15E of the Exchange Act and the 
rules thereunder. For example, the fines, penalties, and sanctions 
applicable to NRSROs are similar in scope to the fines, penalties, and 
sanctions applicable to other registrants under the Exchange Act, such 
as broker-dealers. Moreover, since enactment of the Rating Agency Act 
of 2006, the Commission has not identified a specific need for a fine 
or penalty applicable to NRSROs not otherwise provided for in the 
Exchange Act. Consequently, the Commission preliminarily believes it 
would be appropriate at this time to defer establishing new fines or 
penalties in addition to those provided for in the Exchange Act. 
However, in the future, the Commission may use the authority in Section 
15E(p)(4)(A) of the Exchange Act if a specific need is identified. For 
the foregoing reasons, to implement Section 15E(p)(4)(A) of the 
Exchange Act at this time, the Commission proposes to amend the 
instructions to Form NRSRO by adding new Instruction A.10.\110\ This 
new instruction would provide notice to credit rating agencies applying 
for registration and NRSROs that an NRSRO is subject to applicable 
fines, penalties, and other available sanctions set forth in Sections 
15E, 21, 21A, 21B, 21C, and 32 of the Exchange Act (15 U.S.C. 78o-7, 
78u, 78u-1, 78u-2, 78u-3, and 78ff, respectively) for violations of the 
securities laws.
---------------------------------------------------------------------------

    \110\ See proposed new Instruction A.10 to Form NRSRO.
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of 
proposed new Instruction A.10 to Form NRSRO. The Commission also seeks 
comment on the following:
    1. Are the fines, penalties and other sanctions applicable to 
NRSROs in Sections 15E, 21, 21A, 21B, 21C, and 32 of the Exchange Act 
sufficient? If not, what additional fines and penalties should the 
Commission establish by rule?

E. Public Disclosure of Information About the Performance of Credit 
Ratings

    Section 932(a)(8) of the Dodd-Frank Act amended Section 15E of the 
Exchange Act to add new subsection (q), which contains paragraphs (1) 
and (2).\111\ Section 15E(q)(1) provides that the Commission shall, by 
rule, require each NRSRO to publicly disclose information on the 
initial credit ratings determined by the NRSRO for each type of 
obligor, security, and money market instrument, and any subsequent 
changes to such credit ratings, for the purpose of allowing users of 
credit ratings to evaluate the accuracy of ratings and compare the 
performance of ratings by different NRSROs.\112\ Section 15E(q)(2) 
provides that the Commission's rules shall require, at a minimum, 
disclosures that:
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    \111\ See Public Law 111-203 Sec.  932(a)(8) and 15 U.S.C. 78o-
7(q)(1) and (2).
    \112\ See 15 U.S.C. 78o-7(q)(1).
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     Are comparable among NRSROs, to allow users of credit 
ratings to compare the performance of credit ratings across NRSROs; 
\113\
---------------------------------------------------------------------------

    \113\ See 15 U.S.C. 78o-7(q)(2)(A).
---------------------------------------------------------------------------

     Are clear and informative for investors having a wide 
range of sophistication who use or might use credit ratings; \114\
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    \114\ See 15 U.S.C. 78o-7(q)(2)(B).
---------------------------------------------------------------------------

     Include performance information over a range of years and 
for a variety of types of credit ratings, including for credit ratings 
withdrawn by the NRSRO; \115\
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    \115\ See 15 U.S.C. 78o-7(q)(2)(C).
---------------------------------------------------------------------------

     Are published and made freely available by the NRSRO, on 
an easily accessible portion of its Web site, and in writing, when 
requested; \116\
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    \116\ See 15 U.S.C. 78o-7(q)(2)(D).
---------------------------------------------------------------------------

     Are appropriate to the business model of an NRSRO; \117\ 
and
---------------------------------------------------------------------------

    \117\ See 15 U.S.C. 78o-7(q)(2)(E).
---------------------------------------------------------------------------

     Require an NRSRO to include an attestation with any credit 
rating it issues affirming that no part of the rating was influenced by 
any other business activities, that the rating was based solely on the 
merits of the instruments being rated, and that such rating was an 
independent evaluation of the risks and merits of the instrument.\118\
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    \118\ See 15 U.S.C. 78o-7(q)(2)(F). As discussed below in 
Section II.G.4 of this release, the Commission preliminarily 
believes that the attestation requirement specified in Section 
15E(q)(2)(F) should be incorporated into the rule the Commission is 
proposing to implement Section 15E(s) of the Exchange Act, which 
specifies, among other things, that the Commission adopt rules 
requiring an NRSRO to generate a form to be included with the 
publication of a credit rating. See 15 U.S.C. 78o-7(s) and proposed 
new paragraph (a)(1)(iii) of Rule 17g-7.

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[[Page 33434]]

    Currently, the Commission's rules require NRSROs to publish two 
types of information about the performance of their credit ratings: (1) 
Performance statistics\119\ and (2) ratings histories.\120\ As 
discussed in detail below, the Commission proposes to implement the 
rulemaking mandated in Section 15E(q) of the Exchange Act, in 
substantial part, by significantly enhancing the requirements for 
generating and disclosing this information by amending the instructions 
to Form NRSRO as they relate to Exhibit 1 and amending Rule 17g-1, Rule 
17g-2, and Rule 17g-7.\121\
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    \119\ See Exhibit 1 to Form NRSRO and Instruction H to Form 
NRSRO (as it relates to Exhibit 1). This type of disclosure shows 
the performance of an NRSRO's credit ratings in the aggregate 
through statistics. Specifically, it provides the percent of rated 
obligors, securities, and money market instruments in each category 
of credit rating in a rating scale (e.g., AAA, AA, A, BBB, BB, B, 
CCC, CC, and C) that over a given time period were downgraded or 
upgraded to another credit rating category (``transition rates'') 
and went into default (``default rates''). The goal is to provide a 
mechanism for users of credit ratings to compare the statistical 
performance of credit ratings across NRSROs.
    \120\ See 17 CFR 240.17g-2(d). This type of disclosure shows the 
credit rating history of a given rated obligor, security, or money 
market instrument. Specifically, it shows the initial credit rating 
and all subsequent modifications to the credit rating (such as 
upgrades, downgrades, and placements on watch) and the dates of such 
actions. The goal is to allow users of credit ratings to compare how 
different NRSROs rated an individual obligor, security, or money 
market instrument and how and when those ratings were changed over 
time. The disclosure of ratings histories also is designed to 
provide ``raw data'' that can be used by third parties to generate 
independent performance statistics such as transition and default 
rates.
    \121\ See proposed amendments to Instruction H to Form NRSRO (as 
it relates to Exhibit 1), paragraph (i) of Rule 17g-1, paragraph (d) 
of Rule 17g-2, and proposed new paragraph (b) of Rule 17g-7.
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1. Proposed Enhancements to Disclosures of Performance Statistics
    The Commission proposes to implement the rulemaking mandated in 
Section 15E(q) of the Exchange Act, in part, by amending Instruction H 
to Form NRSRO (the ``instructions for Exhibit 1'') and Rule 17g-1.\122\
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    \122\ See proposed amendments to the instructions for Exhibit 1 
and paragraph (i) of Rule 17g-1.
---------------------------------------------------------------------------

a. Proposed Amendments to Instructions for Exhibit 1
    Exhibit 1 is part of the registration application a credit rating 
agency seeking to be registered as an NRSRO (an ``applicant'') must 
submit to the Commission and an NRSRO must file with the Commission, 
keep up-to-date, and publicly disclose.\123\ Section 15E(a)(1)(B)(i) of 
the Exchange Act requires that the registration application include 
performance measurement statistics over short-term, mid-term, and long-
term periods (as applicable).\124\ The Commission implemented this 
requirement, in large part, through Exhibit 1 to Form NRSRO and the 
instructions for Exhibit 1.\125\ Section 15E(b)(1)(A) of the Exchange 
Act provides that the performance measurement statistics must be 
updated annually in an annual submission of the registration 
application required by Section 15E(b)(2) (the ``annual 
certification'').\126\
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    \123\ In particular, Section 15E(a)(1)(A) of the Exchange Act 
requires an applicant to furnish an application for registration to 
the Commission, in such form as the Commission shall require, by 
rule or regulation. See 15 U.S.C. 78o-7(a)(1)(A). Section 
15E(a)(1)(B) of the Exchange Act identifies information that must be 
included in the application for registration. See 15 U.S.C. 78o-
7(a)(1)(B)(i)-(x). The Commission implemented Sections 15E(a)(1)(A) 
and (B) of the Exchange Act by adopting Form NRSRO. See Form NRSRO; 
see also Oversight of Credit Rating Agencies Registered as 
Nationally Recognized Statistical Rating Organizations, 72 FR at 
33569-33582 (June 18, 2007). Section 15E(a)(3) of the Exchange Act 
provides that the Commission, by rule, shall require an NRSRO, upon 
being granted registration, to make the information and documents in 
its completed application for registration, or in any amendment to 
its application, publicly available on its Web site, or through 
another comparable, readily accessible means, except for certain 
information that is submitted on a confidential basis. See 15 U.S.C. 
78o-7(a)(3). The Commission implemented this provision by adopting 
paragraph (i) of Rule 17g-1. See 17 CFR 240.17g-1(i); see also 
Oversight of Credit Rating Agencies Registered as Nationally 
Recognized Statistical Rating Organizations, 72 FR at 33569 (June 
18, 2007). Section 15E(b)(1) requires an NRSRO to promptly amend its 
application for registration if any information or document provided 
therein becomes materially inaccurate; however, (as discussed below) 
certain information does not have to be updated and other 
information must be updated only on an annual basis. See 15 U.S.C. 
78o-7(b)(1); see also 15 U.S.C. 78o-7(b)(1) and 15 U.S.C. 78o-
7(a)(1)(B)(ix). The Commission implemented this provision by 
adopting Form NRSRO and paragraph (e) of Rule 17g-1. See Form NRSRO 
and 17 CFR 240.17g-1(e); see also Oversight of Credit Rating 
Agencies Registered as Nationally Recognized Statistical Rating 
Organizations, 72 FR at 33567, 33569-33582 (June 18, 2007).
    \124\ See 15 U.S.C. 78o-7(a)(1)(B)(i).
    \125\ See instructions for Exhibit 1.
    \126\ See 15 U.S.C. 78o-7(b)(1) and (2). In particular, Section 
15E(b)(2) of the Exchange Act provides that not later than 90 days 
after the end of each calendar year, an NRSRO shall file with the 
Commission an amendment to its registration application, in such 
form as the Commission, by rule, may prescribe: (1) Certifying that 
the information and documents in the application for registration 
continue to be accurate; and (2) listing any material change that 
occurred to such information and documents during the previous 
calendar year. See 15 U.S.C. 78o-7(b)(2). The Commission implemented 
these provisions by adopting Form NRSRO and paragraph (f) of Rule 
17g-1. See Form NRSRO and 17 CFR 240.17g-1(f); see also Oversight of 
Credit Rating Agencies Registered as Nationally Recognized 
Statistical Rating Organizations, 72 FR at 33567, 33569-33582 (June 
18, 2007).
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    The instructions for Exhibit 1 require an applicant and NRSRO to 
provide performance measurement statistics of the credit ratings of the 
applicant or NRSRO, including performance measurement statistics of the 
credit ratings separately for each class of credit rating for which the 
applicant is seeking registration or the NRSRO is registered.\127\ The 
classes of credit ratings for which an NRSRO can be registered are 
enumerated in the definition of ``nationally recognized statistical 
rating organization'' in Section 3(a)(62) of the Exchange Act: (1) 
Financial institutions, brokers, or dealers; \128\ (2) insurance 
companies; \129\ (3) corporate issuers; \130\ (4) issuers of asset-
backed securities (as that term is defined in Section 1101(c) of part 
229 of Title 17, Code of Federal Regulations, ``as in effect on the 
date of enactment of this paragraph''); \131\ and (5) issuers of 
government securities, municipal securities, or securities issued by a 
foreign government.\132\ With respect to the fifth class of credit 
ratings, the instructions for Exhibit 1 require the NRSRO to provide 
performance measurement statistics for the following three subclasses 
(as opposed to the class

[[Page 33435]]

as a whole): sovereigns, United States public finance, and 
international public finance.\133\
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    \127\ See instructions for Exhibit 1.
    \128\ See 15 U.S.C. 78c(a)(62)(A)(i).
    \129\ See 15 U.S.C. 78c(a)(62)(A)(ii).
    \130\ See 15 U.S.C. 78c(a)(62)(A)(iii).
    \131\ See 15 U.S.C. 78c(a)(62)(A)(iv). The instructions for 
Exhibit 1 broaden this class of credit rating to include a credit 
rating of any security or money market instrument issued by an asset 
pool or as part of any asset-backed or mortgage-backed securities 
transaction. The intent of the instruction is to include in the 
class (and, therefore, in the performance statistics for the class) 
credit ratings for structured finance products that are outside the 
scope of the definition referenced in Section 3(a)(62)(A)(iv) of the 
Exchange Act. See 15 U.S.C. 78c(a)(62)(A)(iv) and Amendments to 
Rules for Nationally Recognized Statistical Rating Organizations, 74 
FR at 6458 (Feb. 9, 2009). As discussed below, the Commission is 
proposing to continue to use a broadened definition in the proposed 
new instructions for Exhibit 1. Moreover, the term ``structured 
finance product'' as used throughout this release refers broadly to 
any security or money market instrument issued by an asset pool or 
as part of any asset-backed or mortgage-backed securities 
transaction. Amendments to Rules for Nationally Recognized 
Statistical Rating Organizations, 74 FR at 63832, footnote 3 (Dec. 
4, 2009). This broad category of financial instrument includes an 
``asset-backed security'' as defined in Section 3(a)(77) of the 
Exchange Act (15 U.S.C. 78c(a)(77)) and other types of structured 
debt instruments such as collateralized debt obligations CDOs, 
including synthetic and hybrid CDOs. Id. The term ``Exchange Act-
ABS'' as used throughout this release refers more narrowly to an 
``asset-backed security'' as defined in Section 3(a)(77) of the 
Exchange Act. 15 U.S.C. 78c(a)(77).
    \132\ See 15 U.S.C. 78c(a)(62)(A)(v).
    \133\ See instructions for Exhibit 1.
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    In addition, the instructions require that the performance 
measurement statistics ``must at a minimum show the performance of 
credit ratings in each class over 1-year, 3-year, and 10-year periods 
(as applicable) through the most recent calendar year-end, including, 
as applicable: historical ratings transition and default rates within 
each of the credit rating categories,\134\ notches, grades, or rankings 
used by the Applicant/NRSRO as an indicator of the assessment of the 
creditworthiness of an obligor, security, or money market instrument in 
each class of credit rating.''\135\ Paragraph (i) of Rule 17g-1 
provides, among other things, that the NRSRO must make the annual 
certification publicly available within 10 business days of furnishing 
the annual certification to the Commission.\136\
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    \134\ The transition rate is the percentage of ratings at a 
given rating notch that transition to another specified rating notch 
over a given time period. Only ratings that were outstanding at the 
beginning of the time period are used in the calculation of the 
transition rate. Transition rates are generally used to measure the 
stability of the ratings. The default rate is the percentage of 
ratings at a given rating notch that have defaulted over a given 
time period. Only the ratings that were outstanding at the beginning 
of the time period are used in the calculation.
    \135\ See instructions for Exhibit 1.
    \136\ See 17 CFR.240.17g-1(i).
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    Currently, the instructions for Exhibit 1 do not prescribe the 
methodology an NRSRO must use to calculate and present the performance 
measurement statistics; nor do the instructions limit the type of 
information that can be disclosed in the Exhibit.\137\ Consequently, 
NRSROs have used different techniques to produce performance 
measurement statistics, which has limited the ability of investors and 
other users of credit ratings to compare the performance of credit 
ratings across NRSROs.\138\ In addition, several NRSROs have included 
substantial amounts of information in Exhibit 1 about performance 
measurement statistics, in addition to transition and default rates. 
These practices make the presentation of information in the Exhibits 
widely inconsistent across NRSROs.
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    \137\ When adopting Form NRSRO, the Commission explained that 
the instructions would not prescribe how NRSROs must calculate 
transition rates and default rates, noting that commenters had 
opposed a standard approach because NRSROs use different 
methodologies to determine credit ratings. See Oversight of Credit 
Rating Agencies Registered as Nationally Recognized Statistical 
Rating Organizations, 72 FR at 33574 (June 18, 2007). The Commission 
stated that it intended to continue to consider the issue ``to 
determine the feasibility, as well as the potential benefits and 
limitations, of devising measurements that would allow reliable 
comparisons of performance between NRSROs.'' Id. The Commission 
incrementally standardized the disclosure requirements in Exhibit 1 
by amending the Form in 2009 to require an NRSRO to disclose 
transition and default rates for each class of credit rating for 
which it was registered and for 1-, 3-, and 10-year periods. See 
Amendments to Rules for Nationally Recognized Statistical Rating 
Organizations 74 FR at 6457-6459 (Feb. 9, 2009).
    \138\ See, e.g., Securities and Exchange Commission: Action 
Needed to Improve Rating Agency Registration Program and Performance 
Related Disclosures, GAO Report 10-782 (Sept. 2010) (``GAO Report 
10-782'').
---------------------------------------------------------------------------

    For the foregoing reasons and to implement Section 15E(q) of the 
Exchange Act, the Commission is proposing significant enhancements to 
the requirements to disclose performance measurement statistics in 
Exhibit 1.\139\ The enhancements would confine the disclosures in the 
Exhibit to transition and default rates and certain limited 
supplemental information. Moreover, the enhancements would standardize 
the production and presentation of the transition and default 
rates.\140\ Specifically, the Commission preliminarily believes that 
the transition and default rates in Exhibit 1 should be produced using 
a ``single cohort approach.'' \141\ As explained below, under this 
approach, an applicant and NRSRO, on an annual basis, would be required 
to compute how the credit ratings assigned to obligors, securities, and 
money market instruments in a particular class or subclass of credit 
rating that were outstanding on the date 1, 3, and 10 years prior to 
the most recent calendar year-end performed during the respective 1-, 
3-, and 10-year time period. The Commission's intent in proposing these 
enhancements is to make the Exhibit 1 disclosures simply presented, 
easy to understand, uniform in appearance, and comparable across 
NRSROs.\142\
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    \139\ See 15 U.S.C. 78o-7(q) and proposed amendments to 
instructions for Exhibit 1.
    \140\ See 15 U.S.C. 78o-7(q)(2)(B).
    \141\ See GAO Report 10-782, pp. 27-37 (comparing, among other 
things, a single cohort approach--the model for the Commission's 
proposal--with an average cohort approach). See also GAO Report 10-
782, p. 25, note 38 (identifying more complex techniques for 
calculating credit rating performance measurement statistics).
    \142\ See Section 15E(q)(2)(A) of the Exchange Act, which 
provides that the disclosure of information about the performance of 
credit ratings should be comparable among NRSROs, to allow users of 
credit ratings to compare the performance of credit ratings across 
NRSROs. 15 U.S.C. 78o-7(q)(2)(A). See also Section 15E(q)(2)(B) of 
the Exchange Act, which provides that the disclosure of information 
about the performance of credit ratings should be clear and 
informative for investors having a wide range of sophistication who 
use or might use credit ratings. 15 U.S.C. 78o-7(q)(2)(B).
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    To implement this proposal, the Commission is proposing to 
substantially revise the instructions for Exhibit 1.\143\ The proposed 
new instructions would be divided into paragraphs (1), (2), (3), and 
(4), some of which would have subparagraphs.\144\ The proposed new 
paragraphs would contain specific instructions with respect to, among 
other things, how required information must be presented in the Exhibit 
(including the order of presentation) and how transition and default 
rates must be produced using a single cohort approach. As with all 
information that must be submitted in Form NRSRO and its Exhibits, 
applicants and NRSROs would be subject to these requirements.\145\
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    \143\ See proposed amendments to instructions for Exhibit 1.
    \144\ See proposed new paragraphs (1), (2), (3), and (4) of the 
instructions for Exhibit 1.
    \145\ Form NRSRO must be used by a credit rating agency to apply 
for registration as an NRSRO and, once registered, an NRSRO must 
publicly disclose the information required in Form NRSRO and 
Exhibits 1 though 9. See 17 CFR 240.17g-1 and Instructions A.1, B, 
C, D, E, and F to Form NRSRO.
---------------------------------------------------------------------------

    Proposed Paragraph (1) of the Instructions for Exhibit 1. Proposed 
new paragraph (1) of the instructions for Exhibit 1 would require an 
applicant and NRSRO to provide performance measurement statistics for 
each class and subclass of credit ratings for which the applicant is 
seeking registration as an NRSRO or the NRSRO is registered.\146\ 
Consistent with the current instructions, proposed new paragraph (1) 
would require an applicant and NRSRO to provide transition and default 
rates for 1-, 3-, and 10-year periods for each applicable class or 
subclass of credit rating.\147\ Also consistent with the current 
instructions, proposed new paragraph (1) would require an applicant and 
NRSRO to produce and present three separate transition and default 
statistics for each applicable class or subclass of credit rating; 
namely, for 1-, 3-, and 10-year time periods through the most recently 
ended calendar year. In addition, as part of the enhancements, an 
applicant and NRSRO would need to present the transition and default 
rates for each time period together in tabular form using a standard 
format (a ``Transition/Default Matrix'').\148\
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    \146\ See proposed new paragraph (1) of the instructions for 
Exhibit 1.
    \147\ Compare current instructions for Exhibit 1 with proposed 
new paragraph (1) of the instructions for Exhibit 1.
    \148\ See proposed new paragraph (1) of the instructions for 
Exhibit 1.
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    Proposed new paragraph (1) would identify the classes and 
subclasses of credit ratings for which an applicant and NRSRO would 
need to produce Transition/Default Matrices, as

[[Page 33436]]

applicable. The identified classes would reference the classes of 
credit ratings for which an NRSRO can be registered as enumerated in 
the definition of NRSRO in Section 3(a)(62)(A) of the Exchange 
Act.\149\ This would be consistent with the current instructions for 
Exhibit 1.\150\ Moreover, also consistent with the current 
instructions, the class of credit ratings enumerated in Section 
3(a)(62)(A)(iv) of the Exchange Act (issuers of certain asset-backed 
securities) would be expanded by the instructions in proposed new 
paragraph (1) to include a broader range of structured finance products 
than are within the scope of the definition of Section 
3(a)(62)(A)(iv).\151\
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    \149\ Compare 15 U.S.C. 78c(a)(62)(A)(i)-(v) with proposed new 
paragraphs (1)(A)-(E) of the instructions for Exhibit 1.
    \150\ Compare current instructions for Exhibit 1 with proposed 
new paragraph (1).
    \151\ See 15 U.S.C. 78c(a)(62)(A)(iv); compare current 
Instructions for Exhibit 1 with proposed new paragraph (1)(D).
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    However, to enhance the disclosure of transition and default rates 
in this class, the Commission is proposing to divide it into the 
following subclasses: RMBS;\152\ commercial mortgage backed securities 
(``CMBS'');\153\ collateralized loan obligations (``CLOs'');\154\ 
CDOs;\155\ issuances of asset-backed commercial paper conduits 
(``ABCP'');\156\ other asset-backed securities;\157\ and other 
structured finance products.\158\ The Commission preliminarily believes 
dividing the broad class of structured finance products into these 
subclasses would provide investors and other users of credit ratings 
with more useful information about the performance of an NRSRO's 
structured finance ratings.\159\ For example, during the recent crisis, 
NRSROs assigned credit ratings to RMBS and CDOs that performed far 
differently than credit ratings of some other types of 
securitizations.\160\ Consequently, if an applicant or NRSRO computed 
transition and default rates for structured finance products as a 
single class, the underperformance of certain subclasses could be muted 
by the better performance of other subclasses.
---------------------------------------------------------------------------

    \152\ The Commission preliminarily intends that an ``RMBS'' for 
the purposes of this disclosure requirement would mean a 
securitization of primarily residential mortgages. See proposed new 
paragraph (1)(D)(i) of the instructions for Exhibit 1.
    \153\ The Commission preliminarily intends that a ``CMBS'' for 
the purposes of this disclosure requirement would mean a 
securitization of primarily commercial mortgages. See proposed new 
paragraph (1)(D)(ii) of the instructions for Exhibit 1.
    \154\ The Commission preliminarily intends that a ``CLO'' for 
the purposes of this disclosure requirement would mean a 
securitization of primarily commercial loans. See proposed new 
paragraph (1)(D)(iii) of the Instructions for Exhibit 1.
    \155\ The Commission preliminary intends that a ``CDO'' for the 
purposes of this disclosure requirement would mean a securitization 
primarily of other debt instruments such as RMBS, CMBS, CLOs, CDOs, 
other asset-backed securities, and corporate bonds. See proposed new 
paragraph (1)(D)(iv) of the instructions for Exhibit 1.
    \156\ The Commission preliminarily intends that ``ABCP'' for the 
purposes of this disclosure requirement would mean short term notes 
issued by a structure that securitizes a variety of financial assets 
(e.g., trade receivables, credit card receivables), which secure the 
notes. See proposed new paragraph (1)(D)(v) of the instructions for 
Exhibit 1.
    \157\ The Commission preliminarily intends that the term ``other 
asset-backed security'' for the purposes of this disclosure 
requirement would mean a securitization primarily of auto loans, 
auto leases, floor plan financings, credit card receivables, student 
loans, consumer loans, equipment loans, or equipment leases. See 
proposed new paragraph (1)(D)(vi) of the instructions for Exhibit 1.
    \158\ The Commission preliminarily intends that ``other 
structured finance product'' for the purposes of this disclosure 
requirement would mean a structured finance product that does not 
fit into any of the other subclasses of structured products. See 
proposed new paragraph (1)(D)(vii) of the instructions for Exhibit 
1.
    \159\ See, e.g., GAO Report 10-782, p. 36 (noting that NRSROs 
active in rating structured finance generally present performance 
statistics for this class by sectors (e.g., RMBS, CMBS and ABS) in 
their voluntary disclosures). See also, GAO Report 10-782, p. 36 
(observing that the various structured finance sectors have risk 
characteristics that vary significantly and, therefore, that 
presenting performance statistics for the class as a whole ``may not 
be useful.'').
    \160\ See, e.g., A Global Cross-Asset Report Card of Ratings 
Performance in Times of Stress, Standard & Poor's (June 8, 2010).
---------------------------------------------------------------------------

    Consistent with the current instructions, proposed new paragraph 
(1) would divide the class of credit ratings enumerated in Section 
3(a)(62)(A)(v) of the Exchange Act (issuers of government securities, 
municipal securities or securities issued by a foreign government) into 
three subclasses.\161\ The subclasses would continue to be: sovereign 
issuers; United States public finance; and international public 
finance.\162\
---------------------------------------------------------------------------

    \161\ See 15 U.S.C. 78c(a)(62)(A)(v); compare current 
instructions for Exhibit 1, with proposed new paragraph (1)(E).
    \162\ See proposed new paragraph (1)(E) of the instructions for 
Exhibit 1.
---------------------------------------------------------------------------

    In addition, consistent with the current instructions for an annual 
certification, proposed new paragraph (1) would provide that the 
performance measurement statistics must be updated yearly in the 
NRSRO's annual certification in accordance with Section 15E(b)(1)(A) 
and paragraph (f) of Rule 17g-1 (i.e., a Form NRSRO with updated 
performance measurement statistics must be filed with the Commission no 
later than 90 days after the end of the calendar year).\163\ Proposed 
new paragraph (1) also would remind an NRSRO that, pursuant to 
paragraph (i) of Rule 17g-1, the annual certification with the updated 
performance measurement statistics must be made publicly and freely 
available on an easily accessible portion of the NRSRO's corporate 
Internet Web site within 10 business days after the filing and that the 
NRSRO must make its up-to-date Exhibit 1 freely available in writing to 
any individual who requests a copy of the Exhibit.\164\
---------------------------------------------------------------------------

    \163\ See Instruction F to Form NRSRO and proposed new paragraph 
(1); see also 15 U.S.C. 78o-7(b)(1)(A) and 17 CFR 240.17g-1(f). 
While paragraph (f) of Rule 17g-1 currently requires the annual 
certification to be ``furnished,'' the Commission is proposing, as 
discussed below in Section II.M.1 of the release, to replace the 
term ``furnished'' with the term ``filed'' in a number of the NRSRO 
rules, including Rule 17g-1.
    \164\ See proposed new paragraph (1) of the instructions for 
Exhibit 1. As discussed below in Section II.E.1.b of this release, 
the Commission is proposing to amend paragraph (i) of Rule 17g-1 (17 
CFR 240.17g-1(i)) to implement Section 15E(q)(2)(D) of the Exchange 
Act, which provides that the Commission's rules must require that 
the information about the performance of credit ratings be published 
and made freely available on an easily accessible portion of an 
NRSRO's Web site, and in writing when requested. See 15 U.S.C. 78o-
7(q)(2)(D). As discussed below, the proposed amendment to paragraph 
(i) of Rule 17g-1 (17 CFR 240.17g-1(i)) would require an NRSRO to 
publish and make freely available on an easily accessible portion of 
its Web site all of Form NRSRO (i.e., not just Exhibit 1). However, 
only Exhibit 1 would need to be made freely available in writing 
when requested.
---------------------------------------------------------------------------

    Proposed Paragraph (2) of the Instructions for Exhibit 1. Proposed 
new paragraph (2) of the instructions for Exhibit 1 would prescribe how 
an applicant and NRSRO must present the performance measurement 
statistics and other required information in the Exhibit.\165\ 
Specifically, it would require that the Transition/Default Matrices for 
each applicable class and subclass of credit ratings be presented in 
the order that the classes and subclasses are identified in proposed 
paragraphs (1)(A) through (E) of Exhibit 1. In addition, the order of 
the Transition/Default Matrices for a given class or subclass would 
need to be: The 1-year matrix, the 3-year matrix, and then the 10-year 
matrix.

[[Page 33437]]

Proposed new paragraph (2) also would provide that if the applicant or 
NRSRO did not issue credit ratings in a particular class or subclass 
for the length of time necessary to produce a Transition/Default Matrix 
for a 1-, 3-, or 10-year period, it would need to explain that fact in 
the location where the Transition/Default Matrix would have been 
presented in the Exhibit.\166\
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    \165\ See proposed new paragraph (2) of the instructions for 
Exhibit 1.
    \166\ For example, if an NRSRO is registered in the corporate 
issuer class but has been issuing credit ratings for only 7 years in 
that class, it could not produce a 10-year Transition/Default Matrix 
for the class. Instead, the NRSRO would need to provide an 
explanation in the location where a 10-year Transition/Default 
Matrix would have been located (i.e., after the 3-year matrix) that 
it had not been issuing credit ratings in that class for a 
sufficient amount of time to produce a 10-year Transition/Default 
Matrix.
---------------------------------------------------------------------------

    Similar to the current Instructions, proposed paragraph (2) would 
require an applicant and NRSRO to clearly define in Exhibit 1, after 
the presentation of all applicable Transition/Default Matrices, each 
symbol, number, or score in the rating scale used by the applicant or 
NRSRO to denote a credit rating category and notches within a category 
for each class and subclass of credit ratings in any Transition/Default 
Matrix presented in the Exhibit.\167\ The instructions also would 
require the applicant or NRSRO to clearly explain the conditions under 
which it classifies obligors, securities, or money market instruments 
as being in default. As discussed below, the Commission preliminarily 
believes that obligors, securities, and money market instruments that 
the applicant or NRSRO has classified as being in default as of the 
period start date for a Transition/Default Matrix should be excluded 
from the statistics in the matrix. Also, as discussed below, the 
Commission is proposing a standard definition of ``default'' for the 
purpose of calculating default rates. In addition, also as discussed 
below, where an applicant or NRSRO has a definition of ``default'' that 
is broader than this standard definition, the instructions would 
require the applicant or NRSRO to supplement the standard definition 
with its internal definition. For these reasons, the Commission 
believes it would be useful for investors and other users of credit 
ratings to know how an NRSRO defines default.
---------------------------------------------------------------------------

    \167\ Compare current instructions for Exhibit 1, with proposed 
new paragraph (2). As discussed in Section II.J.2 of this release, 
the Commission is proposing to implement Section 938(a)(2) of the 
Dodd-Frank Act through paragraph (b)(2) of new Rule 17g-8, which 
would require an NRSRO to have policies and procedures reasonably 
designed to clearly define the meaning of any symbol used by the 
NRSRO to denote a credit rating, including in Exhibit 1 to Form 
NRSRO. See Public Law 111-203 Sec.  938(a)(2) and proposed paragraph 
(b)(2) of new Rule 17g-8.
---------------------------------------------------------------------------

    Similar to the current instructions, proposed paragraph (2) would 
require that an applicant and NRSRO provide in Exhibit 1 the uniform 
resource locator (URL) of its corporate Internet Web site where the 
credit rating histories required to be disclosed pursuant to paragraph 
(b) of Rule 17g-7 would be located (in the case of an applicant) or are 
located (in the case of an NRSRO).\168\
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    \168\ Compare current instructions for Exhibit 1, with proposed 
new paragraph (2). As discussed below in Section II.E.2 of this 
release, the Commission is proposing to amend Rule 17g-2 (17 CFR 
240.17g-2) and Rule 17g-7 (17 CFR 240.17g-7) to enhance the credit 
rating history disclosure requirements currently located in Rule 
17g-2. Among other things, the Commission proposes relocating the 
credit rating history disclosure requirements from Rule 17g-2 to 
proposed new paragraph (b) of Rule 17g-7. See proposed amendments to 
paragraph (d) of Rule 17g-2 and proposed new paragraph (b) of Rule 
17g-7.
---------------------------------------------------------------------------

    Finally, proposed paragraph (2) would provide that Exhibit 1 must 
contain no performance measurement statistics or information other than 
as described in, and required by, the instructions for Exhibit 1; 
except the applicant or NRSRO would be permitted to provide, after the 
presentation of all required Transition/Default Matrices and other 
required disclosures, Internet Web site URLs where other information 
relating to performance measurement statistics of the applicant or 
NRSRO is located.\169\ As noted above, some NRSROs include substantial 
amounts of information in Exhibit 1 about the performance of their 
credit ratings. The Commission preliminarily believes information in 
addition to the disclosures that would be required under the 
enhancements to Exhibit 1 may be useful to investors and other users of 
credit ratings. However, the Commission also preliminarily believes 
disclosing this related information in Exhibit 1 would make the Exhibit 
less easy to use in terms of locating a particular Transition/Default 
Matrix and comparing it with the matrices of other NRSROs. 
Consequently, the Commission preliminarily believes an appropriate 
balance would be to exclude related information from the Exhibit but 
permit an NRSRO to cross-reference such information by providing 
Internet Web site URLs at the end of the Exhibit.
---------------------------------------------------------------------------

    \169\ See proposed new paragraph (2) of the instructions for 
Exhibit 1.
---------------------------------------------------------------------------

    Proposed Paragraph (3) of the Instructions for Exhibit 1. Proposed 
paragraph (3) of the Instructions for Exhibit 1 would prescribe how an 
applicant and NRSRO must design a Transition/Default Matrix.\170\ The 
instructions would require an applicant and NRSRO to produce a 1-, 3-, 
and 10-year Transition/Default Matrix for each applicable class and 
subclass of credit rating that resembles, in design, the Transition/
Default Matrix in Figure 1 below.\171\
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    \170\ See proposed new paragraph (3) of the instructions for 
Exhibit 1.
    \171\ However, as explained below, the top row and first column 
would be based on the rating scale used by the applicant or NRSRO 
for the applicable class or subclass of credit ratings. For example, 
in the Sample Transition/Default Matrix, there are nine categories 
denoted by the symbols: AAA, AA, A, BBB, BB, B, CCC, CC, and C but 
no notches within those categories. An NRSRO that uses notches in 
its ratings scale (e.g., AA+, AA, and AA-) would need to include the 
symbol for each notch in the individual cells of the first column 
and top row. However, as discussed below, the applicant or NRSRO 
would exclude a ``default'' category even if it uses such a category 
in its rating scale (though, as explained below, there would be a 
column with the heading ``Default'' in the matrix that would depict 
the percent of rated obligors, securities, and money market 
instruments that went into default during the relevant time period 
based on a standard definition of ``default'' in the instructions 
for Exhibit 1 (i.e., not on the definition of the applicant or 
NRSRO).

                                                                Figure 1--Corporate Issuers--10-Year Transition and Default Rates
                                                                          [December 31, 2000 through December 31, 2010]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Number of
                                                                      ratings                                                                                                 Paid    Withdrawn
                       Credit rating scale                        outstanding as    AAA       AA       A       BBB       BB       B       CCC       CC       C     Default    off      (other)
                                                                   of 12/31/2000
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
AAA.............................................................              10      50%      10%  .......  .......  .......  .......  .......  .......  .......  .......      40%  ...........
AA..............................................................            2000       1%      39%      12%      10%       8%       5%       4%  .......  .......       1%      19%           1%
A...............................................................            4000  .......       6%      34%      15%      10%       6%       4%       3%  .......       2%      18%           2%
BBB.............................................................            3600  .......       2%       9%      28%      15%      10%       6%       5%       1%       4%      17%           3%
BB..............................................................            1000  .......  .......       2%       4%      20%      14%       5%  .......  .......       2%      16%          37%
B...............................................................             500  .......  .......       1%       3%       6%      20%      20%      15%  .......      15%      15%           5%
CCC.............................................................             300  .......  .......  .......  .......       4%       6%      15%      25%      20%      20%       4%           6%

[[Page 33438]]

 
CC..............................................................             200  .......  .......  .......  .......  .......       2%       8%      10%      38%      30%       2%          10%
C...............................................................             160  .......  .......  .......  .......  .......  .......       2%       8%      10%      67%       1%          12%
    Total.......................................................          11,770  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  ...........
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

    A sample Transition/Default Matrix similar to Figure 1 would be 
depicted in proposed new paragraph (3) to provide a visual 
representation of how to design and present a matrix.\172\ In addition 
to the visual depiction, proposed new paragraph (3) would contain 
narrative instructions on how to design a matrix. First, the narrative 
instructions would prescribe the headings for each required column in a 
Transition/Default Matrix by referring to the cells in the top row of 
the table (the ``header row'').\173\ The narrative instructions would 
require that the first and second cells in the header row contain the 
headings, respectively, ``Credit Rating Scale'' and ``Number of Ratings 
Outstanding as of [insert the applicable date].'' \174\ The applicable 
date would be the date 1, 3, or 10 years prior to the most recent 
calendar year-end depending on whether the Transition/Default Matrix 
was being produced for a 1-, 3-, or 10-year period. The next sequence 
of cells in the header row would need to contain, in order from left to 
right, each credit rating symbol, number, or score used to denote a 
category and a notch within a category in the rating scale used by the 
applicant or NRSRO for the applicable class or subclass of credit 
ratings in descending order from the highest to the lowest notch.\175\ 
The narrative instructions would require that the applicant or NRSRO 
not include a ``default'' category in the header row even if such a 
category is used in the rating scale.\176\ The narrative instructions 
would require that the cells in the last three columns in the 
Transition/Default Matrix contain the headings, in order from left to 
right, ``Default'', ``Paid Off'', and ``Withdrawn (other).'' \177\
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    \172\ See proposed new paragraph (3) of the instructions for 
Exhibit 1.
    \173\ See proposed new paragraph (3) of the instructions for 
Exhibit 1.
    \174\ See, e.g., the 1st and 2nd columns of the Sample 
Transition/Default Matrix in Figure 1.
    \175\ See proposed new paragraph (3) of the instructions for 
Exhibit 1; see also the 3rd through 11th columns of the Sample 
Transition/Default Matrix in Figure 1.
    \176\ The Commission's reasoning for proposing to exclude a 
category of ``default'' from the first column is explained below.
    \177\ See proposed new paragraph (3) of the instructions for 
Exhibit 1; see also the 12th through 14th columns of the Sample 
Transition/Default Matrix in Figure 1.
---------------------------------------------------------------------------

    Next, the narrative instructions would require that the first 
column have a separate cell containing each credit rating symbol, 
number, or score in the rating scale used by the applicant or NRSRO to 
denote a category and a notch within a category for the applicable 
class or subclass of credit ratings in descending order from the 
highest to the lowest notch.\178\ The applicant or NRSRO would be 
required to populate the column with the credit rating symbols, 
numbers, or scores in descending order from the highest to the lowest 
notch. Consistent with the header row, the narrative instructions also 
would require that the first column not include a ``default'' category 
if the applicant or NRSRO uses such a category in its rating scale. The 
last cell in the first column would need to contain the term ``Total.'' 
\179\
---------------------------------------------------------------------------

    \178\ See, e.g., the first column of the Sample Transition/
Default Matrix in Figure 1.
    \179\ See proposed new paragraph (3) of the instructions for 
Exhibit 1; see also the first column of the Sample Transition/
Default Matrix in Figure 1.
---------------------------------------------------------------------------

    Finally, the narrative instructions would require that the 
Transition/Default Matrix have a title identifying the applicable class 
or subclass of credit ratings, the period covered (1, 3, or 10 years), 
and start date and end date for the period.
    Proposed Paragraph (4) of the Instructions for Exhibit 1. Proposed 
new paragraph (4) of the instructions for Exhibit 1 would prescribe how 
an applicant or NRSRO would need to populate a Transition/Default 
Matrix with data and statistical information.\180\ First, proposed new 
paragraph (4)(A) would prescribe how to populate the cells of the 
second column headed ``Number of Ratings Outstanding [as the Start 
Date].'' \181\ First, the applicant or NRSRO would be required to 
determine a start-date cohort consisting of the obligors, securities, 
and money market instruments in the applicable class or subclass of 
credit ratings that were assigned a credit rating (other than an 
expected or preliminary credit rating)\182\ that was outstanding as of 
the start date for the applicable period (i.e., the date 1, 3, or 10 
years prior to the most recently ended calendar year).\183\ 
Consequently, the start-date cohort would exclude any obligor, 
security, or money market instrument that received an initial credit 
rating in the class or subclass after the start date.\184\
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    \180\ See proposed paragraph (4) of the instructions for Exhibit 
1.
    \181\ See proposed paragraph (4)(A) of the instructions for 
Exhibit 1; see also the 2nd column of the Sample Transition/Default 
Matrix in Figure 1.
    \182\ ``Expected'' or ``preliminary'' credit ratings most 
commonly are issued by an NRSRO with respect to a structured finance 
product at the time the issuer commences the offering and typically 
are included in pre-sale reports. Expected or preliminary credit 
ratings may include a range of ratings, or any other indications of 
a credit rating used prior to the assignment of an initial credit 
rating for a new issuance. As such, the Commission preliminarily 
believes they should be excluded from the Transition/Default 
Matrices since the issuance of the ``initial'' credit rating is the 
first formal expression of the NRSRO's view of the relative 
creditworthiness of the obligor, security, or money market 
instrument.
    \183\ For example, if the most recent year end was December 31, 
2010, the NRSRO would need to determine all the obligors, 
securities, and money market instruments with credit ratings 
outstanding in the relevant class as of December 31, 2009 (for the 
1-year Transition/Default Matrix), December 31, 2007 (for the 3-year 
Transition/Default Matrix), and December 31, 2000 (for the 10-year 
Transition/Default Matrix). Because some obligors, securities, and 
money market instruments have characteristics that could cause them 
to be assigned more than one class of credit rating, the Commission 
is seeking comment below in Section II.M.4.a of this release on 
which class would be the most appropriate for certain types of 
obligors, securities, and money market instruments. Based on the 
comments received in response to those questions, the Commission may 
decide to prescribe by rule or identify through guidance how certain 
types of obligors, securities, and money market instruments should 
be classified for the purpose of determining start-date cohorts.
    \184\ For example, a Transition/Default Matrix covering a 10-
year period would not include obligors, securities, and money market 
instruments that had been rated by the NRSRO for less than 10 years. 
However, these obligors, securities, and money instruments may be 
included in the start-date cohorts for the 1- and 3-year matrices 
for the class or subclass.
---------------------------------------------------------------------------

    In addition, the proposed instructions would provide that the 
applicant or NRSRO must exclude from the start-date cohort any 
obligors, securities, or money

[[Page 33439]]

market instruments that were classified by the applicant or NRSRO as 
being in default as of the period start date.\185\ The Commission 
preliminarily believes that the Transition/Default Matrices should not 
include obligors, securities, and money market instruments the 
applicant or NRSRO has classified as in default.\186\ The reason is 
that, if an applicant or NRSRO classifies an obligor, security, or 
money market instrument as in default, the applicant or NRSRO is no 
longer assessing the relative likelihood that the obligor, security, or 
money market will continue to meet its obligations to make timely 
payments of principal and interest as they come due (i.e., not default 
on its obligations). Consequently, as long as the obligor, security, or 
money market instrument continues to be classified as in default there 
is no credit rating performance to measure. However, if an obligor, 
security, or money market instrument is upgraded from the default 
category because, for example, the obligor emerges from a bankruptcy 
proceeding, the obligor would need to be included in a Transition/
Default Matrix that has a start date after the upgrade.\187\
---------------------------------------------------------------------------

    \185\ See proposed paragraph (4)(A) of the instructions for 
Exhibit 1. As indicated, the determination of whether an obligor, 
security, or money market instrument should be excluded from the 
start date cohort would be based on the definition of ``default'' 
used by the applicant or NRSRO. As discussed below, in determining 
the outcome of a credit rating assigned to an obligor, security, and 
money market instrument during the applicable time period covered by 
a Transition/Default Matrix, the applicant or NRSRO would need to 
use a standard definition of ``default'' in proposed new paragraph 
(4)(B)(iii) as opposed to its own definition. The Commission 
recognizes that the use of a standard definition of ``default'' to 
determine the outcome of a credit rating during the applicable time 
period could result in an obligor, security, or money market 
instrument being included in the start-date cohort that, as of the 
start date, would be classified as in ``default'' under the proposed 
definition of ``default'' in paragraph (4)(B)(iii). In other words, 
the applicant or NRSRO may not have classified the obligor, 
security, or money market instrument as in default as of the start 
date using its own narrower definition. In this case, the Commission 
preliminarily believes such an obligor, security, or money market 
instrument should be included in the start-date cohort since the 
applicant or NRSRO had assigned it a credit rating representing a 
relative assessment of the likelihood of default (rather than a 
classification of default) on the start date. Therefore, the 
performance of the applicant or NRSRO in rating that obligor, 
security, or money market instrument should be incorporated into the 
default rate.
    \186\ This does not mean that the obligor, security or money 
market instrument would never be reflected in default rates. For 
example, assume that as of the date 10 years prior to the most 
recently ended calendar year-end an obligor in the corporate issuer 
class was assigned a credit rating of BBB. This obligor would be 
included in the start-date cohort for the 10-year Transition/Default 
Matrix and grouped with the other obligors, securities, and/or money 
market instruments assigned BBB ratings. Further, assume that during 
the first seven years of the 10-year period, the credit rating of 
the obligor was downgraded from BBB to BB (in year 2), from BB to B 
(in year 5) and from B to CCC (in year 7). Having an outstanding 
credit rating of CCC in year 7, the obligor would be included in the 
start-date cohort for the 3-year Transition/Default Matrix and 
grouped with obligors, securities, and money market instruments 
assigned CCC ratings. Finally assume the obligor defaults in year 8. 
For the purposes of the 10- and 3-year Transition/Default Matrices, 
the obligor would need to be classified as having defaulted and 
included in the default rates calculated for those matrices. 
However, because the obligor would be in default as of the period 
start date for the 1-year Transition/Default Matrix, it would not be 
included in the start-date cohort for that matrix.
    \187\ See proposed paragraph (4)(A) of the instructions for 
Exhibit 1. For example, assume an obligor was classified as in 
default by the NRSRO as of the start date for the 10-year 
Transition/Default Matrix. The obligor would be excluded from the 
start-date cohort for the matrix. Assume further that two years 
later the obligor emerged from a bankruptcy proceeding after a re-
structuring. At that point in time, the NRSRO upgraded the obligor 
from the default category by assigning it a credit rating of BBB. 
Assume that three years later the NRSRO upgraded the obligor's 
credit rating from BBB to A- and that it retained that rating for 
the next five years. In this case, the obligor would be included in 
the start-date cohorts for the 1- and 3-year Transition/Default 
Matrices and grouped with the obligors, securities, and money market 
instruments assigned A- credit ratings.
---------------------------------------------------------------------------

    The next step, after determining the start-date cohort, would be to 
determine the number of obligors, securities, and money market 
instruments in the start-date cohort that, as of the start date, were 
assigned a credit rating at each notch in the rating scale used for the 
class or subclass.\188\ The final step would be to populate the 
appropriate column cells with these amounts and in the bottom cell 
provide the total number of obligors, securities, and money market 
instruments in the start-date cohort. As discussed next, determining 
these totals would be necessary to compute the percentages used to 
populate the rows of the Transition/Default Matrix. Moreover, the 
Commission preliminarily believes it would be useful to investors and 
other users of credit ratings to include these amounts in the matrix. 
This would inform them of the sample sizes of the obligors, securities, 
and money market instruments used to generate the transition and 
default rates for the notches entered in the matrix.\189\
---------------------------------------------------------------------------

    \188\ See proposed paragraph (4)(A) of the instructions for 
Exhibit 1. For the class of credit ratings in the Sample Transition/
Default Matrix in Figure 1, this would mean determining how many of 
the obligors, securities, and money market instruments in the start-
date cohort were assigned a credit rating of AAA, AA, A, BBB, BB, B, 
CCC, CC, and C as of the start date. For example, the Sample 
Transition/Default Matrix in Figure 1 shows a total start-date 
cohort of 11,770 obligors, securities, and/or money market 
instruments. Within this cohort and as of the 12/31/2000 start date, 
10 were rated AAA, 2000 were rated AA, 4000 were rated A, 3600 were 
rated BBB, 1000 were rated BB, 500 were rated B, 300 were rated CCC, 
200 were rated CC, and 16 were rated C.
    \189\ For example, if the outcome for a notch with 10 obligors 
is that 5 defaulted, the default rate reflected on the Transition/
Default Matrix for that notch would be 50%. Similarly, if the 
outcome of a notch with 5,000 obligors is that 2,500 defaulted, the 
default rate for that notch would be 50% as well. Investors and 
other users of credit ratings might conclude that 2,500 obligors 
going into default reflects significantly worse performance than 5 
obligors. Consequently, if the sample sizes were not reflected on 
the matrix, investors and other users of credit ratings could draw 
conclusions about the comparative performance of NRSROs that are 
distorted by varying sample sizes.
---------------------------------------------------------------------------

    Proposed new paragraph (4)(B) would focus on the horizontal axis of 
the Transition/Default Matrix by prescribing how an applicant and NRSRO 
would need to populate the rows representing sequentially in descending 
order the notches in the credit rating scale used for the applicable 
class or subclass of credit ratings.\190\ The instructions would 
provide that each row must contain percents indicating the cumulative 
credit rating outcomes of the obligors, securities, and money market 
instruments assigned a credit rating at that notch.\191\ The 
instructions also would provide that the percents in a row must add up 
to 100%.\192\
---------------------------------------------------------------------------

    \190\ See proposed new paragraph (4)(B) of the instructions for 
Exhibit 1; see also the 2nd through the 10th rows of the Sample 
Transition/Default Matrix in Figure 1 (AAA through C).
    \191\ For example, in the Sample Transition/Default Matrix in 
Figure 1, cumulative outcomes would need to determined for: the 10 
obligors, securities, and/or money market instruments in the 2nd row 
(AAA); the 2000 obligors, securities, and/or money market 
instruments in the 3rd row (AA); the 4000 obligors, securities, and/
or money market instruments in the 4th row (A); the 3600 obligors, 
securities, and/or money market instruments in the 5th row (BBB); 
the 1000 obligors, securities, and/or money market instruments in 
the 6th row (BB); the 300 obligors, securities, and/or money market 
instruments in the 8th row (CCC); the 200 obligors, securities, and/
or money market instruments in the 9th row (CC); and the 160 
obligors, securities, and/or money market instruments in the 10th 
row (C).
    \192\ See proposed new paragraph (4)(B) of the instructions for 
Exhibit 1. For example, in the Sample Transition/Default Matrix in 
Figure 1, the percents in the row representing the AAA category are 
(from left to right): 50%, 10%, and 40%, which when added together 
equal 100%.
---------------------------------------------------------------------------

    As discussed in detail below, proposed new paragraph (4)(B) would 
identify five potential credit rating outcomes: (1) The obligor, 
security, or money market instrument was assigned the same credit 
rating as of the period end date; (2) the obligor, security, or money 
market instrument was assigned a different credit rating as of the 
period end date; (3) the obligor, security, or money market instrument 
defaulted at any time during the period; (4) the obligor, security, or 
money market instrument paid off during the period; or (5) the 
applicant or NRSRO withdrew a credit rating of the obligor, security, 
or

[[Page 33440]]

money market instrument at any time during the period for a reason 
other than that the obligor, security, or money market instrument 
defaulted or ``paid off.''\193\ Because the percents in a row would 
need to add up to 100%, each obligor, security, and money market 
instrument reflected in the numbers contained in the 2nd column of a 
Transition/Default Matrix could be assigned only one credit rating 
outcome.\194\ Proposed paragraphs (4)(B)(i) through (v) would instruct 
applicants and NRSROs how to compute the percents used to populate each 
row representing a notch in the rating scale in the Transition/Default 
Matrix.\195\
---------------------------------------------------------------------------

    \193\ See proposed new paragraphs (4)(B)(i)-(v) of the 
Instructions for Exhibit 1.
    \194\ See proposed new paragraph (4)(B) of the instructions for 
Exhibit 1; see also the 2nd column in the Sample Transition/Default 
Table in Figure 1.
    \195\ See proposed new paragraphs (4)(B)(i)-(v) of the 
instructions for Exhibit 1.
---------------------------------------------------------------------------

    Proposed new paragraph (4)(B)(i) would require the applicant or 
NRSRO to determine the number of obligors, securities, and money market 
instruments assigned a credit rating at the notch represented by the 
row as of the period start date that were assigned a credit rating at 
the same notch as of the period end date.\196\ The instructions would 
require that: (1) this number be expressed as a percent of the total 
number of obligors, securities, and/or money market instruments 
assigned a credit rating at that notch as of the period start date; and 
(2) the percent be entered in the column representing the same 
notch.\197\
---------------------------------------------------------------------------

    \196\ See proposed new paragraph (4)(B)(i) of the instructions 
for Exhibit 1.
    \197\ For example, the 2nd row of the Sample Transition/Default 
Matrix in Figure 1 represents the AAA notch in the applicable rating 
scale. As reflected in the matrix, 10 obligors, securities, and/or 
money market instruments were assigned a credit rating of AAA as of 
the 12/31/2000 start date. Of these 10, 5 (or 50%) were assigned a 
credit rating of AAA as of the 12/31/2010 end date. Accordingly, 50% 
is input in the AAA column.
---------------------------------------------------------------------------

    An obligor, security, or money market instrument could have the 
same credit rating as of the period end-date because the credit rating 
did not change between the start date and the end date or the credit 
rating transitioned to one or more other notches during the relevant 
period but transitioned back to the start-date notch where it remained 
as of the period end date. Consequently, proposed new paragraph 
(4)(B)(i) would clarify that, to determine this amount, the applicant 
or NRSRO would need to use the credit rating at the notch assigned to 
the obligor, security, or money market instrument as of the period end 
date and not a credit rating at any other notch assigned to the 
obligor, security, or money market instrument between the period start 
date and the period end date.\198\
---------------------------------------------------------------------------

    \198\ See proposed new paragraph (4)(B)(i) of the instructions 
for Exhibit 1. For example, assume an obligor was assigned a credit 
rating of BBB as of the start date of a 10-year Transition/Default 
Matrix. Assume further that three years after the start date, the 
credit rating was upgraded to AA but then eight years after the 
start date the credit rating was downgraded to A, and nine years 
after the start date the credit rating was downgraded to BBB where 
it remained as of the period end date. For the purpose of the 10-
year Transition/Default Matrix, the outcome assigned this obligor 
would be that it had the same credit rating as of the period end 
date. However, the transitions that occurred in years eight and nine 
would be reflected, respectively, in the 3- and 1-year Transitions/
Default Matrices for the class or subclass of credit ratings. In 
other words, the credit rating history for this obligor would 
reflect volatility over the short term but stability over the long 
term.
---------------------------------------------------------------------------

    Proposed new paragraph (4)(B)(ii) would require the applicant or 
NRSRO to determine the number of obligors, securities, and money market 
instruments assigned a credit rating at the notch represented by the 
row as of the period start date that were assigned a credit rating at 
each other notch as of the period end date.\199\ The instructions would 
require that: (1) these numbers be expressed as percents of the total 
number of obligors, securities, and/or money market instruments 
assigned a credit rating at that notch as of the period start date; and 
(2) the percents be entered in the columns representing each 
notch.\200\ The instructions in the paragraph would clarify that, to 
determine these numbers, the applicant or NRSRO would need to use the 
credit rating at the notch assigned to the obligor, security, or money 
market instrument as of the period end-date and not a credit rating at 
any other notch assigned to the obligor, security, or money market 
instrument between the period start date and the period end date.\201\
---------------------------------------------------------------------------

    \199\ See proposed new paragraph (4)(B)(ii) of the instructions 
for Exhibit 1.
    \200\ See proposed new paragraph (4)(B)(ii) of the instructions 
for Exhibit 1. For example, the 3rd row of the Sample Transition/
Default Matrix in Figure 1 represents the AA notch in the applicable 
rating scale. As reflected in the matrix, 2000 obligors, securities, 
and/or money market instruments were assigned a credit rating of AA 
as of the 12/31/2000 start date. Of these 2000, as of the period end 
date: 2 (or 1%) were assigned a credit rating of AAA; 240 (or 12%) 
were assigned a credit rating of A; 200 (or 10%) were assigned a 
credit rating of BBB; 160 (or 8%) were assigned a credit rating of 
BB; 100 (or 5%) were assigned a credit rating of B; and 80 (or 4%) 
were assigned a credit rating of CCC. Accordingly, 1% is input in 
the AAA column, 12% in the A column, 10% in the BBB column, 8% in 
the BB column, 5% in the B column, and 4% in the CCC column.
    \201\ See proposed new paragraph (4)(B)(ii) of the instructions 
for Exhibit 1. This instruction would mirror the instruction in 
proposed new paragraph (4)(B)(i). As explained above, the applicant 
or NRSRO would need to reflect in the transition rate for a given 
notch the credit ratings assigned to the obligors, securities, and 
money market instruments at that notch as of the period end-date 
(rather than transitional credit ratings assigned during the 
period). For example, in the Sample Transition/Default Matrix in 
Figure 1, there were 2000 obligors, securities and/or money market 
instruments assigned AA ratings as of 12/31/2000. As of 12/31/2010, 
4% (or 80) of the obligors, securities, and/or money market 
instruments were assigned a credit rating of CCC. The path by which 
these obligors, securities, or money market instruments arrived at a 
CCC credit rating as of the period end date could have been through 
a series of rating actions that occurred during the 10 year period 
(e.g., being downgraded to A, then BBB, then BB, then B, and then 
CCC). The transitional credit ratings of these 80 obligors, 
securities, and money market instruments between the AA credit 
rating as of 12/31/2000 and the CCC credit rating as of 12/31/2010 
would not be reflected in the transition rate for the AA notch.
---------------------------------------------------------------------------

    Proposed new paragraph (4)(B)(iii) would require an applicant and 
NRSRO to determine the total number of obligors, securities, and money 
market instruments assigned a credit rating at the notch represented by 
the row as of the period start date that went into Default at any time 
during the applicable time period.\202\ The instructions would require 
that: (1) This number be expressed as a percent of the total number of 
obligors, securities, and/or money market instruments assigned a credit 
rating at that notch as of the period start date; and (2) the percent 
to be entered in the Default column.\203\
---------------------------------------------------------------------------

    \202\ See proposed new paragraph (4)(B)(iii) of the instructions 
for Exhibit 1. This release denotes the proposed standardized 
definition of the term ``default'' as ``Default'' to distinguish the 
definition and its meaning from other uses of the term ``default'' 
herein.
    \203\ See proposed new paragraph (4)(B)(iii) of the instructions 
for Exhibit 1. For example, the 7th row of the Sample Transition/
Default Matrix in Figure 1 represents the B notch in the applicable 
rating scale. As reflected in the matrix, 500 obligors, securities, 
and/or money market instruments were assigned a credit rating of B 
as of the 12/31/2000 start date. Of these 500, 75 (or 15%) were 
classified as having gone into Default during period (12/31/2000-12/
31/2010). Accordingly, 15% is input in the Default column.
---------------------------------------------------------------------------

    As indicated, the classification of Default would be triggered if 
the obligor, security, or money market instrument went into Default at 
any time during the period.\204\ This is different than the 
classifications in proposed paragraphs (4)(B)(i) and (ii), which are 
based solely on the end-date status of the obligor, security or money 
market instrument.\205\ This period-long approach is designed to 
address concerns that an applicant or NRSRO might withdraw a credit 
rating of an obligor, security, or money market instrument that went 
into Default during the period in order to omit the obligor, security, 
or money market instrument from the Transition/Default

[[Page 33441]]

Matrix and, therefore, improve the default rates presented in the 
matrix.\206\
---------------------------------------------------------------------------

    \204\ See proposed new paragraph (4)(B)(iii) of the instructions 
for Exhibit 1.
    \205\ See proposed new paragraphs (4)(B)(i) and (ii) of the 
instructions for Exhibit 1.
    \206\ See 15 U.S.C. 78o-7(q)(2)(C) (providing that the 
disclosures include performance information over a range of years 
and for a variety of types of credit ratings, including for credit 
ratings withdrawn by the NRSRO). The following provides an example 
of how withdrawals can be used to impact a default rate. In the 
Sample Transition/Default Matrix in Figure 1, the Default rate over 
the 10-year period for the 3600 obligors, securities, and money 
market instruments assigned a BBB rating as of the period start date 
is 4%. This means that 144 obligors, securities, or money market 
instruments assigned a credit rating at this notch as of the start 
date went into Default during the period (144/3600 = 4%). If the 
default rate was determined by the credit assigned to these 144 
obligors as of the period end date, the NRSRO could withdraw, for 
example, 100 of these credit ratings after default. Consequently, 
only 44 of the obligors, securities, and/or money market instruments 
would be in the default category as of the period end-date and, 
therefore, the default rate for the BBB notch would be 1.2% instead 
of 4% (44/3600 = 1.2%).
---------------------------------------------------------------------------

    The Commission preliminarily believes it would be appropriate to 
prescribe a standard definition of Default in proposed new paragraph 
(4)(B)(iii).\207\ This standard definition would need to be used by all 
applicants and NRSROs to determine whether an obligor, security, or 
money market instrument in the start-date cohort defaulted. The 
Commission's goal in proposing a standard definition is to make the 
default rates calculated and disclosed by the NRSROs more readily 
comparable.\208\ The Commission is concerned that if applicants or 
NRSROs use their own definitions of ``default,'' differences in those 
definitions may result in the applicants and NRSROs inconsistently 
classifying obligors, securities, and money market instruments as in 
default.\209\ For example, an NRSRO that uses a narrow definition may 
show better (i.e., lower) default rates than an NRSRO using a broader 
definition even though the former's credit ratings would perform no 
better under the broader definition. The Commission preliminarily 
believes that potential variances in how applicants and NRSROs may 
define ``default'' could make comparing performance across NRSROs 
difficult and could be a way to manipulate the data to produce more 
favorable results.
---------------------------------------------------------------------------

    \207\ See proposed new paragraph (4)(B)(iii) of the Instructions 
for Exhibit 1.
    \208\ See 15 U.S.C. 78o-7(q)(2)(A) (providing that the 
Commission's rules shall require disclosures that are comparable 
among NRSROs, to allow users of credit ratings to compare the 
performance of credit ratings across NRSROs).
    \209\ See, e.g., GAO Report 10-782, p. 38 (``NRSROs can differ 
in how they define default. Therefore, some agencies may have higher 
default rates than others as a result of a broader set of criteria 
for determining that a default has occurred.'').
---------------------------------------------------------------------------

    The Commission recognizes that a proposal to use a standard 
definition of default may raise concerns among the NRSROs. For example, 
in the past, NRSROs have argued against prescribing a standardized 
approach for calculating transition and default rates given the 
different meanings of their credit ratings and definitions of 
default.\210\ Nonetheless, as explained above, the Commission 
preliminarily believes a standard definition is the preferred approach 
to make disclosures of default rates comparable and, therefore, useful 
to investors and other users of credit ratings. However, the Commission 
is requesting comment below on the proposed use of a standard 
definition, including whether there are alternatives that could achieve 
the Commission's goal of comparability.
---------------------------------------------------------------------------

    \210\ See, e.g., letter dated March 12, 2007 from Jeanne M. 
Dering, Executive Vice President, Moody's Investors Services and 
letter dated March 12, 2007 from Vickie A. Tillman, Executive Vice 
President, Standard & Poor's (commenting on proposals in Oversight 
of Credit Rating Agencies Registered as Nationally Recognized 
Statistical Rating Organizations, 72 FR at 33574 (Feb. 9, 2007).
---------------------------------------------------------------------------

    Proposed new paragraph (4)(B)(iii) would prescribe two disjunctive 
definitions of Default.\211\ An applicant and NRSRO would need to 
classify an obligor, security, or money market instrument as having 
gone into Default if the conditions in either or both of the 
definitions were met. The first definition would apply if the obligor 
failed to timely pay principal or interest due according to the terms 
of an obligation, or the issuer of the security or money market 
instrument failed to timely pay principal or interest due according to 
the terms of the security or money market instrument.\212\ This would 
be the standard definition of Default used by the applicant or NRSRO. 
The goal of this proposed definition is to establish a minimum baseline 
for classifying an obligor, security, or money market instrument as 
having gone into Default. The Commission's intent is to avoid a 
situation in which applicants and NRSROs use varying definitions of 
default, which, as noted above, could result in some NRSROs using 
materially narrower definitions in order to produce more favorable 
default rates.\213\
---------------------------------------------------------------------------

    \211\ See proposed new paragraphs (4)(B)(iii)(a) and (b) of the 
instructions for Exhibit 1.
    \212\ See proposed new paragraphs (4)(B)(iii)(a) of the 
instructions for Exhibit 1.
    \213\ Because this would be a standard definition, the applicant 
or NRSRO would need to classify the obligor, security, or money 
market instrument as having gone into Default even if the applicant 
or NRSRO assigned a credit rating other than default to the obligor, 
security, or money market instrument at the time of the event of 
Default because, for example, the applicant or NRSRO uses a narrower 
definition of ``default.''
---------------------------------------------------------------------------

    The second definition would apply if the applicant or NRSRO 
classified the obligor, security, or money market instrument as having 
gone into default using its own definition of ``default.'' \214\ This 
proposal is designed to supplement the standard definition to address a 
situation where the NRSRO's definition of ``default'' is broader than 
the standard definition and, as a consequence, the NRSRO has classified 
an obligor, security, or money market instrument as having gone into 
default during the time period even though, under the standard 
definition, the applicant or NRSRO would not need to make a Default 
classification. The Commission preliminarily believes that the standard 
definition of Default, as proposed, is broad and would apply to most 
cases commonly understood as a default. Consequently, the Commission 
preliminarily believes a classification of default under the second 
definition would be rare.\215\
---------------------------------------------------------------------------

    \214\ See proposed new paragraph (4)(B)(iii) of the instructions 
for Exhibit 1.
    \215\ The Commission recognizes that supplementing the standard 
definition in proposed paragraph (4)(B)(iii) with the definition 
used by the applicant or NRSRO could potentially import an 
idiosyncratic element to a given NRSRO's Default classifications. 
However, any such impact only could increase the number of obligors, 
securities, and money market instruments classified as having gone 
into Default (i.e., an internal definition only could expand the 
standard definition). The Commission is not concerned if an 
applicant or NRSRO over-classifies (relative to other applicants or 
NRSROs) the number of obligors, securities, or money market 
instruments that went into Default, provided all NRSROs are using 
the standard definition as a baseline. Moreover, the Commission 
believes any such over-classifications would be de minimis given the 
broad scope of the standard definition. Furthermore, each obligor, 
security, and money market instrument in the start-date cohort must 
be assigned 1 of 5 potential outcomes. Consequently, if an applicant 
or NRSRO has classified an obligor, security, or money market 
instrument as having gone into default based on its own definition a 
classification of Default would be the most appropriate outcome 
among the 5 possible outcomes identified in proposed new paragraph 
(4)(B) of the instructions for Exhibit 1.
---------------------------------------------------------------------------

    Finally, proposed new paragraph (4)(B)(iii) also would clarify that 
an obligor, security, or money market instrument that goes into in 
Default must be classified as in Default even if the applicant or NRSRO 
assigned a credit rating to the obligor, security, or money market 
instrument at a notch above default in its rating scale on or after the 
event of Default or withdrew the credit rating on or after the event of 
Default.\216\ This proposed clarification is designed to affirm the 
requirement that an obligor, security, or money market instrument that 
goes into Default at any time during the period covered by the 
Transition/Default Matrix must be included in the default rate for the 
applicable category of credit rating

[[Page 33442]]

irrespective of the post-Default status of the obligor, security, or 
money market instrument.
---------------------------------------------------------------------------

    \216\ See proposed new paragraph (4)(B)(iii) of the instructions 
for Exhibit 1.
---------------------------------------------------------------------------

    Proposed new paragraph (4)(B)(iv) would require an applicant and 
NRSRO to determine the number of obligors, securities, and money market 
instruments assigned a credit rating at the notch represented by the 
row as of the period start date that Paid Off at any time during the 
applicable time period.\217\ The instructions would require that: (1) 
This amount be expressed as a percent of the total number of obligors, 
securities, and/or money market instruments assigned a credit rating at 
that notch as of the period start date; and (2) the percent be entered 
in the Paid Off column.\218\ As with the Default classification, this 
classification would be made if the obligor, security, or money market 
instrument Paid Off at any time during the period.\219\
---------------------------------------------------------------------------

    \217\ See proposed new paragraph (4)(B)(iv) of the instructions 
for Exhibit 1.
    \218\ Id. For example, the 9th row of the Sample Transition/
Default Matrix in Figure 1 represents the CC notch in the applicable 
rating scale. As reflected in the matrix, 200 obligors, securities, 
and/or money market instruments were assigned a credit rating of CC 
as of the 12/31/2000 start date. Of these 200, 4 (or 2%) were 
classified as having Paid Off during period (12/31/2000-12/31/2010). 
Accordingly, 2% is input in the Paid Off column.
    \219\ See proposed new paragraph (4)(B)(iv) of the instructions 
for Exhibit 1.
---------------------------------------------------------------------------

    Proposed new paragraph (4)(B)(iv) would define Paid Off using two 
different sets of conditions: (1) One set applicable to obligors; and 
(2) one set applicable to securities and money market instruments.\220\ 
The reason is that a credit rating of an ``obligor'' typically means a 
credit rating of the entity with respect to all obligations of the 
entity; whereas a credit rating of a ``security'' or ``money market 
instrument'' means a credit rating of a specific debt instrument such 
as a bond, note, or issuance of commercial paper.\221\ Consequently, as 
used generally, a credit rating of an obligor does not relate to a 
single obligation with a term of maturity but rather to the obligor's 
overall ability to meet any obligations as they come due. Therefore, an 
obligor credit rating normally would not be classified as Paid Off 
since it does not reference a specific obligation that will mature. 
However, the Commission preliminarily believes it is possible that an 
applicant or NRSRO could determine a credit rating relating directly to 
an obligor's ability to meet a specific obligation with a definite term 
to maturity.\222\ In this case, the obligor could be classified as 
having Paid Off given that the obligation to which the credit rating 
relates is identifiable and was extinguished during the period. At the 
same time, the Commission's objective is to avoid inadvertently 
proposing a definition that would permit an NRSRO to classify an 
obligor assigned a typical obligor credit rating as having Paid Off 
because it extinguished one of its obligations during the time 
period.\223\
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    \220\ See proposed new paragraphs (4)(B)(iv)(a) and (b) of the 
instructions for Exhibit 1.
    \221\ As discussed earlier, this understanding of the meaning of 
an ``obligor'' credit rating is based, in part, on the definition of 
``credit rating'' in Section 3(a)(60) of the Exchange Act (``The 
term `credit rating' means an assessment of the creditworthiness of 
an obligor as an entity or with respect to specific securities or 
money market instruments.''). See 15 U.S.C. 78o-7(a)(60).
    \222\ For example, an NRSRO could issue a credit rating that 
relates solely to the likelihood that the obligor would meet an 
obligation to pay principal and interest on a specific term loan.
    \223\ For example, an applicant or NRSRO could seek to improve 
its default rates by classifying obligors as having paid off because 
they extinguished one obligation during the relevant period before 
defaulting on other obligations.
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    For these reasons, the Commission proposes that paragraph 
(4)(B)(iv)(a) provide that an applicant and NRSRO may classify an 
obligor as having Paid Off only if the applicant or NRSRO assigned the 
obligor a credit rating with respect to a single specifically 
identified obligation; the obligor extinguished the obligation during 
the applicable time period by paying in full all outstanding principal 
and interest due on the obligation according to the terms of the 
obligation (e.g., because the obligation matured, was called, or was 
prepaid); and the applicant or NRSRO withdrew the credit rating because 
the obligation was extinguished.\224\ The third clause of the proposed 
definition (that the NRSRO withdrew the credit rating) would be 
designed to ensure that the credit rating, in fact, did relate to the 
single specifically identified obligation. If the applicant or NRSRO 
continued to assign a credit rating to the obligor after the obligation 
was extinguished, it would suggest that the credit rating related to 
the obligor's creditworthiness in a broader sense (i.e., not with 
respect to the single obligation).
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    \224\ See proposed new paragraph (4)(B)(iv)(a) of the 
instructions for Exhibit 1.
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    As for securities and money market instruments, proposed paragraph 
(4)(B)(iv)(b) would provide that the applicant or NRSRO may classify a 
security or money market instrument as having Paid Off only if the 
issuer of the security or money market instrument extinguished its 
obligation with respect to the security or money market instrument 
during the applicable time period by paying in full all outstanding 
principal and interest due according to the terms of the security or 
money market instrument (e.g., because the security or money market 
instrument matured, was called, or was prepaid); and the applicant or 
NRSRO withdrew the credit rating for the security or money market 
instrument because the obligation was extinguished.\225\ Consequently, 
the proposed definition would mirror the second and third elements of 
the definition of Paid Off as it relates to the credit rating of an 
obligor.\226\
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    \225\ See proposed new paragraph (4)(B)(iv)(b) of the 
instructions for Exhibit 1.
    \226\ Compare proposed new paragraphs (4)(B)(iv)(a) and (b) of 
the instructions for Exhibit 1.
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    Proposed new paragraph (4)(B)(v) would require the applicant or 
NRSRO to determine the number of obligors, securities, and money market 
instruments assigned a credit rating at the notch represented by the 
row as of the period start date for which the applicant or NRSRO 
withdrew a credit rating assigned to the obligor, security, or money 
market instrument at any time during the applicable time period for a 
reason other than Default or Paid-Off.\227\ The instructions would 
require that: (1) This amount be expressed as a percent of the total 
number of obligors, securities, and/or money market instruments 
assigned a credit rating at that notch as of the period start date; and 
(2) the percent be entered in the Withdrawn (other) column.\228\ The 
instructions would provide that the applicant or NRSRO must classify 
the obligor, security, or money market instrument as Withdrawn (other) 
even if the applicant or NRSRO assigned a credit rating to the obligor, 
security, or money market instrument after withdrawing the credit 
rating.\229\
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    \227\ See proposed new paragraph (4)(B)(v) of the instructions 
for Exhibit 1.
    \228\ Id. For example, the 4th row of the Sample Transition/
Default Matrix in Figure 1 represents the A notch in the applicable 
rating scale. As reflected in the matrix, 4000 obligors, securities, 
and/or money market instruments were assigned a credit rating of A 
as of the 12/31/2000 start date. Of these 4000, 80 (or 2%) were 
classified as having been Withdrawn (other) during the period (12/
31/2000-12/31/2010). Accordingly, 2% is input in the Withdrawn 
(other) column.
    \229\ See proposed new paragraph (4)(B)(v) of the instructions 
for Exhibit 1.
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    There are legitimate reasons to withdraw a credit rating assigned 
to an obligor, security, or money market instrument. For example, an 
NRSRO might withdraw a credit rating because the rated obligor or 
issuer of the rated security or money market instrument stopped paying 
for the surveillance of the credit rating or because the NRSRO issued 
and was monitoring the credit rating on an unsolicited basis and no 
longer wanted to devote resources to

[[Page 33443]]

monitoring it. However, the Commission also is concerned that an 
applicant or NRSRO could withdraw a credit rating assigned to an 
obligor, security, or money market instrument to make its transition or 
default rates appear more favorable.\230\ Therefore, the Commission 
proposes requiring an applicant and NRSRO to disclose the percent of 
obligors, securities, and money market instruments for which the 
applicant or NRSRO withdrew the credit rating for reasons other than 
Default or Paid Off during the period covered by the Transition/Default 
Matrix.\231\ Investors and other users of credit ratings could use the 
percents of withdrawn credit ratings to assess whether the number of 
withdrawals impacted the transition and default rates entered in the 
Transition/Default Matrix.\232\ They also would be able to compare 
historical withdrawal percents of an NRSRO and across all NRSROs. If an 
NRSRO has a disproportionate number of withdrawals for one period as 
compared to prior periods or as compared to those of other NRSROs, 
investors and other users of credit ratings could consider that factor 
in assessing the veracity of the transition and default rates entered 
in the NRSRO's Transition/Default Matrix.
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    \230\ For example, the 5th row of the Sample Transition/Default 
Matrix in Figure 1 represents the BBB notch in the applicable rating 
scale. 3600 obligors, securities, and/or money market instruments 
were assigned a credit rating at this notch as of the start date. 
The transition rates from this notch to a lower notch are: 15% (BB), 
10% (B), 6% (CCC), 5% (CC), and 1% (C). Taken together, this means 
that 37% (or 1332) of the obligors, securities, and money market 
instruments were assigned a credit rating as of the end-date that 
was below BBB (i.e., in categories commonly referred to as ``non-
investment grade'' or ``speculative''). To lower the transition 
rates to ``non-investment grade'' categories, the credit ratings for 
400 obligors, securities, or money market instruments assigned a BBB 
credit rating as of the start date could be withdrawn. This would 
reduce the transition rate to notches below BBB from 37% (1332/3600) 
to 26% (932/3600).
    \231\ See proposed new paragraph (4)(B)(v) of the instructions 
for Exhibit 1.
    \232\ For example, the 6th row of the Sample Transition/Default 
Matrix in Figure 1 represents the BB notch in the applicable rating 
scale. 1000 obligors, securities, and/or money market instruments 
were assigned a credit rating at this notch as of the start date. Of 
these 1000, 370 (or 37%) had their credit ratings withdrawn during 
the period (12/31/2000-12/31/2010). This amount is much larger than 
the withdrawal rates for the other notches, which range from 0% (AAA 
notch) to 12% (C notch). Moreover, the default rate for the BB notch 
(2%) is an anomaly in that it is lower than the default rate for the 
next highest notch BBB (4%). Normally, lower notches would be 
expected to have higher default rates. In addition, the AAA, AA, A, 
and BBB notches all have single digit default rates (ranging from 0% 
to 4%); whereas the notches below BBB all have double digit default 
rates (ranging from 15% to 67%), except for the BB notch (which, as 
noted, has a default rate of 2%). Furthermore, the two-notch 
downgrade transition rate for the BB notch is 5% (BB to CCC). This 
appears to be an anomaly given that the two-notch downgrade rates 
for the other notches are: 10% for the AA notch (AA to BBB); 10% for 
the A notch (A to BB); 10% for the BBB notch (BBB to B); 15% for the 
B notch (B to CC); 20% for the CCC notch (CCC to C); and 30% for the 
CC notch (CC to Default). An investor or other user of credit 
ratings reviewing this matrix could conclude that the withdrawal of 
credit ratings at the BB notch for reasons other than Default or 
Paid Off materially impacted the transition and default rates for 
the BB notch. The high rate of withdrawals in this instance also 
could be the focus of examination by the Commission staff.
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Request for Comment
    The Commission generally requests comment on all aspects of the 
proposed new instructions for Exhibit 1 to Form NRSRO. The Commission 
also seeks comment on the following:
    1. With respect to prescribing a standard method of calculating 
transition and default rates, would a single cohort approach (rather 
than an average cohort approach or some other approach) \233\ be the 
most appropriate way to make the transition and default rates clear and 
informative for investors having a wide range of sophistication who use 
or might use credit ratings? Commenters should identify and explain any 
other approach they believe could be used to prescribe a standard 
process for calculating and presenting transition and default rates 
that would better achieve this goal.
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    \233\ An average cohort approach for calculating rating 
transitions or default statistics consists of taking the average of 
several cohorts over a longer time period. For example, the one-year 
average transition rate would be calculated by taking the average 
transition rate from several one-year cohorts over a given time 
period.
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    2. What practical issues should the Commission consider in 
implementing a standard process for calculating and presenting 
transition and default rates? For example, would the variances in the 
procedures and methodologies NRSROs use to determine credit ratings 
raise practical issues in terms of adhering to a standard process for 
calculating and presenting transition and default rates? In addition, 
would the variances in the meanings and definitions NRSROs ascribe to 
the notches of credit ratings in their rating scales raise practical 
issues in terms of adhering to a standard process for calculating and 
presenting transition and default rates? How could the proposal be 
modified to address any practical issues identified without undermining 
the goal of comparability?
    3. With respect to any practical issues identified in response to 
the solicitation of comment in question 2, would the proposed 
single cohort approach for calculating and presenting transition and 
default rates heighten or lessen the issues relative to other possible 
approaches such as the average cohort approach? Commenters should 
identify and explain any other approach they believe could be used to 
prescribe a standard process for calculating and presenting transition 
and default rates that would raise the least practical issues.
    4. Would the proposals require an NRSRO to disclose proprietary 
information? If so, describe the type or types of proprietary 
information. Also, describe potential ways to address this issue.
    5. Would the proposals have an impact on competition? For example, 
would they advantage or disadvantage a certain type of NRSRO? Could 
they potentially alter the behavior of NRSROs? For example, could the 
proposals cause certain NRSROs to stop determining a particular type of 
credit rating? If so, describe whether there would be any costs or 
negative impacts as a result and, if so, how such costs or negative 
impacts could be addressed.
    6. How would the proposals differ from the way NRSROs currently 
calculate and present transition and default rates? For example, would 
they be more or less sophisticated than current methods? Would they be 
more or less burdensome than current methods? Describe the differences. 
Furthermore, describe the benefits of a standardized approach in terms 
of making the disclosure more useful to investors and other users of 
credit ratings.
    7. Would dividing the class of credit ratings for structured 
finance products into the subclasses identified in proposed paragraphs 
(1)(D)(i) through (vii) of the instructions for Exhibit 1 provide 
investors and other users of credit ratings with more useful 
information about the performance of an NRSRO's structured finance 
ratings? For example, should the Commission continue to require 
transition and default rates for this class only as a whole? If so, 
explain how this would provide more useful information about the 
performance of an NRSRO's structured finance ratings.
    8. Are the subclasses of credit ratings for structured finance 
products identified in proposed paragraphs (1)(D)(i) through (vii) of 
the instructions for Exhibit 1 the most appropriate way to stratify 
this class of credit ratings? For example, should the ``other-ABS'' 
subclass be divided up into subclasses based on the assets underlying 
the ABS (i.e., auto loans, auto leases, floor plan financings, credit 
card receivables, student loans, consumer loans, equipment loans or 
equipment leases)?

[[Page 33444]]

In addition, are there other classes of structured finance products 
that should be identified in proposed paragraph (1)(D) of the 
instructions for Exhibit 1?
    9. Are the descriptions of the subclasses of credit ratings for 
structured finance products identified in proposed paragraphs (1)(D)(i) 
through (vii) of the instructions for Exhibit 1 sufficiently clear to 
provide an applicant and NRSRO with guidance as to which credit ratings 
should be included in the production of the Transition/Default Matrices 
for each subclass? How could the descriptions be modified to make them 
clearer and provide better guidance?
    10. Would the design and presentation of a Transition/Default 
Matrix prescribed in proposed paragraph (3) of the instructions for 
Exhibit 1 be clear and informative for investors having a wide range of 
sophistication who use or might use credit ratings? How could the 
design and presentation of the Transition/Default Matrix be modified to 
better achieve this goal?
    11. Would the design and presentation of a Transition/Default 
Matrix prescribed in proposed paragraph (3) of the instructions for 
Exhibit 1 be an appropriate way to present transition and default 
rates? How could the design and presentation of the Transition/Default 
Matrix be modified to better accommodate these statistics?
    12. Are the instructions in proposed paragraphs (1), (2), (3), and 
(4) of Exhibit 1 sufficiently clear in terms of requirements for 
producing the required Transition/Default Matrices and presenting 
necessary information in the Exhibit? For example, are instructions in 
the paragraphs sufficiently clear in terms of the requirements for 
populating the columns and rows of a Transition/Default Matrix? How 
could the instructions be modified to make them clearer and provide 
better guidance?
    13. Should obligors, securities, and money market instruments that 
an applicant or NRSRO has classified as being in default as of the 
start date of a period covered by a Transition/Default Matrix be 
excluded from the start-date cohort for that matrix? If not, explain 
the rationale for including them.
    14. Should the start-date cohorts for the Transition/Default 
Matrices be comprised of obligors only (i.e., not include securities or 
money market instruments assigned credit ratings in the class or 
subclass)? For example, if the credit ratings of securities or money 
instruments issued by an obligor are simply a function of the credit 
rating of the obligor, would it be sufficient to include only the 
obligor in the start-date cohort? If so, should this be the case for 
all classes and subclasses of credit ratings or for certain classes and 
subclasses? For example, the credit ratings assigned to securities and 
money market instruments in the structured finance class often are 
based on differing levels of credit enhancement specific to each 
tranche of a security issued by the obligor. Consequently, in such a 
case, the credit rating of the security or money market instrument 
issued would not be a function solely or primarily of the credit rating 
of the obligor.
    15. Commenters are referred to the questions in Section II.M.4.a of 
this release with respect Items 6 and 7 of Form NRSRO and how certain 
types of obligors, securities, and money market instruments should be 
classified for purposes of providing approximate amounts of credit 
ratings outstanding in each class of credit rating for which an 
applicant is seeking registration (Item 6) or an NRSRO is registered 
(Item 7)? In responding to those questions, commenters should consider 
how proposed classifications could be applied to determining the 
composition of start-date cohorts for the purposes of the proposed 
enhancements to Exhibit 1.
    16. Should the default rates in the Transition/Default Matrices be 
determined using the proposed standard definition of Default? For 
example, would the use of a standard definition raise practical issues 
in light of the different meanings that NRSROs ascribe to the notches 
in their credit rating scales or the different definitions of 
``default'' they utilize? How could the proposal be modified to address 
any practical issues identified without undermining the goal of 
comparability?
    17. Is the proposed standard definition of Default sufficiently 
broad to apply to most, if not all, events commonly understood as 
constituting a default? For example, should the definition explicitly 
include that the obligor or issuer of the security or money market 
instrument is in a bankruptcy proceeding or would this be redundant in 
that the definition already provides that the obligor or issuer of the 
security has failed to timely pay interest or principal due? In 
addition, should the definition explicitly include events that would 
constitute a default due to a breach of a covenant unrelated to the 
failure to timely pay interest or principal due on a security or money 
market instrument (e.g., a covenant might provide that a default by the 
issuer on a bank loan to a third party or a default by an affiliate of 
the issuer would constitute a default with respect to a rated security 
of the issuer)? Would it be appropriate to include such cross-default 
provisions as part of the definition of the Default in the instructions 
for Exhibit 1? For example, if the issuer continued to make timely 
payments of interest and principal to the holders of the security 
notwithstanding the cross-defaults, would it nonetheless be appropriate 
to classify the security as in Default? If so, how could the proposed 
definition be modified to make it broad enough to apply to all 
instances of default? Should the requirement provide for an NRSRO to be 
able to use its own definition if the standard definition would not be 
feasible given the NRSRO's procedures and methodologies for determining 
credit ratings? If so, should the NRSRO be required to make disclosures 
about why it is using its own definition? Describe the nature of such 
disclosures.
    18. Should the proposed standard definition of Default be refined 
to distinguish between degrees of default severity? For example, should 
the definition distinguish between a situation where an obligor or the 
issuer of a security or money market instrument has failed to make a 
timely payment of interest or principal that potentially could be cured 
and the situation where the obligor or issuer of the security or money 
market instrument is no longer able to cure a failed payment of 
interest or principal or is in a bankruptcy proceeding? How could the 
proposed definition be modified to account for relative degrees of 
default severity and how should such modifications be incorporated into 
the proposed instructions for calculating default statistics?
    19. Is the proposed standard definition of Paid Off sufficiently 
broad to apply to most, if not all, events commonly understood as 
constituting the extinguishment of an obligation upon which a credit 
rating is based? If not, how could the proposed definition be modified 
to make it broad enough to apply to all instances that should, for the 
purposes of transition and default rates, be classified as having Paid 
Off? Should the requirement provide for an NRSRO to be able to use its 
own definition if the standard definition would not be feasible given 
the NRSRO's procedures and methodologies for determining credit 
ratings? If so, should the NRSRO be required to make disclosures about 
why it is using its own definition? Describe the nature of such 
disclosures.
    20. Would the proposed treatment for Withdrawn (other) credit 
ratings in the Transition/Default Matrices sufficiently

[[Page 33445]]

address the concern that an applicant or NRSRO might use withdrawals to 
make its transition and default rates appear more favorable? For 
example, should the Commission, by rule, require an NRSRO to monitor an 
obligor, security, or money market instrument after withdrawal in order 
to classify whether the obligor, security, or money market instrument 
went into Default or Paid Off? If so, how long should the applicant or 
NRSRO be required to monitor the obligor, security, or money market 
instrument? Alternatively, should the applicant or NRSRO be required to 
explain and disclose in Exhibit 1 the reason why it withdrew the credit 
ratings in the given class or subclass of credit ratings? If so, how 
much detail should the applicant or NRSRO provide in the description? 
Should the requirement provide for an NRSRO to be able to use its own 
definition if the standard definition would not be feasible given the 
NRSRO's procedures and methodologies for determining credit ratings? If 
so, should the NRSRO be required to make disclosures about why it is 
using its own definition? Describe the nature of such disclosures.
b. Proposed Amendments to Rule 17g-1
    Section 15E(q)(2)(D) of the Exchange Act provides that the 
Commission's rules must require an NRSRO to make the information about 
the performance of credit ratings freely available and disclose it on 
an easily accessible portion of its Web site, and in writing when 
requested.\234\ The Commission proposes to implement Section 
15E(q)(2)(D) by amending paragraph (i) of Rule 17g-1.\235\ Paragraph 
(i) requires an NRSRO to make its current Form NRSRO and information 
and documents submitted in Exhibits 1 through 9 publicly available on 
its Web site or through another comparable, readily accessible means 
within 10 business days of being granted an initial registration or a 
registration in an additional class of credit ratings, and within 10 
business days of furnishing a Form NRSRO to update information on the 
Form, to provide the annual certification, and to withdraw a 
registration.\236\ These requirements implemented Section 15E(a)(3) of 
the Exchange Act,\237\ which provides, among other things, that the 
Commission shall, by rule, require an NRSRO, upon the granting of a 
registration, to make the information and documents submitted to the 
Commission in its completed application for registration, or in any 
amendment, publicly available on its Internet Web site, or through 
another comparable, readily accessible means.\238\
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    \234\ See 15 U.S.C. 78o-7(q)(2)(D).
    \235\ See proposed amendments to paragraph (i) of Rule 17g-1.
    \236\ See 17 CFR 240.17g-1(i).
    \237\ 15 U.S.C. 78o-7(a)(3).
    \238\ See 15 U.S.C. 78o-7(a)(3).
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    Although Section 15E(q)(2)(D) only addresses disclosures of 
information about the performance of credit ratings, the Commission is 
proposing to amend paragraph (i) of Rule 17g-1 to require an NRSRO to 
make Form NRSRO and Exhibits 1 through 9 freely available on an easily 
accessible portion of its corporate Internet Web site. This would avoid 
having separate requirements for the Exhibit 1 performance statistics 
and the rest of Form NRSRO and the other public Exhibits. The 
Commission preliminarily believes users of credit ratings would benefit 
if Form NRSRO and all the public Exhibits were disclosed together in 
the same manner. In addition, the Commission preliminarily believes 
applying the requirement to disclose the information on an ``easily 
accessible'' portion of the NRSRO's corporate Internet Web site would 
assist investors and other users of credit ratings by making it easier 
to locate a Form NRSRO. For example, some corporate Internet Web sites 
contain large amounts of information, some of which must be accessed by 
navigating through multiple Web pages. The Commission believes Form 
NRSRO and the public Exhibits should be easy for investors and other 
users of credit ratings to locate when they access an NRSRO's corporate 
Internet Web site. In this regard, the Commission preliminarily 
believes that a Form NRSRO would be on an ``easily accessible'' portion 
of a Web site if it could be accessed through a clearly and prominently 
labeled hyperlink to the Form on the home-page of the NRSRO's corporate 
Internet Web site.
    The proposed amendment to paragraph (i) also would remove the 
option for an NRSRO to make its Form NRSRO publicly available ``through 
another comparable, readily accessible means'' as an alternative to 
Internet disclosure. The Commission preliminarily believes there is no 
alternative means of disclosure that makes information as ``readily 
accessible'' as (and, therefore, is comparable to) an Internet Web 
site. This view is supported by the fact that all NRSROs currently 
comply with paragraph (i) of Rule 17g-1 by making their Form NRSROs 
available on their corporate Internet Web sites.\239\ The Commission, 
therefore, is proposing amending paragraph (i) to require that the 
disclosure of Form NRSRO and its public Exhibits be made on an NRSRO's 
corporate Internet Web site without exception.\240\ In addition, to 
implement Section 15E(q)(2)(D) of the Exchange Act, the Commission is 
proposing to amend paragraph (i) to provide that Exhibit 1 must be made 
freely available in writing, when requested.
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    \239\ See Annual Report on Nationally Recognized Statistical 
Rating Organizations. Commission (Jan. 2011), pp. 18-19.
    \240\ See proposed amendments to paragraph (i) of Rule 17g-1.
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    Finally, the Commission notes that throughout Form NRSRO and the 
Instructions to Form NRSRO there are references to the current 
requirement in paragraph (i) to make Form NRSRO and information and 
documents submitted in Exhibits 1 through 9 ``publicly available on 
[the NRSRO's] Web site or through another comparable, readily 
accessible means.\241\ The Commission proposes amending all these 
references so that they would mirror the text of the proposed amendment 
to paragraph (i).
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    \241\ See, e.g., references in Item 5, in the Note to Item 6.C, 
Item 8, and Item 9 of Form NRSRO and Instruction A.3 and Instruction 
H to Form NRSRO.
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Request for Comment
    The Commission generally requests comment on all aspects of the 
proposed amendments to paragraph (i) of Rule 17g-1. The Commission also 
seeks comment on the following:
    1. Is there any reason why the Commission should not apply the 
requirement to make an NRSRO's performance statistics ``freely 
available on an easily accessible portion of its Web site'' to Form 
NRSRO and the public Exhibits as a whole? For example, should the 
requirement apply only to Exhibit 1?
    2. Is the Commission correct in its preliminary belief that a Form 
NRSRO would be on an ``easily accessible'' portion of a Web site if it 
could be accessed through a clearly and prominently labeled hyperlink 
to the Form on the home-page of the NRSRO's corporate Internet Web 
site? Are there other portions of an NRSRO's corporate Internet Web 
site that, provided the NRSRO placed a hyperlink to Form NRSRO on such 
portion of the Web site, should be deemed ``easily accessible''?
    3. Is there another means of making Form NRSRO publicly available 
besides the Internet that should be deemed ``another comparable, 
readily accessible means''? If so, identify the means and explain the 
potential advantages of permitting it as a means of disclosure.

[[Page 33446]]

    4. With respect to the proposed requirement that Exhibit 1 be made 
freely available in writing, when requested, how should an NRSRO meet 
such a request? For example, should an NRSRO be required to mail a 
written copy of Exhibit 1 to a party requesting the Exhibit? If so, 
would it be appropriate to permit the NRSRO to charge reasonable 
handling and postage fees? For example, would allowing an NRSRO to 
charge a reasonable handling and postage fee discourage requests that 
are not based on a legitimate need to obtain Exhibit 1 in paper form? 
In this regard, the Commission notes that Exhibit 1 currently can be 
immediately accessed through an NRSRO's corporate Internet Web site 
and, under the proposed amendments to paragraph (i) of Rule 17g-1, 
would need to be posted on an easily accessible portion of the NRSRO's 
corporate Internet Web site. Consequently, why would a person have a 
legitimate need to request that an NRSRO provide Exhibit 1 in paper 
form (which would take time to process the request and send out the 
Exhibit) when it could be obtained immediately through the Internet?
2. Proposed Enhancements to Rating Histories Disclosures
    Paragraph (a)(8) of Rule 17g-2 requires an NRSRO to make and retain 
a record that, ``for each outstanding credit rating, shows all rating 
actions and the date of such actions from the initial credit rating to 
the current credit rating identified by the name of the rated security 
or obligor and, if applicable, the CUSIP of the rated security or the 
Central Index Key (``CIK'') number of the rated obligor.'' \242\ An 
NRSRO is required to retain this record for three years pursuant to 
paragraph (c) of Rule 17g-2.\243\
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    \242\ 17 CFR 240.17-2(a)(8). A CIK number has ten-digits and is 
assigned to uniquely identify a filer using the Commission's EDGAR 
system.
    \243\ See 17 CFR 240.17g-2(c).
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    In addition, paragraph (d) of Rule 17g-2 requires the NRSRO to 
publicly disclose certain of this information as well. Specifically, 
paragraph (d)(2) of Rule 17g-2 requires an NRSRO to ``make and keep 
publicly available on its corporate Internet Web site in an eXtensible 
Business Reporting Language (``XBRL'') format'' the information 
required to be documented pursuant to paragraph (a)(8) of Rule 17g-2 
for 10% of the outstanding credit ratings, selected on a random basis, 
in each class of credit rating for which the NRSRO is registered if the 
credit rating was paid for by the obligor being rated or by the issuer, 
underwriter, or sponsor of the security being rated (``issuer-paid'' 
credit ratings) and the NRSRO has 500 or more such issuer-paid credit 
ratings outstanding in that class (the ``10% Rule'').\244\ Paragraph 
(d)(2) further provides that any ratings action required to be 
disclosed need not be made public less than six months from the date 
the action is taken.\245\ This six-month grace period is designed to 
preserve the ability of NRSROs to sell data feeds to the portfolios of 
their current credit ratings by making the information disclosed in the 
10% Rule out-of-date.\246\ Paragraph (d)(2) also requires that, if a 
credit rating made public pursuant to the rule is withdrawn or the 
rated instrument matures, the NRSRO must randomly select a new 
outstanding credit rating from that class of credit ratings in order to 
maintain the 10% disclosure threshold.\247\ Finally, paragraph (d)(2) 
provides that in making the information available on its corporate 
Internet Web site, the NRSRO must use the List of XBRL Tags for NRSROs 
as specified on the Commission's Internet Web site.\248\
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    \244\ 17 CFR 240.17-2(d)(2).
    \245\ Id.
    \246\ The fact that the disclosure involves only a random sample 
of 10% of the outstanding credit ratings also limits the utility of 
the information disclosed in terms of serving as a substitute to 
purchasing a data feed to the NRSRO's current portfolio of 
outstanding credit ratings.
    \247\ 17 CFR 240.17-2(d)(2).
    \248\ Id.
---------------------------------------------------------------------------

    Paragraph (d)(3) of Rule 17g-2 requires an NRSRO to make publicly 
available on its corporate Internet Web site information required to be 
documented pursuant to paragraph (a)(8) of the rule for any credit 
rating initially determined by the NRSRO on or after June 26, 2007, the 
effective date of the Rating Agency Act of 2006 (the ``100% 
Rule'').\249\ The 100% Rule applies to all types of credit ratings, as 
opposed to the 10% Rule, which is limited to issuer-paid credit 
ratings. However, paragraphs (d)(3)(i)(B) and (C) prescribe different 
grace periods for when an NRSRO must disclose a rating action depending 
on whether or not it was issuer-paid.\250\ Specifically, paragraph 
(d)(3)(i)(B) provides that if the credit rating is issuer-paid, then 
the grace period is 12 months after the date the action is taken.\251\ 
Similar to the 6-month grace period in the 10% Rule, this 12-month 
grace is designed to preserve the ability of NRSROs to sell data feeds 
to their portfolios of current outstanding credit ratings by making the 
information disclosed in the 100% Rule out-of-date.\252\ For all non-
issuer paid credit ratings, paragraph (d)(3)(i)(C) provides a grace 
period of 24 months after the date the rating action is taken. This 
longer grace period is designed to address the ``subscriber-paid'' 
business model in which the NRSRO makes its credit ratings available 
for a fee rather than for free.\253\ Paragraph (d)(3)(ii) of Rule 17g-2 
requires the NRSRO to disclose the ratings history information on its 
corporate Internet Web site in an XBRL format using the List of XBRL 
Tags for NRSROs as published by the Commission on its Internet Web 
site.\254\
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    \249\ 17 CFR 240.17-2(d)(3).
    \250\ 17 CFR 240.17-2(d)(3)(i)(B) and (C).
    \251\ 17 CFR 240.17-2(d)(3)(i)(B).
    \252\ See Amendments to Rules for Nationally Recognized 
Statistical Rating Organizations, 74 FR at 63837-63842 (Dec. 4, 
2009) (discussing the grace periods in the rule).
    \253\ Id.
    \254\ At the time the 10% Rule became effective (which preceded 
the 100% Rule), the Commission had not published the List of XBRL 
Tags. Consequently, the Commission issued a notice that NRSROs could 
use any machine readable format to publish the ratings history 
information required by the 10% Rule. See Notice Regarding the 
Requirement to Use eXtensible Business Reporting Language Format to 
Make Publicly Available the Information Required Pursuant to Rule 
17g-2(d) of the Exchange Act, Exchange Act Release No. 60451 (Aug. 
5, 2009). On August 27, 2010, the Commission provided notice that 
the List of XBRL tags required to be used for purposes of the 10% 
Rule and, the subsequently adopted 100% Rule, was available on the 
Commission's Internet Web site. See Notice Regarding the Requirement 
to Use eXtensible Business Reporting Language Format to Make 
Publicly Available the Information Required Pursuant to Rule 17g-
2(d) of the Exchange Act, Exchange Act Release No. 62784 (Aug. 27, 
2010), 75 FR 53988 (Sept. 2, 2010). Information about the List of 
XBRL Tags is located at the following page on the Commission's Web 
site: http://www.sec.gov/spotlight/xbrl/nrsro-implementation-guide.shtml. The publication of this notice in the Federal Register 
triggered the 60-day period after which NRSROs were required to 
begin using an XBRL format for purposes of the two rules. The 60-day 
period ended on November 1, 2010. The XBRL Tags identified by the 
Commission include mandatory tags with respect to the information 
specifically identified in paragraph (a)(8) of Rule 17g-2 (17 CFR 
240.17g-2(a)(8)) (i.e., the date of the rating action, the credit 
rating identified by the name of the rated security or obligor and, 
if applicable, the CUSIP of the rated security or the CIK number of 
the rated obligor). The XBRL Tags also identify additional 
information that could be tagged by the NRSRO to enhance the 
disclosure.
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    The Commission is proposing amendments designed to enhance the 
utility of the 100% Rule.\255\ Moreover, in light of the proposed 
amendments to the 100% Rule (discussed below) and Exhibit 1 (discussed 
above), the Commission is proposing to repeal the 10% Rule. The 10% 
Rule does not permit comparability across NRSROs

[[Page 33447]]

because it captures only issuer-paid credit ratings in a class of 
credit ratings where there are 500 or more such ratings and only if two 
or more NRSROs randomly select the same rated obligor, issuer, or money 
instrument to be included in the sample.\256\ Moreover, the Commission 
understands that the 10% Rule may not produce sufficient ``raw data'' 
to allow third parties to generate independent performance 
statistics.\257\ The goal of the rule was to provide some information 
about how an NRSRO's credit ratings performed, particularly ratings 
assigned to obligors, securities and money market instruments that had 
been rated for 10 or 20 years. The Commission now preliminarily 
believes that, in light of the proposed enhancements to Exhibit 1 and 
the 100% Rule, the 10% Rule would provide minimal incremental benefit 
to investors and other users of credit ratings in terms of providing 
information about the performance of a given NRSRO's credit ratings.
---------------------------------------------------------------------------

    \255\ See, e.g., GAO Report 10-782, p. 40 (``However, we found 
that the data disclosed under the 10 percent sample disclosure 
requirement do not contain enough information to construct 
comparable performance statistics and are not representative of the 
population of credit ratings at each NRSRO and that the data 
disclosed under the 100 percent disclosure requirement likely 
present similar issues.'').
    \256\ See, e.g., GAO Report 10-782, pp. 40-47.
    \257\ Id.
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    With respect to the 100% Rule, the Commission is proposing its 
provisions be moved from Rule 17g-2 (the NRSRO recordkeeping rule) to 
Rule 17g-7.\258\ Currently, Rule 17g-7 requires an NRSRO to disclose 
certain information in any report accompanying an asset-backed 
security.\259\ In other words, the rule requires an NRSRO to publicly 
disclose information outside of Form NRSRO (the predominant NRSRO 
disclosure rule). Similarly, the 100% Rule in its current form (and as 
proposed) also requires (and would require) an NRSRO to disclose 
information outside of Form NRSRO. Finally, as discussed below in 
Section II.G of this release, Section 15E(s) of the Exchange Act 
provides that the Commission shall adopt rules to require an NRSRO to 
disclose further information outside of Form NRSRO.\260\ The Commission 
is proposing to consolidate non-Form NRSRO disclosure rules by 
codifying them in Rule 17g-7.\261\
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    \258\ 17 CFR 240.17g-7.
    \259\ See 17 CFR 240.17g-7, which requires an NRSRO to include 
in any report accompanying a credit rating with respect to an asset-
backed security, as that term is defined in Section 3(a)(77) of the 
Exchange Act (15 U.S.C. 78c(a)(77)) a description of: the 
representations, warranties and enforcement mechanisms available to 
investors; and how they differ from the representations, warranties 
and enforcement mechanisms in issuances of similar securities. Id.
    \260\ See 15 U.S.C. 78o-7(s).
    \261\ See 15 U.S.C. 78o-7 and 15 U.S.C. 78q. The current 
provisions of Rule 17g-7 would be incorporated into new paragraph 
(a) of Rule 17g-7 as discussed below in Section II.G of this 
release. The Commission notes that some NRSROs may (or could in the 
future) have additional disclosure requirements based on their 
status as another type of registrant or because they are part of a 
company that has filing obligations under other provisions of the 
securities laws. The Commission does not intend to consolidate such 
other disclosure requirements in Rule 17g-7.
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    The proposed enhancements to the 100% Rule would be codified in new 
paragraph (b) of Rule 17g-7.\262\ Proposed paragraph (b)(1) would 
require, among other things, that the NRSRO publicly disclose the 
ratings history information for free on an easily accessible portion of 
its corporate Internet Web site.\263\ This would implement Section 
15E(q)(2)(D) of the Exchange Act and, by using the ``easily accessible 
portion'' language, enhance the current requirement of the 100% Rule 
that the ratings history information be disclosed on the NRSRO's 
corporate Internet Web site.\264\ As discussed above in Section 
II.E.1.b of this release, some Internet Web sites contain large amounts 
of information, some of which must be accessed by navigating through 
multiple web pages.\265\ Consequently, as discussed, the Commission 
preliminary believes that Form NRSRO would be on an ``easily 
accessible'' portion of an Internet Web site if it could be accessed 
through a clearly and prominently labeled hyperlink to the Form on the 
homepage of the NRSRO's corporate Internet Web site. The Commission 
preliminarily believes that the same holds true for the disclosure of 
the data file or files containing the information that would be 
required by the enhanced 100% Rule.\266\
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    \262\ See proposed new paragraph (b) of Rule 17g-7.
    \263\ See proposed new paragraph (b)(1) of Rule 17g-7.
    \264\ See 15 U.S.C. 78o-7(q)(2)(D); compare 17 CFR 240.17g-
7(d)(3)(i)(A), with proposed new paragraph (b) of Rule 17g-7. As 
discussed above, Section 15E(q)(2)(D) of the Exchange Act provides 
that the Commission's rules shall require the information about the 
performance of credit ratings be published and made freely available 
by the NRSRO, on an easily accessible portion of its Web site, and 
in writing, when requested. Id. The Commission, however, 
preliminarily believes that the ``in writing'' requirement would not 
be feasible if applied to the disclosures of rating histories. 
First, the data file containing the disclosures would need to be 
constantly updated by the NRSRO as new rating actions are added. 
Thus, it would not remain static like the Exhibit 1 performance 
measurement statistics which are updated annually. Consequently, by 
the time a party received a written copy of the disclosure, it 
likely would not be up-to-date. Second, the amount of information in 
the data file would be substantial (particularly for NRSROs that 
have issued hundreds of thousands of credit ratings) and increase 
over time. For these reasons, the Commission preliminarily believes 
that converting the information in the electronic disclosure to 
written form and mailing it to the party making the request would be 
impractical and not particularly useful. In terms of utility, as 
discussed below, the electronic disclosure of the data would need to 
be made using an XBRL format. The Commission preliminarily believes 
this would be a much more efficient and practical medium for 
accessing and analyzing the information rather than obtaining it in 
paper form. Consequently, the Commission preliminarily believes that 
the benefits, if any, to requiring a written disclosure would be 
limited. However, the Commission is requesting comment below on this 
issue.
    \265\ See Section II.E.1.b of this release proposing amendments 
to paragraph (i) of Rule 17g-1 to implement Section 15E(q)(2)(D) of 
the Exchange Act. 15 U.S.C. 78o-7(q)(2)(D). Under the proposals, an 
NRSRO would need to make Form NRSRO and Exhibits 1 through 9 
``freely available on an easily accessible portion of its website.'' 
See proposed amendments to paragraph (i) of Rule 17g-1.
    \266\ See 15 U.S.C. 78o-7(q)(2)(D).
---------------------------------------------------------------------------

    The next enhancement to the 100% Rule proposed by the Commission is 
to substantially broaden the scope of credit ratings that would be 
subject to the disclosure requirements. The Commission's intent is to 
require disclosure of information about all outstanding credit ratings 
in each class and subclass of credit ratings for which the NRSRO is 
registered but within certain prescribed time frames. As noted above, 
the 100% Rule currently only captures credit ratings where the NRSRO 
initially determined a credit rating for the obligor, security, or 
money market instrument on or after June 26, 2007.\267\ This means that 
obligors, securities, and money market instruments assigned a credit 
rating by the NRSRO before that date are excluded entirely from the 
disclosure even if a rating action is taken with respect to the 
obligor, security, or money market instrument after that date. 
Consequently, if a user of the disclosures wanted to calculate a 
transition or default rate for a given NRSRO's credit ratings, the user 
could not compile a start-date cohort that included all obligors, 
securities, or money market instruments assigned a credit as of the 
start date.\268\ The Commission's proposal would be designed to address 
this issue.\269\
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    \267\ See 17 CFR 240.17g-2(d)(3)(i)(A).
    \268\ See, e.g., GAO Report 10-782, p. 45. This issue is 
particularly acute when the NRSRO determines credit ratings for 
obligors in only one class of credit ratings. As discussed earlier, 
obligor credit ratings typically provide an assessment of the 
relative creditworthiness of the obligor as an entity for all its 
obligations. Thus, it is different from a credit rating for a 
security or money instrument that typically has a single finite 
obligation that will mature, be called, or be prepaid (if it does 
not default). An NRSRO that primarily issued obligor credit ratings 
in a class and initially rated them prior to June 26, 2007 would 
never have to include the rating histories of these obligors in the 
disclosure. For example, the NRSRO could be monitoring credit 
ratings for the same group of obligors that were initially rated 10 
to 20 years ago. In this case, the NRSRO would have no ratings 
histories to disclose.
    \269\ See, e.g., GAO Report 10-782, pp. 45-46.
---------------------------------------------------------------------------

    In particular, the Commission is proposing that the rule no longer 
be limited to the disclosure of histories for credit ratings where the 
NRSRO initially

[[Page 33448]]

determined a credit rating for the obligor, security, or money market 
instrument on or after June 26, 2007.\270\ Instead, the rule, as 
proposed, would apply to any credit rating that was outstanding as of 
June 26, 2007, but the rating histories disclosed for these credit 
ratings would not need to include information about actions taken 
before June 26, 2007.\271\ Moreover, in order to immediately include 
these credit ratings in the disclosure, the proposed rule would require 
the NRSRO to disclose the credit rating assigned to the obligor, 
security, or money market instrument and associated information as of 
June 26, 2007. Specifically, proposed paragraph (b)(1)(i) of Rule 17g-7 
would require an NRSRO to disclose each credit rating assigned to an 
obligor, security, and money market instrument in every class of credit 
ratings for which the NRSRO is registered that was outstanding as of 
June 26, 2007 and any subsequent upgrades or downgrades of a credit 
rating assigned to the obligor, security, or money market instrument 
(including a downgrade to, or assignment of, default), any placements 
of a credit rating assigned to the obligor, security, or money market 
instrument on watch or review, any affirmation of a credit rating 
assigned to the obligor, security, or money market instrument, and a 
withdrawal of a credit rating assigned to the obligor, security, or 
money market instrument.\272\ Consequently, an NRSRO would need to 
include in the XBRL file through which it makes the rating history 
disclosures all outstanding credit ratings as of June 26, 2007 (i.e., 
not wait until a new rating action was taken with respect to the credit 
rating) and then disclose subsequent actions taken with respect to 
those credit ratings. In other words, the histories for this class of 
credit ratings would begin on June 26, 2007. This would mean that the 
disclosures would not contain complete histories for many credit 
ratings.\273\ However, the disclosures would capture all outstanding 
credit ratings in each class of credit ratings for which the NRSRO is 
registered and, therefore, market participants could immediately begin 
computing short-term transition and default rates using start-date 
cohorts that include all the obligors, securities, and money market 
instruments assigned a credit rating in a given class.\274\
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    \270\ See proposed new paragraph (b)(1)(i) of Rule 17g-7.
    \271\ The Commission notes, however, that an NRSRO could 
voluntarily disclose more rating history information than required 
by the current rule or the proposed amendment to the rule.
    \272\ Id.
    \273\ For example, assume an obligor was initially rated in AA 
on June 26, 2000. Thereafter, the rating was downgraded to AA- on 
June 26 2003, to A on June 26, 2005, and to BBB on June 26, 2008. 
Under the proposed rule, the ratings history disclosure would cross 
the June 26, 2007 threshold with an A rating. The history for this 
obligor would omit the initial AA rating on June 26, 2000 and the 
downgrades to AA- and A on June 26, 2003 and June 26, 2005, 
respectively. Therefore, the first event in the rating history would 
be that the obligor was assigned an A rating as of June 26, 2007. 
The next event in the rating history would be the downgrade of the 
credit rating to BBB on June 26, 2008.
    \274\ For example, a user of the credit rating histories would 
be able to generate transition and default rates for a period having 
a start date as far back as June 26, 2007. In doing so, the user 
would be able to compile a start-date cohort consisting of all the 
obligors, securities, and money market instruments assigned an 
outstanding credit rating in a given class as of June 26, 2007. The 
user could compute transition and default rates over short-term 
periods (i.e., 1 or 2 years) in the near term and for longer periods 
as time progresses and more ratings actions over a longer time 
horizon are added to the disclosure. In addition, the user could 
calculate transition or default rates using a different process than 
the single cohort approach proposed for the Exhibit 1 disclosures. 
For example, the user could begin calculating short-term transition 
and default rates using a rolling average in which start-date 
cohorts are identified each month (e.g., June 26, 2007, July 26, 
2007, August 26, 2007, and so on).
---------------------------------------------------------------------------

    Proposed paragraph (b)(1)(ii) of Rule 17g-7 would contain the 
existing requirement in the 100% Rule that an NRSRO disclose rating 
histories for each credit rating in every class of credit ratings for 
which the NRSRO is registered that was initially determined on or after 
June 26, 2007 and any subsequent rating action taken with respect to 
such credit ratings.\275\ Specifically, proposed paragraph (b)(1)(ii) 
would require the NRSRO to disclose each credit rating assigned to an 
obligor, security, and money market instrument in every class of credit 
ratings for which the NRSRO is registered that was initially determined 
on or after June 26, 2007, and any subsequent upgrades or downgrades of 
a credit rating assigned to the obligor, security, or money market 
instrument (including a downgrade to, or assignment of, default), any 
placements of a credit rating assigned to the obligor, security, or 
money market instrument on watch or review, any affirmation of a credit 
rating assigned to the obligor, security, or money market instrument, 
and a withdrawal of a credit rating assigned to the obligor, security, 
or money market instrument. Consequently, the disclosure mandated under 
proposed paragraph (b)(1) of Rule 17g-7 would capture all credit 
ratings outstanding as of June 26, 2007 (regardless of when the 
obligor, security, or money market instrument was initially assigned a 
credit rating) and the subsequent rating actions taken with respect to 
those credit ratings as well as all credit ratings initially determined 
on or after that date and the subsequent rating actions taken with 
respect to those credit ratings.\276\
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    \275\ See proposed new paragraph (b)(1)(ii) of Rule 17g-7.
    \276\ See proposed new paragraph (b)(1) of Rule 17g-7.
---------------------------------------------------------------------------

    The next enhancement to the 100% Rule proposed by the Commission is 
to increase the number and scope of the data fields that must be 
disclosed about a rating action.\277\ Specifically, proposed paragraph 
(b)(2) of Rule 17g-7 would identify 7 categories of data that would 
need to be disclosed when a credit rating action is published pursuant 
to proposed new paragraph (b)(1) of Rule 17g-7. In addition, some of 
the categories would have sub-categories.\278\ The goal would be to 
make the data more useful in terms of the amount of information 
provided, the ability to search and sort the information, and the 
ability to compare historical rating information across NRSROs.\279\
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    \277\ See proposed new paragraph (b)(2) of Rule 17g-7.
    \278\ If adopted, the Commission would need to update the List 
of XBRL Tags to include some of the new data fields; whereas other 
of the fields are covered by existing Tags, including by some of the 
voluntary Tags.
    \279\ See, e.g., GAO Report 10-782, p. 41 (``First, SEC [sic] 
did not specify the data fields the NRSROs were to disclose in the 
rule, and the data fields provided by the NRSROs were not always 
sufficient to identify a complete rating history for ratings in each 
of the seven samples. If users cannot identify the rating history 
for each rating in the sample, they cannot develop performance 
measures that track how an issuer's credit rating evolves.'').
---------------------------------------------------------------------------

    Proposed new paragraph (b)(2)(i) of Rule 17g-7 would identify the 
first category of data: namely, the identity of the NRSRO disclosing 
the rating action.\280\ This may seem unnecessary as the identity of 
the NRSRO making the disclosure should be obvious. However, as noted 
above, the NRSRO would need to assign an XBRL Tag to each item of 
information, including the identity of the NRSRO. Including and tagging 
the identity of the NRSRO would assist users who download and combine 
data files of multiple NRSROs to sort credit ratings by a given NRSRO.
---------------------------------------------------------------------------

    \280\ See proposed new paragraph (b)(2)(i) of Rule 17g-7.
---------------------------------------------------------------------------

    Proposed new paragraph (b)(2)(ii) of Rule 17g-7 would identify the 
second category of data: namely, the date of the rating action.\281\ 
This proposed

[[Page 33449]]

requirement is in the 100% Rule as it exists today.\282\ The inclusion 
of the date of a rating action is designed to allow investors and other 
users of credit ratings to review the timing of a rating action.\283\ 
This would allow the person reviewing the credit rating histories of 
the NRSROs to reach conclusions about which NRSROs did the best job in 
determining an initial rating and, thereafter, making appropriate and 
timely adjustments to the credit rating.\284\
---------------------------------------------------------------------------

    \281\ See proposed new paragraph (b)(2)(ii) of Rule 17g-7. The 
Commission notes that many of the rating actions in an NRSRO's 
disclosure would share the date of June 26, 2007, which would be the 
first action disclosed for rating histories of credit ratings 
initially determined before June 26, 2007. This would result from 
the proposed requirement to add all credit ratings outstanding as of 
June 26, 2007 to the disclosure. See proposed new paragraph 
(b)(1)(i) of Rule 17g-7. As discussed below, the Commission is 
proposing that this action (the adding of an outstanding credit 
rating) have a unique XBRL tag so that persons using these 
disclosures do not confuse the action as an initial credit rating or 
change to an existing credit rating (e.g., an upgrade or a down 
grade). See proposed new paragraph (b)(2)(v)(A) of Rule 17g-7.
    \282\ See 17 CFR 240.17g-2(a)(8).
    \283\ See Amendments to Rules for Nationally Recognized 
Statistical Rating Organizations, 74 FR at 63837-63838 (Dec. 4, 
2009).
    \284\ Id.
---------------------------------------------------------------------------

    Proposed new paragraph (b)(2)(iii) of Rule 17g-7 would identify the 
third category of data.\285\ The information in this category would 
need to be disclosed if the rating action is taken with respect to an 
obligor (i.e., as opposed to a credit rating of a security or money 
market instrument). In this case, the NRSRO would need to disclose (if 
applicable): (1) the CIK number of the rated obligor; and (2) the legal 
name of the obligor. This proposed requirement is in the 100% Rule as 
it exists today.\286\
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    \285\ See proposed new paragraph (b)(2)(iii) of Rule 17g-7.
    \286\ See 17 CFR 240.17g-2(a)(8).
---------------------------------------------------------------------------

    Proposed new paragraph (b)(2)(iv) of Rule 17g-7 would identify the 
fourth category of data.\287\ The information in this category would 
need to be disclosed when the rating action is taken with respect to a 
security or money market instrument. In this case, the NRSRO would need 
to disclose (if applicable): (1) The CIK number of the issuer of the 
security or money market instrument; (2) the legal name of the issuer 
of the security or money market instrument; and (3) the CUSIP of the 
security or money market instrument.\288\ The proposed requirement to 
include the CUSIP of security or money market instrument is in the 100% 
Rule as it exists today.\289\ The requirements to include the name and 
CIK number of the issuer would be new. The Commission preliminarily 
believes including this information would be useful because it would 
allow users of the XBRL data file to sort credit ratings of securities 
and money market instruments by issuer.
---------------------------------------------------------------------------

    \287\ See proposed new paragraph (b)(2)(iv) of Rule 17g-7.
    \288\ CUSIP stands for the Committee on Uniform Securities and 
Identification. A CUSIP number consists of nine characters that 
uniquely identify a company or issuer and the type of security.
    \289\ See 17 CFR 240.17g-2(a)(8).
---------------------------------------------------------------------------

    Proposed paragraph (b)(2)(v) of Rule 17g-7 would identify the fifth 
category of data: namely, a classification of the type of rating 
action.\290\ The NRSRO would be required to select 1 of 7 
classifications to identify the reason for the rating action.\291\ 
Aside from the first classification discussed below, the Commission 
preliminarily believes that the classifications identify all types of 
actions an NRSRO might take with respect to a credit rating.
---------------------------------------------------------------------------

    \290\ See proposed paragraph (b)(2)(v) of Rule 17g-7.
    \291\ The actual disclosure would need to be the type of rating 
action and not the credit rating resulting from the rating action. 
For example, if the rating action was a downgrade, the NRSRO would 
need to classify it as a ``downgrade'' and not, for example, a 
change of the current credit rating from the AA notch to AA- notch. 
This would allow users of the disclosures to sort the information 
by, for example, initial credit ratings, upgrades, and downgrades.
---------------------------------------------------------------------------

    The first classification would be that the rating action 
constitutes a disclosure of a credit rating that was outstanding as of 
June 26, 2007 for the purposes of proposed paragraph (b)(1)(i) of Rule 
17g-7.\292\ As discussed above, the Commission is proposing that the 
100% rule capture all credit ratings outstanding as of June 26, 2007 by 
disclosing the credit rating and associated information as of that 
date.\293\ If adopted, this would mean that thousands, if not hundreds 
of thousands, of ratings histories each beginning on June 26, 2007 
would be disclosed. The proposed classification is designed to alert 
users of the disclosures that the proposed rule caused the June 26, 
2007 entry in the rating history of the obligor, security, or money 
market instrument and not because, for example, a credit rating was 
initially determined for the obligor, security, or money market 
instrument on that date.
---------------------------------------------------------------------------

    \292\ See proposed paragraph (b)(2)(v)(A) of Rule 17g-7.
    \293\ See proposed paragraph (b)(1)(i) of Rule 17g-7.
---------------------------------------------------------------------------

    The second classification would be that the rating action was an 
initial credit rating.\294\ For example, an NRSRO would select this 
classification if the rating action was the first credit rating 
determined by the NRSRO with respect to the obligor, security, or money 
market instrument. The third classification would be an upgrade to an 
existing credit rating.\295\ The fourth classification would be a 
downgrade to an existing credit rating, which would include assigning a 
credit rating of default.\296\ The fifth classification would be 
placing an existing credit rating on credit watch or review.\297\ This 
means the NRSRO has disclosed that it is actively evaluating whether 
the credit rating should be changed. The sixth classification would be 
affirming the current credit rating assigned to the obligor, security, 
or money market instrument.\298\ For example, an NRSRO may publish an 
announcement that it is affirming the current credit rating of an 
obligor, security, or money market instrument and, consequently, 
determine not to upgrade or downgrade the credit rating to a different 
notch in the rating scale.
---------------------------------------------------------------------------

    \294\ See proposed paragraph (b)(2)(v)(B) of Rule 17g-7. The 
Commission is not proposing that a rating action that results in an 
``expected'' or ``preliminary'' credit rating be included in the 
rating history for a given obligor, security, or money market 
instrument. As noted above, expected or preliminary ratings most 
commonly are issued by an NRSRO with respect to a structured finance 
product at the time the issuer commences the offering and typically 
are included in pre-sale reports. These ratings may include a range 
of ratings, or any other indications of a credit rating used prior 
to the assignment of an initial credit rating for a new issuance. As 
such, the Commission preliminarily believes they should be excluded 
from the ratings histories since the issuance of the ``initial'' 
credit rating is the first formal expression of the NRSRO's view of 
the relative creditworthiness of the obligor, security, or money 
market instrument.
    \295\ See proposed paragraph (b)(2)(v)(C) of Rule 17g-7.
    \296\ See proposed paragraph (b)(2)(v)(D) of Rule 17g-7.
    \297\ See proposed paragraph (b)(2)(v)(E) of Rule 17g-7.
    \298\ See proposed paragraph (b)(2)(v)(F) of Rule 17g-7. Some 
NRSRO's also may ``confirm'' an existing credit rating. For the 
purposes of this proposed disclosure requirement, the Commission 
intends the term ``affirmation of an existing credit rating'' to 
include a ``confirmation'' of an existing credit rating.
---------------------------------------------------------------------------

    The seventh classification would be the withdrawal of an existing 
credit rating.\299\ In the case of a withdrawal, the NRSRO would be 
required to provide a sub-classification identifying reason for the 
withdrawal.\300\ There would be three sub-classifications: (1) The 
obligor defaulted, or the security or money, market instrument went 
into default; \301\ (2) the obligation subject to the credit rating was 
extinguished by payment in full of all outstanding principal and 
interest due on the obligation according to the terms of the 
obligation; \302\ or (3) the credit rating was withdrawn for reasons 
other than those set forth in (1) and (2) above.\303\

[[Page 33450]]

These sub-classifications would parallel, in many respects, the 
outcomes identified in paragraphs (4)(B)(iii), (iv), and (v) of the 
proposed amendments to the instructions for Exhibit 1 to Form NRSRO 
discussed above in Section II.E.1.a of this release. However, the 
Commission preliminarily believes that it would not be appropriate to 
prescribe standard definitions of ``default'' and ``paid-off'' for the 
purposes of making these classifications.\304\ The reason is the 
ratings history disclosure requirement is designed to allow investors 
and other users of credit ratings to compare how each NRSRO treats a 
commonly rated obligor, security, or money market instrument. In other 
words, unlike the production of performance statistics where standard 
definitions are necessary to promote comparability of aggregate 
statistics, the historical rating information should indicate on the 
granular level any differences between the NRSROs with respect to the 
rating actions they take for a commonly rated obligor, security or 
money, market instrument, including their differing definitions of 
default. This would allow investors and other users of credit ratings 
to review, for example, the timing of when one NRSRO downgraded an 
obligor to the default category as opposed to another NRSRO or group of 
NRSROs. Among other things, investors and other users of credit ratings 
could review the data to identify outliers that are either quick or 
slow to downgrade obligors, securities, or money market instruments to 
default. In addition, an NRSRO with a very narrow definition of 
``default'' might continue to maintain a security at a notch in its 
rating scale above the default category; whereas other NRSROs, using 
broader definitions, had classified the security as having gone into 
default. Creating a mechanism to identify these types of variances is a 
goal of the enhancements to the 100% Rule. Moreover, users of the 
ratings history information could use the standard definition of 
Default in the proposed enhancements to the instructions for Exhibit 1 
as a benchmark to compare when an NRSRO classified obligors, 
securities, or money markets as having gone into default.
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    \299\ See proposed paragraph (b)(2)(v)(G) of Rule 17g-7.
    \300\ See proposed paragraphs (b)(2)(v)(G)(1), (2) and (3) of 
Rule 17g-7.
    \301\ See proposed paragraph (b)(2)(v)(G)(1) of Rule 17g-7.
    \302\ See proposed paragraphs (b)(2)(v)(G)(2) of Rule 17g-7.
    \303\ See proposed paragraphs (b)(2)(v)(G)(3) of Rule 17g-7.
    \304\ For the reasons discussed herein, the Commission also 
preliminarily believes that the NRSRO should use its definition of 
``default'' in taking a rating action that results in a downgrade to 
the default category, which would need to be classified as a 
downgrade in the information disclosed with the rating action 
pursuant to proposed paragraph (b)(2)(v)(D) of Rule 17g-7.
---------------------------------------------------------------------------

    The Commission preliminarily believes a default and the 
extinguishment of an obligation because it was paid in full are the 
most frequently occurring reasons why an NRSRO withdraws a credit 
rating. However, as discussed above, in Section II.E.1.a of this 
release, there are other reasons an NRSRO might withdraw a credit 
rating, including that the rated obligor or issuer of the rated 
security or money market instrument stopped paying for the surveillance 
of rating or the NRSRO decided not to devote resources to continue to 
perform surveillance on the rating of an obligor, security, or money 
market instrument on an unsolicited basis. However, as also discussed 
above, the withdrawal of credit ratings could be used to make 
performance statistics appear more favorable. Consequently, as with the 
Transition/Default Matrices in Exhibit 1, an NRSRO would be required to 
identify when a credit rating was withdrawn for reasons other than 
default or the extinguishment of the obligation upon which the credit 
rating is based. Similar to the Transition/Default Matrices, persons 
using the ratings history information could analyze how often an NRSRO 
withdraws a credit rating for ``other'' reasons in a class or subclass 
of credit ratings.
    Proposed paragraph (b)(2)(vi) of Rule 17g-7 would identify the 
sixth category of data: Namely, a classification of the class or 
subclass of credit rating.\305\ The classes of credit ratings would be 
based on the definition of ``nationally recognized statistical rating 
organization'' in Section 3(a)(62) of the Exchange Act.\306\ 
Consequently, the first classification would be financial institutions, 
brokers or dealers.\307\ The second classification would be insurance 
companies.\308\ The third classification would be corporate 
issuers.\309\
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    \305\ See proposed paragraph (b)(2)(vi) of Rule 17g-7.
    \306\ See 15 U.S.C. 78o-7(a)(62). Because some obligors, 
securities, and money market instruments have characteristics that 
could cause them to be assigned more than one class of credit 
rating, the Commission is seeking comment below in Section II.M.4.a 
of this release on which class would be the most appropriate for 
certain types of obligors, securities, and money market instruments. 
Based on the comments received in response to those requests, the 
Commission may decide to prescribe by rule or identify through 
guidance how certain types of obligors, securities, and money market 
instruments should be classified for the purposes proposed in new 
paragraph (b)(vi) of Rule 17g-7.
    \307\ See 15 U.S.C. 78o-7(a)(62)(B)(i) and proposed paragraph 
(b)(2)(vi)(A) of Rule 17g-7.
    \308\ See 15 U.S.C. 78o-7(a)(62)(B)(ii) and proposed paragraph 
(b)(2)(vi)(B) of Rule 17g-7.
    \309\ See 15 U.S.C. 78o-7(a)(62)(B)(iii) and proposed paragraph 
(b)(2)(vi)(C) of Rule 17g-7.
---------------------------------------------------------------------------

    The fourth classification would be issuers of structured finance 
products.\310\ If the credit rating falls into this class, the proposed 
rule would require the NRSRO to identify a sub-classification as 
well.\311\ The sub-classifications would be the same subclasses for 
structured finance credit ratings the Commission is proposing an 
applicant and NRSRO use for the purposes of the Transition/Default 
Matrices to be disclosed in Exhibit 1 to Form NRSRO:\312\ RMBS;\313\ 
CMBS;\314\ CLOs;\315\ CDOs;\316\ ABCP;\317\ other asset-backed 
securities;\318\ and other structured finance products.\319\
---------------------------------------------------------------------------

    \310\ See 15 U.S.C. 78o-7(a)(62)(B)(iv) and proposed paragraph 
(b)(2)(vi)(D) of Rule 17g-7. Consistent with the existing 
Instructions to Exhibit 1 to Form NRSRO (and the proposed amendments 
to those instructions) this class of credit rating would be broader 
than the class identified in Section 15E(a)(62)(B)(iv) of the 
Exchange Act.
    \311\ See proposed paragraphs (b)(2)(vi)(D)(1)-(7) of Rule 17g-
7.
    \312\ See discussion in Section II.E.1.a of this release and 
proposed new paragraphs (1)(D)(i)-(vii) of the instructions for 
Exhibit 1.
    \313\ See proposed paragraph (b)(2)(vi)(D)(1) of Rule 17g-7. As 
with the proposal for Exhibit 1 to Form NRSRO, the Commission 
preliminarily intends that ``RMBS'' for the purposes of this rule 
means a securitization primarily of residential mortgages.
    \314\ See proposed paragraph (b)(2)(vi)(D)(2) of Rule 17g-7. As 
with the proposal for Exhibit 1 to Form NRSRO, the Commission 
preliminarily intends that ``CMBS'' for the purposes of this rule 
means a securitization primarily of commercial mortgages.
    \315\ See proposed paragraph (b)(2)(vi)(D)(3) of Rule 17g-7. As 
with the proposal for Exhibit 1 to Form NRSRO, the Commission 
preliminarily intends ``CLO'' for the purposes of this rule means a 
securitization primarily of commercial loans.
    \316\ See proposed paragraph (b)(2)(vi)(D)(4) of Rule 17g-7. As 
with the proposal for Exhibit 1 to Form NRSRO, the Commission 
preliminary intends ``CDO'' for the purposes of this rule to mean a 
securitization primarily of other debt instruments such as RMBS, 
CMBS, CLOs, CDOs, other asset backed securities, and corporate 
bonds.
    \317\ See proposed paragraph (b)(2)(vi)(D)(5) of Rule 17g-7. As 
with the proposal for Exhibit 1 to Form NRSRO, the Commission 
preliminarily intends ``ABCP'' for the purposes of this rule to mean 
short term notes issued by a structure that securitizes a variety of 
financial assets (e.g., trade receivables or credit card 
receivables), which secure the notes.
    \318\ See proposed paragraph (b)(2)(vi)(D)(6) of Rule 17g-7. As 
with the proposal for Exhibit 1 to Form NRSRO, the Commission 
preliminarily intends that ``other asset backed security'' for the 
purposes of this rule to mean a securitization primarily of auto 
loans, auto leases, floor plan financings, credit card receivables, 
student loans, consumer loans, equipment loans or equipment leases.
    \319\ See proposed paragraph (b)(2)(vi)(D)(7) of Rule 17g-7. As 
with the proposal for Exhibit 1 to Form NRSRO, the Commission 
preliminarily intends that ``other structured finance product'' for 
the purposes of this rule to mean a structured finance product not 
identified in the other sub-classifications of structured finance 
products.
---------------------------------------------------------------------------

    The fifth classification would be issuers of government securities, 
municipal securities or securities issued by a foreign government.\320\ 
If the credit rating falls into this class, the proposed rule would 
require the NRSRO to

[[Page 33451]]

identify a sub-classification as well.\321\ The sub-classifications 
would be the same for this class as are currently identified in the 
Instructions for Exhibit 1 to Form NRSRO: (1) Sovereign issuers;\322\ 
(2) United States public finance;\323\ or (3) International public 
finance.\324\
---------------------------------------------------------------------------

    \320\ See 15 U.S.C. 78o-7(a)(62)(B)(v) and proposed paragraph 
(b)(2)(vi)(E) of Rule 17g-7.
    \321\ See proposed paragraphs (b)(2)(vi)(E)(1)-(3) of Rule 17g-
7.
    \322\ See Instructions for Exhibit 1 to Form NRSRO and proposed 
paragraph (b)(2)(vi)(E)(1) of Rule 17g-7.
    \323\ See Instructions for Exhibit 1 to Form NRSRO and proposed 
paragraph (b)(2)(vi)(E)(2) of Rule 17g-7.
    \324\ See Instructions for Exhibit 1 to Form NRSRO and proposed 
paragraph (b)(2)(vi)(E)(3) of Rule 17g-7.
---------------------------------------------------------------------------

    Proposed paragraph (b)(2)(vii) of Rule 17g-7 would identify the 
seventh category of data: Namely, the credit rating symbol, number, or 
score in the applicable rating scale of the NRSRO assigned to the 
obligor, security, or money market instrument as a result of the rating 
action or, if the credit rating remained unchanged as a result of the 
action, the credit rating symbol, number, or score in the applicable 
rating scale of the NRSRO assigned to the obligor, security, or money 
market instrument as of the date of the rating action.\325\ The rating 
symbol, number, or score is a key component of the information that 
would need to be disclosed as it reflects the NRSRO's view of the 
relative creditworthiness of the obligor, security, or money market 
instrument subject to the rating as of the date the action is taken. 
The proposal would specify that the NRSRO, in either case, would need 
to include a credit rating in a default category, if applicable. 
Otherwise an NRSRO might exclude a default on the theory that it is not 
a credit rating per se (i.e., an opinion of creditworthiness) but 
rather a statement of fact.
---------------------------------------------------------------------------

    \325\ See proposed new paragraph (b)(2)(vii) of Rule 17g-7.
---------------------------------------------------------------------------

    Proposed paragraph (b)(3) of Rule 17g-7 would provide that the 
information identified in paragraph (b)(2) of the rule (discussed 
above) must be disclosed in an interactive data file that uses an XBRL 
format and the List of XBRL Tags for NRSROs as published on the 
Internet Web site of the Commission.\326\ This would be consistent with 
the current requirement of the 100% Rule.\327\ As discussed above, 
however, the data fields that would need to have an XBRL tag would be 
expanded.\328\
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    \326\ See proposed new paragraph (b)(3) of Rule 17g-7.
    \327\ See 17 CFR 240.17g-2(d)(3)(ii).
    \328\ See proposed new paragraph (b)(2)(i)-(vii).
---------------------------------------------------------------------------

    Proposed paragraph (b)(4) of Rule 17g-7 would specify when a rating 
action would need to be disclosed by establishing two distinct grace 
periods: 12 months and 24 months.\329\ In particular, a rating action 
would need to be disclosed: (1) Within 12 months from the date the 
action is taken, if the credit rating subject to the action is issuer-
paid; \330\ (2) or within 24 months from the date the action is taken, 
if the credit rating subject to the action is not issuer-paid.\331\ 
These separate grace periods for issuer-paid and non-issuer-paid credit 
ratings are consistent with the current requirement of the 100% 
Rule.\332\
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    \329\ See proposed new paragraph (b)(4) of Rule 17g-7.
    \330\ See proposed paragraph (b)(4)(i) of Rule 17g-7.
    \331\ See proposed paragraph (b)(4)(ii) of Rule 17g-7.
    \332\ See 17 CFR 240.17g-2(d)(3)(i)(B) and (C). See Amendments 
to Rules for Nationally Recognized Statistical Rating Organizations, 
74 FR at 63837-63842 (Dec. 4, 2009) (discussing the 100% Rule and 
the reasons why the Commission adopted distinct 12 and 24 month 
grace periods).
---------------------------------------------------------------------------

    Finally, paragraph (b)(5) of Rule 17g-7 would provide that an NRSRO 
may cease disclosing a rating history of an obligor, security, or money 
market instrument no earlier than 20 years after the date a rating 
action with respect to the obligor, security, or money market 
instrument is classified as a withdrawal of the credit rating pursuant 
to paragraph (b)(2)(v)(G) of Rule 17g-7, provided no subsequent credit 
ratings are assigned to the obligor, security, or money market 
instrument after the withdrawal classification.\333\ This proposed 
requirement is designed to ensure that information about credit ratings 
that are withdrawn for any reason would remain a part of the disclosure 
for a significant period of time. The Commission preliminarily believes 
this would address concerns that an NRSRO might withdraw a credit 
rating to remove its history from the disclosure requirement to, for 
example, make the performance of its credit ratings appear better than, 
in fact, is the case.
---------------------------------------------------------------------------

    \333\ See proposed paragraph (b)(5) of Rule 17g-7.
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of 
proposed new paragraph (b) of Rule 17g-7. The Commission also seeks 
comment on the following:
    1. Should the 10% Rule be retained? For example, could it be 
enhanced to meet the requirement of Section 15E(q)(A) of the Exchange 
Act that disclosures be comparable among NRSROs, to allow users of 
credit ratings to compare the performance of credit ratings across 
NRSROs? If so, how could the 10% Rule be modified to better meet this 
requirement? Moreover, even with such modifications, would an enhanced 
10% Rule provide information to investors and other users of credit 
ratings that would be useful to assess the performance of credit 
ratings across NRSROs?
    2. Should the proposed rule require that the disclosure of the 
ratings history information under the proposed enhancements to the 100% 
Rule be made freely available in writing, when requested? If so, how 
should an NRSRO meet such a request? For example, would an NRSRO be 
required to mail a written copy of information in the XBRL data file to 
a party requesting the information? If so, would it be appropriate to 
permit the NRSRO to charge reasonable handling and postage fees? Would 
such a requirement to provide a written copy of the information in the 
XBRL data file be feasible? Are there other ways an NRSRO could make 
this disclosure freely available in writing?
    3. If the rule required an NRSRO to provide a written copy of the 
information in the XBRL data file, when requested, under what 
circumstances would a party request this information in writing, given 
that it would be freely available on an easily accessible portion of 
the NRSRO's corporate Internet Web site? Moreover, why would a party 
request the information in written form when downloading an electronic 
file in an XBRL format would make accessing and analyzing the 
information much easier?
    4. Should the rule require that an NRSRO publish quarterly, bi-
annual, or annual copies of the rating histories and that these be made 
available when requested to implement the ``in writing'' provision in 
the statute?
    5. What practical issues should the Commission consider in 
implementing the proposed enhancements to the 100% Rule? For example, 
would the variances in the procedures and methodologies NRSROs use to 
determine credit ratings raise practical issues in terms of classifying 
and disclosing the proposed required information about a credit rating 
action? In addition, would the variances in the meanings and 
definitions that NRSROs ascribe to the categories of credit ratings in 
their rating scales raise practical issues in terms of classifying and 
disclosing the proposed required information about a credit rating 
action? How could the proposal be modified to address any practical 
issues identified without undermining the goal of making the data more 
useful in terms of the

[[Page 33452]]

amount of information provided, the ability to search and sort the 
information, and the ability to compare historical rating information 
across NRSROs?
    6. How long would it take an NRSRO to implement the proposed 
requirements and begin making the proposed disclosures? What steps 
would an NRSRO need to take to implement the proposed requirements?
    7. What practical issues should the Commission consider with 
respect to the proposed requirement to add histories for all credit 
ratings outstanding as of June 26, 2007 to the disclosure? How could 
the proposal be modified to address any practical issues identified 
without undermining the rule's goal of making the data more useful in 
terms of the amount of information provided, the ability to search and 
sort the information, and the ability to compare historical rating 
information across NRSROs?
    8. What practical issues should the Commission consider with 
respect to the proposed new requirement to disclose the name and CIK 
number of the issuer of a rated security or money market instrument? 
How could the proposal be modified to address any practical issues 
identified without undermining the goal of making the data more useful 
in terms of the amount of information provided, the ability to search 
and sort the information, and the ability to compare historical rating 
information across NRSROs?
    9. What practical issues should the Commission consider with 
respect to the proposed new requirement to disclose the type of rating 
action? For example, are the proposed classifications a comprehensive 
list of the types of rating actions taken by NRSROs? If not, identify 
and describe any other types of rating actions. Would the disclosure of 
this data be useful to investors and other users of credit ratings? How 
could the proposal be modified to address any practical issues 
identified without undermining the goal of making the data more useful 
in terms of the amount of information provided, the ability to search 
and sort the information, and the ability to compare historical rating 
information across NRSROs?
    10. With respect to the proposal to disclose the types of rating 
actions, are the three sub-classifications proposed for the withdrawal 
classification sufficient? For example, should the rule further refine 
the ``withdrawal for other reasons'' sub-classification to require 
disclosure of certain other reasons that a credit rating might be 
withdrawn such as the obligor or issuer ceased paying for the credit 
rating?
    11. What practical issues should the Commission consider with 
respect to the proposed new requirement to disclose the class or 
subclass of the credit rating? For example, are the descriptions of the 
subclasses of credit ratings for structured finance products 
sufficiently clear to provide an NRSRO with guidance as to how such 
credit ratings should be classified? How could the descriptions be 
modified to make them clearer and provide better guidance?
    12. Are the subclasses of credit ratings for structured finance 
products the most appropriate way to divide this class of credit 
ratings? For example, should the ``other-ABS'' subclass be separated 
into subclasses based on the assets underlying the ABS (i.e., auto 
loans, auto leases, floor plan financings, credit card receivables, 
student loans, consumer loans, equipment loans, or equipment leases)? 
In addition, are there other classes of structured finance products 
that should be identified?
    13. Commenters are referred to the questions in Section II.M.4.a of 
this release with respect to Items 6 and 7 of Form NRSRO and how 
certain types of obligors, securities, and money market instruments 
should be classified for purposes of providing approximate amounts of 
credit ratings outstanding in each class of credit rating for which an 
applicant is seeking registration (Item 6) or an NRSRO is registered 
(Item 7)? In responding to those questions, commenters should consider 
how proposed classifications could be applied for the purposes of 
proposed new paragraph (b)(2)(vi) of Rule 17g-7.
    14. Is 20 years the appropriate amount of time to require that the 
ratings history for a withdrawn credit rating remain part of the 
disclosure? Should the rule require these histories be retained for a 
lesser period of time, such as 10 or 15 years or a greater period of 
time, such as 25 or 30 years? If a different time period would be more 
appropriate, explain the rationale for such different time period.
    15. Are the existing 12 and 24 month grace periods appropriate? 
Should the Commission consider adopting a single grace period, rather 
than the existing bifurcated approach?

F. Credit Rating Methodologies

    Section 932(a)(8) of the Dodd-Frank Act amends Section 15E of the 
Exchange Act to add new subsection (r).\334\ Section 15E(r) of the 
Exchange Act provides that the Commission shall prescribe rules, for 
the protection of investors and in the public interest, with respect to 
the procedures and methodologies, including qualitative and 
quantitative data and models, used by NRSROs that require each NRSRO to 
ensure a number of objectives.\335\ The Commission preliminarily 
believes it would be appropriate to implement Section 15E(r) by 
proposing rules requiring an NRSRO to establish, maintain, enforce, and 
document policies and procedures that are reasonably designed to ensure 
the objectives identified in that section of the statute.\336\ This 
approach would allow an NRSRO to establish policies and procedures that 
can be integrated with its procedures and methodologies for determining 
credit ratings, which vary across NRSROs. At the same time, the 
proposed rule would set forth specific objectives that the policies and 
procedures would need to be reasonably designed to achieve both in 
design and operation. The Commission preliminarily believes this 
approach would be appropriate, particularly given that the objectives 
set forth in Section 15E(r) of the Exchange Act relate to the 
procedures and methodologies an NRSRO uses to determine credit 
ratings.\337\
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    \334\ See Public Law 111-203 Sec.  932(a)(8) and 15 U.S.C. 78o-
7(r).
    \335\ See 15 U.S.C. 78o-7(r)(1)-(3).
    \336\ See id.
    \337\ See Section 15E(r) of the Exchange Act (15 U.S.C. 78o-
7(r)); see also Section 15E(c)(2) of the Exchange Act (providing, in 
pertinent part, that the Commission may not regulate the substance 
of credit ratings or the procedures and methodologies by which any 
NRSRO determines credit ratings). 15 U.S.C. 78o-7(c)(2).
---------------------------------------------------------------------------

    For these reasons, the Commission is proposing to implement Section 
15E(r) of the Exchange Act, in large part, through paragraph (a) of new 
Rule 17g-8.\338\ The Commission also is proposing an amendment to Rule 
17g-2 to apply the record retention and production requirements of that 
rule to the policies and procedures.\339\
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    \338\ See proposed paragraph (a) of new Rule 17g-8. As discussed 
above in Section II.C of this release, the Commission is proposing 
to implement several provisions of the Dodd-Frank Act through rules 
that would prescribe policies and procedures an NRSRO would need to 
establish, maintain, enforce, and document. The Commission is 
proposing that all such rule requirements be consolidated in new 
Rule 17g-8. See proposed paragraphs (a), (b), and (c) of new Rule 
17g-8 and Section II.C.1 of this release discussing proposed 
paragraph (c) and Section II.J.1 discussing proposed paragraph (b).
    \339\ See proposed new paragraph (b)(13) of Rule 17g-2.
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1. Proposed Paragraph (a) of New Rule 17g-8
    As noted above, proposed paragraph (a) of new Rule 17g-8 would 
require an NRSRO to have policies and procedures

[[Page 33453]]

that are reasonably designed to achieve objectives identified in 
Section 15E(r) of the Exchange Act.\340\ In particular, the prefatory 
text would require an NRSRO to establish, maintain, enforce, and 
document policies and procedures that are reasonably designed to ensure 
the objectives identified in paragraphs (a)(1), (2), (3), (4), and (5).
---------------------------------------------------------------------------

    \340\ See prefatory text of proposed paragraph (a) of new Rule 
17g-8.
---------------------------------------------------------------------------

    Proposed paragraph (a)(1) of new Rule 17g-8 would implement Section 
15E(r)(1)(A) of the Exchange Act.\341\ This section provides that the 
Commission's rules shall require an NRSRO to ensure that credit ratings 
are determined using procedures and methodologies, including 
qualitative and quantitative data and models, that are approved by the 
board of the NRSRO, or a body performing a function similar to that of 
a board.\342\ The Commission preliminarily believes that the mandate 
set forth in the statute is explicit and, consequently, proposes rule 
text that would mirror the statutory text.\343\ Therefore, proposed 
paragraph (a)(1) of new Rule 17g-8 would require an NRSRO to have 
policies and procedures that are reasonably designed to ensure that the 
procedures and methodologies, including qualitative and quantitative 
data and models, the NRSRO uses to determine credit ratings are 
approved by its board of directors or another body performing a 
function similar to that of a board of directors.\344\ In this regard, 
the Commission notes that Section 15E(t)(3)(A) of the Exchange Act 
contains a self-executing provision that the board of the NRSRO shall 
oversee the ``establishment, maintenance, and enforcement of the 
policies and procedures for determining credit ratings.'' \345\ 
Consequently, the Commission preliminarily believes that the policies 
and procedures proposed to be required pursuant to paragraph (a)(1) of 
Rule 17g-8 would need to be designed to assist the NRSRO's board in 
carrying out this responsibility. In addition, Section 15E(t)(5) of the 
Exchange Act provides that the Commission may permit an NRSRO to 
delegate responsibilities required in Section 15E(t) to a committee if 
the Commission finds that compliance with the provisions of that 
section present an unreasonable burden on a small NRSRO.\346\ 
Consequently, the Commission preliminarily believes that the policies 
and procedures proposed to be required pursuant to paragraph (a)(1) of 
Rule 1717g-8 would need to be designed to assist the NRSRO's committee 
in carrying out the responsibility to oversee the ``establishment, 
maintenance, and enforcement of the policies and procedures for 
determining credit ratings mandated by Section 15E(t)(3)(A) of the 
Exchange Act'' if the committee (rather than the board) carries out 
this responsibility.\347\
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    \341\ See proposed paragraph (a)(1) of new Rule 1717g-8 and 15 
U.S.C. 78o-7(r)(1)(A).
    \342\ See 15 U.S.C. 78o-7(r)(1)(A).
    \343\ See proposed paragraph (a)(1) of new Rule 17g-8.
    \344\ Compare proposed paragraph (a)(1) of new Rule 17g-8, with 
15 U.S.C. 78og-7(r)(1)(A).
    \345\ See 15 U.S.C. 78og-7(t)(3)(A).
    \346\ See 15 U.S.C. 78og-7(t)(5).
    \347\ See 15 U.S.C. 78og-7(t)(3)(A).
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    Proposed paragraph (a)(2) of new Rule 17g-8 would implement Section 
15E(r)(1)(B) of the Exchange Act.\348\ This section provides that the 
Commission's rules shall require an NRSRO to ensure that credit ratings 
are determined using procedures and methodologies, including 
qualitative and quantitative data and models, that are in accordance 
with the policies and procedures of the NRSRO for the development and 
modification of credit rating procedures and methodologies.\349\ The 
Commission preliminarily believes that the mandate set forth in the 
statute is explicit and, consequently, proposes rule text that would 
mirror the statutory text.\350\ Therefore, proposed paragraph (a)(2) of 
new Rule 17g-8 would require an NRSRO to have policies and procedures 
that are reasonably designed to ensure that the procedures and 
methodologies, including qualitative and quantitative data and models, 
the NRSRO uses to determine credit ratings are developed and modified 
in accordance with the policies and procedures of the NRSRO.\351\
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    \348\ See proposed paragraph (a)(2) of new Rule 17g-8 and 15 
U.S.C. 78og-7(r)(1)(B).
    \349\ See 15 U.S.C. 78o-7(r)(1)(B).
    \350\ See proposed paragraph (a)(2) of new Rule 17g-8.
    \351\ Compare proposed paragraph (a)(2) of new Rule 17g-8, with 
15 U.S.C. 78o-7(r)(1)(B).
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    Proposed paragraph (a)(3)(i) of new Rule 17g-8 would implement 
Section 15E(r)(2)(A) of the Exchange Act.\352\ This section provides 
that the Commission's rules shall require an NRSRO to ensure that when 
material changes are made to credit rating procedures and methodologies 
(including changes to qualitative and quantitative data and models), 
the changes are applied consistently to all credit ratings to which the 
changed procedures and methodologies apply.\353\ The Commission 
preliminarily believes that the mandate set forth in the statute is 
explicit and, consequently, proposes rule text that would mirror the 
statutory text.\354\ Therefore, proposed paragraph (a)(3)(i) of new 
Rule 17g-8 would require an NRSRO to have policies and procedures that 
are reasonably designed to ensure that material changes to the 
procedures and methodologies, including changes to qualitative and 
quantitative data and models, the NRSRO uses to determine credit 
ratings are applied consistently to all credit ratings to which the 
changed procedures or methodologies apply.\355\
---------------------------------------------------------------------------

    \352\ See proposed paragraph (a)(3)(i) of new Rule 17g-8 and 15 
U.S.C. 78o-7(r)(2)(A).
    \353\ See 15 U.S.C. 78o-7(r)(2)(A).
    \354\ See proposed paragraph (a)(3)(i) of new Rule 17g-8.
    \355\ Compare proposed paragraph (a)(3)(i) of new Rule 17g-8, 
with 15 U.S.C. 78o-7(r)(2)(A).
---------------------------------------------------------------------------

    Proposed paragraph (a)(3)(ii) of new Rule 17g-8 would implement 
Section 15E(r)(2)(B) of the Exchange Act.\356\ This section provides 
that the Commission's rules shall require an NRSRO to ensure that when 
material changes are made to credit rating procedures and methodologies 
(including changes to qualitative and quantitative data and models), to 
the extent that changes are made to credit rating surveillance 
procedures and methodologies, the changes are applied to then-current 
credit ratings by the NRSRO within a reasonable time period determined 
by the Commission, by rule.\357\ The Commission proposes that paragraph 
(a)(3)(ii) of new Rule 17g-8 require the NRSRO to have policies and 
procedures that are reasonably designed to ensure that material changes 
to the procedures and methodologies, including changes to qualitative 
and quantitative data and models, the NRSRO uses to determine credit 
ratings are, to the extent that the changes are to surveillance or 
monitoring procedures and methodologies, applied to then-current credit 
ratings within a reasonable period of time taking into consideration 
the number of ratings impacted, the complexity of the procedures and 
methodologies used to determine the credit ratings, and the type of 
obligor, security, or money market instrument being rated.\358\ This 
proposed rule would mirror the text of Section 15E(r)(2)(B) of the 
Exchange Act but add additional language to implement the rulemaking 
provision that the changes are applied to then-current credit ratings 
by the NRSRO within a ``reasonable time

[[Page 33454]]

period determined by the Commission, by rule.'' \359\
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    \356\ See proposed paragraph (a)(3)(i) of new Rule 17g-8 and 15 
U.S.C. 78o-7(r)(2)(B).
    \357\ 15 U.S.C. 78o-7(r)(2)(B).
    \358\ See proposed paragraph (a)(3)(ii) of new Rule 17g-8.
    \359\ Compare proposed paragraph (a)(3)(ii) of new Rule 17g-8, 
with 15 U.S.C. 78o-7(r)(2)(B).
---------------------------------------------------------------------------

    In determining what time period would be reasonable, the Commission 
preliminarily believes that the NRSRO should be required to have 
policies and procedures designed to ensure that the changes are applied 
to existing credit ratings within a reasonable time period taking into 
consideration certain relevant factors; namely, the number of ratings 
impacted, the complexity of the procedures and methodologies used to 
determine the credit ratings, and the type of obligor, security, or 
money market instrument being rated. The Commission preliminarily 
believes that a prescribed time frame (e.g., 1, 2, 3, 4 or more months) 
would not be appropriate because the reasonableness of the timeframe in 
which existing credit ratings are modified would depend on the facts 
and circumstances. If the rule mandated a time-frame that is too short, 
under the circumstances, the NRSRO would need to rush to meet the 
deadline. This could negatively impact the quality of the credit 
ratings determined using the changed surveillance procedures and 
methodologies. Moreover, prescribing a timeframe that is too long could 
create an inadvertent ``safe harbor'' allowing the NRSRO to act more 
slowly to apply the changed surveillance procedures and methodologies 
to the impacted obligors, securities, and money market instruments. 
Consequently, the Commission preliminarily believes that the best 
approach is to require the NRSRO to apply the changed surveillance 
procedures and methodologies to the impacted obligors, securities, and 
money market instruments within a reasonable amount of time given the 
circumstances.
    Proposed paragraph (a)(4)(i) of new Rule 17g-8 would implement 
Sections 15E(r)(2)(C), 15E(r)(3)(B), and 15E(r)(3)(D) of the Exchange 
Act as they all relate to disclosing information about material changes 
to procedures and methodologies (including changes to qualitative and 
quantitative data and models) an NRSRO uses to determine credit 
ratings.\360\ Specifically, Section 15E(r)(2)(C) provides that the 
Commission's rules shall require an NRSRO to ensure that when material 
changes are made to credit rating procedures and methodologies 
(including changes to qualitative and quantitative data and models), 
the NRSRO publicly discloses the reason for the change.\361\ Section 
15E(r)(3)(B) provides that the Commission's rules shall require an 
NRSRO to notify users of credit ratings when a material change is made 
to a procedure or methodology, including to a qualitative model or 
quantitative input.\362\ Finally, Section 15E(r)(3)(D) provides that 
that the Commission's rules shall require an NRSRO to notify users of 
credit ratings when a material change is made to a procedure or 
methodology, including to a qualitative model or quantitative input, of 
the likelihood the change will result in a change in current credit 
ratings.\363\
---------------------------------------------------------------------------

    \360\ See proposed paragraph (a)(4)(i) of new Rule 17g-8, 15 
U.S.C. 78o-7(r)(2)(B), 15 U.S.C. 78o-7(r)(3)(B), and 15 U.S.C. 78o-
7(r)(3)(D).
    \361\ See 15 U.S.C. 78o-7(r)(2)(C).
    \362\ See 15 U.S.C. 78o-7(r)(3)(B).
    \363\ See 15 U.S.C. 78o-7(r)(3)(D).
---------------------------------------------------------------------------

    Consequently, Section 15E(r)(3)(B) requires the NRSRO to notify 
users of a change, Section 15E(r)(2)(C) requires the NRSRO to publish 
the reason for a change, and Section 15E(r)(3)(D) requires the NRSRO to 
disclose the potential impact of the change on existing credit 
ratings.\364\ The Commission preliminarily believes that the mandates 
set forth in these sections are explicit and, consequently, proposes 
rule text that would mirror the statutory text.\365\ Moreover, because 
the objective of the provision is to provide disclosure to investors 
and users of credit ratings, the Commission preliminarily believes 
proposed paragraph (a)(4)(i) of Rule 17g-8 should specify that these 
disclosures be published on an easily accessible portion of the NRSRO's 
corporate Internet Web site.\366\ This would be consistent with the 
Commission's proposed Internet disclosure requirements for Form NRSRO 
under paragraph (i) of Rule 17g-1 and the ratings history information 
under proposed new paragraph (b)(1) of Rule 17g-1. For these reasons, 
proposed paragraph (a)(4)(i) of new Rule 17g-8 would require the NRSRO 
to have policies and procedures that are reasonably designed to ensure 
that the NRSRO promptly publishes on an easily accessible portion of 
its corporate Internet Web site material changes to the procedures and 
methodologies, including to qualitative models or quantitative inputs, 
the NRSRO uses to determine credit ratings, the reason for the changes, 
and the likelihood the changes will result in changes to any current 
ratings.\367\
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    \364\ 15 U.S.C. 78o-7(r)(3)(B), 15 U.S.C. 78o-7(r)(2)(C), and 15 
U.S. C. 78o-7(r)(3)(D).
    \365\ Compare proposed paragraph (a)(4)(ii) of new Rule 17g-8, 
with 15 U.S.C. 78o-7(r)(3)(B), 15 U.S.C. 78o-7(r)(2)(C), and 15 U.S. 
C. 78o-7(r)(3)(D).
    \366\ As discussed above in Section II.E.1.b of this release, 
the Commission preliminarily believes there is no alternative means 
of disclosure that makes information as ``readily accessible'' as an 
Internet Web site. In addition, as discussed in that section of this 
release, the Commission preliminarily believes that information 
would be disclosed on an ``easily accessible'' portion of a 
corporate Internet Web site if it could be accessed through a 
clearly and prominently labeled hyperlink on the homepage of the 
NRSRO's corporate Internet Web site.
    \367\ See proposed paragraph (a)(4)(i) of new Rule 17g-8.
---------------------------------------------------------------------------

    Proposed paragraph (a)(4)(ii) of new Rule 17g-8 would implement 
Sections 15E(r)(3)(C) of the Exchange Act.\368\ This section provides 
that the Commission's rules shall require an NRSRO to notify users of 
credit ratings when a significant error is identified in a procedure or 
methodology, including a qualitative or quantitative model, that may 
result in credit rating actions.\369\ The Commission preliminarily 
believes that the mandate set forth in the statute is explicit and, 
consequently, proposes rule text that would mirror the statutory 
text.\370\ Moreover, as with the proposed paragraph (a)(4)(i) 
disclosures, the Commission preliminarily believes proposed paragraph 
(a)(4)(ii) of Rule 17g-8 should specify that these disclosures be 
published on the NRSRO's corporate Internet Web site. Therefore, 
proposed paragraph (a)(4)(ii) of new Rule 17g-8 would require the NRSRO 
to have policies and procedures that are reasonably designed to ensure 
the NRSRO promptly publishes on an easily accessible portion of its 
corporate Internet Web site significant errors identified in a 
procedure or methodology, including a qualitative or quantitative 
model, the NRSRO uses to determine credit ratings that may result in a 
change in current credit ratings.\371\
---------------------------------------------------------------------------

    \368\ See proposed paragraph (a)(4)(ii) of new Rule 17g-8 and 15 
U.S.C. 78o-7(r)(3)(C).
    \369\ See 15 U.S.C. 78o-7(r)(3)(C).
    \370\ Compare proposed paragraph (a)(4)(ii) of new Rule 17g-8, 
with 15 U.S.C. 78o-7(r)(3)(C).
    \371\ See proposed paragraph (a)(4)(ii) of new Rule 17g-8.
---------------------------------------------------------------------------

    Proposed paragraph (a)(5) of new Rule 17g-8 would implement 
Section15E(r)(3)(A) of the Exchange Act.\372\ This section provides 
that the Commission's rules shall require an NRSRO to notify users of 
credit ratings of the version of a procedure or methodology, including 
the qualitative methodology or quantitative inputs, used with respect 
to a particular credit rating.\373\ The Commission preliminarily 
believes that the mandate set forth in the statute is explicit and, 
consequently, proposes rule text that would mirror the statutory 
text.\374\ Therefore, proposed

[[Page 33455]]

paragraph (a)(5) of new Rule 17g-8 would require the NRSRO to have 
policies and procedures that are reasonably designed to ensure that it 
discloses the version of a credit rating procedure or methodology, 
including the qualitative methodology or quantitative inputs, used with 
respect to a particular credit rating.\375\
---------------------------------------------------------------------------

    \372\ See proposed paragraph (a)(5) of new Rule 17g-8 and 15 
U.S. C. 78o-7(r)(3)(A).
    \373\ 15 U.S.C. 78o-7(r)(3)(A).
    \374\ Compare proposed paragraph (a)(5) of new Rule 17g-8, with 
15 U.S.C. 78o-7(r)(3)(A).
    \375\ See proposed paragraph (a)(5) of new Rule 17g-8. In 
addition, because this would be a rating-by-rating disclosure, the 
Commission is proposing, as discussed in Section II.G.3 of this 
release, that disclosure of the version of a credit rating procedure 
or methodology be part of the rule implementing Section 15E(s) of 
the Exchange Act, which specifies, among other things, that the 
Commission adopt rules requiring an NRSRO to generate a form to be 
included with the publication of a credit rating. See 15 U.S.C. 78o-
7(s) and proposed new paragraph (a)(1)(ii)(B) of Rule 17g-7.
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of 
proposed paragraph (a) of new Rule 17g-8. The Commission also seeks 
comment on the following:
    1. Are there alternatives to implementing Section 15E(r) of the 
Exchange Act (i.e., other than requiring policies and procedures 
reasonably designed to achieve the objectives identified in the 
statute) that the Commission should consider? If so, please identify 
those alternatives and explain how they would better achieve the goals 
of Section 15E(r)?
    2. Would proposed paragraph (a)(1) of new Rule 17g-8 requiring an 
NRSRO to have policies and procedures that are reasonably designed to 
achieve the objective that the procedures and methodologies, including 
qualitative and quantitative data and models, the NRSRO uses to 
determine credit ratings are approved by its board of directors or 
another body performing a function similar to that of a board of 
directors appropriately meet the mandate identified in Section 
15E(r)(1)(A) of the Exchange Act? If not, how could the proposal be 
modified to provide more guidance to NRSROs about how to design their 
policies and procedures?
    3. Would proposed paragraph (a)(2) of new Rule 17g-8 requiring an 
NRSRO to have policies and procedures that are reasonably designed to 
ensure that the procedures and methodologies, including qualitative and 
quantitative data and models, the NRSRO uses to determine credit 
ratings are developed and modified in accordance with the policies and 
procedures of the NRSRO appropriately meet the mandate identified in 
Section 15E(r)(1)(B) of the Exchange Act? If not, how should the 
proposal be modified to provide more guidance to NRSROs about how to 
design their policies and procedures? In addition, how would this 
proposed requirement relate to the requirement in Section 15E(c)(3)(A) 
of the Exchange Act requiring an NRSRO to establish, maintain, enforce, 
and document an effective internal control structure governing the 
implementation of and adherence to policies, procedures, and 
methodologies for determining credit ratings. For example, would 
procedures established under proposed paragraph (a)(2) of Rule 17g-8 be 
part of the internal control structure or would they be designed to 
achieve different goals?
    4. Would proposed paragraph (a)(3)(i) of new Rule 17g-8 requiring 
an NRSRO to have policies and procedures that are reasonably designed 
to ensure that material changes to the procedures and methodologies, 
including changes to qualitative and quantitative data and models, the 
NRSRO uses to determine credit ratings are applied consistently to all 
credit ratings to which the changed procedures or methodologies apply 
appropriately meet the mandate identified in Section 15E(r)(2)(A) of 
the Exchange Act? If not, how should the proposal be modified to 
provide more guidance to NRSROs about how to design their policies and 
procedures?
    5. Would proposed paragraph (a)(3)(ii) of new Rule 17g-8 requiring 
an NRSRO to have policies and procedures that are reasonably designed 
to ensure that material changes to the procedures and methodologies, 
including changes to qualitative and quantitative data and models, the 
NRSRO uses to determine credit ratings are, to the extent that the 
changes are to surveillance or monitoring procedures and methodologies, 
applied to then-current credit ratings within a reasonable period of 
time taking into consideration the number of ratings impacted, the 
complexity of the procedures and methodologies used to determine the 
credit ratings, and the type of obligor, security, or money market 
instrument being rated appropriately meet the mandate identified in 
Section 15E(r)(2)(B) of the Exchange Act? If not, how should the 
proposal be modified to provide more guidance to NRSROs about how to 
design their policies and procedures?
    6. With respect to proposed paragraph (a)(3)(ii) of new Rule 17g-8, 
should the Commission consider prescribing specific time frames such as 
1, 2, 3, 4, 5, 6 or more months to apply the new procedures and 
methodologies to existing credit ratings? Should the time frame depend 
on the methodology used to determine credit ratings (i.e., quantitative 
as opposed to qualitative)? As another alternative, should the 
Commission prescribe a timeframe based on the number of outstanding 
credit ratings? For example, should the Commission consider requiring 
that the new procedures and methodologies be applied to existing credit 
ratings in tranches such as 10 credit ratings per week or 60 credit 
ratings per month or some other ratio of the period of time to the 
number of credit ratings? Should such a ratio depend on the methodology 
used to determine credit ratings (i.e., quantitative as opposed to 
qualitative)?
    7. Would proposed paragraph (a)(4)(i) of new Rule 17g-8 requiring 
an NRSRO to have policies and procedures that are reasonably designed 
to ensure that the NRSRO promptly publishes on an easily accessible 
portion of its corporate Internet Web site material changes to the 
procedures and methodologies, including to qualitative models or 
quantitative inputs, the NRSRO uses to determine credit ratings, the 
reason for the changes, and the likelihood the changes will result in 
changes to any current ratings appropriately meet the mandates 
identified in Sections 15E(r)(3)(B), 15E(r)(2)(C) and 15E(r)(3)(D) of 
the Exchange Act? If not, how should the proposal be modified to 
provide more guidance to NRSROs about how to design their policies and 
procedures?
    8. Would proposed paragraph (a)(4)(ii) of new Rule 17g-8 requiring 
an NRSRO to have policies and procedures that are reasonably designed 
to ensure the NRSRO promptly publishes on an easily accessible portion 
of its corporate Internet Web site significant errors identified in a 
procedure or methodology, including a qualitative or quantitative 
model, the NRSRO uses to determine credit ratings that may result in a 
change in current credit ratings appropriately meet the mandates 
identified in Section 15E(r)(3)(C) of the Exchange Act? If not, how 
should the proposal be modified to provide more guidance to NRSROs 
about how to design their policies and procedures? For example, should 
the Commission define ``significant error''? If so, how should the term 
be defined? Should the definition establish a materiality threshold? If 
so, how should such a threshold be prescribed? Similarly, should the 
Commission interpret the term ``may result in a change in current 
credit ratings'' to, for example, clarify the level of likelihood 
necessary to trigger the reporting requirement? For example, should 
there be a reasonable likelihood that the error may result in a change 
in current credit ratings?
    9. Would proposed paragraph (a)(5) of new Rule 17g-8 requiring an 
NRSRO to

[[Page 33456]]

have policies and procedures that are reasonably designed to ensure 
that it discloses the version of a credit rating procedure or 
methodology, including the qualitative methodology or quantitative 
inputs, used with respect to a particular credit rating appropriately 
meet the mandates identified in Sections 15E(r)(3)(A) of the Exchange 
Act? If not, how should the proposal be modified to provide more 
guidance to NRSROs about how to design their policies and procedures?
2. Proposed Amendment to Rule 17g-2
    For the reasons discussed in Section II.A.2 of this release, the 
Commission preliminarily believes that the policies and procedures that 
would be required pursuant to proposed paragraph (a) of new Rule 17g-8 
should be subject to the record retention and production requirements 
of Rule 17g-2.\376\ Consequently, the Commission proposes adding new 
paragraph (b)(13) to Rule 17g-2 to identify the policies and procedures 
an NRSRO is required to establish, maintain, enforce, and document 
pursuant to proposed paragraph (a) of new Rule 17g-8 as a record that 
must be retained.\377\
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    \376\ 17 CFR 240.17g-2.
    \377\ See proposed new paragraph (b)(13) to Rule 17g-2; see also 
Section 17(a)(1) of the Exchange Act, which requires an NRSRO to 
make and keep such records, and make and disseminate such reports, 
as the Commission prescribes by rule as necessary or appropriate in 
the public interest, for the protection of investors, or otherwise 
in furtherance of the Exchange Act. 15 U.S.C. 78q(a)(1).
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of 
proposed new paragraph (a)(9) of Rule 17g-2.

G. Form and Certifications To Accompany Credit Ratings

    Section 932(a)(8) of the Dodd-Frank Act amended Section 15E of the 
Exchange Act to add new paragraph (s).\378\ Sections 15E(s)(1) through 
(4), among other things, set forth provisions specifying Commission 
rulemaking with respect to disclosures an NRSRO must make with the 
publication of a credit rating.\379\ The Commission proposes to 
implement these provisions by adding new paragraph (a) to Rule 17g-
7.\380\ As discussed in detail below, the prefatory text of proposed 
new paragraph (a) would require an NRSRO to publish two items when 
taking a rating action: (1) A form containing information about the 
credit rating resulting from or subject to the rating action; \381\ and 
(2) any certification of a provider of third-party due diligence 
services received by the NRSRO that relates to the credit rating.\382\ 
Proposed paragraph (a)(1) of Rule 17g-7 would contain three primary 
components: paragraph (a)(1)(i) prescribing the format of the form; 
\383\ paragraph (a)(1)(ii) prescribing the content of the form; \384\ 
and paragraph (a)(1)(iii) prescribing an attestation requirement for 
the form.\385\ Proposed paragraph (a)(2) of Rule 17g-7 would identify 
the certification from a provider of third-party due diligence services 
as an item to be published with the rating action.\386\
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    \378\ See 15 U.S.C. 78o-7(s).
    \379\ See Public Law 111-203 Sec.  932(a)(8) and 15 U.S.C. 78o-
7(s)(1)-(4). Section 15E(s)(4) of the Exchange Act also establishes 
requirements for issuers and underwriters of asset-backed 
securities, NRSROs, and providers of third-party due diligence 
services with respect to third-party due diligence services relating 
to asset-backed securities. See 15 U.S.C. 78o-7(s)(4)(A)-(D). The 
Commission's proposals to implement additional provisions in Section 
15E(s)(4) are discussed below in Section II.H of this release.
    \380\ See proposed new paragraph (a) of Rule 17g-7.
    \381\ See proposed new paragraph (a)(1) of Rule 17g-7. As 
discussed below, this paragraph would implement, in large part, 
rulemaking specified in Sections 15E(s)(1), (2), and (3) of the 
Exchange Act. See 15 U.S.C. 78o-7(s)(1), (2), and (3).
    \382\ See proposed new paragraph (a)(2) of Rule 17g-7. As 
discussed below, this paragraph would implement, in part, rulemaking 
specified in Section 15E(s)(4) of the Exchange Act. See 15 U.S.C. 
78o-7(s)(4).
    \383\ See proposed new paragraph (a)(1)(i) of Rule 17g-7. As 
discussed below, this paragraph would implement, in large part, 
rulemaking specified in Section 15E(s)(2) of the Exchange Act. See 
15 U.S.C. 78o-7(s)(2).
    \384\ See proposed new paragraph (a)(1)(ii) of Rule 17g-7. As 
discussed below, this paragraph would implement, in large part, 
rulemaking specified in Section 15E(s)(3) of the Exchange Act. See 
15 U.S.C. 78o-7(s)(3).
    \385\ See proposed new paragraph (a)(1)(iii) of Rule 17g-7. As 
discussed below, this paragraph would implement, in large part, 
rulemaking specified in Section 15E(q)(2)(F) of the Exchange Act. 
See 15 U.S.C. 78o-7(q)(2)(F).
    \386\ See proposed paragraph (a)(2) of Rule 17g-7.
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1. Paragraph (a)--Prefatory Text
    Section 15E(s)(1) of the Exchange Act provides that the Commission 
shall require, by rule, an NRSRO to prescribe a form to accompany the 
publication of each credit rating that discloses: (1) Information 
relating to the assumptions underlying the credit rating procedures and 
methodologies; the data that was relied on to determine the credit 
rating; and if applicable, how the NRSRO used servicer or remittance 
reports, and with what frequency, to conduct surveillance of the credit 
rating; and (2) information that can be used by investors and other 
users of credit ratings to better understand credit ratings in each 
class of credit rating issued by the NRSRO.\387\ In addition, Section 
15E(s)(2)(C) provides that the form shall be made readily available to 
users of credit ratings, in electronic or paper form, as the Commission 
may, by rule, determine.\388\ Finally, Section 15E(s)(4)(D) of the 
Exchange Act provides that the Commission shall adopt rules requiring 
an NRSRO at the time it produces a credit rating, to disclose any 
certifications from providers of third-party due diligence services to 
the public in a manner that allows the public to determine the adequacy 
and level of due diligence services provided by the third-party.\389\ 
The Commission proposes to implement Sections 15E(s)(1), 15E(s)(2)(C), 
and 15E(s)(4)(D) of the Exchange Act, in large part, through the 
prefatory text of proposed paragraph (a) of Rule 17g-7.\390\
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    \387\ See 15 U.S.C. 78o-7(s)(1)(A) and (B).
    \388\ See 15 U.S.C. 78o-7(s)(2)(C).
    \389\ See 15 U.S.C. 78o-7(s)(4)(D).
    \390\ See proposed new paragraph (a) of Rule 17g-7. As discussed 
below, the Commission proposes to implement Section 
15E(s)(1)(A)(iii) of the Exchange Act--which relates to the use of 
servicer or remittance reports--in proposed paragraph (a)(1)(i)(G) 
of Rule 17g-7 because it specifies a particular item of information 
that would need to be disclosed in the form. See 15 U.S.C. 78o-
7(a)(1)(i)(G).
---------------------------------------------------------------------------

    The first sentence of the proposed prefatory text would provide 
that an NRSRO must publish the items described in paragraphs (a)(1) and 
(a)(2) of the proposed rule, as applicable, when taking a rating action 
with respect to credit rating assigned to an obligor, security, or 
money market instrument in a class of credit ratings for which the 
NRSRO is registered.\391\ Proposed paragraph (a)(1) would identify the 
form and proposed paragraph (a)(2) would identify the certification 
from a provider of third-party due diligence services.\392\ The 
Commission preliminarily intends that the requirement to publish the 
form and, when applicable, the certification would be triggered each 
time an NRSRO takes a rating action with respect to an obligor, 
security, or money market instrument.\393\ Consequently, the second 
sentence of the prefatory text of paragraph (a) would define the term 
``rating action'' to mean any of the following: the publication of an 
expected or preliminary credit rating assigned to an obligor, security, 
or

[[Page 33457]]

money market instrument before the publication of an initial credit 
rating; an initial credit rating; an upgrade or downgrade of an 
existing credit rating (including a downgrade to, or assignment of, 
default); a placement of an existing credit rating on credit watch or 
review; an affirmation of an existing credit rating; and a withdrawal 
of an existing credit rating. The inclusion of expected or preliminary 
credit ratings in the list of ``rating actions'' would incorporate the 
requirements in the note to current Rule 17g-7.\394\ As the Commission 
explained when adopting Rule 17g-7, the definition of ``credit rating'' 
in the note is designed to address pre-sale reports, which are 
typically issued by an NRSRO with respect to an asset-backed security 
at the time the issuer commences the offering and typically include an 
expected or preliminary rating and a summary of the important features 
of a transaction.\395\ Consequently, disclosure at the time of issuance 
of a pre-sale report is particularly important to investors, since such 
reports provide them with important information prior to the point at 
which they make an investment decision.\396\ The Commission 
preliminarily believes that the importance of providing investors with 
timely information to enable them to make informed investment decisions 
applies equally to the broader range of disclosures mandated by Section 
15E(s) of the Exchange Act.\397\ Accordingly, the Commission is 
proposing that the requirement to publish the form and any 
certifications be triggered upon the issuance of an expected or 
preliminary credit rating.\398\ Furthermore, as the Commission stated 
when adopting Rule 17g-7, the term ``preliminary credit rating'' 
includes any credit rating, any range of ratings, or any other 
indications of a credit rating published prior to the assignment of an 
initial credit rating for a new issuance.\399\
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    \391\ See proposed new paragraph (a) of Rule 17g-7.
    \392\ See proposed new paragraphs (a)(1) and (a)(2) of Rule 17g-
7.
    \393\ In other words, the form and any certifications would need 
to be included when the NRSRO publishes an initial credit rating, 
publishes an upgrade of an existing credit rating, publishes a 
downgrade of an existing credit rating (including to a default 
category), publishes a credit rating as being on credit watch or 
review, publishes an affirmation of an existing credit rating, or 
withdraws a credit rating.
    \394\ See Note to 17 CFR 240.17g-7, which provides that for the 
purposes of the rule's current requirements, a ``credit rating'' 
includes any expected or preliminary credit rating issued by an 
NRSRO.
    \395\ See Disclosure for Asset-Backed Securities Required by 
Section 943 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, 76 FR at 4503-4505 (Jan. 26, 2011).
    \396\ Id.
    \397\ 15 U.S.C. 78o-7(s).
    \398\ See proposed new paragraph (a) of Rule 17g-7.
    \399\ See Disclosure for Asset-Backed Securities Required by 
Section 943 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, 76 FR at 4503-4505 (Jan. 26, 2011).
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    The third sentence of the proposed prefatory text would provide 
that the items described in the form and any applicable certifications 
must be published in the same medium and made available to the same 
persons who can receive or access the credit rating that is the result 
of the rating action or the subject of rating action.\400\ In other 
words, if the NRSRO publishes its credit ratings via a press release 
disseminated through its corporate Internet Web site and/or through 
other electronic information providers, the form and any applicable 
certifications would need to be disseminated through the same venues. 
The Commission preliminarily believes one way to accomplish this 
disclosure would be to publish the credit rating and information in the 
press release on the form along with the required contents of the form 
(discussed below) and, if applicable, to attach any relevant 
certifications to the form.\401\ In addition, the form and any 
certifications would need to be disseminated to the same persons who 
can receive or access the credit rating that is the result of the 
rating action or the subject of the rating action. Consequently, if the 
NRSRO publishes credit ratings for free on its corporate Internet Web 
site, it would need to make the form and any certifications similarly 
available. Alternatively, if the NRSRO operates under the subscriber-
pay business model, it would need to disseminate the form and any 
certifications to the subscribers only.
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    \400\ See proposed new paragraph (a) of Rule 17g-7. A credit 
rating would be the ``result'' of a rating action in the case where 
the rating action is either the publication of an expected or 
preliminary credit rating assigned to an obligor, security, or money 
market instrument before the publication of an initial credit 
rating; an initial credit rating; or an upgrade or downgrade of an 
existing credit rating (including a downgrade to, or assignment of, 
default). A credit rating would be the ``subject'' of a rating 
action in the case where the rating action is either a placement of 
an existing credit rating on credit watch or review; an affirmation 
of an existing credit rating; or a withdrawal of an existing credit 
rating.
    \401\ As discussed below, the Commission is proposing that the 
required contents of the form include the credit rating. 
Consequently, if adopted, an NRSRO would be required to include the 
credit rating on the form regardless of whether the NRSRO also 
publishes the credit rating on a separate record. If the NRSRO 
publishes the credit rating on a separate record, the NRSRO would be 
required to publish the form (which would also contain the credit 
rating) with the separate record under proposed new paragraph (a) of 
Rule 17g-7.
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Request for Comment
    The Commission generally requests comment on all aspects of 
proposed prefatory text to paragraph (a) of Rule 17g-7. The Commission 
also seeks comment on the following:
    1. What practical issues should the Commission consider in 
implementing the proposal that an NRSRO publish the form and the 
certifications every time the NRSRO takes a rating action? For example, 
should the certifications only be required to be included with the 
publication of an expected, preliminary, or initial credit rating or do 
they remain relevant for the term of the rated security or money market 
instrument and, therefore, should they continue to be published with 
subsequent rating actions? How could the proposal be modified to 
address any practical issues identified without undermining the goal of 
making this information available to users of the NRSRO's credit 
ratings?
    2. What practical issues should the Commission consider in 
implementing the proposal that an NRSRO publish the form and the 
certifications in the same medium and make it available to the same 
persons who can receive or access the credit rating resulting from or 
subject to the rating action? How could the proposal be modified to 
address any practical issues identified without undermining the goal of 
making this information available to users of the NRSRO's credit 
ratings?
    3. What practical issues should the Commission consider in 
implementing the proposal to apply provisions of the current note to 
Rule 17g-7--that the term ``rating action'' includes the publication of 
any expected or preliminary credit rating by the NRSRO--to all of the 
information required under Rule 17g-7 as it would be amended under 
these proposals? How could the proposal be modified to address any such 
practical issues without undermining the goal of the disclosure 
requirements currently contained in Rule 17g-7, that is, to make 
available to investors, if a credit rating is issued with respect to an 
asset-backed security, a description of: (1) The representations, 
warranties, and enforcement mechanisms available to investors; and (2) 
how they differ from the representations, warranties, and enforcement 
mechanisms in issuances of similar securities?
    4. The Commission has proposed to require issuers of asset-backed 
securities using a registration statement on proposed Form SF-3 to file 
a preliminary prospectus, under proposed Rule 424(h), containing 
transaction-specific information at least 5 business days in advance of 
the first sale of securities in the offering in order to allow 
investors additional time to analyze the specific structure, assets, 
and contractual rights regarding each transaction.\402\ Should the 
Commission

[[Page 33458]]

explicitly require that the disclosures required by Rule 17g-7 be 
provided no later than the time of the proposed Rule 424(h) preliminary 
prospectus?
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    \402\ See Asset Backed Securities, Securities Act Release No. 
9117 (Apr. 7, 2010), 75 FR 23328 (May 3, 2010).
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    5. If the NRSRO publishes its credit ratings via a press release 
disseminated through its corporate Internet Web site and/or through 
other electronic information providers, would it be appropriate to 
permit the NRSRO to accomplish the required disclosure by publishing 
the credit rating and information in the press release on the form 
along with the required contents of the form (as discussed below) and, 
if applicable, attaching any relevant certifications to the form? What 
other methods could be used to make the required disclosures?
2. Paragraph (a)(1)(i)--Format of the Form
    Proposed new paragraph (a)(1) of Rule 17g-7 would identify a form 
generated by the NRSRO that meets the requirements of proposed new 
paragraphs (a)(1)(i), (a)(1)(ii), and (a)(1)(iii) of Rule 17g-7 as the 
first item that must be included with a credit rating.\403\ In this 
regard, Section 15E(s)(2) of the Exchange Act provides that the form 
developed by the NRSRO shall: (1) Be easy to use and helpful for users 
of credit ratings to understand the information contained in the 
report; \404\ (2) require the NRSRO to provide the required 
quantitative content specified in Section 15E(s)(3)(B) in a manner that 
is directly comparable across types of securities; \405\ and (3) be 
made readily available to users of credit ratings, in electronic or 
paper form, as the Commission may, by rule, determine.\406\ The 
Commission preliminarily believes that the provisions identified in 
items (1) and (2) above are high-level objectives that an NRSRO should 
be required to achieve in developing the presentation of the form. As 
discussed next, Section 15E(s)(3) of the Exchange Act identifies very 
specific items of information that the Commission's rule shall require 
an NRSRO to include in the form.\407\ Given the specificity in Section 
15E(s)(3), the Commission preliminarily believes it would be 
appropriate to use the higher level objectives specified in Section 
15E(s)(2) to prescribe presentation requirements for the form.\408\ 
Consequently, the Commission is proposing rule text that would mirror 
the statutory text.\409\ In particular, proposed new paragraph 
(a)(1)(i)(A) of Rule 17g-7 would provide that the form generated by the 
NRSRO would need to be easy to use and helpful for users of credit 
ratings to understand the information contained in the form.\410\ For 
example, the Commission preliminarily believes that a form that 
presents the required information in complex mathematical equations 
would not achieve this objective.
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    \403\ See proposed new paragraph (a)(1) of Rule 17g-7.
    \404\ See 15 U.S.C. 78o-7(s)(2)(A).
    \405\ See 15 U.S.C. 78o-7(s)(2)(B).
    \406\ See 15 U.S.C. 78o-7(s)(2)(C). As discussed above, the 
Commission proposes to implement Section 15E(s)(2)(C) of the 
Exchange Act through the prefatory text in proposed new paragraph 
(a) of Rule 17g-7.
    \407\ See 15 U.S.C. 78o-7(s)(3)(A) and (B).
    \408\ See 15 U.S.C. 78o-7(s)(2) and 15 U.S.C. 78o-7(s)(3).
    \409\ See proposed new paragraphs (a)(1)(i)(A) and (B) of Rule 
17g-7.
    \410\ Compare new paragraph (a)(1)(i)(A) of Rule 17g-7, with 15 
U.S.C. 78o-7(s)(2)(A).
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    Similarly, proposed new paragraph (a)(1)(i)(B) of Rule 17g-7 would 
mirror the statutory text by requiring that the content described in 
proposed new paragraphs (a)(1)(ii)(K), (L) and (M) of Rule 17g-7 be 
disclosed in a manner that is directly comparable across types of 
obligors, securities, and money market instruments.\411\ As discussed 
below, Section 15E(s)(3) of the Exchange Act identifies qualitative and 
quantitative information that must be included in the form.\412\ 
Section 15E(s)(2)(B) provides that the quantitative content identified 
in Section 15E(s)(3)(B) be directly comparable across types of 
securities.\413\ The Commission is proposing that the quantitative 
content specified in Section 15E(s)(3)(B) of the Exchange Act be 
disclosed in the form pursuant to new paragraphs (a)(1)(ii)(K), (L), 
and (M) of Rule 17g-7.\414\ Consequently, as proposed, new paragraph 
(a)(1)(i)(B) of Rule 17g-7 would implement Section 15E(s)(2)(B) by 
requiring an NRSRO to present this quantitative information in a manner 
that is directly comparable across types of obligors, securities, and 
money market instruments.
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    \411\ Compare new paragraph (a)(1)(i)(B) of Rule 17g-7, with 15 
U.S.C. 78o-7(s)(2)(B). See also 15 U.S.C. 78o-7(s)(2)(B) and 15 
U.S.C. 78o-7(s)(3)(B). While the statutory text only refers to 
``securities,'' Section 3(a)(60) of the Exchange Act defines the 
term ``credit rating'' to mean an ``assessment of the 
creditworthiness of an obligor as an entity or with respect to 
specific securities or money market instruments.'' See 15 U.S.C. 
78c(a)(60). The Commission believes it would be appropriate to 
expand this presentation requirement for the form to include credit 
ratings of ``obligors'' and ``money market instruments'' to ensure 
that it applies to all types of credit ratings and to be consistent 
with the Commission's existing and proposed rules for NRSROs, which 
commonly apply to credit ratings of ``obligors, securities, and 
money market instruments.'' See, e.g., 17 CFR 240.17g-2 and 17 CFR 
240.17g-3.
    \412\ See 15 U.S.C. 78o-7(s)(3).
    \413\ See 15 U.S.C. 78o-7(s)(3)(A) and (B).
    \414\ See proposed new paragraphs (a)(1)(ii)(K), (L), and (M) of 
Rule 17g-7 and 15 U.S.C. 78o-7(s)(3)(B)).
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Request for Comment
    The Commission generally requests comment on all aspects of 
proposed paragraph (a)(1)(ii) of proposed Rule 17g-7. The Commission 
also seeks comment on the following:
    1. Is the objective that the form be easy to use and helpful for 
users of credit ratings to understand the information contained in the 
report sufficiently clear to provide NRSROs with guidance on how to 
present the information in the form in accordance with this proposed 
requirement? If not, how should the proposal be modified to provide 
better guidance? Commenters should provide specific suggested rule text 
and explain the rationale for it.
    2. Is the objective that the content described in proposed 
paragraphs (a)(1)(ii)(K), (L) and (M) of Rule 17g-7 be disclosed in a 
manner that is directly comparable across types of obligors, 
securities, and money market instruments sufficiently clear to provide 
NRSROs with guidance on how to present this information in the form in 
accordance with this proposed requirement? If not, how should the 
proposal be modified to provide better guidance? Commenters should 
provide specific suggested rule text and explain the rationale for it. 
In addition, how would adding ``obligors'' and ``money market 
instruments'' to the presentation requirement expand its scope? 
Finally, the Commission requests commenters to provide examples of 
disclosures in these areas that are being made now (if such disclosures 
are being made) and how the disclosures might be presented under the 
proposed requirements.
    3. Should the Commission require that the information an NRSRO must 
include in the form be presented in a certain order to enhance 
comparability? For example, should the Commission require that the 
information be disclosed in the order in which it is identified in 
proposed paragraph (a)(1)(ii) of Rule 17g-7 discussed below? Are there 
other means of enhancing the comparability of forms among NRSROs? For 
example, should the Commission require a more standardized format for 
the form?
3. Paragraph (a)(1)(ii)--Content of the Form
    Section 15E(s)(3) of the Exchange Act provides that the Commission 
shall require, by rule, that the form accompanying the publication of a 
credit rating contain specifically

[[Page 33459]]

identified items of information.\415\ In particular, Section 
15E(s)(3)(A) identifies items of ``qualitative content'' and Section 
15E(s)(3)(B) identifies items of ``quantitative content.'' \416\ The 
Commission preliminarily believes that the items of information 
identified in Sections 15E(s)(3)(A) and (B) are explicit and, 
consequently, proposes rule text that would mirror the statutory 
text.\417\ In addition, the Commission also is proposing that certain 
additional information be included in the form.
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    \415\ See 15 U.S.C. 78o-7(s)(3).
    \416\ See 15 U.S.C. 78o-7(s)(3)(A) and (B).
    \417\ Compare proposed new paragraph (a)(1)(ii) of Rule 17g-7, 
with 15 U.S.C. 78o-7(s)(3).
---------------------------------------------------------------------------

    Prefatory Text of Paragraph (a)(1)(ii). The prefatory text of 
proposed new paragraph (a)(1)(ii) of Rule 17g-7 would provide that the 
form generated by the NRSRO must contain information about the credit 
rating identified in paragraphs (a)(1)(ii)(A) through (N).\418\
---------------------------------------------------------------------------

    \418\ See proposed new paragraph (a)(1)(ii) of Rule 17g-7.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(A). The first item of information would be 
identified in proposed new paragraph (a)(1)(ii)(A) of Rule 17g-7.\419\ 
This paragraph would implement, in part, Section 15E(s)(3)(A)(i) of the 
Exchange Act, which provides that the Commission's rule shall require 
the NRSRO to disclose in the form the credit ratings produced by the 
NRSRO.\420\ Specifically, paragraph (a)(1)(ii)(A) of Rule 17g-7 would 
require the NRSRO to include the symbol, number, or score in the rating 
scale used by the NRSRO to denote the credit rating categories and 
notches within categories assigned to the obligor, security, or money 
market instrument that is the subject of the rating action and the 
identity of the obligor, security, or money market instrument.\421\ In 
other words, the form would need to identify the symbol, number, or 
score representing the notch in the applicable rating scale assigned to 
the obligor, security, or money market instrument, which, as proposed 
in the prefatory text to paragraph (a) of Rule 17g-7, would include a 
preliminary credit rating, an initial credit rating, an upgrade or 
downgrade of an existing credit rating (including a downgrade to, or 
assignment of, default), a placement of an existing credit rating on 
watch or review, an affirmation of an existing credit rating, or 
withdrawal of an existing credit rating.\422\
---------------------------------------------------------------------------

    \419\ See proposed new paragraph (a)(1)(ii)(A) of Rule 17g-7.
    \420\ See 15 U.S.C. 78o-7(s)(3)(A)(i).
    \421\ Id.
    \422\ See proposed new paragraph (a) of Rule 17g-7.
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    In addition, under proposed new paragraph (a)(1)(ii)(A) of Rule 
17g-7, the form would need to contain the identity of the obligor, 
security, or money market instrument that is the subject of the rating 
action. The Commission preliminarily believes that the identity of the 
obligor would be the person's legal name and any other name the obligor 
uses in its business. Furthermore, the Commission preliminarily 
believes that the identity of the security or money market instrument 
would be the name of the security or money market instrument, if 
applicable, and a description of the security or money market 
instrument. For example, a bond could be identified as ``senior 
unsecured debt issued by Company XYZ maturing in 2015.'' Providing the 
CUSIP for the security or money market instrument also could be a way 
to further identify it. The Commission preliminarily believes that the 
disclosure on the form of the identity of the obligor, security, or 
money market instrument must be sufficient to notify (and not confuse) 
users of the form as to the identity of rated obligor, security, or 
money market instrument. As discussed above, the Commission is 
proposing in new paragraph (a)(1)(i)(A) of Rule 17g-7 that the NRSRO 
must generate a form that is easy to use and helpful for users of 
credit ratings to understand the information contained in the 
form.\423\ The Commission preliminarily believes a form that does not 
clearly identify the obligor, security, or money market instrument 
subject to the rating action would not meet this requirement.
---------------------------------------------------------------------------

    \423\ See proposed new paragraph (a)(1)(i)(A) of Rule 17g-7.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(B). The second item of information would be 
identified in proposed new paragraph (a)(1)(ii)(B) of Rule 17g-7.\424\ 
This paragraph would implement, in part, Section 15E(r)(3)(A) of the 
Exchange Act.\425\ As discussed above in Section II.F.1 of this 
release, Section 15E(r)(3)(A) provides that the rules adopted by the 
Commission must ensure an NRSRO notifies users of credit ratings of the 
version of a procedure or methodology, including the qualitative 
methodology or quantitative inputs, used with respect to a particular 
credit rating.\426\ The Commission is proposing to implement Section 
15E(r)(3)(A), in part, through paragraph (a)(5) of new Rule 17g-8.\427\ 
Proposed paragraph (a)(5) of new Rule 17g-8 would require an NRSRO to 
have policies and procedures that are reasonably designed to ensure the 
NRSRO discloses the version of a credit rating procedure or 
methodology, including the qualitative methodology or quantitative 
inputs, used with respect to a particular credit rating.
---------------------------------------------------------------------------

    \424\ See proposed new paragraph (a)(1)(ii)(B) of Rule 17g-7.
    \425\ See 15 U.S.C. 78o-7(r)(3)(A).
    \426\ Id.
    \427\ See proposed paragraph (a)(5) of new Rule 17g-8.
---------------------------------------------------------------------------

    The Commission proposes to further implement Section 15E(r)(3)(A) 
of the Exchange Act through proposed paragraph (a)(1)(ii)(B) of Rule 
17g-7. Specifically, paragraph (a)(1)(ii)(B) would require the NRSRO to 
disclose on the form the version of the procedure or methodology used 
to determine the credit rating.\428\ The Commission preliminarily 
believes that this disclosure could be made by identifying the name of 
the procedure or methodology (including any number used to denote the 
version), the date the procedure was implemented, and an Internet URL 
where further information about the procedure or methodology can be 
obtained.\429\ The Commission preliminarily believes that proposed 
paragraph (a)(1)(ii)(B) of Rule 17g-7 would complement and work in 
conjunction with proposed paragraph (a)(5) of new Rule 17g-8.\430\ Rule 
17g-7 would require the disclosure and Rule 17g-8 would require the 
NRSRO to have policies and procedures that are reasonably designed to 
ensure the disclosure is made.\431\
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    \428\ See proposed paragraph (a)(1)(ii)(B) of Rule 17g-7.
    \429\ For example, a disclosure could resemble: ``RMBS Rating 
Methodology 3.0, implemented February 12, 2011. For further 
information go to [insert website address].''
    \430\ See 15 U.S.C. 78o-7(r)(3)(A), proposed new paragraph 
(a)(1)(ii)(B) of Rule 17g-7, and proposed paragraph (a)(5) of Rule 
17g-8.
    \431\ See proposed new paragraph (a)(1)(ii)(B) of Rule 17g-7 and 
proposed paragraph (a)(5) of Rule 17g-8.
---------------------------------------------------------------------------

    The Commission also notes that Section 15E(s)(1)(B) of the Exchange 
Act provides that the Commission shall require, by rule, each NRSRO to 
prescribe a form to accompany the publication of a credit rating that 
discloses information that can be used by investors and other users of 
credit ratings to better understand credit ratings in each class of 
credit rating issued by the NRSRO.\432\ The Commission preliminarily 
believes that disclosing the version of the procedure or methodology 
used to determine the credit rating would promote this goal. For 
example, credit rating methodologies that are predominantly 
quantitative rely on models to produce credit ratings. These models 
periodically are updated and released as newer or different versions of 
the

[[Page 33460]]

previous model. The Commission preliminarily believes disclosing the 
version of a model used to produce a credit rating would help investors 
and other users of credit ratings better understand the credit rating 
and how the determination of the credit rating may differ from similar 
products rated using an earlier version of the model.
---------------------------------------------------------------------------

    \432\ See 15 U.S.C. 78o-7(s)(1)(B).
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(C). The third item of information would be 
identified in proposed new paragraph (a)(1)(ii)(C) of Rule 17g-7.\433\ 
This paragraph would implement Section 15E(s)(3)(A)(ii) of the Exchange 
Act, which provides that the Commission's rule shall require the NRSRO 
to disclose in the form the main assumptions and principles used in 
constructing procedures and methodologies, including qualitative 
methodologies and quantitative inputs and assumptions about the 
correlation of defaults across underlying assets used in rating 
structured products.\434\ The Commission preliminarily believes that 
the statutory text is explicit with respect to the information to be 
disclosed and, consequently proposed new paragraph (a)(1)(ii)(C) of 
Rule 17g-7 would mirror the statutory text.\435\ In particular, 
proposed new paragraph (a)(1)(ii)(C) of Rule 17g-7 would require the 
NRSRO to disclose in the form the main assumptions and principles used 
in constructing the procedures and methodologies used to determine the 
credit rating, including qualitative methodologies and quantitative 
inputs and, if the credit rating is for a structured finance product, 
assumptions about the correlation of defaults across the underlying 
assets.\436\
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    \433\ See proposed new paragraph (a)(1)(ii)(C) of Rule 17g-7.
    \434\ See 15 U.S.C. 78o-7(s)(3)(A)(ii).
    \435\ Compare 15 U.S.C. 78o-7(s)(3)(A)(ii), with proposed new 
paragraph (a)(1)(ii)(C) of Rule 17g-7.
    \436\ See proposed new paragraph (a)(1)(ii)(C) of Rule 17g-7.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(D). The fourth item of information would be 
identified in proposed new paragraph (a)(1)(ii)(D) of Rule 17g-7.\437\ 
This paragraph would implement Section 15E(s)(3)(A)(iii) of the 
Exchange Act, which provides that the Commission's rule shall require 
the NRSRO to disclose in the form the potential limitations of the 
credit ratings and the types of risks excluded from the credit ratings 
that the NRSRO does not comment on, including liquidity, market, and 
other risks.\438\ The Commission preliminarily believes that the 
statutory text is explicit with respect to the information to be 
disclosed and, consequently proposed new paragraph (a)(1)(ii)(D) of 
Rule 17g-7 would mirror the statutory text.\439\ In particular, 
proposed new paragraph (a)(1)(ii)(D) of Rule 17g-7 would require the 
NRSRO to disclose in the form the potential limitations of the credit 
rating, including the types of risks excluded from the credit rating 
that the NRSRO does not comment on, including, as applicable, 
liquidity, market, and other risks.\440\
---------------------------------------------------------------------------

    \437\ See proposed new paragraph (a)(1)(ii)(D) of Rule 17g-7.
    \438\ See 15 U.S.C. 78o-7(s)(3)(A)(iii).
    \439\ Compare 15 U.S.C. 78o-7(s)(3)(A)(iii), with proposed new 
paragraph (a)(1)(ii)(D) of Rule 17g-7.
    \440\ See proposed new paragraph (a)(1)(ii)(D) of Rule 17g-7.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(E). The fifth item of information would be 
identified in proposed new paragraph (a)(1)(ii)(E) of Rule 17g-7.\441\ 
This paragraph would implement Section 15E(s)(3)(A)(iv) of the Exchange 
Act, which provides that the Commission's rule shall require the NRSRO 
to disclose in the form information on the uncertainty of the credit 
rating, including: (1) Information on the reliability, accuracy, and 
quality of the data relied on in determining the credit rating; and (2) 
a statement relating to the extent to which data essential to the 
determination of the credit rating were reliable or limited, including 
any limits on the scope of historical data; and any limits in 
accessibility to certain documents or other types of information that 
would have better informed the credit rating.\442\ The Commission 
preliminarily believes that the statutory text is explicit with respect 
to the information to be disclosed and, consequently proposed new 
paragraph (a)(1)(ii)(E) of Rule 17g-7 would mirror the statutory 
text.\443\ In particular, proposed new paragraph (a)(1)(ii)(E) of Rule 
17g-7 would require the NRSRO to disclose in the form information on 
the uncertainty of the credit rating, including: (1) Information on the 
reliability, accuracy, and quality of the data relied on in determining 
the credit rating; and (2) a statement relating to the extent to which 
data essential to the determination of the credit rating were reliable 
or limited, including: any limits on the scope of historical data; and 
any limits in accessibility to certain documents or other types of 
information that would have better informed the credit rating.\444\
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    \441\ See proposed new paragraph (a)(1)(ii)(E) of Rule 17g-7.
    \442\ See 15 U.S.C. 78o-7(s)(3)(A)(iv).
    \443\ Compare 15 U.S.C. 78o-7(s)(3)(A)(iv), with proposed new 
paragraph (a)(1)(ii)(E) of Rule 17g-7.
    \444\ See proposed new paragraph (a)(1)(ii)(E) of Rule 17g-7.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(F). The sixth item of information would be 
identified in proposed new paragraph (a)(1)(ii)(F) of Rule 17g-7.\445\ 
This paragraph would implement Section 15E(s)(3)(A)(v) of the Exchange 
Act, which provides that the Commission's rule shall require the NRSRO 
to disclose in the form whether and to what extent third-party due 
diligence services have been used by the NRSRO, a description of the 
information that such third-party reviewed in conducting due diligence 
services, and a description of the findings and conclusions of such 
third-party.\446\ The Commission preliminarily believes that the 
statutory text is explicit with respect to the information to be 
disclosed and, consequently proposed new paragraph (a)(1)(ii)(F) of 
Rule 17g-7 would mirror the statutory text.\447\ In particular, 
proposed new paragraph (a)(1)(ii)(F) of Rule 17g-7 would require the 
NRSRO to disclose in the form whether and to what extent third-party 
due diligence services were used by the NRSRO, a description of the 
information that such third-party reviewed in conducting due diligence 
services, and a description of the findings or conclusions of such 
third-party.\448\
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    \445\ See proposed new paragraph (a)(1)(ii)(F) of Rule 17g-7.
    \446\ See 15 U.S.C. 78o-7(s)(3)(A)(v).
    \447\ Compare 15 U.S.C. 78o-7(s)(3)(A)(v), with proposed new 
paragraph (a)(1)(ii)(F) of Rule 17g-7.
    \448\ See proposed new paragraph (a)(1)(ii)(F) of Rule 17g-7.
---------------------------------------------------------------------------

    The Commission notes that Section 15E(s)(4)(A) of the Exchange Act 
contains a requirement that the issuer or underwriter of any asset-
backed security shall make publicly available the findings and 
conclusions of any third-party due diligence report obtained by the 
issuer or underwriter.\449\ In addition, Section 15E(s)(4)(B) of the 
Exchange Act contains a self-executing requirement providing that in 
any case in which third-party due diligence services are employed by an 
NRSRO, an issuer, or an underwriter, the person providing the due 
diligence services shall provide to any NRSRO that produces a rating to 
which such services relate, written certification in a format 
prescribed, by rule, by the Commission.\450\ Finally, as discussed 
above in Section II.G.1 of this release and below in Section II.G.5, 
the NRSRO would be required to disclose with the publication of a 
credit rating any certifications it receives from a provider of third-
party due diligence services pursuant to Section 15E(s)(4)(B)

[[Page 33461]]

of the Exchange Act.\451\ The Commission preliminarily believes that 
the disclosure that would be required pursuant to proposed paragraph 
(a)(1)(ii)(F) of Rule 17g-7 would need to describe how the NRSRO used 
the findings and conclusions of any third-party due diligence report 
made publicly available by an issuer or underwriter pursuant to Section 
15E(s)(4)(A) of the Exchange Act.\452\ Similarly, the Commission 
preliminarily believes that the disclosure would need to describe how 
the NRSRO used any certifications it receives from providers of third-
party due diligence services pursuant to Section 15E(s)(4)(B) of the 
Exchange Act.\453\
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    \449\ See 15 U.S.C. 78o-7(s)(4)(A). The Commission's proposals 
for implementing this provision are discussed below in Section 
II.H.1 of this release.
    \450\ See 15 U.S.C. 78o-7(s)(4)(B). The Commission's proposals 
for implementing this provision are discussed below in Sections 
II.H.2 and II.H.3 of this release.
    \451\ See proposed prefatory text of paragraph (a) and proposed 
paragraph (a)(2) of Rule 17g-7.
    \452\ See 15 U.S.C. 78o-7(s)(4)(A).
    \453\ See 15 U.S.C. 78o-7(s)(4)(B).
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    Paragraph (a)(1)(ii)(G). The seventh item of information would be 
identified in proposed new paragraph (a)(1)(ii)(G) of Rule 17g-7.\454\ 
This paragraph would implement Section 15E(s)(1)(A)(iii) of the 
Exchange Act, which provides that the Commission's rule shall require 
the NRSRO to disclose, if applicable, how the NRSRO used servicer or 
remittance reports, and with what frequency, to conduct surveillance of 
the credit rating.\455\ The Commission preliminarily believes that the 
statutory text is explicit with respect to the information to be 
disclosed and, consequently proposed new paragraph (a)(1)(ii)(G) of 
Rule 17g-7 would mirror the statutory text.\456\ In particular, 
proposed new paragraph (a)(1)(ii)(G) of Rule 17g-7 would require the 
NRSRO to disclose in the form, if applicable, how servicer or 
remittance reports were used, and with what frequency, to conduct 
surveillance of the credit rating.\457\
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    \454\ See proposed new paragraph (a)(1)(ii)(G) of Rule 17g-7.
    \455\ See 15 U.S.C. 78o-7(s)(1)(A)(iii).
    \456\ Compare 15 U.S.C. 78o-7(s)(1)(A)(iii), with proposed new 
paragraph (a)(1)(ii)(G) of Rule 17g-7.
    \457\ See proposed new paragraph (a)(1)(ii)(G) of Rule 17g-7.
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    Paragraph (a)(1)(ii)(H). The eighth item of information would be 
identified in proposed new paragraph (a)(1)(ii)(H) of Rule 17g-7.\458\ 
This paragraph would implement Section 15E(s)(3)(A)(vi) of the Exchange 
Act, which provides that the Commission's rule shall require the NRSRO 
to disclose in the form a description of the data about any obligor, 
issuer, security, or money market instrument that were relied upon for 
the purpose of determining the credit rating.\459\ The Commission 
preliminarily believes that the statutory text is explicit with respect 
to the information to be disclosed and, consequently proposed new 
paragraph (a)(1)(ii)(H) of Rule 17g-7 would mirror the statutory 
text.\460\ In particular, proposed new paragraph (a)(1)(ii)(H) of Rule 
17g-7 would require the NRSRO to disclose in the form a description of 
the data about any obligor, issuer, security, or money market 
instrument that was relied upon for the purpose of determining the 
credit rating.\461\
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    \458\ See proposed new paragraph (a)(1)(ii)(H) of Rule 17g-7.
    \459\ See 15 U.S.C. 78o-7(s)(3)(A)(vi).
    \460\ Compare 15 U.S.C. 78o-7(s)(3)(A)(vi), with proposed new 
paragraph (a)(1)(ii)(H) of Rule 17g-7.
    \461\ See proposed new paragraph (a)(1)(ii)(H) of Rule 17g-7.
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    Paragraph (a)(1)(ii)(I). The ninth item of information would be 
identified in proposed new paragraph (a)(1)(ii)(I) of Rule 17g-7.\462\ 
This paragraph would implement Section 15E(s)(3)(A)(vii) of the 
Exchange Act, which provides that the Commission's rule shall require 
the NRSRO to disclose in the form a statement containing an overall 
assessment of the quality of information available and considered in 
producing a rating for the obligor, security, or money market 
instrument, in relation to the quality of information available to the 
NRSRO in rating similar obligors, securities, and money market 
instruments.\463\ The Commission preliminarily believes that the 
statutory text is explicit with respect to the information to be 
disclosed and, consequently, proposed new paragraph (a)(1)(ii)(I) of 
Rule 17g-7 would mirror the statutory text.\464\ In particular, 
proposed new paragraph (a)(1)(ii)(I) of Rule 17g-7 would require the 
NRSRO to disclose in the form a statement containing an overall 
assessment of the quality of information available and considered in 
producing a rating for an obligor, security, or money market 
instrument, in relation to the quality of information available to the 
NRSRO in rating similar obligors, securities, or money market 
instruments.\465\
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    \462\ See proposed new paragraph (a)(1)(ii)(I) of Rule 17g-7.
    \463\ See 15 U.S.C. 78o-7(s)(3)(A)(vii). The Commission notes 
that the end of the statutory text refers to ratings of ``similar 
issuances.'' Id. However, the preceding text refers to rating an 
``obligor, security, or money market instrument.'' Id. As discussed 
earlier, a credit rating of an ``obligor'' commonly means the rating 
of the obligor as an entity rather than a rating of securities or 
money market instruments issued by the obligor. Consequently, the 
rating of an obligor may not relate to an ``issuance'' of a 
particular security or money market instrument. Therefore, the 
Commission proposes in new paragraph (a)(1)(ii)(I) of Rule 17g-7 to 
use the term ``similar obligors, securities, or money market 
instruments'' instead of the term ``similar issuances'' in the 
statutory text.
    \464\ Compare 15 U.S.C. 78o-7(s)(3)(A)(vii), with proposed new 
paragraph (a)(1)(ii)(I) of Rule 17g-7.
    \465\ See proposed new paragraph (a)(1)(ii)(I) of Rule 17g-7.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(J). The tenth item of information would be 
identified in proposed new paragraph (a)(1)(ii)(J) of Rule 17g-7.\466\ 
This paragraph would implement, in part, Section 15E(s)(3)(A)(viii) of 
the Exchange Act, which provides that the Commission's rule shall 
require the NRSRO to disclose in the form information relating to 
conflicts of interest of the NRSRO.\467\ The Commission preliminarily 
believes that the statutory text of Section 15E(s)(3)(A)(viii) is 
relatively general in that it does not specify the type of information 
about conflicts of interest that should be disclosed.\468\ Accordingly, 
the Commission is proposing to identify three specific items of 
information that, at a minimum, would need to be disclosed about 
conflicts of interest.\469\
---------------------------------------------------------------------------

    \466\ See proposed new paragraph (a)(1)(ii)(I) of Rule 17g-7.
    \467\ See 15 U.S.C. 78o-7(s)(3)(A)(viii).
    \468\ Id.
    \469\ See proposed new paragraph (a)(1)(ii)(J) of Rule 17g-7.
---------------------------------------------------------------------------

    The first type of disclosure would be identified in proposed new 
paragraph (a)(1)(ii)(J)(1) of Rule 17g-7, which would require the NRSRO 
to classify the credit rating as either ``solicited'' or 
``unsolicited.'' \470\ Proposed new paragraphs (a)(1)(ii)(J)(1)(i), 
(ii) and (iii) of Rule 17g-7 would define ``solicited'' and 
``unsolicited'' credit ratings.\471\ In this regard, the Commission is 
proposing two different sub-categories for solicited ratings: 
``solicited sell-side'' and ``solicited buy-side.'' \472\ Proposed new 
paragraph (a)(1)(ii)(J)(1)(i) of Rule 17g-7 would define ``Solicited 
sell-side'' to mean the credit rating was paid for by the obligor being 
rated or the issuer, underwriter, depositor, or sponsor of the security 
or money market instrument being rated.\473\ In other words, the 
``solicited sell-side'' classification would be used for issuer-paid 
credit ratings. Proposed new paragraph (a)(1)(ii)(J)(1)(ii) of Rule 
17g-7 would define ``Solicited buy-side'' to mean the credit rating was 
paid for by a person other than the obligor being rated or the issuer, 
underwriter, depositor, or sponsor of the security or money market 
instrument being rated. For example, a potential investor in a security 
may pay

[[Page 33462]]

an NRSRO to determine a credit rating for the security. The Commission 
preliminarily believes this distinction is relevant because, depending 
on the type of entity paying for the rating, the potential conflict may 
exert different types of undue influence on the NRSRO. For example, a 
sell-side purchaser of the credit rating presumably would want the 
highest rating possible. However, a buy-side purchaser could want a 
lower credit rating if the purchaser is maintaining a short position or 
desiring a higher interest rate.
---------------------------------------------------------------------------

    \470\ See proposed new paragraph (a)(1)(ii)(J)(1) of Rule 17g-7.
    \471\ See proposed new paragraphs (a)(1)(ii)(J)(1)(i), (ii) and 
(iii) of Rule 17g-7.
    \472\ See proposed new paragraph (a)(1)(ii)(J)(1)(i) and (ii) of 
Rule 17g-7.
    \473\ See proposed new paragraph (a)(1)(ii)(J)(1)(i) of Rule 
17g-7.
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    Proposed new paragraph (a)(1)(ii)(J)(1)(iii) of Rule 17g-7 would 
define an ``unsolicited'' credit rating to mean a credit rating the 
NRSRO was not paid to determine.\474\ The Commission preliminarily 
intends this definition to include credit ratings funded by selling 
subscriptions to access the credit ratings (so-called ``subscriber-paid 
credit ratings''). However, if a subscriber paid the NRSRO to determine 
a credit rating for a specific obligor, security, or money market 
instrument, the credit rating would need to be classified as either 
``solicited sell-side'' if the subscriber also was the obligor being 
rated or the issuer, underwriter, depositor, or sponsor of the security 
or money market instrument being rated, or ``solicited buy-side'' if 
the subscriber was not the obligor being rated or the issuer, 
underwriter, depositor, or sponsor of the security or money market 
instrument being rated. This would apply, for example, if the 
subscriber was an investor or potential investor in the security or 
money market instrument and hired the NRSRO to specifically rate the 
security or money market instrument. In such a case, the credit rating 
would need to be classified as ``solicited buy-side.''
---------------------------------------------------------------------------

    \474\ See proposed new paragraph (a)(1)(ii)(J)(1)(iii) of Rule 
17g-7.
---------------------------------------------------------------------------

    The second type of conflict disclosure would be identified in 
proposed new paragraph (a)(1)(ii)(J)(2) of Rule 17g-7.\475\ This 
paragraph would provide that if the credit rating is classified as 
either ``solicited sell-side'' or ``solicited buy-side'' the NRSRO 
would be required to disclose whether the NRSRO provided services other 
than determining credit ratings to the person that paid for the rating 
during the most recently ended fiscal year.\476\ In other words, the 
NRSRO would be required to indicate whether the person who purchased 
the credit rating was a client with respect to other services provided 
by the NRSRO. The Commission preliminarily believes clients paying an 
NRSRO for services in addition to determining credit ratings may pose 
an increased risk of exerting undue influence on the NRSRO with respect 
to its determination of credit ratings.\477\ The Commission has adopted 
rules that address consulting and advisory services under authority in 
Section 15E(h)(2)(B).\478\ The Commission preliminarily believes that 
the proposed disclosure requirement about other services would 
complement these requirements.
---------------------------------------------------------------------------

    \475\ See proposed new paragraph (a)(1)(ii)(J)(2) of Rule 17g-7.
    \476\ Id.
    \477\ In this regard, the Commission notes that Section 939H of 
the Dodd-Frank Act contains a sense of the Congress that the 
Commission should exercise rulemaking authority under Section 
15E(h)(2)(B) of the Exchange Act to prevent improper conflicts of 
interest arising from employees of NRSROs providing services to 
issuers of securities that are unrelated to the issuance of credit 
ratings, including consulting, advisory, and other services. See 
Public Law 111-203 Sec.  939H.
    \478\ See 17 CFR 240.17g-5(a) and (b)(3), (4) and (5) and 17 CFR 
240.17g-5(c).
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    The third type of conflict disclosure would be identified in 
proposed new paragraph (a)(1)(ii)(J)(3) of Rule 17g-7.\479\ This 
paragraph would require disclosure of information about a conflict of 
interest influencing a credit rating action discovered as a result of a 
look-back review conducted pursuant to Section 15E(h)(4)(A) of the 
Exchange Act and proposed paragraph (c) of new Rule 17g-8.\480\
---------------------------------------------------------------------------

    \479\ See proposed new paragraph (a)(1)(ii)(J)(3) of Rule 17g-7.
    \480\ This information is discussed in detail above in Section 
II.C.1 of this release.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(K). The eleventh item of information would be 
identified in proposed new paragraph (a)(1)(ii)(K) of Rule 17g-7.\481\ 
This paragraph would implement Section 15E(s)(3)(B)(i) of the Exchange 
Act, which provides that the Commission's rule shall require the NRSRO 
to disclose in the form an explanation or measure of the potential 
volatility of the credit rating, including: (1) Any factors that might 
lead to a change in the credit ratings; and (2) the magnitude of the 
change that a user can expect under different market conditions.\482\ 
The Commission preliminarily believes that the statutory text is 
explicit with respect to the information to be disclosed and, 
consequently proposed new paragraph (a)(1)(ii)(K) of Rule 17g-7 would 
mirror the statutory text.\483\ In particular, proposed new paragraph 
(a)(1)(ii)(K) of Rule 17g-7 would require the NRSRO to disclose in the 
form an explanation or measure of the potential volatility of the 
credit rating, including: (1) Any factors that might lead to a change 
in the credit rating; and (2) the magnitude of the change that could 
occur under different market conditions.\484\
---------------------------------------------------------------------------

    \481\ See proposed new paragraph (a)(1)(ii)(K) of Rule 17g-7.
    \482\ See 15 U.S.C. 78o-7(s)(3)(B)(i).
    \483\ Compare 15 U.S.C. 78o-7(s)(3)(B)(i), with proposed new 
paragraph (a)(1)(ii)(K) of Rule 17g-7.
    \484\ See proposed new paragraph (a)(1)(ii)(K) of Rule 17g-7.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(L). The twelfth item of information would be 
identified in proposed new paragraph (a)(1)(ii)(L) of Rule 17g-7.\485\ 
This paragraph would implement Section 15E(s)(3)(B)(ii) of the Exchange 
Act, which provides that the Commission's rule shall require the NRSRO 
to disclose in the form information on the content of the credit 
rating, including: (1) The historical performance of the credit rating; 
and (2) the expected probability of default and the expected loss in 
the event of default.\486\ The Commission preliminarily believes that 
the statutory text is explicit with respect to the information to be 
disclosed and, consequently proposed new paragraph (a)(1)(ii)(L) of 
Rule 17g-7 would mirror the statutory text.\487\ In particular, 
proposed new paragraph (a)(1)(ii)(L) of Rule 17g-7 would require the 
NRSRO to disclose in the form information on the content of the rating, 
including: (1) If applicable, the historical performance of the rating; 
and (2) the expected probability of default and the expected loss in 
the event of default.\488\
---------------------------------------------------------------------------

    \485\ See proposed new paragraph (a)(1)(ii)(L) of Rule 17g-7.
    \486\ See 15 U.S.C. 78o-7(s)(3)(B)(ii).
    \487\ Compare 15 U.S.C. 78o-7(s)(3)(B)(ii), with proposed new 
paragraph (a)(1)(ii)(L) of Rule 17g-7.
    \488\ See proposed new paragraph (a)(1)(ii)(L) of Rule 17g-7.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(M). The thirteenth item of information would 
be identified in proposed new paragraph (a)(1)(ii)(M) of Rule 17g-
7.\489\ This paragraph would implement Section 15E(s)(3)(B)(iii) of the 
Exchange Act, which provides that the Commission's rule shall require 
the NRSRO to disclose in the form information on the sensitivity of the 
credit rating to assumptions made by the NRSRO, including: (1) Five 
assumptions made in the ratings process that, without accounting for 
any other factor, would have the greatest impact on a rating if the 
assumptions were proven false or inaccurate; and (2) an analysis, using 
specific examples, of how each of the 5 assumptions identified impacts 
a credit rating.\490\ The Commission preliminarily believes that the 
statutory text is explicit with respect to the information to be 
disclosed and, consequently proposed new paragraph (a)(1)(ii)(M) of 
Rule 17g-7 would mirror

[[Page 33463]]

the statutory text.\491\ In particular, proposed new paragraph 
(a)(1)(ii)(M) of Rule 17g-7 would require the NRSRO to disclose in the 
form information on the sensitivity of the rating to assumptions made 
by the NRSRO, including: (1) 5 assumptions made in the ratings process 
that, without accounting for any other factor, would have the greatest 
impact on a rating if the assumptions were proven false or inaccurate; 
and (2) an analysis, using specific examples, of how each of the 5 
assumptions identified in the form impacts a rating.\492\
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    \489\ See proposed new paragraph (a)(1)(ii)(M) of Rule 17g-7.
    \490\ See 15 U.S.C. 78o-7(s)(3)(B)(iii).
    \491\ Compare 15 U.S.C. 78o-7(s)(3)(B)(iii), with proposed new 
paragraph (a)(1)(ii)(M) of Rule 17g-7.
    \492\ See proposed new paragraph (a)(1)(ii)(M) of Rule 17g-7.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(N). Finally, the fourteenth item of 
information would be identified in proposed new paragraph (a)(1)(ii)(N) 
of Rule 17g-7.\493\ This paragraph would contain the current disclosure 
requirement in Rule 17g-7.\494\ In particular, the current requirements 
in paragraphs (a) and (b) of Rule 17g-7 would be contained in proposed 
new paragraph (a)(1)(ii)(N).\495\ Specifically, this paragraph would 
provide that if the credit rating is issued with respect to an asset-
backed security, as that term is defined in Section 3(a)(77) of the 
Exchange Act, the NRSRO must include in the form a description of: (1) 
The representations, warranties, and enforcement mechanisms available 
to investors; and (2) how they differ from the representations, 
warranties, and enforcement mechanisms in issuances of similar 
securities.
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    \493\ See proposed new paragraph (a)(1)(ii)(N) of Rule 17g-7.
    \494\ See 17 CFR 240.17g-7. As discussed above Section II.G.1 of 
this release, the definition of ``credit rating'' in the third 
sentence of the prefatory text to proposed new paragraph (a) of Rule 
17g-7 would contain the provisions in the current Note to 17 CFR 
240.17g-7, which provides that for the purposes of the rule's 
current requirements, a ``credit rating'' includes any expected or 
preliminary credit rating issued by an NRSRO.
    \495\ Compare 17 CFR 240.17g-7(a) and (b), with proposed new 
paragraph (a)(1)(ii)(N) of Rule 17g-7.
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Request for Comment
    The Commission generally requests comment on all aspects of 
proposed paragraph (a)(1)(ii) of proposed Rule 17g-7. The Commission 
also seeks comment on the following:
    1. With respect to proposed paragraph (a)(1)(ii)(A), should the 
Commission consider requiring the disclosure of information in addition 
to the identity of the obligor's legal name and any other name that the 
obligor uses in its business? Are there additional or alternative ways 
to identify the obligor? Also, provide examples of how this disclosure 
might appear on the form.
    2. With respect to proposed paragraph (a)(1)(ii)(A), should the 
Commission consider requiring the disclosure of information in addition 
to the name of the security or money market instrument, if applicable, 
and a description of the security or money market instrument? Are there 
additional or alternative ways to identify the security or money market 
instrument? Would disclosing the CUSIP alone be sufficient to identify 
the security or money market instrument? If so, should the Commission 
consider requiring that the CUSIP be disclosed? Also, provide examples 
of how this disclosure might appear on the form.
    3. With respect to proposed paragraph (a)(1)(ii)(B), would the 
disclosure of the version of the procedure or methodology used to 
determine the credit rating in conjunction with proposed paragraph 
(a)(5) of Rule 17g-8 achieve the goals of Section 15E(r)(3)(A) of the 
Exchange Act? If not, what alternative or additional requirements 
should the Commission consider? Also, provide examples of how this 
disclosure might appear on the form.
    4. Proposed paragraph (a)(1)(ii)(C) of Rule 17g-7 would require an 
NRSRO to disclose in the form the main assumptions and principles used 
in constructing the procedures and methodologies used to determine the 
credit rating, including qualitative methodologies and quantitative 
inputs and, if the credit rating is for a structured finance product, 
assumptions about the correlation of defaults across the underlying 
assets. Is this proposed requirement sufficiently explicit with respect 
to the information that would need to be disclosed? If not, what 
additional detail should the Commission provide in terms of the 
information that would need to be disclosed? Also, provide examples of 
how this disclosure might appear on the form. In addition, would the 
proposal require the disclosure of proprietary information? If so, what 
type or types of proprietary information would be disclosed? How could 
this issue be addressed?
    5. Proposed paragraph (a)(1)(ii)(D) of Rule 17g-7 would require the 
NRSRO to disclose in the form the potential limitations of the credit 
rating, including the types of risks excluded from the credit rating 
that the NRSRO does not comment on, including, as applicable, 
liquidity, market, and other risks. Is this proposed requirement 
sufficiently explicit with respect to the information that would need 
to be disclosed? If not, what additional detail should the Commission 
provide in terms of the information that would need to be disclosed? 
Also, provide examples of how this disclosure might appear on the form.
    6. Proposed paragraph (a)(1)(ii)(E) of Rule 17g-7 require the NRSRO 
to disclose in the form information on the uncertainty of the credit 
rating, including: (1) Information on the reliability, accuracy, and 
quality of the data relied on in determining the credit rating; and (2) 
a statement relating to the extent to which data essential to the 
determination of the credit rating were reliable or limited, including: 
Any limits on the scope of historical data; and any limits in 
accessibility to certain documents or other types of information that 
would have better informed the credit rating. Is this proposed 
requirement sufficiently explicit with respect to the information that 
would need to be disclosed? If not, what additional detail should the 
Commission provide in terms of the information that would need to be 
disclosed? Also, provide examples of how this disclosure might appear 
on the form. In addition, would the proposal require the disclosure of 
proprietary information? If so, what type or types of proprietary 
information would be disclosed? How could this issue be addressed?
    7. Proposed paragraph (a)(1)(ii)(F) of Rule 17g-7 would require the 
NRSRO to disclose in the form whether and to what extent third-party 
due diligence services were used by NRSRO organization, a description 
of the information that such third-party reviewed in conducting due 
diligence services, and a description of the findings or conclusions of 
such third-party? Is this proposed requirement sufficiently explicit 
with respect to the information that would need to be disclosed? If 
not, what additional detail should the Commission provide in terms of 
the information that would need to be disclosed? Also, provide examples 
of how this disclosure might appear on the form.
    8. With respect to proposed paragraph (a)(1)(ii)(F) of Rule 17g-7, 
how should the findings and conclusions of any third-party due 
diligence report made publicly available by the issuer or underwriter 
pursuant to Section 15E(s)(4)(A) of the Exchange Act be incorporated 
into the disclosure if used by the NRSRO? Similarly, how should any 
certifications the NRSRO receives from providers of third-party due 
diligence services pursuant to Section 15E(s)(4)(B) of the Exchange Act 
be

[[Page 33464]]

incorporated into the disclosure if used by the NRSRO? Also, provide 
examples of how this disclosure might appear on the form.
    9. Proposed paragraph (a)(1)(ii)(G) of Rule 17g-7 would require the 
NRSRO to disclose in the form, if applicable, how servicer or 
remittance reports were used, and with what frequency, to conduct 
surveillance of the credit rating? Is this proposed requirement 
sufficiently explicit with respect to the information that would need 
to be disclosed? If not, what additional detail should the Commission 
provide in terms of the information that would need to be disclosed? 
Also, provide examples of how this disclosure might appear on the form.
    10. Proposed paragraph (a)(1)(ii)(H) of Rule 17g-7 would require 
the NRSRO to disclose in the form a description of the data about any 
obligor, issuer, security, or money market instrument that was relied 
upon for the purpose of determining the credit rating? Is this proposed 
requirement sufficiently explicit with respect to the information that 
would need to be disclosed? If not, what additional detail should the 
Commission provide in terms of the information that would need to be 
disclosed? Also, provide examples of how this disclosure might appear 
on the form.
    11. Proposed paragraph (a)(1)(ii)(I) of Rule 17g-7 would require 
the NRSRO to disclose in the form a statement containing an overall 
assessment of the quality of information available and considered in 
producing a rating for an obligor, security, or money market 
instrument, in relation to the quality of information available to the 
NRSRO in rating similar obligors, securities, or money market 
instruments. Is this proposed requirement sufficiently explicit with 
respect to the information that would need to be disclosed? If not, 
what additional detail should the Commission provide in terms of the 
information that would need to be disclosed? Also, provide examples of 
how this disclosure might appear on the form.
    12. With respect to proposed paragraph (a)(1)(ii)(J)(1) of Rule 
17g-7, are the proposed definitions of ``solicited sell-side'', 
``solicited buy-side'', and ``unsolicited'' credit ratings sufficiently 
clear? If not, how should the definitions be augmented or altered? 
Also, provide examples of how this disclosure might appear on the form.
    13. With respect to proposed paragraph (a)(1)(ii)(J)(1) of Rule 
17g-7, would distinguishing between ``solicited sell-side'' and 
``solicited buy-side'' credit ratings provide useful disclosure of 
potentially different conflicts of interest? Alternatively, should the 
disclosure more simply require classification of whether the credit 
rating was ``solicited'' or ``unsolicited''? Also, provide examples of 
how this disclosure might appear on the form.
    14. With respect to proposed paragraph (a)(1)(ii)(J)(2) of Rule 
17g-7, would the proposed disclosure of whether the NRSRO provided 
other services to the person that paid for the credit rating during the 
most recently ended fiscal year provide useful disclosure of potential 
conflicts of interest? Also, provide examples of how this disclosure 
might appear on the form.
    15. With respect to proposed paragraph (a)(1)(ii)(J) of Rule 17g-7, 
is there other information about conflicts of interest that the 
Commission should consider requiring to be disclosed in the form? 
Commenters should provide specific examples of such information and 
explain how it would provide useful information. Also, provide examples 
of how this disclosure might appear on the form.
    16. Proposed paragraph (a)(1)(ii)(K) of Rule 17g-7 would require 
the NRSRO to disclose in the form an explanation or measure of the 
potential volatility of the credit rating, including: (1) Any factors 
that might lead to a change in the credit rating; and (2) the magnitude 
of the change that could occur under different market conditions. Is 
this proposed requirement sufficiently explicit with respect to the 
information that would need to be disclosed? If not, what additional 
detail should the Commission provide in terms of the information that 
would need to be disclosed? Also, provide examples of how this 
disclosure might appear on the form. Should the Commission provide 
guidance on the types of factors that should be disclosed to establish 
a materiality threshold? If so, describe the factors and the 
corresponding materiality threshold. Furthermore, should the Commission 
define the term ``might lead to a change in the credit rating'' to 
establish the level of probability necessary to trigger the disclosure? 
If so, how should the term be defined?
    17. Proposed paragraph (a)(1)(ii)(L) of Rule 17g-7 would require 
the NRSRO to disclose in the form information on the content of the 
rating, including: (1) If applicable, the historical performance of the 
rating; and (2) the expected probability of default and the expected 
loss in the event of default. Is this proposed requirement sufficiently 
explicit with respect to the information that would need to be 
disclosed? If not, what additional detail should the Commission provide 
in terms of the information that would need to be disclosed? Also, 
provide examples of how this disclosure might appear on the form.
    18. With respect to proposed paragraph (a)(1)(ii)(M) of Rule 17g-7 
would require the NRSRO to disclose in the form information on the 
sensitivity of the rating to assumptions made by the NRSRO, including: 
(1) 5 assumptions made in the ratings process that, without accounting 
for any other factor, would have the greatest impact on a rating if the 
assumptions were proven false or inaccurate; and (2) an analysis, using 
specific examples, of how each of the 5 assumptions identified in the 
form impacts a rating? Is this proposed requirement sufficiently 
explicit with respect to the information that would need to be 
disclosed? If not, what additional detail should the Commission provide 
in terms of the information that would need to be disclosed? Also, 
provide examples of how this disclosure might appear on the form. In 
addition, would the proposal require the disclosure of proprietary 
information? If so, what type or types of proprietary information would 
be affected? How could this issue be addressed?
    19. Is the proposal to codify the current requirements in 
paragraphs (a) and (b) of Rule 17g-7 in proposed paragraph 
(a)(1)(ii)(N) of Rule 17g-7 appropriate? For example, would this re-
designation change those requirements in some manner?
4. Paragraph (a)(1)(iii)--Attestation Requirement
    Section 15E(q)(2)(F) of the Exchange Act provides that the 
Commission's rules must require an NRSRO to include an attestation with 
any credit rating it issues affirming that no part of the rating was 
influenced by any other business activities, that the rating was based 
solely on the merits of the instruments being rated, and that such 
rating was an independent evaluation of the risks and merits of the 
instrument.\496\ While Section 15E(q) relates to disclosure of 
information about the performance of credit ratings, the Commission 
preliminarily believes this attestation provision would more 
appropriately be implemented with respect to disclosures that must be 
made when a specific rating action is published. Consequently, the 
Commission proposes that it be part of the form that would be required 
to accompany a credit rating pursuant to

[[Page 33465]]

rulemaking under Section 15E(s) of the Exchange Act as opposed to a 
part of the proposed disclosures of Transition/Default Matrices in 
Exhibit 1 to Form NRSRO or credit rating histories that would implement 
Section 15E(q).\497\
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    \496\ See 15 U.S.C. 78o-7(q)(2)(F).
    \497\ See 15 U.S.C. 78o-7(s) and 15 U.S.C. 78o-7(q).
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    Consequently, the Commission proposes to implement this attestation 
requirement as part of the rule requirement for an NRSRO to generate a 
form to accompany the publication of a credit rating.\498\ In 
particular, under the proposal, the NRSRO would be required to attach 
to the form a signed statement by a person within the NRSRO stating 
that the person has responsibility for the credit rating and, to the 
best knowledge of the person: (1) No part of the credit rating was 
influenced by any other business activities; (2) the credit rating was 
based solely upon the merits of the obligor, security, or money market 
instrument being rated; and (3) the credit rating was an independent 
evaluation of the risks and merits of the obligor, security, or money 
market instrument.\499\ Thus, the proposed requirement would mirror the 
statutory text in terms of the representations that would need to be 
made in the attestation.\500\
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    \498\ See 15 U.S.C. 78o-7(s).
    \499\ See proposed new paragraphs (a)(1)(iii)(A)-(C) of Rule 
17g-7.
    \500\ Compare proposed new paragraphs (a)(1)(iii)(A)-(C) of Rule 
17g-7, with 15 U.S.C. 78o-7(q)(2)(F).
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Request for Comment
    The Commission generally requests comment on all aspects of 
proposed paragraph (a)(1)(iii) of proposed Rule 17g-7. The Commission 
also seeks comment on the following:
    1. Are there alternative means of implementing Section 15E(q)(2)(F) 
with respect to the attestation requirement? For example, should 
Section 15E(q)(2)(F) be implemented in proposed provisions requiring 
NRSROs to disclose information about the performance of credit ratings 
(i.e., the proposed Form NRSRO Exhibit 1 Transition/Default Matrices 
and/or the proposed ratings histories disclosure requirement)? If so, 
how would the attestation requirement be made a part of either of these 
other proposals?
    2. What person within the NRSRO has responsibility for the credit 
rating and the other information that would be required to be disclosed 
in the form and, consequently, could make the attestation? For example, 
could the lead analyst, the chair of the rating committee, a senior 
manager, or some other person make the proposed attestation?
5. Paragraph (a)(2)--Certification of Third-Party Due Diligence 
Provider
    Section 15E(s)(4)(B) of the Exchange Act requires a third-party 
providing due diligence services to an NRSRO, issuer, or underwriter 
with respect to an Exchange Act-ABS \501\ to provide a written 
certification to any NRSRO that produces a credit rating to which the 
due diligence services relate.\502\ Section 15E(s)(4)(D) of the 
Exchange Act provides that the Commission shall adopt a rule requiring 
an NRSRO that receives a certification from a provider of third-party 
due diligence services to disclose the certification to the public in a 
manner that allows the public to determine the adequacy and level of 
the due diligence services provided by the third-party.\503\ The 
Commission preliminarily believes that this goal could best be achieved 
by requiring the NRSRO to disclose any such certifications with the 
publication of the NRSRO's credit rating to which the certification 
relates. Therefore, the Commission is proposing to add a new paragraph 
(a)(2) to Rule 17g-7 that, in conjunction with the proposed prefatory 
text of paragraph (a), would provide that the NRSRO must include with 
the publication of a credit rating any written certification related to 
the credit rating received from a provider of third-party due diligence 
services pursuant to Section 15E(s)(4)(B) of the Exchange Act.\504\
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    \501\ See 15 U.S.C. 78o-7(s)(4)(A)-(D). As noted earlier, the 
term ``structured finance product'' as used throughout this release 
refers broadly to any security or money market instrument issued by 
an asset pool or as part of any asset-backed or mortgage-backed 
securities transaction. This broad category of financial instrument 
includes an ``asset-backed security'' as defined in Section 3(a)(77) 
of the Exchange Act (15 U.S.C. 78c(a)(77)) and other types of 
structured debt instruments such as CDOs, including synthetic and 
hybrid CDOs. The term ``Exchange Act-ABS'' as used throughout this 
release refers more narrowly to an ``asset-backed security'' as 
defined in Section 3(a)(77) of the Exchange Act. 15 U.S.C. 
78c(a)(77).
    \502\ See 15 U.S.C. 78o-7(s)(4)(B).
    \503\ See 15 U.S.C. 78o-7(s)(4)(D).
    \504\ See proposed paragraph (a)(2) of Rule 17g-7.
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Request for Comment
    The Commission generally requests comment on all aspects of 
proposed new paragraph (a)(2) of Rule 17g-7. The Commission also seeks 
comment on the following:
    1. Would it be appropriate to require the inclusion of the 
certification of the provider of third-party due diligence services 
with the publication of the credit rating and the form containing 
information about the credit rating? Is there an alternative means of 
disclosing the certifications that would be reasonably designed to 
ensure they are disseminated to users of the NRSRO's credit ratings? If 
so, describe the method of disclosure.

H. Third-Party Due Diligence for Asset-Backed Securities

    Section 932(a)(8) of the Dodd-Frank Act amended Section 15E of the 
Exchange Act to add new paragraph (s), which, as discussed above in 
Section II.G of this release, has four subparagraphs: (1), (2), (3) and 
(4).\505\ Section 15E(s)(4), ``Due diligence services for asset-backed 
securities,'' contains four provisions regarding due diligence services 
relating to an Exchange Act-ABS. Section 15E(s)(4)(A) requires the 
issuer or underwriter to make publicly available the findings and 
conclusions of any third-party due diligence report obtained by the 
issuer or underwriter.\506\ Section 15E(s)(4)(B) requires that in any 
case in which third-party due diligence services are employed by an 
NRSRO, an issuer, or an underwriter, the person providing the due 
diligence services shall provide to any NRSRO that produces a rating to 
which such services relate, written certification in a format as 
provided in Section 15E(s)(4)(C).\507\ Section 15E(s)(4)(C) of the 
Exchange Act provides that the Commission shall establish the 
appropriate format and content for the written certifications required 
under Section 15E(s)(4)(B), to ensure that providers of due diligence 
services have conducted a thorough review of data, documentation, and 
other relevant information necessary for an NRSRO to provide an 
accurate rating.\508\ Finally, Section 15E(s)(4)(D) of the Exchange Act 
provides that the Commission shall adopt rules requiring an NRSRO, at 
the time at which the NRSRO produces a rating, to disclose the 
certification described in Section 15E(s)(4)(B) to the public in a 
manner that allows the public to determine the adequacy and level of 
due diligence services provided by a third party.\509\
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    \505\ See Public Law 111-203 Sec.  932(a)(8) and 15 U.S.C. 78o-
7(s)(1)-(4).
    \506\ See 15 U.S.C. 78o-7(s)(4)(A).
    \507\ See 15 U.S.C. 78o-7(s)(4)(B).
    \508\ See 15 U.S.C. 78o-7(s)(4)(C).
    \509\ See 15 U.S.C. 78o-7(s)(4)(D).
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    As discussed below in Section II.H.1 of this release, the 
Commission is proposing to implement Section 15E(s)(4)(A) of the 
Exchange Act by proposing amendments to Rule 314 of Regulation S-T and 
Form ABS-15G, and proposing new Rule 15Ga-2.\510\ In

[[Page 33466]]

addition, as discussed below in Sections II.H.2 and II.H.3 of this 
release, the Commission is proposing to implement Sections 15E(s)(4)(B) 
and (C) of the Exchange Act by proposing new Rule 17g-10 and a related 
form--Form ABS Due Diligence-15E.\511\ As discussed above in Section 
II.G.5 of this release, the Commission is proposing to implement 
Section 15E(s)(4)(D) by proposing new paragraph (a)(2) to Rule 17g-
7.\512\
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    \510\ See proposed amendments to Rule 314 of Regulation S-T and 
Form ABS-15G and proposed new Rule 15Ga-2. New Rule 15Ga-2 would be 
codified at 17 CFR 240.15Ga-2.
    \511\ See proposed new Rule 17g-10 and Form ABS Due Diligence-
15E. New Rule 17g-10 would be codified at 17 CFR 240.17g-10 and Form 
ABS Due Diligence 15E would be identified in the Code of Federal 
Regulation at 17 CFR 249b.400.
    \512\ See proposed new paragraph (a)(2) of Rule 17g-7.
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    Before discussing the proposals to implement Sections 15E(s)(4)(A) 
through (C), the Commission notes the provisions of Section 15E(s)(4) 
raise two fundamental questions: (1) How will a provider of third-party 
due diligence services know the identities of the NRSROs producing 
credit ratings to which its services relate (particularly NRSROs 
producing unsolicited credit ratings); and (2) when must the 
certification be provided to the NRSROs? Accordingly, the Commission is 
requesting comment on these questions in order to consider further 
guidance or rulemaking to better determine how a provider of third-
party due diligence services can comply with the requirement in Section 
15E(s)(4)(B) of the Exchange Act.\513\
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    \513\ 15 U.S.C. 78o-7(s)(4)(B).
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of Section 
15E(s)(4)(B) of the Exchange Act. The Commission also seeks comment on 
the following:
    1. How would a provider of third-party due diligence services 
identify the NRSROs producing credit ratings to which the due diligence 
services relate? For example, would it be sufficient for the provider 
of third-party due diligence services to contractually require issuers 
and underwriters that employ it to provide these services to identify 
the NRSROs engaged by the issuer or underwriter to produce credit 
ratings for the Exchange Act-ABS and to identify any other NRSROs the 
issuers and underwriters have notice are producing unsolicited credit 
ratings for the Exchange Act-ABS? Would issuers and underwriters agree 
to such contractual terms or would they use a provider of third-party 
due diligence services that does not demand such terms? Even if issuers 
and underwriters agree to such contractual terms, would they know the 
identity of every NRSRO producing a credit rating for the Exchange Act-
ABS, particularly NRSROs producing unsolicited credit ratings? Would an 
appropriate mechanism for providing the certifications to all NRSROs 
producing a credit rating for the Exchange Act-ABS be to disclose it 
with the information required by paragraph (a)(3) of Rule 17g-5 (which 
requires, among other things, the issuer or underwriter to make the 
information provided to an NRSRO hired to produce a credit rating for a 
structured finance product such as an Exchange Act-ABS available to any 
other NRSRO)? \514\
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    \514\ 17 CFR 240.17g-5(a)(3).
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    2. In the case where an NRSRO (as opposed to the issuer or 
underwriter) employs the provider of third-party due diligence 
services, how would the NRSRO know of any other NRSROs that are 
producing credit ratings to which the due diligence services relate and 
provide the identities of such NRSROs to the provider of the third-
party due diligence services? If paragraph (a)(3) of Rule 17g-5 would 
be an appropriate mechanism for providing the certifications to all 
NRSROs producing a credit rating for the Exchange Act-ABS, could the 
hired NRSRO obtain a representation from the issuer or underwriter that 
it would make any certifications received by the NRSRO available to 
other NRSROs through the process by which the issuer or underwriter 
makes the information required by paragraph (a)(3) of Rule 17g-5 
available to other NRSROs?
    3. Should there be some type of centralized database where NRSROs 
producing credit ratings for an Exchange Act-ABS identify themselves 
and which would be deemed constructive notice to any provider of third-
party due diligence services that is providing services related to the 
Exchange Act-ABS? If so, should the Commission administer this 
centralized database or should the issuers and underwriters, providers 
of third-party due diligence services, NRSROs, or users of credit 
ratings administer this database?
    4. Should there be a centralized database where a provider of 
third-party due diligence services submits its certification for 
publication, and should submitting the certification to such a database 
be deemed constructive receipt by an NRSRO producing a credit rating 
for an Exchange Act-ABS to which the due diligence services described 
in the certification relate? Should this database also be the mechanism 
by which issuers and underwriters make publicly available, pursuant to 
the requirement in Section 15E(s)(4)(A) of the Exchange Act, the 
findings and conclusions of any third-party due diligence report 
obtained by the issuer or underwriter? If so, should the Commission 
administer this centralized database or should the issuers and 
underwriters, providers of third-party due diligence services, NRSROs, 
or users of credit ratings administer this database? For example, 
should the certification be furnished or filed on the Commission's 
EDGAR system?
    5. Should there be a reasonableness test in terms of assessing 
whether the provider of third-party due diligence services submitted 
the certification to all NRSROs required to receive the certification? 
For example, should the provider of third-party due diligence services 
be required to provide the certification to all NRSROs it knows or 
reasonably should know are producing a credit rating for which its 
services relate?
    6. How soon after the provider of third-party due diligence 
services completes its review should the certifications be provided to 
all NRSROs required to receive it? For example, should the 
certification be provided ``promptly'' or within 24 hours, 2 business 
days, 10 business days, or some other period of time?
    7. Should the provider of third-party due diligence services be 
required to provide the certification to all required NRSROs at the 
same time so that no single NRSRO has the benefit of using the 
certification before the other NRSROs that are required to receive it? 
How would such a requirement be implemented and enforced in practice?
    8. Should the requirement to provide the certification to all 
NRSROs required to receive it sunset after some period of time after 
the due diligence services are completed such as 30, 60, 90, 120, 150, 
180 days or some longer period? For example, should the provider of 
third-party due diligence services be required to provide the 
certification to any NRSRO that produces a credit rating to which its 
services relate until the security matures, is called, is pre-paid, or 
goes into default?
    9. If the provider of third-party due diligence services is hired 
to provide due diligence services with respect to an initial issuance 
of securities, would it need to provide the certification at some later 
time to an NRSRO that does not rate the securities initially but 
produces a credit rating after the securities have been outstanding for 
a period of time?
1. Proposed Rule 15Ga-2 and Amendments to Form ABS-15G
    The Commission is re-proposing rules, with some revisions, to

[[Page 33467]]

implement Section 15E(s)(4)(A) of the Exchange Act, which requires that 
an issuer or underwriter of any Exchange Act-ABS make publicly 
available the findings and conclusions of any third-party due diligence 
report obtained by the issuer or underwriter.\515\ The Commission 
previously proposed to implement Section 15E(s)(4)(A) of the Exchange 
Act as part of a set of rules proposed to implement Section 945 of the 
Dodd-Frank Act.\516\ Under those proposals, an issuer of a registered 
Exchange Act-ABS offering would have been required to disclose the 
findings and conclusions of any third party engaged to perform a review 
obtained by the issuer, as required by Section 15E(s)(4)(A), in the 
prospectus.\517\ In the case of unregistered Exchange Act-ABS 
offerings, the Commission proposed new Rule 15Ga-2.\518\ This rule 
would have required an issuer of Exchange Act-ABS to file a new Form 
ABS-15G to disclose the findings and conclusions of any third-party 
engaged to perform a review obtained by an issuer with respect to 
unregistered transactions.\519\ Proposed Rule 15Ga-2 also would have 
required an underwriter of Exchange Act-ABS to file Form ABS-15G with 
the same information for reports obtained by an underwriter in 
registered and unregistered transactions.\520\ Finally, proposed Form 
ABS-15G would have been required to be filed with the Commission on 
EDGAR five business days prior to the first sale of the offering.\521\
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    \515\ See 15 U.S.C. 78o-7(s)(4)(A).
    \516\ See Issuer Review of Assets in Offerings of Asset-Backed 
Securities, Securities Act Release No. 9150 (Oct. 13, 2010), 75 FR 
64182 (Oct. 19, 2010). In the same release in which the Commission 
proposed to implement Section 15E(s)(4)(A), the Commission also 
proposed to implement Section 7(d) of the Securities Act (15 U.S.C. 
77g(d)), as added by Public Law 111-203 Sec.  945. Section 7(d) of 
the Securities Act requires the Commission to adopt rules that, with 
respect to a registration statement for an asset-backed security, 
will require the issuer of the security to: (1) Perform a review of 
the assets underlying the asset-backed security; and (2) disclose 
the nature of the review. See 15 U.S.C. 77g(d)(1) and (2). The 
Commission implemented this provision by adopting new rule 17 CFR 
230.193 (``Rule 193'') and amendments to 17 CFR 229.1111 (``Item 
1111 of Regulation AB''). See Issuer Review of Assets in Offerings 
of Asset-Backed Securities, Securities Act Release No. 9176 (Jan. 
20, 2011), 76 FR 4231 (Jan. 25, 2011).
    \517\ See Issuer Review of Assets in Offerings of Asset-Backed 
Securities, 75 FR at 64188-64190 (Oct. 19, 2010).
    \518\ Id.
    \519\ Id.
    \520\ Id.
    \521\ Id.
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    With respect to these proposals, the Commission requested comment 
on, among other things, whether rules implementing Section 15E(s)(4)(A) 
of the Exchange Act should be part of a later rulemaking under Section 
15E.\522\ Some commenters stated that Section 15E(s)(4) should be read 
as a whole, and that it would be inappropriate to consider subsection 
(A) alone.\523\ These commenters suggested postponing implementation of 
Section 15E(s)(4)(A) until the Commission implements Section 
15E(s)(4)(B), (C) and (D).\524\ These commenters argued that Rule 15Ga-
2, as proposed, would have ``construe[d] Section 15E(s)(4)(A) in a 
vacuum, divorced from Congress' intent to regulate NRSROs and the 
credit ratings process.'' \525\ These commenters also argued that 
proposed Rule 15Ga-2 was inappropriately broad. One such commenter 
suggested that Rule 15Ga-2 be modified to apply only to any third-party 
due diligence report prepared for an issuer or underwriter of Exchange 
Act-ABS specifically for the purpose of having the issuer or 
underwriter share the report with an NRSRO issuing a credit rating for 
the securities.\526\
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    \522\ Id.
    \523\ See comment letters from American Bar Association 
(``ABA''); National Association of Bond Lawyers (``NABL'') 
(responding to Issuer Review of Asset in Offerings of Asset-Backed 
Securities, 75 FR 64182 (Oct. 19, 2010)). The comment letters are 
available at http://sec.gov/comments/s7-26-10/s72610.shtml.
    \524\ See comment letters from ABA and NABL.
    \525\ See comment letters from ABA and NABL.
    \526\ See comment letter from ABA.
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    In January 2011, the Commission adopted rules implementing Section 
7(d) of the Securities Act and, at the same time, deferred action on 
implementing Section 15E(s)(4)(A).\527\ After considering the comment 
letters relating to Section 15E(s)(4)(A), the Commission is re-
proposing Rule 15Ga-2 with revisions.\528\ As proposed in October 2010, 
Rule 15Ga-2 would have required issuers and underwriters of Exchange 
Act-ABS to file Form ABS-15G containing, or provide prospectus 
disclosure with respect to, the findings and conclusions of any report 
of a third-party engaged for purposes of performing a review of the 
pool assets obtained by the issuer or underwriter.\529\ As noted above, 
the Commission included this proposal in the context of rulemaking with 
respect to issuer review of assets required by Section 7(d) of the 
Securities Act.\530\
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    \527\ See Issuer Review of Assets in Offerings of Asset-Backed 
Securities, 76 FR 4231 (Jan. 25, 2011). Although the Commission 
deferred action on implementing Section 15E(s)(4)(A), the Commission 
adopted, in a separate release, new Form ABS-15G to implement 
Section 943 of the Dodd-Frank Act. See Disclosure for Asset-Backed 
Securities Required by Section 943 of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act, 76 FR 4489 (Jan. 26, 2011).
    \528\ See proposed new Rule 15Ga-2. The Commission also is 
proposing conforming amendments to Form ABS-15G.
    \529\ See Issuer Review of Assets in Offerings of Asset-Backed 
Securities, 75 FR at 64188-64190 (Oct. 19, 2010).
    \530\ See Issuer Review of Assets in Offerings of Asset-Backed 
Securities, 76 FR 4231 (Jan. 25, 2011).
---------------------------------------------------------------------------

    After reviewing the comments, the Commission now believes that 
Section 15E(s)(4)(A) of the Exchange Act, when considered in the 
context of Sections 15E(s)(4)(B), (C) and (D), should be interpreted 
more narrowly to relate to those provisions.\531\ Therefore, as re-
proposed, Rule 15Ga-2 would require an issuer or underwriter of any 
Exchange Act-ABS that is to be rated by an NRSRO to furnish a Form ABS-
15G on the EDGAR system containing the findings and conclusions of any 
third-party ``due diligence report'' obtained by the issuer or 
underwriter.\532\ The rule would define ``due diligence report'' as any 
report containing findings and conclusions relating to ``due diligence 
services'' as defined in proposed new Rule 17g-10 discussed below in 
Section II.H.2 of this release. Under the re-proposal, the disclosure 
would be furnished using Form ABS-15G for both registered and 
unregistered offerings of Exchange Act-ABS.\533\ Thus, unlike the 
October 2010 proposal, discussed above, issuers in registered Exchange 
Act-ABS offerings would not be required to include the disclosure in 
their prospectuses.
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    \531\ See 15 U.S.C 78o-7(s)(4)(A) through (D), which relate to 
due diligence performed by third-parties with respect to Exchange 
Act-ABS.
    \532\ See proposed new Rule 15Ga-2 and conforming changes to 
Form ABS-15G. For purposes of this rule, consistent with the 
definition of ``issuer'' in proposed new Rule 17g-10, the issuer is 
the depositor or sponsor that participates in the issuance of 
Exchange Act-ABS. See discussion below in Section II.H.2 of this 
release.
    \533\ The Commission is proposing that the form be deemed 
``furnished'' rather than ``filed'' for purposes of Section 18 of 
the Exchange Act (15 U.S.C. 78r) and the liabilities of that 
section, unless the issuer specifically states that the form be 
considered ``filed'' under the Exchange Act or incorporates it by 
reference into a filing under the Securities Act or the Exchange 
Act.
---------------------------------------------------------------------------

    In addition, under the Commission's re-proposal, an issuer or 
underwriter would not need to furnish Form ABS-15G if the issuer or 
underwriter obtains a representation from each NRSRO engaged to produce 
a credit rating for the Exchange Act-ABS that can be reasonably relied 
on that the NRSRO will publicly disclose the findings and conclusions 
of any third-party due diligence report obtained by the issuer or 
underwriter with the publication of the credit rating five business 
days prior to the first sale in the offering in an information 
disclosure form generated pursuant to proposed new paragraph

[[Page 33468]]

(a)(1) of Rule 17g-7.\534\ As discussed above in Section II.G.3 of this 
release, proposed new paragraph (a)(1)(ii)(F) of Rule 17g-7 would 
implement Section 15E(s)(3)(A)(v) of the Exchange Act by requiring an 
NRSRO to disclose in the form whether and to what extent third-party 
due diligence services were used by the NRSRO, a description of the 
information that such third party reviewed in conducting due diligence 
services, and a description of the findings or conclusions of such 
third-party. In addition, as discussed below in Section II.H.3 of this 
release, the Commission is proposing that the certification a provider 
of third-party due diligence services would need to provide to an NRSRO 
producing a credit rating for an Exchange Act-ABS pursuant to Section 
15E(s)(4)(B) and (C) include a summary of the findings and conclusions 
of the provider of third-party due diligence services.\535\ And, as 
discussed above in Section II.G.5 of this release, an NRSRO would be 
required to include the certification with the publication of the 
credit rating.\536\
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    \534\ See 15 U.S.C. 78o-7(s)(3)(A)(v). In this context, the 
Commission preliminarily believes that the term ``publicly 
disclose'' means make the findings and conclusions readily available 
to any users of credit ratings. Consequently, an NRSRO that agreed 
to make the findings and conclusions available only to its 
subscribers or prospective investors in the Exchange Act-ABS would 
not satisfy this proposed requirement.
    \535\ See Item 5 of proposed new Form ABS Due Diligence-15E.
    \536\ See proposed new paragraph (a)(2) of Rule 17g-7.
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    For these reasons, having the issuer and underwriter publicly 
disclose the same information an NRSRO must, when applicable, disclose 
pursuant to proposed new paragraphs (a)(1)(ii)(F) and (a)(2) of Rule 
17g-7 with the publication of a credit rating would be redundant. 
Moreover, as discussed earlier, potential investors in Exchange Act-ABS 
may be accustomed to receiving and reviewing expected or preliminary 
credit ratings issued by NRSROs prior to making an investment decision 
and proposed new paragraph (a) of Rule 17g-7 would require the form and 
any certifications to be included with the issuance of such credit 
ratings. Therefore, the Commission believes that an effective means of 
disseminating this information to investors and other users of credit 
ratings would be to include it with the publication of the credit 
rating. Also, because the form would contain substantial additional 
information, consolidating the information in one disclosure would 
benefit investors and other users of credit ratings.
    As noted above, the issuer or underwriter would not need to furnish 
Form ABS-15G if it obtained a representation from each NRSRO engaged to 
produce a credit rating upon which the issuer or underwriter could 
reasonably rely.\537\ The Commission preliminarily recognizes, however, 
that there may be instances where, notwithstanding an issuer's or 
underwriter's reasonable reliance on a representation by an NRSRO 
engaged to produce a credit rating to publicly disclose the required 
information, the NRSRO fails to make such information publicly 
available in its information disclosure form pursuant to proposed Rule 
17g-7(a)(1) five business days prior to the first sale in the 
offering.\538\ Therefore, the Commission proposes to require that an 
issuer or underwriter furnish, two business days prior to the first 
sale in the offering, Form ABS-15G with the information required by 
proposed Rule 15Ga-2 if the NRSRO fails to comply with its 
representation to make such information publicly available in an 
information disclosure form generated pursuant to proposed paragraph 
(a)(1) of Rule 17g-7 five business days prior to the first sale in the 
offering. Under the proposal, issuers or underwriters would be 
permitted to reasonably rely on a representation by an NRSRO to meet 
their obligation to publicly disclose the information required to be 
provided in Form ABS-15G. However, they would continue to be 
responsible for furnishing Form ABS-15G two business days prior to the 
first sale in the offering if the NRSRO does not publicly disclose the 
information five business days prior to the first sale in the offering.
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    \537\ The issuer or underwriter would be required to provide to 
the Commission, upon request, information regarding the manner in 
which it obtained the representation. The Commission notes that in 
most cases the NRSROs likely would have an independent obligation to 
disclose the information pursuant to the proposed amendments to Rule 
17g-7 and proposed new Rule 17g-10 and Form ABS Due Diligence-15E.
    \538\ The NRSRO's failure to disclose the certification would be 
a violation of proposed paragraph (a) of Rule 17g-7.
---------------------------------------------------------------------------

    This ``reasonable reliance'' provision would parallel requirements 
in paragraph (a)(3) of Rule 17g-5 that require an NRSRO to obtain 
certain representations from arrangers of structured finance products 
that hire the NRSRO to determine a credit rating for the structured 
finance product.\539\ When adopting this requirement the Commission 
stated, ``The question of whether reliance was reasonable will depend 
on the facts and circumstances of a given situation.'' \540\ The 
Commission further stated, ``The factors relevant to this analysis 
would include, but not be limited to: (1) Ongoing or prior failures by 
the arranger to adhere to the representations; or (2) a pattern of 
conduct by the arranger where it fails to promptly correct breaches of 
its representations.'' \541\ The Commission preliminarily believes that 
the same would hold true with respect to relying on the representations 
from NRSROs obtained for the purposes of proposed Rule 15Ga-2.
---------------------------------------------------------------------------

    \539\ See 17 CFR 17g-5(a)(3); see also Amendments to Rules for 
Nationally Recognized Statistical Rating Organizations, 74 FR at 
63844-63850 (Dec. 4, 2009).
    \540\ See Amendments to Rules for Nationally Recognized 
Statistical Rating Organizations, 74 FR at 63847 (Dec. 4, 2009).
    \541\ Id.
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    The Commission notes that Rule 193, adopted to implement Section 
7(d) of the Securities Act, requires issuers of registered Exchange 
Act-ABS to perform a review of the pool assets underlying the asset-
backed security.\542\ This review must be designed and effected to 
provide reasonable assurance that the prospectus disclosure regarding 
the pool assets is accurate in all material respects.\543\ Although 
third-party due diligence reports may be relevant to the review, 
neither Section 7(d) of the Securities Act nor Rule 193 ties the review 
to third-party due diligence reports.\544\ Rule 193 permits, though 
does not require, an issuer to rely on one or more third parties to 
fulfill its obligation to perform the required review.\545\
---------------------------------------------------------------------------

    \542\ See 17 CFR 230.193.
    \543\ Id.
    \544\ See 15 U.S.C. 77g(d) and 17 CFR 230.193.
    \545\ Id.
---------------------------------------------------------------------------

    The Commission recognizes Exchange Act-ABS issuers may routinely 
hire third-parties to conduct various types of reviews and believes 
that issuers may employ third parties to assist in satisfying their 
obligations to perform a review under Rule 193.\546\ The Commission 
also recognizes that an issuer of Exchange Act-ABS may obtain a third-
party due diligence report from a third party the issuer has engaged to 
assist in performing its Rule 193 review. Nonetheless, the Commission 
believes that the third-party due diligence reports referenced in 
Section 15E(s)(4) of the Exchange Act are not the same as the review 
required by Section 7(d) of the Securities Act and Rule 193.\547\ 
Instead, Section 15E(s)(4) of the Exchange Act and, consequently, 
proposed Rule 15Ga-2 relate to a

[[Page 33469]]

particular type of report that is relevant to the determination of a 
credit rating by an NRSRO. By contrast, Section 7(d) of the Securities 
Act and Rule 193 relate to a more general concept of an issuer review 
of the assets underlying an Exchange Act-ABS, one aspect of which may 
(or may not) include a third-party due diligence report. As a result, 
the treatment of due diligence reports under proposed Rule 15Ga-2 is 
not predicated on the use of third-party due diligence services to 
assist with reviews under Rule 193.\548\ For these reasons, the 
Commission also is proposing that Rule 15Ga-2 apply only with respect 
to Exchange-Act ABS that are to be rated by an NRSRO.\549\
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    \546\ The Commission also notes that an issuer may rely on 
multiple third-parties to fulfill its Rule 193 review obligation, 
provided the issuer complies with the requirements of Rule 193 for 
each third party.
    \547\ Compare 15 U.S.C. 77g(d) and 17 CFR 230.193, with 15 
U.S.C. 78o-7(s)(4).
    \548\ The Commission does not intend for all third-parties from 
whom the issuer obtains a third-party due diligence report, as 
defined in proposed Rule 15Ga-2, to be named in the registration 
statement and consent to being named as an expert, in accordance 
with the requirements in Rule 193, solely because an issuer files 
Form ABS-15G. If the issuer's prospectus disclosure attributes the 
findings and conclusions of the Rule 193 review to the third-party 
from whom it obtains a third-party due diligence report, however, 
the third-party would be required to be named in the registration 
statement and consent to being named as an expert in accordance with 
Rule 436 under the Securities Act.
    \549\ See proposed new Rule 15Ga-2.
---------------------------------------------------------------------------

    As noted above, the disclosure required by proposed Rule 15Ga-2 
would be required to be provided in Form ABS-15G. Unlike the first 
proposal, the Commission now proposes to require issuers in registered 
Exchange Act-ABS transactions to include the disclosure required by 
proposed Rule 15Ga-2 in Form ABS-15G, rather than in the prospectus. 
Whether the findings and conclusions of a third-party are part of the 
Rule 193 review and, therefore, included in the prospectus disclosure 
is dictated by the requirements of Rule 193 and Item 1111 of Regulation 
AB.\550\ The Commission is not proposing to separately require that 
disclosure provided in connection with Rule 15Ga-2 regarding any third-
party due diligence report be provided in the prospectus for a 
registered offering, because the information required by proposed Rule 
15Ga-2 only pertains to the findings and conclusions of a third-party 
due diligence report relevant to the determination of a credit rating.
---------------------------------------------------------------------------

    \550\ See 17 CFR 230.193 and 17 CFR 229.1111.
---------------------------------------------------------------------------

    As stated above, Section 15E(s)(4)(A) applies to issuers and 
underwriters of both registered and unregistered offerings of Exchange 
Act-ABS. Thus, proposed Rule 15Ga-2 would apply to a municipal entity 
that sponsors or issues Exchange Act-ABS (``municipal Exchange Act-
ABS'') or an underwriter of municipal Exchange Act-ABS, if the 
municipal entity or underwriter of the offering obtains a third-party 
due-diligence report, as defined by the proposed rule, and the 
municipal Exchange Act-ABS is to be rated by an NRSRO. Since Section 
15E(s)(4) relates to oversight of NRSROs, commenters to the first 
proposal noted that a significant difference between municipal Exchange 
Act-ABS and more typical Exchange Act-ABS is that the Municipal 
Securities Rulemaking Board \551\ collects and publicly disseminates 
market information and information about municipal securities issuers 
and offerings on its centralized public database, the Electronic 
Municipal Market Access system (``EMMA'').\552\ Consistent with 
suggestions from commenters and the Commission's approach in 
implementing Section 943 of the Dodd-Frank Act,\553\ the Commission 
proposes to permit municipal securitizers of Exchange Act-ABS, or 
underwriters in the offering, to provide the information required by 
Form ABS-15G on EMMA.\554\ The Commission believes this would limit the 
cost and burden on issuers and underwriters of municipal Exchange Act-
ABS subject to the new rule, as well as provide the disclosure for 
investors in the same location as other disclosures regarding municipal 
ABS. Since Section 15E(s)(4) relates to oversight of NRSROs and the 
ratings process, the Commission preliminarily believes it is not 
appropriate to exempt any particular issuers if they receive a rating 
for the securities.\555\
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    \551\ The MSRB, a self-regulatory organization subject to 
oversight by the Commission, regulates securities firms and banks 
that underwrite, trade and sell municipal securities.
    \552\ See comment letters from Minnesota Housing Finance Agency, 
NABL, and the National Council of State Housing Agencies (responding 
to proposals in Issuer Review of Assets in Offerings of Asset-Backed 
Securities, 75 FR 64182 (Oct. 19, 2010)).
    \553\ See Disclosure for Asset-Backed Securities Required by 
Section 943 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, 76 FR 4489 (Jan. 26, 2011).
    \554\ See proposed amendments to Rule 314 of Regulation S-T. 17 
CFR 232.314. A municipal securitizer is defined as a securitizer (as 
that term in defined in Section 15(G)(a) of the Exchange Act (---- 
U.S.C. ------)) that is any State or Territory of the United States, 
the District of Columbia, any political subdivision of any State, 
Territory, or the District of Columbia, or any public 
instrumentality of one or more States, Territories, or the District 
of Columbia.
    \555\ As noted earlier, the Commission is soliciting comment in 
Section II.M.4.a of this release with respect Items 6 and 7 of Form 
NRSRO about how certain types of obligors, securities, and money 
market instruments should be classified for purposes of providing 
the approximate number of credit ratings outstanding in each class 
of credit rating for which an applicant is seeking registration 
(Item 6) or an NRSRO is registered (Item 7). In this regard, the 
Commission solicits comment on whether municipal structured finance 
issuers should be classified as (1) issuers of asset-backed 
securities identified in Section 15E(a)(62)(A)(iv) of the Exchange 
Act as broadened to include any rated security or money market 
instrument issued by an asset pool or as part of any asset-backed 
securities transaction; or (2) issuers of government securities, 
municipal securities, or securities issued by a foreign government 
identified in Section 15E(a)(62)(A)(v) of the Exchange Act. The 
Commission is requesting comment on this matter with respect to 
disclosing the number of credit ratings outstanding in a particular 
class of credit ratings in Form NRSRO (and potentially for purposes 
of the proposed amendments to Exhibit 1 to Form NRSRO and the 
disclosure of information about the histories of credit ratings 
under proposed new paragraph (b) of Rule 17g-7). The Commission, in 
seeking comment on these matters, is not suggesting an issuer of 
municipal Exchange Act-ABS should be exempt from requirements in the 
securities laws that apply to Exchange Act-ABS because it might 
appropriately be classified as an issuer of government securities, 
municipal securities, or securities issued by a foreign government 
identified in Section 15E(a)(62)(A)(v) of the Exchange Act for 
purposes of Items 6 and 7 of Form NRSRO.
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    The Commission recognizes that public disclosure of information 
relating to an unregistered Exchange Act-ABS offering could raise 
concerns regarding the reliance by an issuer or underwriter on the 
private offering exemptions and safe harbors under the Securities 
Act.\556\ As noted above, the Commission intends for Form ABS-15G to be 
used for both registered and unregistered ABS offerings. The Commission 
is of the view that issuers and underwriters can disclose information 
required by Rule 15Ga-2 without jeopardizing reliance on those 
exemptions and safe harbors, provided the only information made 
publicly available on the form is that which is required by the 
proposed rule, and the issuer does not otherwise use Form ABS-15G to 
offer or sell securities in a manner that conditions the market for 
offers or sales of its securities.\557\
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    \556\ See 15 U.S.C. 77d(2), 17 CFR 230.144A, and 17 CFR 230.501-
508.
    \557\ Furnishing proposed Form ABS-15G would not foreclose the 
reliance of an issuer on the private offering exemption in the 
Securities Act and the safe harbor for offshore transactions from 
the registration provisions in Section 5. 15 U.S.C. 77e.
---------------------------------------------------------------------------

    The Commission is proposing that the disclosures--whether made by 
the engaged NRSROs or the issuer or underwriter--be made five business 
days prior to the first sale of the offering. Since the form an NRSRO 
would be required to include with a credit rating pursuant to proposed 
new paragraph (a) of Rule 17g-7 would not be required to be filed with 
the Commission, the Commission believes it would be consistent to 
permit issuers and underwriters to furnish, rather than file, Form ABS-
15G. The Commission proposes that Form ABS-15G be signed by the senior 
officer of the depositor in charge of securitization, if the form were 
provided to include the findings and conclusions of a third-party hired 
by the

[[Page 33470]]

issuer. The Commission believes that requiring the senior officer of 
the depositor in charge of securitization to sign the form is 
consistent with other signature requirements for filings relating to 
Exchange Act-ABS.\558\ If the form included the findings and 
conclusions of a third-party engaged by the underwriter, then the form 
would be signed by a duly authorized officer of the underwriter. The 
Commission believes that requiring Form ABS-15G be signed by a duly 
authorized officer of the underwriter would provide an incentive for 
the person who signs the form to review it for accuracy.
---------------------------------------------------------------------------

    \558\ See, e.g., signature requirement for Form 10-K (17 CFR 
249.312). It is also consistent with the Commission's proposed 
signature requirements for the registration statements for offerings 
of asset-backed securities. See Asset-Backed Securities, 75 FR 23328 
(May 3, 2010).
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of 
proposed new Rule 15Ga-2 and the proposed amendments to Form ABS-15G. 
The Commission also seeks comment on the following:
    1. Is proposed Rule 15Ga-2 appropriate? Is the proposed definition 
of ``third-party due diligence report'' appropriate? Is there an 
alternative definition that would be consistent with the requirements 
of Section 15E(s)(4)?
    2. The Commission is proposing to require disclosure regarding the 
findings and conclusions of third-party due diligence reports for both 
registered and unregistered transactions. Is there any reason Section 
15E(s)(4)(A) of the Exchange Act should not apply to both registered 
and unregistered Exchange Act-ABS transactions? If the requirement 
applies to both registered and unregistered transactions, should the 
universe of Exchange Act-ABS offerings that would be subject to the 
requirement be defined, as proposed, as an offering of Exchange Act-
ABS, as that term is defined in Section 3(a)(77) of the Exchange Act?
    3. Proposed Rule 15Ga-2 would apply only if the Exchange Act-ABS is 
to be rated by a NRSRO. Is that appropriate? \559\ Why or why not?
---------------------------------------------------------------------------

    \559\ For example, Fannie Mae and Freddie Mac are government 
sponsored enterprises (``GSEs'') that purchase mortgage loans and 
issue or guarantee mortgage-backed securities. Mortgage-backed 
securities issued or guaranteed by these GSEs have been, and 
continue to be, exempt from registration under the Securities Act 
and reporting requirements under Sections 13 or 15 of the Exchange 
Act. These securities have not been, and are not currently, rated by 
credit rating agencies.
---------------------------------------------------------------------------

    4. Should the Commission exempt any issuers, underwriters or other 
parties from this requirement? As proposed, Rule 15Ga-2 would apply to 
issuers and underwriters of Exchange Act-ABS that are exempted 
securities as defined in Section 3(a)(12) of the Exchange Act, 
including government securities and municipal securities. Should 
issuers or underwriters of such exempted securities be exempt from this 
provision? \560\ Is the proposed accommodation for municipal Exchange 
Act-ABS appropriate?
---------------------------------------------------------------------------

    \560\ Exchange Act ``exempted securities'' include government 
securities and municipal securities, as defined under the Exchange 
Act. For example, mortgage-backed securities issued by the 
Government National Mortgage Association are fully modified pass-
through securities guaranteed by the full faith and credit of the 
United States government. See http://www.ginniemae.gov/.
---------------------------------------------------------------------------

    5. Is the proposal to not require the issuer or underwriter to 
furnish Form ABS-15G if it obtains the necessary representations from 
the NRSROs engaged to produce credit ratings for the Exchange Act-ABS 
appropriate? For example, would investors and other users of credit 
ratings benefit from having issuers and underwriters and NRSROs 
disclose the findings and conclusions of the provider of third-party 
due diligence services? In addition, would NRSROs engaged to determine 
a credit rating for an Exchange Act-ABS agree to make the disclosure? 
Could potential concerns among NRSROs about making the disclosure be 
addressed by permitting them to rely on the disclosure the provider of 
third-party due diligence services would need to make about the 
findings and conclusions of the review in Item 5 of proposed new Form 
Due Diligence-15E discussed below in Section II.H.3 of this release?
    Under proposed Rule 15Ga-2, an issuer or underwriter would not be 
required to furnish Form ABS-15G if it receives a representation from 
an NRSRO that can be reasonably relied upon that the NRSRO will 
publicly disclose the required information five business days prior to 
the first sale in the offering in an information disclosure form 
generated pursuant to Rule 17g-7(a)(1). Should the Commission, as 
proposed, also require an issuer or underwriter to furnish Form ABS-15G 
if the NRSRO fails to publicly disclose in an information disclosure 
form the required disclosure five business days prior to the first sale 
in the offering? If so, should the issuer or underwriter be required, 
as proposed, to furnish Form ABS-15G two business days prior to the 
first sale in the offering? Should the requirement instead be three 
days before? Alternatively, should the Commission require that the 
issuer or underwriter wait another five business days after furnishing 
Form ABS-15G before the first sale? If not, how long in advance of the 
first sale should issuers or underwriters be required to furnish Form 
ABS-15G? Should an issuer or underwriter not be required to furnish 
Form ABS-15G two business days prior to the first sale in the offering 
if the NRSRO fails to publicly disclose the required information five 
business days prior to the first sale, but does publicly disclose the 
information on the fourth or third business day prior to the first sale 
since an issuer's or underwriter's furnishing in that case would result 
in duplicative disclosure? If so, how could an NRSRO be properly 
incentivized to publicly disclose the required information five 
business days prior to the first sale in the offering?
    6. Does the proposal to require an issuer or underwriter to furnish 
Form ABS-15G in the event that the NRSRO fails to fulfill its 
representation offset the effectiveness or benefit of the proposal to 
permit issuers and underwriters to reasonably rely on a representation 
from an NRSRO?
    7. Under the proposal, the issuer or underwriter would be required 
to provide to the Commission, upon request, information regarding the 
manner in which it obtained the representation of the NRSRO engaged to 
produce credit ratings. Are there any other provisions that should be 
added to ensure compliance with the proposal not to require the issuer 
or underwriter to furnish Form ABS-15G if it obtains the necessary 
representations from the NRSRO?
    8. Are there other appropriate means of making the findings and 
conclusions of third-party due diligence reports ``publicly available'' 
as required by Section 15E(s)(4)(A) of the Exchange Act? Is furnishing 
information regarding the findings and conclusions of the report of the 
provider of third-party due diligence services on proposed Form ABS-15G 
on EDGAR (except with respect to offerings of municipal Exchange Act-
ABS) an appropriate way for issuers in unregistered offerings and for 
underwriters in registered and unregistered offerings to make this 
information publicly available? Should the Form ABS-15G be required to 
be filed instead?
    9. Would the proposed requirement that Form ABS-15G be furnished 
five business days prior to first sale provide investors with 
sufficient time to review the findings and conclusions contained 
therein? Would it provide NRSROs with sufficient time to take the 
included information into account in determining a rating? If not, what 
would be a more appropriate deadline and why? Are five business days 
also appropriate in

[[Page 33471]]

unregistered offerings? Is there reason to require a different number 
of days in unregistered offerings?
    10. Is the proposed signature requirement for Form ABS-15G 
appropriate? Is it necessary? Conversely, are there other appropriate 
individuals that are better suited to sign the form?
    11. Should issuers of registered Exchange Act-ABS offerings be 
required to furnish the information required by proposed Rule 15Ga-2 on 
Form ABS-15G and not be required to provide the information in a 
prospectus that is filed with the Commission, as proposed? Why or why 
not?
2. Proposed New Rule 17g-10
    As noted above, Section 15E(s)(4)(C) of the Exchange Act provides 
that the Commission shall establish the appropriate format and content 
for the written certifications required under Section 15E(s)(4)(B), to 
ensure that providers of due diligence services have conducted a 
thorough review of data, documentation, and other relevant information 
necessary for an NRSRO to provide an accurate rating for an Exchange 
Act-ABS.\561\ The Commission preliminarily believes providers of third-
party due diligence services most commonly are hired by issuers and 
underwriters to perform reviews of pools of mortgages that will be 
securitized into an RMBS; accordingly, the following discussion of 
proposed Rule 17g-10 and Form ABS Due Diligence-15E centers on 
RMBS.\562\ The proposed rule and form, however, would apply to all 
Exchange Act-ABS. Generally, in the RMBS context, the provider of 
third-party due diligence services is hired by the entity (e.g., the 
underwriter, sponsor, or depositor) purchasing the pool of mortgage 
loans for the purpose of securitizing them.\563\ In conducting a 
review, the provider of third-party due diligence services analyzes a 
sample (for example, 25%) of the loans in the pool for one or more of 
the following purposes: (1) To assess the quality of the loan-by-loan 
data in the electronic file (``loan-tape'') that aggregates the 
information for the pool by comparing the information on the loan tape 
for each loan in the sample with the information contained on the hard-
copy documents in the loan file; (2) to determine whether each loan in 
the sample adheres to the underwriting guidelines of the loan 
originator; (3) to assess the validity of the appraised value of the 
property indicated on the loan tape that collateralizes each loan in 
the sample; and (4) to determine whether the originator complied with 
Federal, state, and local laws in making each loan in the sample. The 
NRSROs most active in rating RMBS have incorporated requirements for 
the engagement of providers of third-party due diligence services by 
the entities requesting such ratings (for example, the underwriter or 
sponsor of the RMBS) into their procedures and methodologies for 
determining RMBS credit ratings.\564\ Moreover, the procedures and 
methodologies of these NRSROs prescribe the minimum scope and manner of 
the review of the provider of third-party due diligence services 
necessary to obtain a credit rating for the RMBS, including the minimum 
sample size of the loans to be selected from the pool.\565\
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    \561\ See 15 U.S.C. 78o-7(s)(4)(C).
    \562\ See, e.g., Testimony of Vicki Beal, Senior Vice President, 
Clayton Holdings, before the Financial Crisis Inquiry Commission 
(Sept. 23, 2010).
    \563\ Id.
    \564\ See, e.g., US RMBS Ratings Criteria, Fitch, Inc. 
(``Fitch'') (Dec. 3, 2009) (``In addition to Fitch's originator/
issuer review and ResiLogic loan-level asset analysis of the 
mortgage pool, Fitch will require third-party loan-level reviews on 
all residential mortgage pools that Fitch is asked to rate. The 
reviews will be conducted by a ``due diligence'' company (review 
company) prior to Fitch providing a rating on the transaction.''); 
Criteria for Evaluating Independent Third-Party Loan Level Reviews 
for US RMBS, Moody's Investors Service, Inc. (``Moody's'') (Nov. 24, 
2008) (``Moody's will not rate a transaction unless it has received 
a report from the third-party review firm as to the TPR scope, 
procedure and findings. The report must include a narrative summary 
of the review and an initial TPR findings report.''); Incorporating 
Third-Party Due Diligence Results Into The U.S. RMBS Rating Process, 
Standard & Poor's Ratings Services (``S&P'') (Nov. 25, 2008) 
(``Standard & Poor's believes that using third-party due diligence 
results in our rating analysis will increase transparency and 
strengthen the rating process. Our due diligence review ratings 
criteria will be effective Dec. 1, 2008, and are intended to 
increase our insight into the quality and validity of the 
information used to originate the mortgage loans pooled into 
securities.'').
    \565\ For example, for established originators and loan 
programs, Fitch requires the randomly selected minimum sample size 
to be the larger of 200 loans or 10% of the pool for prime loans and 
the larger of 400 loans or 20% of the pool for Alt-A/subprime and 
all other product types. Moreover, if originators or their loan 
programs have had less than two years of performance history, Fitch 
requires that the sample size should be doubled. Moody's defines its 
minimum sample size through statistical techniques. Specifically, 
Moody's requires that the sample size must not be less than that 
computed using a 95% confidence level, a 5% precision level, and an 
assumed error rate equal to the higher of the historic error rate 
for the originator or a Minimum Assumed Error Rate. S&P requires a 
sample that is the greater of either the number of loans needed for 
a statistically valid sample, or a 10% random sample for subprime 
and 5% sample for prime. At a minimum, S&P states that the number of 
loans in the sample should be 200 for subprime, and 100 for prime. 
S&P defines a statistically valid sample as the number of loans 
based on a 5% one-tailed level of significance with a 2% level of 
precision. S&P also expects that the number of loans in the sample 
also will be a function of an estimate of an error rate.
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    To implement the rulemaking mandated by Section 15E(s)(4)(C) of the 
Exchange Act, the Commission is proposing new Rule 17g-10 and related 
Form ABS Due Diligence-15E.\566\ Proposed new Rule 17g-10 would contain 
three paragraphs: (a), (b) and (c).\567\ Proposed paragraph (a) would 
provide that the written certification required pursuant to Section 
15E(s)(4)(B) of the Exchange Act must be on Form ABS Due Diligence-
15E.\568\ In other words, a provider of third-party due diligence 
services would need to use Form ABS Due Diligence-15E to meet the 
requirement in Section 15E(s)(4)(B) of the Exchange Act.\569\
---------------------------------------------------------------------------

    \566\ See proposed new Rule 17g-10 and new Form ABS Due 
Diligence-15E.
    \567\ See proposed paragraphs (a), (b) and (c) of Rule 17g-10.
    \568\ See proposed paragraph (a) of new Rule 17g-10.
    \569\ See 15 U.S.C. 78o-7(s)(4)(B) and proposed paragraph (a) of 
new Rule 17g-10.
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    Proposed paragraph (b) of new Rule 17g-10 would provide that the 
written certification must be signed by an individual who is duly 
authorized by the person providing the third-party due diligence 
services to make such a certification.\570\ This proposal is designed 
to ensure that the person executing the certification on behalf of the 
provider of third-party due diligence services has responsibilities 
that will make the person aware of the basis for the information being 
provided in the form. This proposed requirement parallels paragraph (b) 
of Rule 17g-3, which requires an NRSRO to attach to the financial 
reports required by that rule a signed statement by a duly authorized 
person associated with the NRSRO stating, among other things, that the 
person has responsibility for the financial reports.\571\
---------------------------------------------------------------------------

    \570\ See proposed paragraph (b) of Rule 17g-10.
    \571\ See 17 CFR 240.17g-3(b).
---------------------------------------------------------------------------

    Proposed paragraph (c) of new Rule 17g-10 would contain four 
definitions to be used for the purposes of Section 15E(s)(4)(B) and 
Rule 17g-10.\572\ Proposed paragraph (c)(1) would define the meaning of 
``due diligence services.'' \573\ The Commission preliminarily believes 
such a definition is necessary because, while the requirements of 
Section 15E(s)(4)(B) are triggered, among other things, by providing 
due diligence services, the Dodd-Frank Act does not define the type of 
activities that constitute ``due diligence services'' in the Exchange 
Act-

[[Page 33472]]

ABS context.\574\ Consequently, the Commission preliminarily believes a 
definition would provide guidance to those entities providing due 
diligence services as to when the requirements of the statute and 
proposed new Rule 17g-10 would apply. In addition, a definition could 
help avoid overly broad interpretations of the meaning of ``due 
diligence services'' that cause entities not providing due diligence 
services to needlessly provide certifications to NRSROs.
---------------------------------------------------------------------------

    \572\ See proposed paragraph (c) of new Rule 17g-10 and 15 
U.S.C. 78o-7(s)(4)(B).
    \573\ See proposed paragraph (c)(1) of new Rule 17g-10.
    \574\ See 15 U.S.C. 78o-7(s)(4)(B).
---------------------------------------------------------------------------

    The Commission intends the definition of ``due diligence services'' 
in the Exchange Act-ABS context to cover services provided by entities 
typically considered to be providers of third-party due diligence 
services in the securitization market and does not intend it to cover 
every type of person that might perform some type of diligence in the 
offering process. As discussed below, the Commission believes that the 
scope of Section 15E(s)(4)(A) is intended to address third-party due 
diligence reports obtained by issuers or underwriters from these 
specialized providers of due diligence services that are relevant to 
the determination of a credit rating for an Exchange Act-ABS by an 
NRSRO.
    The Commission preliminarily believes, as discussed above, there 
are four categories of reviews undertaken by entities commonly 
understood as providers of third-party due diligence services for 
issuances of RMBS that NRSROs have deemed relevant for determining 
credit ratings for such Exchange Act-ABS.\575\ Consequently, the 
proposed definition would identify each of the four categories. In 
addition, because the Commission's understanding of due diligence 
services largely is based on such services as applied to pools of 
mortgage loans, the Commission is proposing a catchall component to the 
proposed definition.\576\ The proposed catchall would be designed to 
apply to due diligence services used for pools of other asset classes 
(e.g., commercial loans, corporate loans, student loans, or credit card 
receivables) to the extent that providers of third-party due diligence 
services currently provide or in the future begin providing due 
diligence services with respect to other asset classes and those 
services, because of the different nature of the assets, do not fall 
into one of the four other categories.
---------------------------------------------------------------------------

    \575\ See, e.g., US RMBS Ratings Criteria, Fitch (Dec. 3, 2009), 
Criteria for Evaluating Independent Third-Party Loan Level Reviews 
for US RMBS, Moody's (Nov. 24, 2008), Incorporating Third-Party Due 
Diligence Results Into The U.S. RMBS Rating Process, S&P (Nov. 25, 
2008).
    \576\ See proposed paragraph (c)(1)(v) of new Rule 17g-10.
---------------------------------------------------------------------------

    Under the Commission's proposed definition of ``due diligence 
services,'' an entity would be deemed to have provided ``due diligence 
services'' if it engaged in a review of the assets underlying an 
Exchange Act-ABS for the purpose of making findings with respect to any 
one of the five types of activities identified in proposed paragraphs 
(c)(1)(i) through (v) of new Rule 17g-10 (i.e., the components of the 
proposed definition would be disjunctive).\577\ The first category of 
``due diligence service'' would be identified in proposed paragraph 
(c)(1)(i) of new Rule 17g-10 as a review of the assets underlying an 
Exchange Act-ABS for the purpose of making findings with respect to the 
quality or integrity of the information or data about the assets 
provided, directly or indirectly, by the securitizer or originator of 
the assets.\578\ This type of review could entail comparing the data on 
loan-tape with the data on the hard-copy documentation in an underlying 
sampled loan file to verify that the loan-tape data matches and 
correctly represents the content of the loan file under review.\579\ 
The provider of due diligence services would need to note any 
differences (exceptions) between the loan-tape data and the information 
in the loan file. This type of review also could entail verifying that 
the loan-tape contains all the information about the underlying assets 
the NRSRO requires for the purpose of determining a credit rating and 
whether that information is presented in the format required by the 
NRSRO.\580\ For example, some NRSROs may specify items of data (``data 
fields'') about a mortgage loan that must be included on the loan tape 
for an RMBS such as occupancy status, property type, loan purpose, 
documentation type, current FICO score of the borrower, combined 
original loan to value ratio, total debt-to-income ratio, and zip code 
of the residence.\581\
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    \577\ See proposed paragraphs (c)(1)(i)-(v) of new Rule 17g-10.
    \578\ See proposed paragraphs (c)(1)(i) of new Rule 17g-10.
    \579\ See, e.g., US RMBS Ratings Criteria, Fitch (Dec. 3, 2009).
    \580\ Id.
    \581\ See, e.g., Incorporating Third-Party Due Diligence Results 
Into The U.S. RMBS Rating Process, S&P (Nov. 25, 2008).
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    The second category of ``due diligence service'' would be 
identified in proposed paragraph (c)(1)(ii) of new Rule 17g-10 as a 
review of the assets underlying an Exchange Act-ABS for the purpose of 
making findings with respect to whether the origination of the assets 
conformed to stated underwriting or credit extension guidelines, 
standards, criteria, or other requirements.\582\ This type of review 
could entail reviewing whether a sampled loan meets the originator's 
underwriting guidelines or, if not, that the originator provided a 
reasonable and documented exception to support the decision to make the 
loan.\583\ This type of review also could entail how the originator 
verified information in a sampled loan underlying an RMBS such as the 
borrower's occupancy status with respect to the residence (e.g., 
primary residence, second home, or rental property), the borrower's 
income, the borrower's assets, and the borrower's employment 
status.\584\
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    \582\ See proposed paragraphs (c)(1)(ii) of new Rule 17g-10.
    \583\ See, e.g., Criteria for Evaluating Independent Third-Party 
Loan Level Reviews for US RMBS, Moody's (Nov. 24, 2008).
    \584\ See, e.g., Incorporating Third-Party Due Diligence Results 
Into The U.S. RMBS Rating Process, S&P (Nov. 25, 2008).
---------------------------------------------------------------------------

    The third category of ``due diligence service'' would be identified 
in proposed paragraph (c)(1)(iii) of new Rule 17g-10 as a review of the 
assets underlying an Exchange Act-ABS for the purpose of making 
findings with respect to the value of collateral securing such 
assets.\585\ This type of review could entail analyzing how the 
originator verified the value of the asset. For example, for an RMBS, 
an NRSRO might require that the review consider the quality of the 
appraiser of the property and the quality of the appraisal.\586\ This 
could include reviewing whether the appraiser used a valuation 
model.\587\ It also could require the provider of third-party due 
diligence services to separately use a valuation model if the reviewer 
believes that the original appraised value of the property is less than 
the value presented by the originator.\588\
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    \585\ See proposed paragraphs (c)(1)(iii) of new Rule 17g-10.
    \586\ See, e.g., Criteria for Evaluating Independent Third-Party 
Loan Level Reviews for US RMBS, Moody's (Nov. 24, 2008).
    \587\ Id.
    \588\ Id.
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    The fourth category of ``due diligence service'' would be 
identified in proposed paragraph (c)(1)(iv) of new Rule 17g-10 as a 
review of the assets underlying an Exchange Act-ABS for the purpose of 
making findings with respect to whether the originator of the assets 
complied with Federal, state, or local laws or regulations.\589\ This 
type of review could entail--with respect to an RMBS--analyzing legal 
documentation

[[Page 33473]]

in a sampled loan file to verify the loan was made in conformance with, 
for example, with ``truth-in-lending'' regulations such as Regulation 
Z.\590\
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    \589\ See proposed paragraphs (c)(1)(iv) of new Rule 17g-10.
    \590\ See 12 CFR 226.1 et seq.
---------------------------------------------------------------------------

    The fifth category of ``due diligence services''--the catchall--
would be identified in proposed paragraph (c)(1)(v) of new Rule 17g-10 
as a review of the assets underlying an Exchange Act-ABS for the 
purpose of making findings with respect to any other factor or 
characteristic of such assets that would be material to the likelihood 
that the issuer of the Exchange Act-ABS will pay interest and principal 
according to its terms and conditions.\591\ The Commission 
preliminarily believes that findings relevant to whether the issuer of 
the Exchange Act-ABS will pay interest and principal according to its 
terms and conditions (i.e., not default) would be relevant to 
determining a credit rating given that the statutory definition of 
``credit rating'' is ``an assessment of the creditworthiness of an 
obligor as an entity or with respect to specific securities or money 
market instruments.'' \592\ The Commission also preliminarily believes 
that reviews of the assets underlying an Exchange Act-ABS that are 
designed to generate findings that would not be relevant to determining 
a credit rating would be outside the scope of proposed catchall 
definition and, therefore, outside the scope of Section 15E(s)(4)(B) of 
the Exchange Act and Rule 17g-10.\593\
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    \591\ See proposed paragraphs (c)(1)(v) of new Rule 17g-10.
    \592\ See 15 U.S.C. 78c(60).
    \593\ See 15 U.S.C. 78o-7(s)(4)(B) and proposed new Rule 17g-10.
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    Proposed paragraph (c)(2) of new Rule 17g-10 would define the term 
``issuer'' as including a sponsor, as defined in 17 CFR 229.1011, or 
depositor, as defined in 17 CFR 229.1011, that participates in the 
issuance of an Exchange Act-ABS.\594\ The Commission preliminarily 
believes this definition is necessary because the requirements of 
Section 15E(s)(4)(B) of the Exchange Act are triggered, among other 
things, when third-party due diligence services are employed by an 
``issuer.'' \595\ The term ``issuer'' could be interpreted by entities 
subject to Section 15E(s)(4)(B) of the Exchange Act and new Rule 17g-10 
as meaning the legal entity issuing the Exchange Act-ABS. However, the 
issuer of an Exchange Act-ABS typically is a passive entity such as a 
statutory trust. Consequently, a sponsor initiates an Exchange Act-ABS 
transaction by selling or pledging to a specially created issuing 
entity a group of financial assets that the sponsor either has 
originated itself or has purchased in the secondary market. In some 
instances, the transfer of assets is a two-step process: the financial 
assets are transferred by the sponsor first to an intermediate entity, 
the depositor, and then the depositor transfers the assets to the 
issuing entity for the particular transaction. Because the issuer is 
passive, the sponsor, depositor, or underwriter would be more likely to 
employ a provider of third-party due diligence services. Consequently, 
if the term ``issuer'' were narrowly interpreted to mean the passive 
entity, the objectives of Section 15E(s)(4)(B) of the Exchange Act 
potentially could be undermined in that the requirement to make the 
disclosure would not be triggered.
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    \594\ See proposed paragraph (c)(2) of new Rule 17g-10. The 
Commission interprets the term ``issuer'' in Section 15G(a)(3)(A) of 
the Exchange Act to refer to the depositor of an asset-backed 
security. This treatment is consistent with the Commission's 
historical regulatory approach to that term, including the 
Securities Act and the rules promulgated under the Securities Act 
and the Exchange Act. See, e.g., 17 CFR 230.191 and 17 CFR 240.3b-
19.
    \595\ See 15 U.S.C. 78o-7(s)(4)(B).
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    The Commission is proposing to define the terms ``originator'' and 
``securitizer'' in proposed paragraphs (c)(3) and (c)(4), respectively, 
of new Rule 17g-10 because the proposed definition of ``due diligence 
services'' in proposed paragraph (c)(1) would use those terms.\596\ The 
Commission preliminarily believes defining these terms would provide 
greater clarity as to the proposed meaning of ``due diligence 
services.'' Moreover, Section 941 of the Dodd-Frank Act added new 
Section 15G of the Exchange Act.\597\ Section 15G(a) contains 
definitions of ``originator'' and ``securitizer'' to be used for the 
purposes of that section.\598\ Consequently, there are existing 
definitions the Commission can utilize for the purposes of new Rule 
17g-10. For these reasons, proposed paragraph (c)(3) of new Rule 17g-10 
would provide that the term ``originator'' has the same meaning as in 
Section 15G of the Exchange Act (15 U.S.C. 78o-9).\599\ Similarly, 
proposed paragraph (c)(4) of new Rule 17g-10 would provide that the 
term ``securitizer'' has the same meaning as in Section 15G of the 
Exchange Act (15 U.S.C. 78o-9).\600\
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    \596\ See proposed paragraphs (c)(3) and (c)(4) of new Rule 17g-
10; see also proposed paragraphs (c)(1)(i) and (iv) using the term 
``originator'' and proposed paragraph (c)(1)(i) using the term 
``securitizer.''
    \597\ See Public Law 111-203 Sec.  941 and 15 U.S.C. 78o-9.
    \598\ See 15 U.S.C. 78o-9(a)(3) and (4).
    \599\ See proposed paragraph (c)(3) of new Rule 17g-10. Section 
15G(a)(4) of the Exchange Act defines the term ``originator'' to 
mean ``a person who--(A) through the extension of credit or 
otherwise, creates a financial asset that collateralizes and asset-
backed security; and (B) sells an asset directly or indirectly to a 
securitizer.'' See 15 U.S.C. 78o-9(a)(4).
    \600\ See proposed paragraph (c)(4) of new Rule 17g-10. Section 
15G(a)(3) of the Exchange Act defines the term ``securitizer'' to 
mean: ``(A) an issuer of an asset-backed security; or (B) a person 
who organizes and initiates an asset-backed securities transaction 
by selling or transferring assets, either directly or indirectly, 
including through an affiliate, to the issuer.'' See 15 U.S.C. 78o-
9(a)(3).
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Request for Comment
    The Commission generally requests comment on all aspects of 
proposed new Rule 17g-10. The Commission also seeks comment on the 
following:
    1. The Commission understands that ``provider of third-party due 
diligence services'' is a phrase used as a term of art in the 
securitization market, and the proposed rules are intended to apply to 
those entities that are commonly identified by that term. Would the 
proposed definition of ``due diligence services'' provide sufficient 
guidance to those entities providing due diligence services as to when 
the requirements of the self-executing provision in Section 
15E(s)(4)(B) and proposed new Rule 17g-10 would apply? How could the 
proposal be modified to provide clearer guidance?
    2. Should, as proposed, the definition of ``due diligence 
services'' apply to Exchange Act-ABS only or should it apply more 
broadly to structured finance products? If it should apply more 
broadly, what types of structured finance products that are not 
Exchange Act-ABS should the definition include within its scope? In 
addition, are providers of third-party due diligence services used with 
respect to these types of structured finance products? If so, explain 
how the results of those services are relevant to the determination of 
a credit rating?
    3. Does the first category of ``due diligence service'' identified 
in proposed paragraph (c)(1)(i) of new Rule 17g-10 (i.e., a review of 
the assets underlying an Exchange Act-ABS for the purpose of making 
findings with respect to the quality or integrity of the information or 
data about the assets provided, directly or indirectly, by the 
securitizer or originator of the assets) appropriately describe a form 
of due diligence service for Exchange Act-ABS that is provided to 
issuers or underwriters by a provider of third-party due diligence 
services? For example, is this component of the definition too broad or 
narrow? If so, how should this component of the definition be refined? 
Alternatively, should it be omitted from the definition as reflecting 
activity that is not a third-party due diligence service?

[[Page 33474]]

    4. Does the second category of ``due diligence service'' identified 
in proposed paragraph (c)(1)(ii) of new Rule 17g-10 (i.e., a review of 
the assets underlying Exchange Act-ABS for the purpose of making 
findings with respect to whether the origination of the assets 
conformed to underwriting or credit extension guidelines, standards, 
criteria or other requirements) appropriately describe a form of due 
diligence service for Exchange Act-ABS that is provided to issuers or 
underwriters by a provider of third-party due diligence services? For 
example, is this component of the definition too broad or narrow? If 
so, how should this component of the definition be refined? 
Alternatively, should it be omitted from the definition as reflecting 
activity that is not a third-party due diligence service?
    5. Does the third category of ``due diligence service'' identified 
in paragraph (c)(1)(iii) of new Rule 17g-10 (i.e., a review of the 
assets underlying an Exchange Act-ABS for the purpose of making 
findings with respect to the value of collateral securing such assets) 
appropriately describe a form of due diligence service for Exchange 
Act-ABS that is provided to issuers or underwriters by a provider of 
third-party due diligence services? For example, is this component of 
the definition too broad or narrow? If so, how should this component of 
the definition be refined? Alternatively, should it be omitted from the 
definition as reflecting activity that is not a third-party due 
diligence service?
    6. Does the fourth category of ``due diligence service'' identified 
in paragraph (c)(1)(iv) of new Rule 17g-10 (i.e., a review of the 
assets underlying an Exchange Act-ABS for the purpose of making 
findings with respect to whether the originator of the assets complied 
with Federal, state or local laws or regulations) appropriately 
describe a form of due diligence service for Exchange Act-ABS that is 
provided to issuers or underwriters by a provider of third-party due 
diligence services? For example, is this component of the definition 
too broad or narrow? If so, how should this component of the definition 
be refined? Alternatively, should it be omitted from the definition as 
reflecting activity that is not a third-party due diligence service?
    7. Would the catchall component of the definition of ``due 
diligence services'' identified in proposed paragraph (c)(1)(v) of new 
Rule 17g-10 (i.e., a review of the assets underlying an Exchange Act-
ABS for the purpose of making findings with respect to any other factor 
or characteristic of such assets that would be material to the 
likelihood that the Exchange Act-ABS will pay interest and principal 
according to its terms and conditions) adequately capture existing or 
future third-party due diligence services not identified in proposed 
paragraphs (c)(1)(i) through (iv) of new Rule 17g-10? For example, is 
this component of the definition too broad or narrow? If so, how should 
this component of the definition be refined? Alternatively, should it 
be omitted from the definition?
    8. Are there other types of due diligence services for Exchange 
Act-ABS provided to issuers or underwriters by a provider of third-
party due diligence services that are not identified in the 
Commission's proposed definition that should be included? For example, 
would the proposed definitions capture third-party due diligence 
services provided with respect to an Exchange Act-ABS after it has been 
issued? If proposed definitions would not capture due diligence 
services provided post-issuance or any other services commonly 
understood as third-party due diligence services, describe such 
services and provide suggested rule text for how they could be 
incorporated into the definition. Also, provide an explanation as to 
how such services would be relevant to the determination of a credit 
rating.
    9. Would the inclusion of the proposed definition of ``issuer'' in 
new Rule 17g-10 identify the types of entities that should trigger the 
requirements of the proposed rule? For example, is the proposed 
definition too broad or narrow? If so, how should the proposed 
definition be refined?
    10. Would the inclusion of the proposed definition of 
``originator'' in new Rule 17g-10 identify the types of entities that 
should trigger the requirements of the proposed rule? For example, is 
the proposed definition too broad or narrow? If so, how should the 
proposed definition be refined?
    11. Would the inclusion of the proposed definition of 
``securitizer'' in new Rule 17g-10 identify the types of entities that 
should trigger the requirements of the proposed rule? For example, is 
the proposed definition too broad or narrow? If so, how should the 
proposed definition be refined?
3. Proposed Form ABS Due Diligence-15E
    Section 15E(s)(4)(C) of the Exchange Act specifies that the 
Commission shall establish the appropriate format and content for the 
written certifications required under Section 15E(s)(4)(B), to ensure 
that providers of due diligence services have conducted a thorough 
review of data, documentation, and other relevant information necessary 
for an NRSRO to provide an accurate rating.\601\ The Commission is 
proposing to prescribe the format of the certification in Form ABS Due 
Diligence-15E.\602\ The proposed form would contain five line items 
identifying information the provider of third-party due diligence 
services would need to set forth in the form. It also would contain a 
signature line with a corresponding representation.\603\
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    \601\ See 15 U.S.C. 78o-7(s)(4)(C).
    \602\ See proposed new Rule 17 CFR 249b.400 and proposed Form 
ABS Due Diligence-15E.
    \603\ Id.
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    Item 1 of proposed Form ABS Due Diligence-15E would elicit the 
identity and address of the provider of third-party due diligence 
services.\604\ This would notify users of the certification as to which 
third party conducted the review described in the certification. Item 2 
of proposed Form ABS Due Diligence-15E would elicit the identity and 
address of the issuer, underwriter, or NRSRO that employed the provider 
of third party due diligence services.\605\ This would notify users of 
the certification as to the person that employed the third-party to 
conduct the review described in the certification.
---------------------------------------------------------------------------

    \604\ See Item 1 to proposed Form ABS Due Diligence-15E.
    \605\ See Item 2 to proposed Form ABS Due Diligence-15E.
---------------------------------------------------------------------------

    Item 3 of proposed Form ABS Due Diligence-15E would instruct the 
provider of third-party due diligence services to identify each NRSRO 
whose published criteria for performing due diligence the third party 
satisfied in performing the due diligence review.\606\ As noted above, 
the NRSROs most active in rating RMBS have incorporated into their 
procedures and methodologies for determining RMBS credit ratings 
minimum steps a provider of third party due diligence services must 
take in conducting due diligence.\607\ Consequently, the instructions 
for Item 3 would provide that if the manner and scope of the due 
diligence provided by the third party satisfied the criteria for due 
diligence published by an NRSRO, the third party should identify the 
NRSRO and the title and date of the published criteria in a table 
provided on the form.\608\ The table and instructions would permit the 
identification of more

[[Page 33475]]

than one NRSRO.\609\ This would allow the third party to reflect in a 
single form that it conducted due diligence services in a manner that 
satisfied the due diligence requirements of multiple NRSROs. As such, 
Item 3 would be designed to elicit a representation from the provider 
of the third-party due diligence services that it satisfied a given 
NRSRO's published due diligence standards.
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    \606\ See Item 3 to proposed Form ABS Due Diligence 15E.
    \607\ See, e.g., US RMBS Ratings Criteria, Fitch (Dec. 3, 2009) 
Criteria for Evaluating Independent Third-Party Loan Level Reviews 
for US RMBS, Moody's (Nov. 24, 2008) Incorporating Third-Party Due 
Diligence Results Into the U.S. RMBS Rating Process, S&P (Nov. 25, 
2008).
    \608\ Id.
    \609\ Id.
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    Items 4 and 5 of proposed Form ABS Due Diligence-15E would require 
the provider of the third-party due diligence services to describe, 
respectively: (1) The scope and manner of the due diligence performed; 
and (2) the findings and conclusions resulting from the review. The 
instructions for Items 4 and 5 would require the summaries to be 
provided in attachments to the form, which would be considered part of 
the form.
    As discussed above in Section II.H.1 of this release, the 
Commission is proposing to implement Section 15E(s)(4)(A) of the 
Exchange Act by requiring the issuer or underwriter of an Exchange Act-
ABS to disclose the findings and conclusions of a provider of third-
party due diligence services by furnishing Form ABS-15G on EDGAR 
pursuant to proposed Rule 15Ga-2.\610\ Alternatively, the issuer or 
underwriter would be permitted to obtain a representation from each 
NRSRO engaged to determine a credit rating for the Exchange Act-ABS 
that the NRSRO will publicly disclose the findings and conclusions of 
the provider of third-party due diligence services in the form that 
would need to be published pursuant to proposed new paragraph (a)(1) of 
Rule 17g-7. In addition, as discussed above in Section II.G.3 of this 
release, proposed new paragraph (a)(1)(ii)(F) of Rule 17g-7 would 
implement Section 15E(s)(3)(A)(v) of the Exchange Act by requiring an 
NRSRO to disclose in the form whether and to what extent third-party 
due diligence services were used by the NRSRO, a description of the 
information that such third party reviewed in conducting due diligence 
services, and a description of the findings or conclusions of such 
third party.\611\ The Commission preliminarily believes that requiring 
a provider of third-party due diligence services to summarize in Items 
4 and 5 of Form ABS Due Diligence-15E the manner and scope of the due 
diligence performed and the findings and conclusions resulting from the 
due diligence would facilitate these other requirements.\612\ For 
example, the NRSRO could use the summaries to make the disclosures in 
the form generated pursuant to proposed new paragraph (a) of Rule 17g-
7. In addition, the Commission preliminarily believes that the 
disclosures would be useful to investors and other users of credit 
ratings (as noted above in Section II.G.5, an NRSRO would be required 
to disclose the certification with the publication of a credit rating 
pursuant to proposed new paragraph (a)(2) of Rule 17g-7).
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    \610\ 15 U.S.C. 78o-7(s)(4)(A), proposed new Rule 15Ga-2, and 
proposed amendments to Form ABS-15G.
    \611\ See 15 U.S.C. 78o-7(s)(3)(A)(v) and proposed new paragraph 
(a)(1)(ii)(F) of Rule 17g-7.
    \612\ See Items 4 and 5 of proposed Form ABS Due Diligence-15E.
---------------------------------------------------------------------------

    To this end, the Commission proposes that Item 4 require the 
provider of third-party due diligence services to describe the steps 
taken in performing the due diligence.\613\ The instructions would 
require the third party to provide this description regardless of 
whether the third party represented in Item 3 of the form that its 
review satisfied published criteria of an NRSRO. In other words, the 
third party would not be able to simply rely on a cross-reference to 
the NRSRO's published criteria to explain the work completed in 
performing the due diligence. Consequently, the instructions to Item 4 
would require the third party to describe the scope and manner of the 
due diligence services provided in connection with the review of assets 
that is sufficiently detailed to provide an understanding of the steps 
taken in performing the review. The instructions further would require 
that the third party include in the description: (1) The type of assets 
that were reviewed; (2) the sample size of the assets reviewed; (3) how 
the sample size was determined and, if applicable, computed; (4) 
whether the quality or integrity of information or data about the 
assets provided, directly or indirectly, by the securitizer or 
originator of the assets was reviewed and, if so, how the review was 
conducted; (5) whether the origination of the assets conformed to, or 
deviated from, stated underwriting or credit extension guidelines; (6) 
whether the value of collateral securing such assets was reviewed and, 
if so, how the review was conducted; (7) whether the compliance of the 
originator of the assets with Federal, state and local laws and 
regulations was reviewed and, if so, how the review was conducted; and 
(8) any other type of review conducted with respect to the assets. In 
other words, the proposed instructions would parallel the Commission's 
proposed definition of ``due diligence services'' in paragraph (c)(1) 
of proposed new Rule 17g-10.\614\
---------------------------------------------------------------------------

    \613\ See Item 4 of proposed Form ABS Due Diligence-15E.
    \614\ Compare Item 4 of proposed Form ABS Due Diligence 15E, 
with paragraph (c)(1) of proposed new Rule 17g-10.
---------------------------------------------------------------------------

    As discussed above, the information required by the instructions 
would provide the NRSRO and investors and users of credit ratings of 
the NRSRO with a description of the nature of the due diligence 
performed along with the publication of the credit rating and the form 
that would be required under proposed new paragraph (a)(1) of Rule 17g-
7.\615\ The information also would allow the NRSRO and users of credit 
ratings to compare whether the provider of third-party due diligence 
services, based on its description, appeared to satisfy published 
criteria of the NRSRO if such a claim was made in Item 3. Finally, if 
no criteria had been published for the type of Exchange Act-ABS or no 
claim to satisfying criteria was made in Item 3, the description would 
be the sole basis of understanding the due diligence performed.
---------------------------------------------------------------------------

    \615\ See proposed new paragraph (a) of Rule 17g-7.
---------------------------------------------------------------------------

    Item 5 of proposed Form ABS Due Diligence-15E would require the 
provider of third-party due diligence services to summarize the 
findings and conclusions resulting from the due diligence review.\616\ 
Specifically, the instructions to Item 5 would require the third party 
to provide a summary of the findings and conclusions that resulted from 
the due diligence services that is sufficiently detailed to provide an 
understanding of the findings and conclusions that were conveyed to the 
person identified in Item 2 (i.e., conveyed to the issuer, underwriter, 
or NRSRO that employed the third party to perform due diligence 
services). As discussed above, the reasons for proposing the 
requirement to provide such a summary are the same as for Item 4 of 
Form ABS Due Diligence-15E.
---------------------------------------------------------------------------

    \616\ See Item 5 of proposed Form ABS Due Diligence 15E.
---------------------------------------------------------------------------

    Finally, the individual executing Form ABS Due Diligence-15E on 
behalf of a provider of third-party due diligence services would need 
to make two representations.\617\ First, the individual would need to 
represent that he or she has executed the Form on behalf of, and on the 
authority of, the third-party. Second, the individual would need to 
represent that the third-party conducted a thorough review in 
performing the due diligence described in Item 4 attached to the Form 
and that the information and statements

[[Page 33476]]

contained in the Form, including Items 4 and 5 attached to the Form, 
which are part of the Form, are accurate in all significant respects. 
The Commission is proposing that this representation be made to 
implement the provision of Section 15E(s)(4)(C) of the Exchange Act, 
which provides that the Commission shall establish the appropriate 
format and content of the written certifications ``to ensure that 
providers of due diligence services have conducted a thorough review of 
data, documentation, and other relevant information necessary for [an 
NRSRO] to provide an accurate rating (emphasis added).'' \618\
---------------------------------------------------------------------------

    \617\ See ``Certification'' of proposed Form ABS Due Diligence-
15E.
    \618\ See 15 U.S.C. 78o-7(s)(4)(C).
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of 
proposed new Form ABS Due Diligence-15E. The Commission also seeks 
comment on the following:
    1. Would the proposed format of proposed Form ABS Due Diligence-15E 
appropriately achieve the objectives of Section 15E(s)(4)(C) of the 
Exchange Act? How could the format be modified to better achieve these 
objectives?
    2. Should proposed Form ABS Due Diligence-15E be more prescriptive 
in terms of the steps a provider of third-party due diligence services 
would need to take in performing the review? For example, should the 
form specify the minimum sample size a provider of third-party due 
diligence services must perform on the assets underlying the Exchange 
Act-ABS? If so, should the sample size be the same across all asset 
classes and within asset classes? For example, with respect to RMBS, 
the scope of due diligence could be based on the type of mortgage loans 
(prime, Alt-A, or sub-prime), the quality of the originator of the 
loans, the level of documentation provided with the loans or other 
characteristics. Moreover, the scope of due diligence required for a 
CMBS could involve reviewing every pool asset (rather than a sample), 
since the number of underlying loans is much less than in an RMBS and, 
therefore, the default of one loan would have a greater impact than the 
default of a loan underlying an RMBS. Moreover, the scope of due 
diligence required by an NRSRO for an Exchange Act-ABS where the asset 
pool composition turns over rapidly because it contains revolving 
assets, such as credit card receivables or dealer floor-plan 
receivables, could involve different sampling techniques. How would the 
Commission account for these variables in prescribing minimum sample 
sizes or other procedures that would need to be undertaken by a 
provider of third-party due diligence services? What benefits and costs 
could result from being more prescriptive? Are there practical issues 
to imposing a more prescriptive approach? If so, describe these issues.
    3. Would the information disclosed in Item 3 of proposed new Form 
ABS Due Diligence-15E identifying each NRSRO whose published criteria 
were satisfied by the provider of third-party due diligence services be 
useful to the NRSRO producing a credit rating for the Exchange Act-ABS? 
If not, how could the proposed instructions for Item 3 be modified to 
make it more useful to NRSROs? Are there practical issues to imposing a 
more prescriptive approach? If so, describe these issues.
    4. Would the summary provided in proposed Item 4 of new Form ABS 
Due Diligence-15E about the scope and manner of the due diligence 
services provided in connection with the review of assets be useful to 
investors, other users of credit ratings, and NRSROs producing a credit 
rating for the asset-backed security? If not, how could the proposed 
instructions for Item 4 be modified to make it more useful? Are there 
practical issues to imposing a more prescriptive approach? If so, 
describe these issues.
    5. Would the summary provided in proposed Item 5 of new Form ABS 
Due Diligence-15E about the findings and conclusions that resulted from 
the due diligence services be useful to investors, other users of 
credit ratings, and NRSROs producing a credit rating for the asset-
backed security? If not, how could the proposed instructions for Item 5 
be modified to make it more useful? Are there practical issues to 
imposing a more prescriptive approach? If so, describe these issues.

I. Standards of Training, Experience, and Competence

    Section 936 of the Dodd-Frank Act provides that the Commission 
shall issue rules that are reasonably designed to ensure that any 
person employed by an NRSRO to perform credit ratings: (1) Meets 
standards of training, experience, and competence necessary to produce 
accurate ratings for the categories of issuers whose securities the 
person rates \619\ and (2) is tested for knowledge of the credit rating 
process.\620\ The Commission proposes to implement Section 936 by 
proposing new Rule 17g-9 and amending Rule 17g-2.\621\
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    \619\ See Public Law 111-203 Sec.  936(1).
    \620\ See Public Law 111-203 Sec.  936(2).
    \621\ See proposed new Rule 17g-9 and proposed new paragraph 
(b)(15) of Rule 17g-2.
---------------------------------------------------------------------------

1. Proposed New Rule 17g-9
    The Commission proposes to implement Section 936 of the Dodd-Frank 
through new Rule 17g-9.\622\ As proposed, new Rule 17g-9 would have 
three paragraphs: (a), (b) and (c).\623\ Proposed paragraph (a) would 
contain a requirement that an NRSRO design and administer standards of 
training, experience, and competence.\624\ Proposed paragraph (b) would 
identify factors an NRSRO would need to consider in designing the 
standards.\625\ Proposed paragraph (c) would prescribe two specific 
requirements that would need to be incorporated into an NRSRO's 
standards.\626\
---------------------------------------------------------------------------

    \622\ See proposed new Rule 17g-9. This rule, if adopted, would 
be codified at 17 CFR 240.17g-9.
    \623\ See proposed paragraphs (a), (b), and (c) of new Rule 17g-
9.
    \624\ See proposed paragraph (a) of new Rule 17g-9.
    \625\ See proposed paragraph (b) of new Rule 17g-9.
    \626\ See proposed paragraph (c) of new Rule 17g-9.
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a. Proposed Paragraph (a)
    Proposed paragraph (a) of new Rule 17g-9 would require an NRSRO to 
establish, maintain, enforce, and document standards of training, 
experience, and competence for the individuals it employs to determine 
credit ratings that are reasonably designed to achieve the objective 
that such individuals produce accurate credit ratings in the classes 
and subclasses of credit ratings for which the NRSRO is 
registered.\627\ Consequently, the provision, as proposed, would 
require the NRSRO to design its own standards.\628\ The Commission 
preliminarily believes this approach would be appropriate because of 
the varying procedures and methodologies used by NRSROs to determine 
credit ratings. The proposed requirement would provide flexibility to 
allow each NRSRO to customize the standards according to its unique 
procedures and methodologies for determining credit ratings and size. 
For example, the standards established by an NRSRO with hundreds or 
thousands of credit analysts that produce tens of thousands of credit 
ratings across a wide range of asset classes may need to be different 
than the standards of a small NRSRO with only a handful of credit 
analysts that focus on a particular class of credit ratings.
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    \627\ See proposed paragraph (a) of new Rule 17g-9.
    \628\ Id.
---------------------------------------------------------------------------

    At the same time, Section 936(1) provides that the Commission's 
rules must be reasonably designed to ensure

[[Page 33477]]

that any person employed by an NRRSRO to perform credit ratings meets 
standards of training, experience, and competence necessary to produce 
accurate ratings for the categories of issuers whose securities the 
person rates.\629\ Accordingly, while the Commission preliminarily 
believes that the rule should allow flexibility in terms of the design 
of the standards, the Commission also preliminarily believes that to 
appropriately implement Section 936(1) the rule should require that the 
standards have a common objective. Therefore, proposed paragraph (a) of 
new Rule 17g-9 would require that the standards, as established, must 
be reasonably designed to achieve the objective that individuals 
employed by the NRSRO to determine credit ratings produce accurate 
credit ratings in the classes of credit ratings for which the NRSRO is 
registered.
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    \629\ See Public Law 111-203 Sec.  936(1).
---------------------------------------------------------------------------

    This approach of identifying an objective--the production of 
accurate ratings--and imposing a requirement that the standards be 
reasonably designed to achieve the objective parallels Sections 15E(g) 
and (h) of the Exchange Act, among other provisions in the securities 
laws.\630\ For example, Section 15E(g) of the Exchange Act contains a 
self-executing requirement that each NRSRO shall establish, maintain, 
and enforce written policies and procedures reasonably designed, taking 
into consideration the nature of the business of such NRSRO, to prevent 
the misuse in violation of the Exchange Act, or the rules or 
regulations thereunder, of material, nonpublic information by such 
NRSRO or any person associated with such NRSRO.\631\ Similarly, Section 
15E(h) contains a self-executing requirement that each NRSRO shall 
establish, maintain, and enforce written policies and procedures 
reasonably designed, taking into consideration the nature of the 
business of such NRSRO and affiliated persons and affiliated companies 
thereof, to address and manage any conflicts of interest that can arise 
from such business.\632\
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    \630\ See 15 U.S.C. 78o-7(g) and (h).
    \631\ See 15 U.S.C. 78o-7(g).
    \632\ See 15 U.S.C. 78o-7(h).
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Request for Comment
    The Commission generally requests comment on all aspects of 
proposed paragraph (a) of new Rule 17g-9. The Commission also seeks 
comment on the following:
    1. Would the approach in paragraph (a) of new Rule 17g-9 (i.e., 
identifying an objective for the standards and requiring the NRSRO to 
design its own standards to achieve that objective) appropriately 
implement Section 936 of the Dodd-Frank Act, particularly when taken 
together with the provisions of proposed paragraphs (b) and (c) of new 
Rule 17g-9 discussed below? If not, should the Commission specifically 
prescribe the requirements of the standards to establish consistent 
industry-wide standards? If so, would it be practical to prescribe 
consistent industry-wide standards applicable to each NRSRO? Commenters 
who believe such an approach would be feasible and appropriate should 
identify such a standard and provide suggested rule text.
    2. Would the objective identified in proposed paragraph (a) of new 
Rule 17g-9 (i.e., standards of training, experience, and competence 
that are reasonably designed to achieve the objective that such credit 
analysts produce accurate credit ratings) be appropriate? Would it 
establish an objective that could be achieved? Would it implement the 
goal of Section 936 of the Dodd-Frank Act? Commenters who believe that 
the proposed objective is not appropriate should explain why and 
provide suggested rule text to modify the objective.
    3. Is the objective--the production of ``accurate credit 
ratings''--assessable? For example, how should the accuracy of credit 
ratings be measured?
    4. Would it be feasible to establish a testing program that has 
standardized components to review the adequacy of the standards of 
training, experience, and competence that an NRSRO maintains, enforces, 
and documents pursuant to proposed paragraph (a) of new Rule 17g-9? If 
so, what should the components of that testing program be? What would 
be the advantages and disadvantages of such a program? Are there 
comparable testing programs used in other contexts that would be 
relevant in developing such a program?
b. Proposed Paragraph (b)
    While proposed paragraph (a) of new Rule 17g-9 would provide that 
the NRSRO must design the standards, proposed paragraph (b) would 
identify factors the NRSRO must consider when designing the 
standards.\633\ The Commission intends the identified factors to 
provide guidance to NRSROs about the Commission's expectations for the 
design of the standards of training, experience, and competence. It 
also is intended to provide benchmarks that Commission examiners could 
use to evaluate whether a given NRSRO's standards are reasonably 
designed to meet the objective set forth in proposed paragraph (a).
---------------------------------------------------------------------------

    \633\ See proposed paragraph (b) of new Rule 17g-9.
---------------------------------------------------------------------------

    Proposed paragraph (b) of new Rule 17g-9 would require the NRSRO to 
consider each factor in the context of the potentially varying roles of 
the individuals employed by the NRSRO to determine credit ratings. More 
specifically, the Commission preliminarily believes that the design of 
the standards must account for different functions and responsibilities 
of such individuals as well as the different procedures and 
methodologies they use to determine credit ratings. The Commission is 
not proposing that the NRSRO design a standard for each individual. 
Rather, the Commission preliminarily believes that the standards, 
particularly of a large NRSRO with hundreds or thousands of credit 
analysts, should account for groups of individuals who are not 
similarly situated, for example, in terms of years of experience, 
education level, responsibility, and complexity of the procedures and 
methodologies they use to determine credit ratings.
    The first factor--identified in proposed paragraph (b)(1) of Rule 
17g-9--would require the NRSRO, when establishing the standards of 
training, experience, and competence, to consider if the credit rating 
procedures and methodologies used by the individual involve qualitative 
analysis, the knowledge necessary to effectively evaluate and process 
the data relevant to the creditworthiness of the obligor being rated or 
the issuer of the securities or money market instruments being 
rated.\634\ The Commission intends proposed paragraph (b)(1) to require 
the NRSRO to consider the fact that qualitative analysis relies, in 
large part, on identifying and assimilating relevant information about 
an obligor or issuer and making judgments on how that information 
impacts the creditworthiness of the obligor or the issuer.
---------------------------------------------------------------------------

    \634\ See proposed paragraph (b)(1) of new Rule 17g-9.
---------------------------------------------------------------------------

    The second factor--identified in proposed paragraph (b)(2) of Rule 
17g-9--would require the NRSRO, when establishing the standards of 
training, experience, and competence, to consider if the credit rating 
procedures and methodologies used by the individual involve 
quantitative analysis, the technical expertise necessary to understand 
any models and model inputs that are a part of the procedures

[[Page 33478]]

and methodologies.\635\ The Commission intends proposed paragraph 
(b)(2) to require the NRSRO to consider the fact that quantitative 
analysis relies, in large part, on mathematical techniques and, 
consequently, credit analysts using quantitative models would need to 
have relevant technical expertise.
---------------------------------------------------------------------------

    \635\ See proposed paragraph (b)(2) of new Rule 17g-9.
---------------------------------------------------------------------------

    The third factor--identified in proposed paragraph (b)(3) of Rule 
17g-9--would require the NRSRO, when establishing the standards of 
training, experience, and competence, to consider the classes and 
subclasses of credit ratings for which each individual participates in 
determining credit ratings and the factors relevant to such classes and 
subclasses, including the geographic location, sector, industry, 
regulatory and legal framework, and underlying assets, applicable to 
the obligors or issuers in the classes and subclasses.\636\ The 
Commission intends proposed paragraph (b)(3) to require the NRSRO to 
consider the fact that different types of obligors and issuers have 
unique characteristics that may be relevant to the creditworthiness of 
the obligor or the issuer. For example, the knowledge and competence 
necessary to rate an operating company is different from that necessary 
to rate an asset-backed security or a municipal security. Moreover, 
there may be differences within classes of credit ratings. For example, 
rating an RMBS requires different knowledge than rating a CMBS, and 
rating a company in the oil industry requires different knowledge than 
rating a company in the telecommunications industry.
---------------------------------------------------------------------------

    \636\ See proposed paragraph (b)(3) of new Rule 17g-9.
---------------------------------------------------------------------------

    The fourth factor--identified in proposed paragraph (b)(4) of Rule 
17g-9--would require the NRSRO to consider, when establishing the 
standards of training, experience, and competence, the complexity of 
the obligors, securities, or money market instruments being rated by 
the individual.\637\ The Commission intends proposed paragraph (b)(4) 
to require the NRSRO to consider the fact that obligors and securities 
it rates may vary widely in terms of complexity. For example, more 
experience and competence may be necessary to rate a synthetic CDO as 
opposed to a typical RMBS or a global financial company as opposed to a 
community bank.
---------------------------------------------------------------------------

    \637\ See proposed paragraph (b)(4) of new Rule 17g-9.
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of 
proposed paragraph (b) of new Rule 17g-9. The Commission also seeks 
comment on the following:
    1. Are there any other factors in addition to, or as an alternative 
to, the four factors identified in paragraphs (b)(1) through (4) an 
NRSRO should consider when establishing standards of training, 
experience, and competence? For example, should the proposed rule 
require an NRSRO to consider the number of initial credit ratings the 
individual is expected to participate in determining annually and the 
number of credit ratings the individual is expected to participate in 
monitoring annually? If so, how should these factors be taken into 
consideration? Identify any additional or alternative factors and 
provide suggested rule text.
    2. Should the factor identified in proposed paragraph (b)(1) of 
Rule 17g-9 (i.e., if the credit rating procedures and methodologies 
used by the individual involve qualitative analysis, the knowledge 
necessary to effectively evaluate and process the data relevant to the 
creditworthiness of the obligor being rated or the issuer of the 
securities or money market instruments being rated) be considered when 
the NRSRO designs its standards of training, experience, and competence 
for the individuals it employs to determine credit ratings? If not, 
should proposed paragraph (b)(1) be modified to provide better guidance 
for designing the standards? If so, how should it be modified? 
Alternatively, should it be omitted from the rule? If so, explain why.
    3. Should the factor identified in proposed paragraph (b)(2) of 
Rule 17g-9 (i.e., if the credit rating procedures and methodologies 
used by the individual involve quantitative analysis, the technical 
expertise necessary to understand any models and model inputs that are 
a part of the procedures and methodologies) be considered when the 
NRSRO designs its standards of training, experience, and competence for 
the individuals it employs to determine credit ratings? If not, should 
proposed paragraph (b)(2) be modified to provide better guidance for 
designing the standards? If so, how should it be modified? 
Alternatively, should it be omitted from the rule? If so, explain why.
    4. Should the factor identified in proposed paragraph (b)(3) of 
Rule 17g-9 (i.e., the classes and subclasses of credit ratings for 
which the individual participates in determining credit ratings and the 
factors relevant to such classes and subclasses, including the 
geographic location, sector, industry, regulatory and legal framework, 
and underlying assets, applicable to the obligors or issuers in the 
classes and subclasses) be considered when the NRSRO designs its 
standards of training, experience, and competence for the individuals 
it employs to determine credit ratings? If not, should proposed 
paragraph (b)(3) be modified to provide better guidance for designing 
the standards? If so, how should it be modified? Alternatively, should 
it be omitted from the rule? If so, explain why.
    5. Should the factor identified in proposed paragraph (b)(4) of 
Rule 17g-9 (i.e., the complexity of the obligors, securities, or money 
market instruments being rated by the individuals) be considered when 
the NRSRO designs its standards of training, experience, and competence 
for the individuals it employs to determine credit ratings? If not, 
should proposed paragraph (b)(4) be modified to provide better guidance 
for designing the standards? If so, how should it be modified? 
Alternatively, should it be omitted from the rule? If so, explain why.
c. Proposed Paragraph (c)
    Proposed paragraph (c) of new Rule 17g-9 would prescribe two 
requirements that an NRSRO must incorporate into its standards of 
training, experience, and competence.\638\ The first requirement would 
be prescribed in proposed paragraph (c)(1) of new Rule 17g-9.\639\ This 
paragraph would provide that the standards of training, experience, and 
competence must include a requirement for periodic testing of the 
individuals employed by the NRSRO to determine credit ratings on their 
knowledge of the procedures and methodologies used by the NRSRO to 
determine credit ratings in the classes or subclasses of credit ratings 
for which the individual participates in determining credit 
ratings.\640\ The Commission is proposing this requirement to implement 
Section 936(2) of the Dodd-Frank Act, which provides that the 
Commission shall issue rules that are reasonably designed to ensure 
that any person employed by an NRSRO to perform credit ratings is 
tested for knowledge of the credit rating process.\641\ The Commission 
preliminarily believes that the frequency and manner of testing should 
be established by the NRSRO. For example, the frequency and manner of 
testing may depend on whether an NRSRO employs a large number of

[[Page 33479]]

analysts with varying levels of experience to rate a wide range of 
obligors, securities, and money market instruments. In this case, 
testing may need to be more frequent, particularly with respect to more 
junior analysts. On the other hand, an NRSRO that employs few analysts 
who focus on rating a specific type of obligor, security, or money 
market instrument may need less frequent testing, particularly if the 
analysts are experienced. However, the Commission notes that the 
testing program--as with all aspects of the standards--would need to be 
reasonably designed to achieve the objective that the credit analysts 
produce accurate credit ratings in the classes of credit ratings for 
which the NRSRO is registered.\642\ Consequently, an NRSRO would need 
to establish a training schedule that is consistent with achieving this 
objective.
---------------------------------------------------------------------------

    \638\ See proposed paragraphs (c)(1) and (2) of new Rule 17g-9.
    \639\ See proposed paragraph (c)(1) of new Rule 17g-9.
    \640\ Id.
    \641\ See Public Law 111-203 Sec.  936(2).
    \642\ See proposed paragraph (a) of new Rule 17g-9.
---------------------------------------------------------------------------

    The second requirement would be prescribed in proposed paragraph 
(c)(2) of new Rule 17g-9.\643\ This paragraph would provide that the 
standards of training, experience, and competence must include a 
requirement that at least one individual with three years or more 
experience in performing credit analysis participates in the 
determination of a credit rating.\644\ The Commission preliminarily 
believes three years of experience is appropriate because, among other 
things, being in business as a credit rating agency for three years was 
a minimum prerequisite to being treated as an NRSRO under the Rating 
Agency Act of 2006.\645\ Specifically, prior to being amended by the 
Dodd-Frank Act, the first prong of the definition of ``nationally 
recognized statistical rating organization,'' provided that the entity 
``has been in business as a credit rating agency for at least the 3 
consecutive years immediately preceding the date of its application for 
registration under Section 15E.'' \646\ Moreover, Section 
15E(a)(1)(B)(ix) of the Exchange Act requires a credit rating agency 
applying for registration as an NRSRO to submit certifications from 
qualified institutional buyers (``QIBs'') as specified in Section 
15E(a)(1)(C) of the Exchange Act.\647\ Sections 15E(a)(1)(C)(i) through 
(iii) of the Exchange Act provide, among other things, that the 
applicant must furnish certifications from a minimum of 10 QIBs, 
including certifications from no less than two QIBs for each category 
of obligor for which the applicant intends to be registered.\648\ 
Section 15E(a)(1)(C)(iv) provides, among other things, that the 
certification must state that the entity meets the definition of a QIB 
and has used the credit ratings of the applicant for at least the three 
years immediately preceding the date of the certification in the 
subject category or categories.\649\
---------------------------------------------------------------------------

    \643\ See proposed paragraph (c)(2) of new Rule 17g-9.
    \644\ Id.
    \645\ See Section 3(a)(61)(A) of the Exchange Act, as added by 
Section 3(a) of the Rating Agency Act of 2006. See Public Law 109-
291 Sec.  3. Section 932(b) of the Dodd-Frank Act struck 
subparagraph (A) of Section 3(a)(61) of the Exchange Act and re-
designated paragraph (B) as paragraph (A). See Public Law 111-203 
Sec.  932(b). While the Dodd-Frank Act eliminated the ``three-year'' 
prong from the definition of NRSRO, the Commission does not believe 
this evidences a view that the credit analysts who work for a credit 
rating agency need not have any experience. In fact, as noted above, 
Section 936(1) of the Dodd-Frank Act, among other things, provides 
that the Commission shall issue rules that are reasonably designed 
to ensure that any person employed by an NRRSRO to perform credit 
ratings meets standards of training, experience, and competence 
necessary to produce accurate ratings for the categories of issuers 
whose securities the person rates. See Public Law 111-203 Sec.  
936(1).
    \646\ Id.
    \647\ See 15 U.S.C. 78o-7(a)(1)(B)(ix) and 15 U.S.C. 78o-
7(a)(1)(C).
    \648\ See 15 U.S.C. 78o-7(a)(1)(C)(i)-(iii).
    \649\ See 15 U.S.C. 78o-7(a)(1)(C)(iv).
---------------------------------------------------------------------------

    The Commission considered these former and current provisions of 
Section 15E of the Exchange Act in developing the proposed three-year 
requirement in paragraph (c)(2) of new Rule 17g-9. The Commission 
preliminarily believes that having at least one person participate in 
the determination of a credit rating who has at least three years 
experience in performing credit analysis would establish an appropriate 
baseline requirement that could be implemented by NRSROs without 
causing them to hire new staff or re-allocate staff resources. For 
example, in terms of participating in the credit rating, the Commission 
preliminarily believes an NRSRO's standard could require that at least 
one person with at least three years experience serve on a committee 
that votes to approve the credit rating or that reviews and approves a 
credit rating action proposed by a junior analyst. Moreover, the 
Commission notes that performing credit analysis is not synonymous with 
determining credit ratings. Many financial institutions have credit 
risk departments staffed by individuals who analyze the 
creditworthiness of existing and future counterparties and borrowers. 
The Commission preliminarily intends that this type of work would 
qualify a credit analyst to meet the three-year requirement in proposed 
paragraph (c)(2) of new Rule 17g-9. Consequently, if an NRSRO employed 
an individual who performed credit analysis for a financial institution 
for more than three years, that individual would qualify for purposes 
of the proposed ``three-year'' requirement.
Request for Comment
    The Commission generally requests comment on all aspects of 
proposed paragraph (c) of new Rule 17g-9. The Commission also seeks 
comment on the following:
    1. Would proposed paragraph (c)(1) of new Rule 17g-9 (which would 
provide that the standards of training, experience, and competence must 
include a requirement for periodic testing of the individuals employed 
by the NRSRO to determine credit ratings on their knowledge of the 
procedures and methodologies used by the NRSRO to determine credit 
ratings in the classes and subclasses of credit ratings for which the 
individual is responsible for determining credit ratings) appropriately 
implement Section 936(2) of the Dodd-Frank Act? If not, how should 
proposed paragraph (c)(1) be modified to better achieve the objective 
of Section 936(2)?
    2. Should the Commission prescribe the frequency of the periodic 
testing that would be mandated under proposed paragraph (c)(1) of new 
Rule 17g-9? For example, should an NRSRO be required to administer 
testing every six months, every year, every two years?
    3. Would proposed paragraph (c)(2) of new Rule 17g-9 (which would 
provide that the standards of training, experience, and competence must 
include a requirement that at least one individual with three years or 
more experience in performing credit analysis participates in the 
determination of a credit rating) be an appropriate measure in terms of 
implementing Section 936 of the Dodd-Frank Act? If not, how should 
proposed paragraph (c)(2) be modified to better achieve the objective 
of Section 936? For example, should the Commission establish a 
different minimum number of years such as 1 or 2 years experience or 4, 
5, 6, 7, or some larger number of years? Alternatively, should this 
proposal be omitted from the rule? If so, explain why?
2. Proposed Amendment to Rule 17g-2
    For the reasons discussed in Section II.A.2 of this release, the 
Commission preliminarily believes that the standards of training, 
experience, and competence an NRSRO would be required, among other 
things, to document pursuant to proposed paragraph (a) of new Rule 17g-
9 should be subject to the recordkeeping requirements of Rule

[[Page 33480]]

17g-2.\650\ Consequently, the Commission proposes adding new paragraph 
(b)(15) to Rule 17g-2 to identify the standards of training, 
experience, and competence the NRSRO must establish, maintain, enforce, 
and document pursuant to proposed new Rule 17g-9 as a record that must 
be retained.\651\ As a result, the standards would be subject to the 
record retention and production requirements in paragraphs (c) through 
(f) of Rule 17g-2.\652\
---------------------------------------------------------------------------

    \650\ 17 CFR 240.17g-2.
    \651\ See proposed new paragraph (b)(15) to Rule 17g-2; see also 
Section 17(a)(1) of the Exchange Act, which requires an NRSRO to 
make and keep such records, and make and disseminate such reports, 
as the Commission prescribes by rule as necessary or appropriate in 
the public interest, for the protection of investors, or otherwise 
in furtherance of the Exchange Act. 15 U.S.C. 78q(a)(1).
    \652\ See 17 CFR 240.17g-2.
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of 
proposed new paragraph (b)(15) of Rule 17g-2.

J. Universal Rating Symbols

    Section 938(a) of the Dodd-Frank Act provides that the Commission 
shall require, by rule, each NRSRO to establish, maintain, and enforce 
written policies and procedures that: (1) Assess the probability that 
an issuer of a security or money market instrument will default, fail 
to make timely payments, or otherwise not make payments to investors in 
accordance with the terms of the security or money market instrument; 
\653\ (2) clearly define and disclose the meaning of any symbol used by 
the NRSRO to denote a credit rating; \654\ and (3) apply any symbol 
described in item (2) in a manner that is consistent for all types of 
securities and money market instruments for which the symbol is 
used.\655\ Section 938(b) of the Dodd-Frank Act provides that nothing 
in Section 938 shall prohibit an NRSRO from using distinct sets of 
symbols to denote credit ratings for different types of securities or 
money market instruments.\656\
---------------------------------------------------------------------------

    \653\ See Public Law 111-203 Sec.  938(a)(1).
    \654\ See Public Law 111-203 Sec.  938(a)(2).
    \655\ See Public Law 111-203 Sec.  938(a)(3).
    \656\ See Public Law 111-203 Sec.  938(b).
---------------------------------------------------------------------------

    The Commission proposes to implement Section 938(a) of the Dodd-
Frank Act by proposing paragraph (b) of new Rule 17g-8 and by amending 
Rule 17g-2.\657\
---------------------------------------------------------------------------

    \657\ See proposed paragraph (b) of Rule new 17g-8 and proposed 
new paragraph (b)(14) of Rule 17g-2. As discussed earlier, the 
Commission is proposing that rule requirements specifying policies 
and procedures be consolidated in new Rule 17g-8.
---------------------------------------------------------------------------

1. Proposed Paragraph (b) of New Rule 17g-8
    The Commission preliminarily believes that Section 938(a) of the 
Dodd-Frank Act is explicit in prescribing the policies and procedures 
the Commission shall require, by rule, of each NRSRO.\658\ 
Consequently, the Commission proposes that the rule text of proposed 
paragraph (b) of new Rule 17g-8 mirror the statutory text.
---------------------------------------------------------------------------

    \658\ See Public Law 111-203 Sec.  936(a).
---------------------------------------------------------------------------

    The prefatory text of proposed paragraph (b) of new Rule 17g-8 
would provide that an NRSRO must establish, maintain, enforce, and 
document policies and procedures that are reasonably designed to 
achieve three objectives, which would be identified in paragraphs 
(b)(1), (2), and (3).\659\ This proposed provision would mirror the 
prefatory text of Section 938(a) of the Dodd-Frank Act except that the 
proposed rule text would add the requirement that the NRSRO 
``document'' the policies and procedures.\660\ The Commission 
preliminarily believes it would be appropriate to add a documentation 
requirement because it would mean that an NRSRO would need to put its 
policies and procedures into writing. This requirement, coupled with 
the Commission's proposal discussed next to apply the record retention 
and production provisions of Rule 17g-2 to the policies and procedures, 
would be designed to make them more readily available to Commission 
examiners. In addition, the Commission believes it is a sound practice 
for any organization to document its policies and procedures to promote 
better understanding of them among the individuals within the 
organization and, therefore compliance with such policies and 
procedures.
---------------------------------------------------------------------------

    \659\ See prefatory text of proposed paragraph (b) of new Rule 
17g-8.
    \660\ Compare prefatory text of Public Law 111-203 Sec.  938(a), 
with prefatory text of proposed paragraph (b) of new Rule 17g-8.
---------------------------------------------------------------------------

    Proposed paragraph (b)(1) of new Rule 17g-8 would require the NRSRO 
to have policies and procedures reasonably designed to assess the 
probability that an issuer of a security or money market instrument 
will default, fail to make timely payments, or otherwise not make 
payments to investors in accordance with the terms of the security or 
money market instrument.\661\ This proposed provision would mirror the 
text of Section 938(a)(1) of the Dodd-Frank Act.\662\ The Commission 
also notes that Section 15E(s)(3)(B)(ii) of the Exchange Act provides 
that the Commission's rule requiring an NRSRO to generate a form to 
disclose information with the publication of a credit rating requires 
disclosure of information on the content of the credit rating, 
including: (1) The historical performance of the credit rating; and (2) 
the expected probability of default and the expected loss in the event 
of default.\663\ As discussed above in Section II.G.3 of this release, 
the Commission is proposing to implement this requirement in proposed 
new paragraph (a)(1)(ii)(L) of Rule 17g-7.\664\ The Commission 
preliminarily believes proposed paragraph (b)(1) of new Rule 17g-8 
would work in conjunction the requirement in proposed new paragraph 
(a)(1)(ii)(L) of Rule 17g-7 insomuch as the policies and procedures 
proposed to be required by the former would assist the NRSRO in making 
the disclosure proposed to be required in the latter.
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    \661\ See proposed paragraph (b)(1) of new Rule 17g-8.
    \662\ Compare text of Public Law 111-203 Sec.  938(a)(1), with 
text of proposed paragraph (b)(1) of new Rule 17g-8.
    \663\ See 15 U.S.C. 78o-7(s)(3)(B)(ii).
    \664\ See proposed new paragraph (a)(1)(ii)(L) of Rule 17g-7.
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    Proposed paragraph (b)(2) of new Rule 17g-8 would require the NRSRO 
to have policies and procedures reasonably designed to clearly define 
each symbol, number, or score in the rating scale used by the NRSRO to 
denote a credit rating category and notches within a category for each 
class and subclass of credit ratings for which the NRSRO is registered 
and to include such definitions in Exhibit 1 to Form NRSRO.\665\ This 
proposed provision would implement Section 938(a)(2) of the Dodd-Frank 
Act.\666\ In addition, it would mirror text in the proposed revisions 
to the Instructions to Exhibit 1 to Form NRSRO as well as work in 
conjunction with the requirements in those instructions.\667\ As 
discussed above in Section II.E.1.a of this release, the Commission is 
proposing to amend the Instructions for Exhibit 1. One of the proposed 
amendments would require the NRSRO to clearly define in Exhibit 1 the 
meaning of each symbol, number, or score in the rating scale used by 
the applicant or NRSRO to denote a credit rating category and notches 
within a category in any Transition/Default Matrix presented in the 
Exhibit.\668\ Consequently, taken together, the proposals would require 
an NRSRO to have policies and procedures that clearly define the 
meaning of each

[[Page 33481]]

symbol, number, or score used by the NRSRO to denote a credit rating 
and to disclose those meanings in Exhibit 1 where investors and other 
users of credit ratings can find them.
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    \665\ See proposed paragraph (b)(2) of new Rule 17g-8.
    \666\ Compare text of Public Law 111-203 Sec.  938(a)(2), with 
text of proposed paragraph (b)(2) of new Rule 17g-8.
    \667\ See Instructions to Exhibit 1 to Form NRSRO.
    \668\ See proposed amendments to Instructions to Exhibit 1 to 
Form NRSRO.
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    Proposed paragraph (b)(3) of new Rule 17g-8 would require the NRSRO 
to have policies and procedures reasonably designed to apply any 
symbol, number, or score defined pursuant to paragraph (b)(2) of Rule 
17g-8 in a manner that is consistent for all types of obligors, 
securities, and money market instruments for which the symbol, number, 
or score is used.\669\ This proposed provision would mirror the text of 
Section 938(a)(3) of the Dodd-Frank Act, except that the proposed rule 
text would add the term ``obligors.'' \670\ The Commission proposes 
this addition in order to apply the provisions of proposed paragraph 
(b)(3) of new Rule 17g-8 to credit ratings of obligors as entities in 
addition to credit ratings of securities and money market 
instruments.\671\
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    \669\ See proposed paragraph (b)(1) of new Rule 17g-8.
    \670\ Compare text of Public Law 111-203 Sec.  938(a)(3), with 
text of proposed paragraph (b)(3) of new Rule 17g-8.
    \671\ See, e.g., the definition of ``credit rating'' in Section 
3(a)(60) of the Exchange Act (``The term `credit rating' means an 
assessment of the creditworthiness of an obligor as an entity or 
with respect to specific securities or money market instruments.''). 
15 U.S.C. 78o-7(a)(60).
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Request for Comment
    The Commission generally requests comment on all aspects of 
proposed paragraph (b) of new Rule 17g-8. The Commission also seeks 
comment on the following:
    1. Is proposed paragraph (b)(1) of new Rule 17g-8 sufficiently 
explicit in terms of the objective that the policies and procedures be 
reasonably designed to assess the probability that an issuer of a 
security or money market instrument will default, fail to make timely 
payments, or otherwise not make payments to investors in accordance 
with the terms of the security or money market instrument)? If not, 
what additional detail should the Commission provide in terms of the 
clarifying the objective?
    2. Is proposed paragraph (b)(2) of new Rule 17g-8 sufficiently 
explicit in terms of the objective that the policies and procedures be 
reasonably designed to clearly define the meaning of each symbol, 
number, or score used by the NRSRO to denote a credit rating category 
and notches within a category in the rating scale for each class and 
subclass of credit ratings for which the NRSRO is registered and to 
include such definitions in Exhibit 1 to Form NRSRO? If not, what 
additional detail should the Commission provide in terms of the 
clarifying the objectives?
    3. Is proposed paragraph (b)(3) of new Rule 17g-8 sufficiently 
explicit in terms of the objective that the policies and procedures be 
reasonably designed to apply any symbol, number, or score defined in a 
manner that is consistent for all types of obligors, securities, and 
money market instruments for which the symbol, number, or score is 
used? If not, what additional detail should the Commission provide in 
terms of the clarifying the objective?
2. Proposed Amendment to Rule 17g-2
    For the reasons discussed in Section II.A.2 of this release, the 
Commission preliminarily believes that the policies and procedures an 
NRSRO would be required, among other things, to document pursuant to 
proposed paragraph (b) of new Rule 17g-8 should be subject to the 
recordkeeping requirements of Rule 17g-2.\672\ Consequently, the 
Commission proposes adding new paragraph (b)(14) to Rule 17g-2 to 
identify the policies and procedures an NRSRO must establish, maintain, 
enforce, and document pursuant to proposed paragraph (b) of new Rule 
17g-8 as a record that must be retained.\673\ As a result, the policies 
and procedures would be subject to the record retention and production 
requirements in paragraphs (c) through (f) of Rule 17g-2.\674\
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    \672\ 17 CFR 240.17g-2.
    \673\ See proposed new paragraph (b)(14) to Rule 17g-2; see also 
Section 17(a)(1) of the Exchange Act, which requires an NRSRO to 
make and keep such records, and make and disseminate such reports, 
as the Commission prescribes by rule as necessary or appropriate in 
the public interest, for the protection of investors, or otherwise 
in furtherance of the Exchange Act. 15 U.S.C. 78q(a)(1).
    \674\ See 17 CFR 240.17g-2.
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Request for Comment
    The Commission generally requests comment on all aspects of 
proposed new paragraph (b)(14) of Rule 17g-2.

K. Annual Report of Designated Compliance Officer

    Section 932(a)(5) of the Dodd-Frank Act amended Section 15E(j) of 
the Exchange Act to re-designate paragraph (j) as paragraph (j)(1) and 
to add new paragraphs (j)(2) through (j)(5).\675\ Section 15E(j)(1) of 
the Exchange Act contains a self-executing provision that an NRSRO 
designate an individual (the ``designated compliance officer'') 
responsible for administering the policies and procedures that are 
required to be established pursuant to Sections 15E(g) and (h) of the 
Exchange Act,\676\ and for compliance with the securities laws and the 
rules and regulations thereunder, including those promulgated by the 
Commission under Section 15E of the Exchange Act.\677\ Sections 
15E(j)(2) through (4) prescribe self-executing requirements with 
respect to, among other things, the activities, duties, and 
compensation of the designated compliance officer.\678\
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    \675\ See Public Law 111-203 Sec.  932(a)(5) and 15 U.S.C. 78o-
7(j)(1) though (5).
    \676\ See 15 U.S.C 780-7(g) and (h).
    \677\ See 15 U.S.C. 78o-7(j)(1).
    \678\ See 15 U.S.C. 78o-7(j)(1) though (4).
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    Section 15E(j)(5)(A) of the Exchange Act requires the designated 
compliance officer to submit to the NRSRO an annual report on the 
compliance of the NRSRO with the securities laws and the policies and 
procedures of the NRSRO that includes: (1) A description of any 
material changes to the code of ethics and conflict of interest 
policies of the NRSRO; and (2) a certification that the report is 
accurate and complete.\679\ Section 15E(j)(5)(B) of the Exchange Act 
provides that the NRSRO shall file the report required pursuant to 
Section 15E(j)(5)(A) together with the financial report that is 
required to be submitted to the Commission under Section 15E of the 
Exchange Act.\680\
---------------------------------------------------------------------------

    \679\ See 15 U.S.C. 78o-7(j)(5)(A).
    \680\ See 15 U.S.C. 78o-7(j)(5)(B).
---------------------------------------------------------------------------

    Consequently, Section 15E(j)(5)(B) of the Exchange Act contains a 
self-executing provision requiring the NRSRO to file the annual report 
of the designated compliance officer ``with the financial report that 
is required to be submitted to the Commission under this section.'' 
\681\ The Commission notes that Section 15E(k) of the Exchange Act 
provides that each NRSRO shall, on a confidential basis, file with the 
Commission, at intervals determined by the Commission, such financial 
statements, certified (if required by the rules or regulations of the 
Commission) by an independent public accountant, and information 
concerning its financial condition, as the Commission, by rule may 
prescribe as necessary or appropriate in the public interest or for the 
protection of investors.\682\ The Commission implemented Section 15E(k) 
by adopting Rule 17g-3.\683\ Therefore, under the self-executing 
provisions in Section 15E(j)(5)(B) of the Exchange Act, an NRSRO must 
file the

[[Page 33482]]

report of the designated compliance officer with the reports required 
to be submitted pursuant to Rule 17g-3.\684\
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    \681\ Id.
    \682\ The Dodd-Frank Act replaced the words ``furnish to the 
Commission'' with the words ``file with the Commission'' in Section 
15E(k) of the Exchange Act. See 15 U.S.C. 78o-7(k).
    \683\ See 17 CFR 240.17g-3; see also Oversight of Credit Rating 
Agencies Registered as Nationally Recognized Statistical Rating 
Organizations, 72 FR at 33590-33593 (June 18, 2007).
    \684\ See 15 U.S.C. 78o-7(j)(5)(B), 15 U.S.C. 78o-7(k), and 17 
CFR 240.17g-3.
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    As discussed above in Section II.A.3 of this release, Rule 17g-3 
requires an NRSRO to furnish five or, in certain cases, six separate 
reports not more than 90 days after the end of the NRSRO's fiscal 
year.\685\ In order to further clarify the self-executing requirement 
in Section 15E(j)(5)(B) of the Exchange Act, the Commission is 
proposing to amend Rule 17g-3 to identify the annual report of the 
designated compliance officer as one of the reports that must be filed 
with the Commission.\686\ Specifically, the Commission proposes adding 
a new paragraph (a)(8) to Rule 17g-3 to identify the report on the 
compliance of the NRSRO with the securities laws and the policies and 
procedures of the NRSRO required to be filed with the Commission 
pursuant to Section 15E(j)(5)(B) of the Exchange Act.\687\ New 
paragraph (a)(8) would provide that the report need not be audited. 
Furthermore, the Commission preliminarily does not intend to prescribe 
how the report must be certified because Section 15E(j)(5)(A)(ii) of 
the Exchange Act already provides that the designated compliance 
officer must certify that the report is accurate and complete.\688\
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    \685\ See 17 CFR 240.17g-3(a)(1)-(6). As discussed above in 
Section II.A.3 of this release, the Commission is proposing that 
Rule 17g-3 be amended to add a new paragraph (a)(7) to implement 
Section 15E(c)(3)(B) of the Exchange Act by requiring an NRSRO to 
file the annual report on the NRSRO's internal control structure 
with the annual reports. See 15 U.S.C. 78o-7(c)(3)(B).
    \686\ See proposed new paragraph (a)(8) of Rule 17g-3.
    \687\ Id.
    \688\ See 15 U.S.C. 78o-7(j)(5)(A)(ii). Paragraph (b) of Rule 
17g-3 provides that the NRSRO must attach to the reports required to 
be submitted pursuant to Rule 17g-3 a signed statement by a duly 
authorized person that the person has responsibility for the reports 
and, to the best knowledge of the person, the reports fairly 
present, in all material respects, the information contained in the 
reports. See 17 CFR 240.17g-3(b).
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Request for Comment
    The Commission generally requests comment on all aspects of 
proposed new paragraph (a)(8) of Rule 17g-3. The Commission also seeks 
comment on the following:
    1. Should an NRSRO be required to attach to the annual report a 
signed statement by a duly authorized person (e.g., the designated 
compliance officer) stating explicitly that the person has 
responsibility for the reports and, to the best knowledge of the 
person, the reports fairly present, in all material respects, the 
information contained in the reports? For example, because the 
designated compliance officer is providing the report to the NRSRO and 
the NRSRO, in turn, is submitting the report to the Commission, would 
it be appropriate for the Commission to require an additional 
certification addressing the submission of the report from the NRSRO to 
the Commission?

L. Electronic Submission of Form NRSRO and the Rule 17g-3 Annual 
Reports

    An NRSRO currently submits the Form NRSROs required under Rule 17g-
1 and the annual reports required under Rule 17g-3 to the Commission in 
paper form. The Commission proposes amending Rule 17g-1, the 
Instructions to Form NRSRO, Rule 17g-3, and Regulation S-T to require 
an NRSRO to use the Commission's EDGAR system to: (1) Electronically 
file or furnish, as applicable, Form NRSRO and the information and 
documents contained in Exhibits 1 through 9 of Form NRSRO if the 
submission is made pursuant to paragraph (e), (f) or (g) of Rule 17g-1 
(i.e., an update of registration, an annual certification, or a 
withdrawal from registration, respectively) \689\ and (2) 
electronically file or furnish, as applicable, the annual reports 
required by Rule 17g-3.\690\
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    \689\ See 17 CFR 240.17g-1(e), (f), and (g). The electronic 
submissions of Form NRSRO and Exhibits 1 through 9 of Form NRSRO 
would be made available to the public immediately upon filing.
    \690\ See 17 CFR 240.17g-3. An NRSRO is not required to make the 
Rule 17g-3 annual reports publicly available and the reports would 
not be available to the public on EDGAR. The information collected 
pursuant to Rule 17g-3 is, and would continue to be, kept 
confidential to the extent permitted by the Freedom of Information 
Act (``FIOA''). See 15 U.S.C. 552 et seq.
---------------------------------------------------------------------------

    Under this proposal, however, an applicant or NRSRO would continue 
to submit in paper format Form NRSROs pursuant to paragraphs (a), (b), 
(c), and (d) of Rule 17g-1 (initial applications for registration, 
applications to register for an additional class of credit ratings, 
supplements to an initial application or application to register for an 
additional class of credit ratings, and withdrawals of initial 
applications or applications to register for an additional class of 
credit ratings, respectively).\691\ The Commission preliminarily 
believes that these materials are appropriately received in paper form 
because of the iterative nature of the NRSRO application process. For 
example, an applicant often will have a number of phone conferences and 
meetings with the Commission staff during the application process to 
clarify the information submitted in the application. These 
interactions may result in applicants informally providing additional 
information relating to the application and informally amending or 
augmenting information provided in the Form and its Exhibits. The 
Commission preliminarily believes paper submissions facilitate this 
type of iterative process.
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    \691\ Paragraph (i) of Rule 17g-1 requires an NRSRO to make Form 
NRSRO and information and documents submitted in Exhibits 1 through 
9 publicly available within 10 business days of the Commission order 
granting an initial application for registration or an application 
to register for an additional class of credit ratings. 17 CFR 
240.17g-1(i). The initial application for registration contains 
information and documents the NRSRO is not required to make publicly 
available. This includes Exhibits 10 through 13 to Form NRSRO, 
disclosure reporting pages to Form NRSRO, and certifications from 
QIBs under Section 15E(a)(1)(C) of the Exchange Act (15 U.S.C. 780-
7(a)(1)(C)).
---------------------------------------------------------------------------

    In terms of requiring the electronic submission of Form NRSROs 
submitted pursuant to paragraph (e), (f), or (g) of Rule 17g-1, the 
Commission notes that one of the primary goals of the EDGAR system is 
to facilitate the rapid dissemination of financial and business 
information in connection with filings the Commission receives. 
Although paragraph (i) of Rule 17g-1 currently requires NRSROs to make 
the public portions of their current Form NRSROs publicly available 
within 10 business days after submission to the Commission, the 
Commission believes having all such information available immediately 
in one location would make the information more easily available and 
searchable to investors and other users of credit ratings. Further, the 
Commission believes submissions to the Commission are more valuable to 
investors and other users of credit ratings if they are available in 
electronic format and that adding the Form NRSRO submissions to the 
EDGAR database would provide a more complete picture for the public. 
The Commission preliminarily believes that, as a result of the 
proposals, the EDGAR page of the Commission's Internet Web site \692\ 
and the NRSRO page of the Commission's Internet Web site \693\ would be 
a comprehensive source containing most public information submitted to 
the Commission, as well as other information, related to NRSROs. The 
Commission preliminarily believes that the electronic submission of 
Form NRSROs would benefit investors and other users of credit ratings 
by

[[Page 33483]]

increasing the efficiency of retrieving and comparing NRSRO public 
submissions and enabling the investors and other users of credit 
ratings to access information more quickly. An investor or other user 
of credit ratings would be able to find and review a Form NRSRO on any 
computer with an Internet connection by accessing EDGAR data on the 
Commission's Internet Web site or through a third party.
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    \692\ http://www.sec.gov/investor/pubs/edgarguide.htm.
    \693\ http://www.sec.gov/divisions/marketreg/ratingagency.htm.
---------------------------------------------------------------------------

    In addition, while the Rule 17g-3 annual reports would not be made 
public through the EDGAR system, having these reports and the Form 
NRSROs available on EDGAR could assist the Commission in its oversight 
of NRSROs. For example, Commission examiners could retrieve more easily 
the Form NRSROs and annual reports of a specific NRSRO to prepare for 
an examination. Moreover, having these records submitted and stored 
through the EDGAR system (i.e., in a centralized location) would assist 
the Commission from a records management perspective by establishing a 
more automated storage process and creating efficiencies in terms of 
reducing the volume of paper submissions that must be manually 
processed and stored.
    Moreover, the Commission preliminarily believes that the electronic 
submission of Form NRSRO and Rule 17g-3 annual reports would benefit 
NRSROs. For example, NRSROs would avoid the uncertainties, delay, and 
expense related to the manual delivery of paper submissions. Further, 
NRSROs would benefit from no longer having to submit multiple paper 
copies of these forms and reports to the Commission.
    As with other entities that make submissions through the EDGAR 
systems, these submissions would be subject to the provisions of 
Regulation S-T \694\ and the EDGAR Filer Manual. Regulation S-T 
includes detailed rules concerning mandatory and permissive electronic 
EDGAR submissions. It also provides that requests for confidential 
treatment must be made in paper form.\695\ The EDGAR Filer Manual 
contains detailed technical specifications concerning EDGAR 
submissions. The EDGAR Filer Manual also provides technical guidance 
concerning how to begin making submissions on EDGAR by submitting Form 
ID to obtain a CIK number \696\ and confidential access codes and how 
to maintain and update company data (e.g., how to change company names 
and contact information).\697\
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    \694\ For a comprehensive discussion of Regulation S-T and 
electronic filing, see ``Electronic Filing and the EDGAR System: A 
Regulatory Overview,'' available on the Commission's Internet Web 
site.
    \695\ See 17 CFR 232.101.
    \696\ As noted earlier, a CIK number is a ten-digit number 
uniquely identifying the person submitting the form or report.
    \697\ In the case of name changes, the changes must be made via 
the EDGAR filing Internet Web site in advance and the new name would 
be reflected in the next EDGAR submission. The name on past 
submissions would not change.
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    One technical specification the EDGAR Filer Manual includes is the 
electronic ``submission type'' for each submission made through the 
EDGAR system. The Commission expects the EDGAR electronic submission 
types for these documents would be designed to facilitate and expedite 
the submission and review of these submissions. Consistent with this 
proposal, the Commission preliminarily intends the EDGAR Filer Manual 
and the EDGARLink software would provide for two EDGAR electronic 
submission types: one for the submission of Form NRSRO and one for the 
submission of the annual reports pursuant to Rule 17g-3. The Commission 
also preliminarily intends that Form NRSRO would become an electronic, 
fillable, form and that the Exhibits would be submitted with the Form.
    As noted above, an NRSRO is not required to make the Rule 17g-3 
annual reports public. Therefore, the Rule 17g-3 annual reports would 
be submitted through the EDGAR system on a confidential basis and would 
not be made available to the public to the extent permitted by law. The 
Commission anticipates that the EDGAR Filer Manual would provide 
guidance for choosing the correct submission type.
    Amendments to Rule 17g-1. To implement the electronic submission 
through EDGAR of a Form NRSRO submitted to the Commission pursuant to 
paragraph (e), (f), or (g) of Rule 17g-1, the Commission proposes to 
amend each of those paragraphs to add a second sentence providing that 
a Form NRSRO and the information and documents in Exhibits 1 through 9, 
filed or furnished, as applicable, under the paragraph must be 
submitted electronically to the Commission in the format required by 
the EDGAR Filer Manual, as defined in Rule 11 of Regulation S-T.\698\ 
Furthermore, the Commission proposes amending paragraphs (a), (b), (c), 
and (d) of Rule 17g-1 to provide that an NRSRO should file ``two paper 
copies'' of the Form NRSROs filed pursuant to those paragraphs. This 
would be designed to clarify that these filings should continue to be 
made in paper. In addition, in the past, some NRSROs have submitted 
more than two paper copies of their Form NRSRO submissions. The 
Commission believes that the filing of two paper copies is sufficient.
---------------------------------------------------------------------------

    \698\ See proposed amendments to paragraphs (e), (f), and (g) of 
Rule 17g-1.
---------------------------------------------------------------------------

    Amendments to the Instructions to Form NRSRO. To further implement 
the electronic submission through the EDGAR system of Form NRSROs 
submitted to the Commission pursuant to paragraphs (e), (f), or (g) of 
Rule 17g-1, the Commission proposes amending Instruction A.8 to Form 
NRSRO to distinguish between Form NRSRO submissions under paragraph 
(a), (b), (c), or (d) of Rule 17g-1 (which would continue to be 
submitted in paper form) and submissions under paragraphs (e), (f), or 
(g) of Rule 17g-1 (which would be submitted electronically through the 
EDGAR system). Currently, Instruction A.8 simply provides the address 
where a Form NRSRO submitted under paragraph (a), (b), (c), (d), (e), 
(f), or (g) of Rule 17g-1 must be submitted (i.e., the headquarters of 
the Commission). The Commission proposes amending Instruction 8.A to 
add above the address a sentence that would instruct an applicant to 
submit to the Commission at the address indicated below two paper 
copies of a Form NRSRO submitted pursuant to paragraph (a), (b), (c), 
or (d) of Rule 17g-1.\699\ The Commission further proposes adding a 
sentence below the address providing that after registration, an NRSRO 
must submit Form NRSRO electronically to the Commission in the format 
required by the EDGAR Filer Manual, as defined in Rule 11 of Regulation 
S-T, if the submission is made pursuant to paragraphs (e), (f), or (g) 
of Rule 17g-1.\700\
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    \699\ See proposed amendments to Instruction A.8 of Form NRSRO.
    \700\ Id.
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    Finally, the Commission proposes amending Instruction A.9 to Form 
NRSRO, which currently provides that a Form NRSRO will be considered 
furnished to the Commission on the date the Commission receives a 
complete and properly executed Form NRSRO that follows all applicable 
instructions for the Form.\701\ The Commission proposes amending the 
instruction to read as follows: ``A Form NRSRO will be considered filed 
with or furnished to, as applicable, the Commission on the date the 
Commission receives a complete and properly executed Form NRSRO that

[[Page 33484]]

follows all applicable instructions for the Form, including the 
instructions in Item A.8 with respect to how a Form NRSRO must be filed 
with or furnished to the Commission.'' \702\ This instruction would be 
designed to clarify that a Form NRSRO submitted pursuant to paragraph 
(e), (f), or (g) of Rule 17g-1 must be submitted electronically.
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    \701\ See Instruction A.9 to Form NRSRO.
    \702\ See proposed amendments to Instruction A.9 to Form NRSRO.
---------------------------------------------------------------------------

    Proposed Amendments to Rule 17g-3. To implement the electronic 
submission through the EDGAR system of the Rule 17g-3 annual reports, 
the Commission proposes adding two new paragraphs to Rule 17g-3: 
paragraphs (d) and (e).\703\ Similar to the proposed amendments to 
paragraphs (e), (f), and (g) of Rule 17g-1, proposed new paragraph (d) 
of Rule 17g-3 would provide that the reports required by the rule must 
be submitted electronically with the Commission in the format required 
by the EDGAR Filer Manual, as defined in Rule 11 of Regulation S-
T.\704\ In addition, because the Rule 17g-3 annual reports are not 
required to be made public, the Commission proposes adding new 
paragraph (e) to Rule 17g-3.\705\ Proposed new paragraph (e) would, in 
the first sentence, instruct an NRSRO that information submitted on a 
confidential basis and for which confidential treatment has been 
requested pursuant to applicable Commission rules will be accorded 
confidential treatment to the extent permitted by law.\706\ Proposed 
new paragraph (e) of Rule 17g-3 would, in the second sentence, instruct 
an NRSRO that confidential treatment may be requested by marking each 
page ``Confidential Treatment Requested'' and by complying with 
Commission rules governing confidential treatment.\707\
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    \703\ See proposed new paragraphs (d) and (e) of Rule 17g-3.
    \704\ See proposed new paragraph (d) of Rule 17g-3.
    \705\ See proposed new paragraph (e) of Rule 17g-3.
    \706\ See the first sentence of proposed new paragraph (e) of 
Rule 17g-3.
    \707\ See the second sentence of proposed new paragraph (e) of 
Rule 17g-3.
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    Proposed Amendments to Regulation S-T. Regulation S-T requires the 
electronic filing of any amendments and related correspondence and 
supplemental information pertaining to a document that is the subject 
of mandated EDGAR submission.\708\ The Commission proposes amending 
Rule 101 of Regulation S-T \709\ by adding a new paragraph 
(a)(1)(xiv).\710\ Proposed new paragraph (a)(1)(xiv) would identify the 
Form NRSROs and the information and documents submitted in Exhibits 1 
through 9 of Form NRSRO submitted to the Commission pursuant to 
paragraphs (e), (f), and (g) of Rule 17g-1 and the annual reports 
submitted pursuant to Rule 17g-3 as submissions that must be made in 
electronic format.\711\
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    \708\ See 17 CFR 232.101(a)(1).
    \709\ 17 CFR 232.101(a)(1).
    \710\ See proposed paragraph (a)(1)(xiv) of Rule 101 under 
Regulation S-T.
    \711\ Related correspondence and supplemental information are 
not automatically disseminated publicly through the EDGAR system but 
are immediately available to the Commission staff.
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    The Commission also is proposing an amendment to Rule 201 of 
Regulation S-T.\712\ Rules 201 and 202 \713\ of Regulation S-T address 
hardship exemptions from EDGAR filing requirements, and paragraph (b) 
of Rule 13 of Regulation S-T \714\ addresses the related issue of 
filing date adjustments. Under Rule 201, if an electronic filer 
experiences unanticipated technical difficulties that prevent the 
timely preparation and submission of an electronic filing, the filer 
may file a properly legended paper copy \715\ of the filing under cover 
of Form TH no later than one business day after the date on which the 
filing was made.\716\ A filer who files in paper form under the 
temporary hardship exemption must submit an electronic copy of the 
filed paper document within six business days of the filing of the 
paper document.\717\
---------------------------------------------------------------------------

    \712\ 17 CFR 232.201
    \713\ 17 CFR 232.202.
    \714\ 17 CFR 232.13(b).
    \715\ See 17 CFR 232.201(a).
    \716\ 17 CFR 239.65, 249.447, 269.10, and 274.404.
    \717\ See 17 CFR 232.201(b).
---------------------------------------------------------------------------

    In addition, an electronic filer may apply for a continuing 
hardship exemption under Rule 202 if it cannot file all or part of a 
filing without undue burden or expense.\718\ The application must be 
made at least 10 business days before the due date of the filing. In 
contrast to the self-executing temporary hardship exemption process, a 
filer can obtain a continuing hardship exemption only by submitting a 
written application, upon which the Commission, or the Commission staff 
pursuant to delegated authority, must then act. Under paragraph (b) of 
Rule 13 of Regulation S-T, if an electronic filer in good faith 
attempts to file a document, but the filing is delayed due to technical 
difficulties beyond the filer's control, the filer may request that the 
Commission grant an adjustment of the filing date.
---------------------------------------------------------------------------

    \718\ See 17 CFR 232.202(a).
---------------------------------------------------------------------------

    The Commission is proposing to make the temporary hardship 
exemption in Rule 201 unavailable for the submissions of Form NRSRO and 
the information and documents submitted in Exhibits 1 through 9 of Form 
NRSRO under paragraph (e), (f), or (g) of Rule 17g-1 and the annual 
reports required under Rule 17g-3.\719\ Specifically, the Commission is 
proposing to amend paragraph (a) of Rule 201 of Regulation S-T to add 
this group of submissions to the list of submissions for which the 
temporary hardship exemption is unavailable.\720\ An NRSRO would 
continue to have the ability to apply for a continuing hardship 
exemption under Rule 202 if it could not submit all or part of an 
application without undue burden or expense or for an adjustment of the 
due date under paragraph (b) of Rule 13 if there were technical 
difficulties beyond the NRSRO's control.
---------------------------------------------------------------------------

    \719\ The Commission previously has made unavailable the ability 
for filers to use the temporary hardship exemption for EDGAR 
submissions of beneficial ownership reports filed by officers, 
directors and principal security holders under Section 16(a) of the 
Exchange Act. See Securities Act Release No. 8230 (May 7, 2003), 68 
FR 25788 (May 13, 2010).
    \720\ See proposed amendment to paragraph (a) of Rule 201 of 
Regulation S-T.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission proposes amending 
Regulation S-T: (1) to provide for the mandatory electronic submission 
of Form NRSRO and the information and documents contained in Exhibits 1 
through 9 of Form NRSRO pursuant to paragraphs (e), (f), or (g) of Rule 
17g-1 and the annual reports pursuant to Rule 17g-3;\721\ and (2) to 
amend paragraph (a) of Rule 201 to make the temporary hardship 
exemption unavailable for submissions of Form NRSROs and the 
information and documents contained in Exhibits 1 through 9 under 
paragraphs (e), (f), or (g) of Rule 17g-1 and the annual reports under 
Rule 17g-3.\722\
---------------------------------------------------------------------------

    \721\ See proposed new paragraph (a)(1)(xiv) to Rule 101 of 
Regulation S-T.
    \722\ See proposed amendment to paragraph (a) of Rule 201 of 
Regulation S-T.
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of these 
proposals to require the electronic submission of Form NRSRO under 
paragraphs (e), (f), and (g) of Rule 17g-1 and the annual reports under 
Rule 17g-3. The Commission also seeks comment on the following:
    1. Should applicants be required to submit Form NRSRO 
electronically under paragraph (a), (b), (c), or (d) of Rule 17g-1?
    2. What would be the impact of making the Form NRSROs required 
under paragraphs (e), (f), and (g) of Rule

[[Page 33485]]

17g-1 and the annual reports required under Rule 17g-3 mandatory 
electronic submissions? Are there additional burdens or costs that 
would result from requiring these submissions to be made 
electronically?
    3. Are there any other difficulties and considerations unique to 
these proposed requirements? If so, what aspect of the proposed 
requirements would be burdensome? Are there other alternatives that 
would be less burdensome? Provide specific details and alternative 
approaches.
    4. Should NRSROs be required to submit the financial information in 
Form NRSRO and the information and documents contained in Exhibits 1 
through 9 and the Rule 17g-3 annual reports using the XBRL format? 
Should NRSROs be required to use eXtensible Markup Language (XML) for 
EDGAR for non-financial information? Provide detailed information on 
any difficulties and considerations as well as benefits concerning such 
requirements.
    5. Should the temporary hardship exemption be available for 
submission of these filings?

M. Other Amendments

    The Commission is proposing additional amendments to several of the 
NRSRO rules in response to amendments the Dodd-Frank Act made to 
sections of the Exchange Act that authorize or otherwise are relevant 
to these rules.
1. Changing ``Furnish'' to ``File''
    Section 932(a) of the Dodd-Frank Act amended Section 15E of the 
Exchange Act to replace the word ``furnish'' with the word ``file'' in 
paragraphs (b), (d), (k), and (l).\723\ In addition, Section 932(a) of 
the Dodd-Frank Act amended paragraph (j) of Section 15E of the Exchange 
to, among other things, add a requirement that an NRSRO ``file'' a 
report of the designated compliance officer.\724\ The Dodd-Frank Act, 
however, did not replace the word ``furnish'' with the word ``file'' in 
Section 15E(a) (which governs the submission of initial applications 
for registration as an NRSRO), Section 15E(e) (which governs the 
submission of voluntary withdrawals from registration), and Section 
17(a)(1) (which provides the Commission with authority to, among other 
things, require NRSROs to furnish reports).\725\ Consistent with the 
amendments to Section 15E described above, the Commission is proposing 
to amend Rule 17g-1 and Rule 17g-3 to treat certain of the submissions 
required in those rules as ``filings'' rather than ``furnishings.'' 
\726\ The Commission also is proposing to make corresponding amendments 
to Form NRSRO and the Instructions to Form NRSRO.
---------------------------------------------------------------------------

    \723\ See Public Law 111-203 Sec.  932(a) and 15 U.S.C. 78o-
7(b), (d), (k), and (l).
    \724\ See Public Law 111-203 Sec.  932(a) and 15 U.S.C. 78o-
7(j)(5).
    \725\ See 15 U.S.C. 78o-7(e) and 15 U.S.C. 78q(a)(1).
    \726\ Among other things, an application, report, or document 
``filed'' with the Commission pursuant to the Exchange Act or the 
rules thereunder is subject to the provisions of Section 18 of the 
Exchange Act. See 15 U.S.C. 78o-7r.
---------------------------------------------------------------------------

    The Commission proposes amending paragraphs (a), (b), (c), and (d) 
of Rule 17g-1 to treat Form NRSROs submitted pursuant to those 
provisions as ``filings'' rather than ``furnishings.'' \727\ These 
paragraphs govern the submissions of initial applications for 
registration as an NRSRO. The Commission notes that the Dodd-Frank Act 
did not replace the word ``furnish'' with the word ``file'' in Section 
15E(a) of the Exchange Act, which addresses the submission of initial 
applications for registration. The Commission, however, preliminarily 
believes that this was an inadvertent omission. For example, Section 
15E(b)(1) refers to information ``required to be filed'' under Section 
15E(a)(1)(B)(i) of the Exchange Act (emphasis added).\728\ Similarly, 
Section 15E(d)(1)(B) of the Exchange Act refers to ``the date on which 
an application for registration is filed with the Commission'' 
(emphasis added).\729\ In addition, the legislative history of Section 
932(a) states that ``[Title IX, Subtitle C, of the Dodd-Frank Act] 
requires all references to `furnish' be replaced with the word `file' 
in existing law.'' \730\ For these reasons, the Commission proposes to 
amend paragraphs (a), (b), (c), and (d) of Rule 17g-1 to treat the 
submissions pursuant to those paragraphs as ``filings.''
---------------------------------------------------------------------------

    \727\ See proposed amendments to paragraphs (a), (b), (c), and 
(d) of Rule 17g-1.
    \728\ See 15 U.S.C. 78o-7(a)(1)(B)(i).
    \729\ See 15 U.S.C. 78o-7(d)(1)(B).
    \730\ See Conference Report, H.R. 4173 (June 29, 2010), p. 872.
---------------------------------------------------------------------------

    The Commission proposes amending paragraphs (e) and (f) of Rule 
17g-1 to treat Form NRSROs submitted pursuant to those provisions as 
``filings'' rather than ``furnishings.'' \731\ As noted above, Section 
932(a) of the Dodd-Frank Act amended Section 15E(b) of the Exchange Act 
to replace the word ``furnish'' with the word ``file.'' \732\ Section 
15E(b) of the Exchange Act addresses updating Form NRSRO to keep it 
current and the submission of the annual certification.\733\ Paragraphs 
(e) and (f) of Rule 17g-1 govern the submission of updated Form NRSROs 
and annual certifications, respectively.\734\ Consequently, the 
Commission proposes amending these paragraphs to treat the submissions 
of an updated Form NRSRO and an annual certification, respectively, as 
``filings'' rather than ``furnishings.'' \735\
---------------------------------------------------------------------------

    \731\ See proposed amendments to paragraphs (e) and (f) of Rule 
17g-1.
    \732\ See Public Law 111-203 Sec.  932(a)(1) and 15 U.S.C. 78o-
7(b).
    \733\ See 15 U.S.C. 78o-7(b)(1) and (2).
    \734\ See 17 CFR 240.17g-1(e) and (f).
    \735\ See proposed amendments to paragraphs (e) and (f) of Rule 
17g-1.
---------------------------------------------------------------------------

    The Commission is not proposing to amend paragraph (g) of Rule 17g-
1 to replace the word ``furnish'' with the word ``file.'' This 
paragraph implemented Section 15E(e) of the Exchange Act, which 
addresses the submission by an NRSRO of a written notice to voluntarily 
withdraw a registration.\736\ The Commission preliminarily believes 
that it is not necessary to subject a notice of withdrawal of 
registration to the higher standards of a ``filing.''
---------------------------------------------------------------------------

    \736\ See 15 U.S.C. 78o-7(e) and 17 CFR 240.17g-1(g).
---------------------------------------------------------------------------

    Given the proposed amendments to paragraphs (a), (b), (c), (d), 
(e), and (f) of Rule 17g-1, the Commission proposes amending paragraphs 
(h) and (i) of Rule 17g-1 to reflect that a Form NRSRO would be 
``filed'' with the Commission under the proposed amendments to 
paragraphs (a), (b), (c), (d), (e), and (f) of Rule 17g-1 and 
``furnished'' to the Commission under paragraph (g) of Rule 17g-1.
    The Commission is proposing to amend paragraphs (a)(1) through 
(a)(5) of Rule 17g-3 to treat the reports submitted pursuant to those 
provisions as ``filings'' rather than ``furnishings.'' \737\ As noted 
above, Section 932(a) of the Dodd-Frank Act amended Section 15E(k) of 
the Exchange Act to replace the word ``furnish'' with the word 
``file.'' \738\ Section 15E(k) of the Exchange Act provides the 
Commission with authority to require NRSROs to submit annual financial 
reports.\739\ The Commission adopted paragraphs (a)(1) through (a)(5) 
of Rule 17g-3 under Section 15E(k).\740\ Consequently, the Commission 
proposes amending Rule 17g-3 to treat the reports identified in 
paragraphs (a)(1) through (a)(5) as ``filings'' rather than 
``furnishings.'' \741\
---------------------------------------------------------------------------

    \737\ See proposed amendments to paragraphs (a)(1) through (5) 
of Rule 17g-3.
    \738\ See Public Law 111-203 Sec.  932(a)(6) and 15 U.S.C. 78o-
7(k).
    \739\ See 15 U.S.C. 78o-7(k).
    \740\ See Oversight of Credit Rating Agencies Registered as 
Nationally Recognized Statistical Rating Organizations, 72 FR at 
33590-33593 (June 18, 2007).
    \741\ See 15 U.S.C. 78o-7(k) and proposed amendments to 
paragraphs (a)(1)-(5) of Rule 17g-3.

---------------------------------------------------------------------------

[[Page 33486]]

    In addition, the Commission proposes that the new report on 
internal controls discussed in Section II.A.3 of this release and the 
new report of the designated compliance officer discussed in Section 
II.K of this release be treated as ``filings'' rather than 
``furnishings.'' \742\ Section 15E(c)(3)(B) of the Exchange Act 
provides, among other things, that the Commission shall prescribe rules 
requiring NRSROs to ``submit'' to the Commission an internal controls 
report.\743\ In addition, Section 15E(j)(5)(B) of the Exchange Act, 
``Submission of reports to the Commission,'' provides that an NRSRO 
``shall file'' the report of the designated compliance officer together 
with the financial report that is required to be ``submitted'' to the 
Commission under Section 15E of the Exchange Act.\744\ As discussed in 
Section II.K of this release, the financial reports are submitted 
pursuant to Rule 17g-3, which was adopted under Section 15E(k).\745\ 
Moreover, as noted above, the Section 932(a)(6) of the Dodd-Frank Act 
amended Section 15E(k) of the Exchange Act to replace the word 
``furnish'' with the word ``file.'' \746\ Consequently, given the 
interchangeable use of the word ``submit'' with the word ``file'' in 
Section 15E(j)(5)(B) and the legislative history discussed above, the 
Commission proposes to treat the new report on internal controls as a 
``filing.'' \747\ As noted above, Section 15E(j)(5)(B) of the Exchange 
Act explicitly provides that an NRSRO ``shall file'' the report of the 
designated compliance officer.\748\ Therefore, the Commission proposes 
to use the term ``file'' in proposed new paragraph (a)(8) of Rule 17g-
3.\749\
---------------------------------------------------------------------------

    \742\ See proposed new paragraphs (a)(7) and (a)(8) of Rule 17g-
3.
    \743\ See 15 U.S.C. 78o-7(c)(3)(B).
    \744\ See 15 U.S.C. 78o-7(j)(5)(B).
    \745\ See 15 U.S.C. 78o-7(k) and 17 CFR 240.17g-3; see also 
Oversight of Credit Rating Agencies Registered as Nationally 
Recognized Statistical Rating Organizations, 72 FR at 33590-33593 
(June 18, 2007).
    \746\ See Public Law 111-203 Sec.  932(a)(6) and 15 U.S.C. 78o-
7(k).
    \747\ See proposed new paragraph (a)(7) of Rule 17g-3.
    \748\ See 15 U.S.C. 78o-7(j)(5)(B).
    \749\ See proposed new paragraph (a)(8) of Rule 17g-3.
---------------------------------------------------------------------------

    The Commission does not propose to amend paragraph (a)(6) of Rule 
17g-3 to treat the report identified in that paragraph as a filing. 
This paragraph was adopted under Section 17(a)(1) of the Exchange 
Act.\750\ Section 17(a)(1) of the Exchange Act provides that any report 
an NRSRO ``is required by Commission rules under this paragraph to make 
and disseminate to the Commission shall be deemed furnished to the 
Commission.'' \751\ As noted above, the Dodd-Frank Act did not change 
this provision to make the report a ``filing.''
---------------------------------------------------------------------------

    \750\ See Amendments to Rules for Nationally Recognized 
Statistical Rating Organizations, 74 FR at 6464-65 (Feb. 9, 2009).
    \751\ See 15 U.S.C. 78o-7q(a)(1).
---------------------------------------------------------------------------

    The Commission is proposing to amend Form NRSRO and the 
Instructions to Form NRSRO to conform the Form and its Instructions to 
the proposed amendments discussed above.\752\ Under the proposed 
amendments, the Commission would replace the word ``furnish'' with the 
word ``file'' when referring to a Form NRSRO submitted under paragraphs 
(a), (b), (c), (d), (e), and (f) of Rule 17g-1. In addition, in some 
cases, the Commission proposes using the term ``submit'' when referring 
to a Form NRSRO that may have been submitted prior to enactment of the 
Dodd-Frank Act when the submission would have been ``furnished to'' as 
opposed to ``filed with'' the Commission. The Commission intends the 
word ``submit'' as used in this context to mean the submission was 
either ``furnished'' or ``filed'' depending on the applicable 
securities laws in effect at the time of the submission.
---------------------------------------------------------------------------

    \752\ See proposed amendments to Form NRSRO and the Instructions 
to Form NRSRO.
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of these 
proposals to replace the word ``furnish'' with the word ``file'' in the 
Commission's NRSRO rules.
2. Amended Definition of NRSRO
    As discussed above in Section II.I.1.c of this release, the first 
prong of the definition of ``nationally recognized statistical rating 
organization'' in Section 3(a)(62) of the Exchange Act, prior to being 
amended by the Dodd-Frank Act, provided that the entity ``has been in 
business as a credit rating agency for at least the 3 consecutive years 
immediately preceding the date of its application for registration 
under Section 15E.'' \753\ Section 932(b) of the Dodd-Frank Act deleted 
this prong of the definition.\754\ Instruction F.4 to Form NRSRO 
contains a definition of ``NRSRO'' that incorporates the Section 
3(a)(62) definition as originally enacted. The Commission proposes 
amending this definition to conform it to the Section 3(a)(62) 
definition as amended by the Dodd-Frank Act.\755\
---------------------------------------------------------------------------

    \753\ See Section 3(a)(62)(A) of the Exchange Act (15 U.S.C. 
78c(a)(62)(A) added by the Rating Agency Act of 2006.
    \754\ See Public Law 111-203 Sec.  932(b).
    \755\ See proposed amendment to Instruction F.4 to Form NRSRO.
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of this 
proposal to amend the definition of NRSRO in Instruction F.4 to Form 
NRSRO.
3. Definition of Asset-Backed Security
    Several of the Commission's NRSRO rules impose requirements 
specific to credit ratings for structured finance products by providing 
that the rules apply to credit ratings with respect to ``a security or 
money market instrument issued by an asset pool or as part of any 
asset-backed or mortgage-backed-securities transaction.'' \756\ This 
language mirrors the text of Section 15E(i) of the Exchange Act, which 
provides the Commission with authority to prohibit an NRSRO from the 
practice of ``lowering or threatening to lower a credit rating on, or 
refusing to rate, securities or money market instruments issued by an 
asset pool or as part of any asset-backed or mortgage-backed securities 
transaction, unless a portion of the assets within such pool or part of 
such transaction, as applicable, also is rated by the [NRSRO].'' \757\ 
As noted earlier, with respect to this language, the Commission has 
provided the following interpretation,
---------------------------------------------------------------------------

    \756\ See paragraphs (a)(2)(iii), (a)(7), and (b)(9) of Rule 
17g-2; paragraph (a)(6) of Rule 17g-3; paragraphs (a)(3) and (b)(9) 
of Rule 17g-5; and paragraph (a)(4) of Rule 17g-6.

    \757\ See 15 U.S.C. 78o-7(i).

The term ``structured finance product'' as used throughout this 
release refers broadly to any security or money market instrument 
issued by an asset pool or as part of any asset-backed or mortgage-
backed securities transaction. This broad category of financial 
instrument includes, but is not limited to, asset-backed securities 
such as residential mortgage-backed securities (``RMBS'') and to 
other types of structured debt instruments such as collateralized 
debt obligations (``CDOs''), including synthetic and hybrid CDOs, or 
collateralized loan obligations (``CLOs'').\758\
---------------------------------------------------------------------------

    \758\ Amendments to Rules for Nationally Recognized Statistical 
Rating Organizations, 74 FR at 63832, footnote 3 (Dec. 4, 2009).

    Section 941(a) of the Dodd-Frank Act amended Section 3 of the 
Exchange Act to add paragraph (a)(77), which defines the term ``asset-
backed security.'' \759\ The Exchange Act definition of ``asset-backed 
security,'' includes a ``collateralized mortgage obligation.'' \760\ 
Consequently, the Commission preliminarily believes that the current 
identification of structured finance products in the Commission's rules 
(i.e., ``a security or money market instrument

[[Page 33487]]

issued by an asset pool or as part of any asset-backed or mortgage-
backed securities transaction'') may have redundant terms insomuch as 
given the new definition of ``asset-backed security'' in Section 
3(a)(77) of the Exchange Act an ``asset-backed securities transaction'' 
would include a ``mortgage-backed securities transaction.'' \761\ 
Accordingly, the Commission is proposing to delete the term ``or 
mortgage-backed'' from the identification of structured finance 
products in these rules.\762\ The term ``asset-backed security[y]'' as 
used in the proposed new NRSRO rule definition would mean an ``asset-
backed security'' as defined in Section 3(a)(77) of the Exchange Act. 
The term ``security or money market instrument issued by an asset pool 
or as part of any asset-backed securities transaction'' would include 
an asset-backed security as defined in Section 3(a)(77) of the Exchange 
Act and other structured finance products relating to asset-backed 
securities such as synthetic CDOs.
---------------------------------------------------------------------------

    \759\ See Public Law 111-203 Sec.  941(a) and 15 U.S.C. 
78c(a)(77).
    \760\ See 15 U.S.C. 78c(a)(77)(A)(i).
    \761\ See 15 U.S.C. 78c(a)(77)(A).
    \762\ See proposed amendments to paragraphs (a)(2)(iii), (a)(7), 
and (b)(9) of Rule 17g-2; paragraph (a)(6) of Rule 17g-3; paragraphs 
(a)(3) and (b)(9) of Rule 17g-5; and paragraph (a)(4) of Rule 17g-6.
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of these 
proposals to delete the term ``or mortgage-backed'' from the 
identification of structured finance products in the NRSRO rules. The 
Commission also seeks comment on the following:
    1. Would the proposal to delete the term ``or mortgage-backed'' 
from the identification of structured finance products in the NRSRO 
rules change the requirements of these rules in any way? For example, 
would it exclude certain types of structured finance products that 
currently are within the scope of these rules by narrowing the 
definition? Alternatively, would it add certain types of structured 
finance products that currently are outside the scope of these rules by 
broadening the definition?
4. Other Amendments to Form NRSRO
    The Commission is proposing additional amendments to the 
Instructions to Form NRSRO to clarify certain requirements because the 
instructions, as written, have created some confusion among NRSROs.
a. Clarification With Respect to Items 6 and 7
    The Commission is proposing amendments to Form NRSRO and the 
Instructions for Form NRSRO to remove potential ambiguity as to how an 
applicant and NRSRO must determine the approximate number of credit 
ratings outstanding for the purposes of Items 6 and 7. In addition, the 
Commission is seeking comment on how certain types of obligors, 
securities, and money market instruments should be classified for the 
purposes of Items 6 and 7.
    Item 6 requires a credit rating agency applying to be registered as 
an NRSRO or an NRSRO applying to be registered in a new class of credit 
ratings to provide, among other things, the approximate number of 
credit ratings it has outstanding as of the date of the application in 
each class of credit ratings for which it is seeking registration.\763\ 
Item 7 requires an NRSRO submitting a Form NRSRO for the purpose of 
updating information in the Form, making the annual certification, or 
withdrawing a registration to provide, among other things, the 
approximate number of credit ratings it had outstanding as of the end 
of the most recently ended calendar year in each class of credit 
ratings for which it is registered.\764\ As noted earlier, the classes 
of credit ratings for which an NRSRO can be registered are: (1) 
financial institutions, brokers, or dealers; \765\ (2) insurance 
companies; \766\ (3) corporate issuers; \767\ (4) issuers of asset-
backed securities (as that term is defined in Section 1101(c) of part 
229 of Title 17, Code of Federal Regulations, as in effect on the date 
of enactment of this paragraph); \768\ and (5) issuers of government 
securities, municipal securities, or securities issued by a foreign 
government.\769\
---------------------------------------------------------------------------

    \763\ See Item 6 of Form NRSRO and Instructions B, C, D, and H 
(as it relates to Item 6) to Form NRSRO.
    \764\ See Item 7 of Form NRSRO and Instructions E, F, G, and H 
(as it relates to Item 7) to Form NRSRO.
    \765\ See 15 U.S.C. 78c(a)(62)(A)(i).
    \766\ See 15 U.S.C. 78c(a)(62)(A)(ii).
    \767\ See 15 U.S.C. 78c(a)(62)(A)(iii).
    \768\ See 15 U.S.C. 78c(a)(62)(A)(iv).
    \769\ See 15 U.S.C. 78c(a)(62)(A)(v).
---------------------------------------------------------------------------

    NRSROs have raised questions about how they should count the number 
of credit ratings outstanding in a given class of credit ratings for 
the purposes of Form NRSRO.\770\ For example, in some classes, certain 
NRSROs count the number of issuers rated but not the number of 
securities or money market instruments rated.\771\ Other NRSROs count 
the number of securities or money market instruments rated (but do 
include the number of rated obligors in the total).\772\ Finally, some 
NRSROs count the number of obligors, securities, and money market 
instruments rated.\773\
---------------------------------------------------------------------------

    \770\ See, e.g., GAO Report 10-782, pp. 46-47.
    \771\ Id.
    \772\ Id.
    \773\ Id.
---------------------------------------------------------------------------

    The Commission's intent in Items 6 and 7 is to elicit the total 
number of obligors, securities, and money market instruments in a given 
class of credit ratings for which the applicant or NRSRO has assigned a 
credit rating that was outstanding as of the applicable date (i.e., the 
date of the application in the case of Item 6 and the date of the most 
recent calendar year-end in the case of Item 7). Consequently, to make 
the Commission's expectations more clear, the Commission is proposing 
to amend the text in Items 6.A and 7.A of Form NRSRO to clarify that an 
applicant or NRSRO must provide the approximate number of obligors, 
securities, and money market instruments in each class of credit 
ratings for which the applicant or NRSRO has an outstanding credit 
rating.\774\ The text in Items 6.A and 7.A currently provides that the 
applicant or NRSRO must provide the approximate number of credit 
ratings outstanding. Consequently, the amendment would clarify that the 
applicant or NRSRO must provide the number of ``obligors, securities, 
and money market instruments'' in the given class for which the 
applicant or NRSRO assigned a credit rating that was outstanding as of 
the applicable date.
---------------------------------------------------------------------------

    \774\ See proposed amendments to the text in Items 6.A and 7.A 
respectively.
---------------------------------------------------------------------------

    In addition, the Commission is proposing to amend Instruction H to 
Form NRSRO (as it relates to Items 6.A and 7.A) in four ways. First, in 
conformity with the proposed amendments to the text of Items 6.A and 
7.A in the Form, the Instructions would be amended to provide that the 
applicant or NRSRO must, for each class of credit ratings, provide in 
the appropriate box the approximate number of obligors, securities, and 
money market instruments in that class for which the applicant or NRSRO 
presently has a credit rating outstanding as of the date of the 
application (Item 6.A) or had a credit rating outstanding as of the 
most recently ended calendar year (Item 7.A).
    Second, Instruction H would be amended to provide that the 
applicant or NRSRO must treat as a separately rated security or money 
market instrument each individually rated security and money market 
instrument that, for example, is assigned a distinct CUSIP or other 
unique identifier, has distinct credit enhancement features as compared 
with other securities or money market instruments of the same

[[Page 33488]]

issuer, or has a different maturity date as compared with other 
securities or money market instruments of the same issuer. This 
proposed instruction would be designed to clarify that each security or 
money market instrument of an issuer must be included in the count if 
it is assigned a credit rating by the applicant or NRSRO. For example, 
if the issuer is in the structured finance class, each tranche of the 
structured finance product that is assigned a credit rating must be 
included in the count. In addition, if an issuer issues securities or 
money market instruments that have different maturities, the applicant 
or NRSRO must include each such security in the count if the NRSRO 
assigns a credit rating to the security or money market instrument.
    Third, Instruction H would be amended to provide that the applicant 
or NRSRO must not include an obligor, security, or money market 
instrument in more than one class of credit rating. In other words, the 
applicant or NRSRO cannot double count an obligor, security, or money 
market instrument by including it in the totals for two or more classes 
of credit ratings. For example, some securities have characteristics 
that could cause an applicant or NRSRO to classify them as municipal 
securities or structured finance products.\775\ Nonetheless, the 
applicant or NRSRO would need to select the most appropriate class for 
the security or money market instrument and include it in the count for 
that class. Because some obligors, securities, and money market 
instruments have characteristics that could cause them to be assigned 
more than one class, the Commission is seeking comment below on which 
class would be the most appropriate for these types of obligors, 
securities, and money market instruments. Based on the comments 
received, the Commission may decide to prescribe by rule or identify 
through guidance how certain types of obligors, securities, and money 
market instruments should be classified.\776\
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    \775\ For example, tax exempt housing bonds share 
characteristics of both municipal securities and structured finance 
products.
    \776\ As noted above in Sections II.E.1 and II.E.2 of this 
release, the comments also could inform Commission rulemaking or 
guidance with respect to the performance statistics that would need 
to be disclosed pursuant to the proposed enhancements to Exhibit 1 
to Form NRSRO and the ratings history information that would need to 
be disclosed pursuant to new paragraph (b) of Rule 17g-7. The goal 
would be to have consistent disclosures in Items 6 and 7 of Form 
NRSRO, Exhibit 1 to Form NRSRO, and in the information about credit 
ratings histories that would be required under proposed new 
paragraph (b) of Rule 17g-7. The Commission notes other requirements 
in the securities laws may be triggered based on the type of 
obligor, security, or money market instrument being rated. See, 
e.g., 17 CFR 240.17g-5(a)(3) (which applies when an NRSRO issues or 
maintains a credit rating for a security or money market instrument 
issued by an asset pool or part of any asset-backed or mortgage-
backed securities transaction). The Commission, in eliciting 
comment, is not suggesting that an obligor, security, or money 
market instrument having shared characteristics of, for example, a 
structured finance product and a municipal security, would not be 
subject to these other requirements because the most appropriate 
classification for purposes of Items 6 and 7 of Form NRSRO, Exhibit 
1 to Form NRSRO, and proposed new paragraph (b) of Rule 17g-7 would 
be to classify it as a type of obligor, security, or money market 
instrument not subject to the other requirements.
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    Fourth, Instruction H would be amended to provide that the 
applicant or NRSRO must include in the class of credit ratings 
described in Section 3(a)(62)(B)(iv) of the Exchange Act (issuers of 
asset-backed securities) to the extent not described in Section 
3(a)(62)(B)(iv), any rated security or money market instrument issued 
by an asset pool or as part of any asset-backed securities transaction. 
As discussed above in Section II.M.3 of this release, Section 
3(a)(62)(B)(iv) contains a narrower definition of ``asset-backed 
security'' than the Commission uses for the purposes of its NRSRO 
rules.\777\ In fact, the definition is narrower than the new definition 
of ``asset-backed security'' in Section 3(a)77 of the Exchange 
Act.\778\ The Commission expects an applicant and NRSRO to use the 
broader definition that captures all structured finance products when 
providing the number of credit ratings outstanding in this class. The 
proposed amendments to Instruction H to Form NRSRO would be designed to 
make this expectation more clear.
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    \777\ Compare 15 U.S.C. 78c(a)(62)(B)(iv), with: Instructions 
for Exhibit 1 to Form NRSRO; paragraphs (a)(2)(iii), (a)(7), and 
(b)(9) of Rule 17g-2; paragraph (a)(6) of Rule 17g-3; paragraphs 
(a)(3) and (b)(9) of Rule 17g-5; and paragraph (a)(4) of Rule 17g-6.
    \778\ Compare 15 U.S.C. 78c(a)(62)(B)(iv), with 15 U.S.C. 
78c(a)(77).
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Request for Comment
    The Commission generally requests comment on all aspects of this 
proposal to amend Form NRSRO Items 6.A and 7.A and Instruction H to 
Form NRSRO as it relates to Items 6.A and 7.A. The Commission also 
seeks comment on the following:
    1. Would the proposed amendments to Items 6.A and 7.A and 
Instruction H to Form NRSRO as it relates to Items 6.A and 7.A make the 
Commission's expectations sufficiently clear in terms of providing the 
approximate number of credit ratings outstanding in each class for 
which an applicant is seeking registration and an NRSRO is registered? 
If not, how could the proposed amendments be modified to provide 
greater clarity?
    2. How should tax-exempt housing bonds be classified for the 
purposes of Items 6 and 7? For example, should they be classified as: 
(1) Issuers of asset-backed securities identified in Section 
3(a)(62)(A)(iv) of the Exchange Act as broadened to include any rated 
security or money market instrument issued by an asset pool or as part 
of any asset-backed securities transaction; or (2) issuers of 
government securities, municipal securities, or securities issued by a 
foreign government identified in Section 3(a)(62)(A)(v) of the Exchange 
Act? Is there another more appropriate classification? Commenters 
should provide explanations for their choices.
    3. How should project finance issuances be classified for the 
purposes of Items 6 and 7? For example, should they be classified as: 
(1) Corporate issuers identified in Section 3(a)(62)(A)(iii) of the 
Exchange Act; (2) issuers of asset-backed securities identified in 
Section 3(a)(62)(A)(iv) of the Exchange Act as broadened to include any 
rated security or money market instrument issued by an asset pool or as 
part of any asset-backed securities transaction; or (3) issuers of 
government securities, municipal securities, or securities issued by a 
foreign government identified in Section 3(a)(62)(A)(v) of the Exchange 
Act? Is there another more appropriate classification? Commenters 
should provide explanations for their choices.
    4. How should supra-national issuers (e.g., the World Bank) be 
classified for the purposes of Items 6 and 7? For example, should they 
be classified as: (1) Financial institutions, brokers, or dealers 
identified in Section 3(a)(62)(A)(i) of the Exchange Act; or (2) 
issuers of government securities, municipal securities, or securities 
issued by a foreign government identified in Section 3(a)(62)(A)(v) of 
the Exchange Act? Is there another more appropriate classification? 
Commenters should provide explanations for their choices.
    5. How should covered bonds be classified? For example, should they 
be classified as: (1) Financial institutions, brokers, or dealers 
identified in Section 3(a)(62)(A)(i) of the Exchange Act; or (2) 
issuers of asset-backed securities identified in Section 
3(a)(62)(A)(iv) of the Exchange Act as broadened to include any rated 
security or money market instrument issued by an asset pool or as part 
of any asset-backed securities transaction? Is there another more 
appropriate classification?

[[Page 33489]]

Commenters should provide explanations for their choices.
    6. How should municipal structured finance issuers be classified? 
For example, should they be classified as: (1) Issuers of asset-backed 
securities identified in Section 3(a)(62)(A)(iv) of the Exchange Act as 
broadened to include any rated security or money market instrument 
issued by an asset pool or as part of any asset-backed securities 
transaction; or (2) issuers of government securities, municipal 
securities, or securities issued by a foreign government identified in 
Section 3(a)(62)(A)(v) of the Exchange Act? Is there another more 
appropriate classification? Commenters should provide explanations for 
their choices.
    7. How should for-profit health care companies (e.g., hospitals, 
assisted living facilities, nursing homes) be treated if a municipality 
issues securities on behalf of the company? For example, should they be 
classified as: (1) Corporate issuers identified in Section 
3(a)(62)(A)(iii) of the Exchange Act; or (2) issuers of government 
securities, municipal securities, or securities issued by a foreign 
government identified in Section 3(a)(62)(A)(v) of the Exchange Act? Is 
there another more appropriate classification? Commenters should 
provide explanations for their choices.
    8. How should securitizations of health care receivables be 
classified? For example, should they be classified as: (1) Issuers of 
asset-backed securities identified in Section 3(a)(62)(A)(iv) of the 
Exchange Act as broadened to include any rated security or money market 
instrument issued by an asset pool or as part of any asset-backed 
securities transaction; or (2) issuers of government securities, 
municipal securities, or securities issued by a foreign government 
identified in Section 3(a)(62)(A)(v) of the Exchange Act? Is there 
another more appropriate classification? Commenters should provide 
explanations for their choices.
    9. How should insurance-linked securities be classified? For 
example, should they be classified as: (1) Insurance companies 
identified in Section 3(a)(62)(A)(ii) of the Exchange Act; or (2) 
issuers of asset-backed securities identified in Section 
3(a)(62)(A)(iv) of the Exchange Act as broadened to include any rated 
security or money market instrument issued by an asset pool or as part 
of any asset-backed securities transaction? Is there another more 
appropriate classification? Commenters should provide explanations for 
their choices.
    10. Are there other types of obligors, securities, or money market 
instruments that share characteristics of one or more classes of credit 
ratings identified in Section 3(a)(62)(A) of the Exchange Act? If so, 
identify each such type of obligor, security, or money market 
instrument, provide a proposed classification, and explain the reason 
for the proposed classification.
b. Clarification With Respect to Exhibit 8
    The Commission proposes to amend Instruction H to Form NRSRO as it 
relates to Exhibit 8. Exhibit 8 requires an applicant and NRSRO to 
provide the number of credit analysts it employs and the number of 
credit analyst supervisors. The Commission is proposing two amendments 
to the instructions for Exhibit 8. The first amendment would delete a 
parenthesis in the instructions that provides that the applicant or 
NRSRO should ``see definition below'' of the term ``credit analyst.'' 
There is no such definition. The second amendment would clarify that 
the applicant or NRSRO, in providing the number of credit analysts, 
should include the number of credit analyst supervisors. This would be 
designed to ensure that the disclosures in Form NRSRO are comparable 
across NRSROs by avoiding the situation in which some NRSROs include 
credit analyst supervisors in the total number of credit analysts and 
some NRSROs do not include credit analyst supervisors in that amount.
Request for Comment
    The Commission generally requests comment on all aspects of this 
proposal to amend Instruction H to Form NRSRO as it relates to Exhibit 
8.
c. Clarification With Respect to Exhibits 10 through 13
    As discussed above, paragraph (i) of Rule 17g-1 requires an NRSRO 
to make its current Form NRSRO and information and documents submitted 
in Exhibits 1 through 9 to Form NRSRO publicly available on its 
Internet Web site, or through another comparable, readily accessible 
means within 10 business days after the date of the Commission order 
granting an initial application for registration.\779\ An NRSRO is not 
required to make Exhibits 10 through 13 of Form NRSRO publicly 
available or update them after registration. Instead, an NRSRO must 
provide similar information in the annual reports required to be filed 
with the Commission pursuant to Rule 17g-3.\780\ An NRSRO is not 
required to make the annual reports public. In the past, some NRSRO 
have submitted the annual reports required by Rule 17g-3 in the form of 
Exhibits 10 through 13, on a confidential basis, as part of the annual 
certification. Consequently, the Commission proposes to amend 
Instruction H in several places to add a ``Note'' instructing that 
after registration, Exhibits 10 through 13 are not required to be made 
publicly available by the NRSRO pursuant to Rule 17g-1(i) and they 
should not be updated with the filing of the annual certification. The 
``Note'' would further instruct that similar information must be filed 
with the Commission not more than 90 days after the end of each fiscal 
year pursuant to Rule 17g-3.\781\
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    \779\ See 17 CFR 240.17g-1.
    \780\ See 17 CFR 240.17g-3; also compare Exhibits 10, 11, 12, 
and 13 to Form NRSRO and Instruction H of Form NRSRO (as it relates 
to those Exhibits), with paragraphs (a) through (5) of Rule 17g-3. 
17 CFR 240.17g-3(a)(1)-(5).
    \781\ See ``Notes'' proposed to be added to Instruction H to 
Form NRSRO.
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Request for Comment
    The Commission generally requests comment on all aspects of this 
proposal to amend Instruction H to Form NRSRO.

III. General Request for Comment

    In responding to the specific requests for comment above, the 
Commission encourages interested persons to provide supporting data and 
analysis and, when appropriate, suggest modifications to proposed rule 
text. Responses that are supported by data and analysis provide great 
assistance to the Commission in considering the practicality and 
effectiveness of proposed new requirements as well as weighing the 
benefits and costs of proposed requirements. In addition, commenters 
are encouraged to identify in their responses a specific request for 
comment by indicating the section number of the release and question 
number within that section to which the response is directed (e.g., 
Section II.E.1.a, Question 15).
    The Commission also seeks comment on the proposals as a whole. In 
this regard, the Commission seeks comment on the following:
    1. How would the proposals integrate with provisions in other 
Titles and Subtitles of the Dodd-Frank Act and any regulations or 
proposed regulations under those other Titles and Subtitles?
    2. How would the proposals integrate with existing requirements 
applicable to NRSROs in the Exchange Act and the regulations adopted 
under authority in the Exchange Act?

[[Page 33490]]

    3. What should the implementation timeframe be for the proposed 
amendments and new rules? For example, should the compliance date be 60 
days after publication in the Federal Register? Alternatively, should 
the compliance date be 90, 120, 150, 180, or some other number of days 
after publication? Should the proposed requirements have different time 
frames before their compliance dates are triggered? For example, would 
it take longer to come into compliance with certain of these proposals 
than others? If so, rank the requirements in terms of the length of 
time it would take to come into compliance with them and propose a 
schedule of compliance dates.

IV. Paperwork Reduction Act

    Certain provisions of the proposed rule amendments and proposed new 
rules would contain new ``collection of information'' requirements 
within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\782\ The Commission has submitted the proposed rule 
amendments and proposed new rules to the Office of Management and 
Budget (``OMB'') for review in accordance with the PRA. An agency may 
not conduct or sponsor, and a person is not required to comply with, a 
collection of information unless it displays a currently valid OMB 
control number.
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    \782\ 44 U.S.C. 3501 et seq.; 5 CFR 1320.11.
---------------------------------------------------------------------------

    The titles for the collections of information are:
    (1) Rule 17g-1, Application for registration as a nationally 
recognized statistical rating organization; Form NRSRO, and Form NRSRO 
Instructions (OMB Control Number 3235-0625);
    (2) Rule 17g-2, Records to be made and retained by nationally 
recognized statistical rating organizations (OMB Control Number 3235-
0628);
    (3) Rule 17g-3, Annual financial reports to be furnished by 
nationally recognized statistical rating organizations \783\ (OMB 
Control Number 3235-0626);
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    \783\ The Commission is proposing to amend the title of Rule 
17g-3 to read, ``Annual financial and other reports to be filed or 
furnished by nationally recognized statistical rating 
organizations.''
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    (4) Rule 17g-7, Disclosure requirements (OMB Control Number 3235-
0656);
    (5) Rule 17g-8, Policies and procedures (a proposed new collection 
of information);
    (6) Rule 17g-9, Standards of training, experience, and competence 
for credit analysts (a proposed new collection of information);
    (7) Rule 17g-10, Certification of providers of third-party due 
diligence services in connection with asset-backed securities; Form ABS 
Due Diligence-15E (a proposed new collection of information);
    (8) Form ABS-15G (OMB Control Number 3235-0675);
    (9) Rule 15Ga-2 (a proposed new collection of information);
    (10) Regulation S-T, General Rules and Regulations for Electronic 
Filing (OMB Control Number 3235-0424); and
    (11) Form ID (OMB Control Number 3235-0328).
    The proposed amendments to Rule 17g-5 (discussed in Section II.B of 
this release) and Rule 17g-6 (discussed in Section II.M.3 of this 
release) do not contain a collection of information requirement within 
the meaning of the PRA.

A. Summary of Collections of Information Under the Proposed Rules and 
Rule Amendments

    In accordance with the Dodd-Frank Act and to enhance oversight, the 
Commission is soliciting comment on proposed amendments to existing 
rules and proposed new rules that would apply to NRSROs, providers of 
third-party due diligence services for Exchange Act-ABS, and issuers 
and underwriters of Exchange Act-ABS. The following proposals contain 
new ``collection of information'' requirements within the meaning of 
the PRA.
1. Proposed Amendments to Rule 17g-1
    The Commission is proposing to amend Rule 17g-1.\784\ First, to 
implement rulemaking mandated in Section 15E(q)(2)(D) of the Exchange 
Act, the Commission is proposing to amend paragraph (i) of Rule 17g-1, 
which requires an NRSRO to make its current Form NRSRO and formation 
and documents submitted in Exhibits 1 through 9 publicly available on 
its Internet Web site or through another comparable, readily accessible 
means within 10 business days of being granted an initial registration 
or a registration in an additional class of credit ratings, and within 
10 business days of furnishing a Form NRSRO to update information on 
the Form, to provide the annual certification, and to withdraw a 
registration.\785\ The Commission's proposed amendment would require an 
NRSRO to make Form NRSRO and Exhibits 1 through 9 freely available on 
an easily accessible portion of its corporate Internet Web site.\786\ 
The proposed amendment to paragraph (i) also would remove the option 
for an NRSRO to make its Form NRSRO publicly available ``through 
another comparable, readily accessible means'' as an alternative to Web 
site disclosure.\787\ In addition, the Commission is proposing amending 
paragraph (i) to provide that Exhibit 1 of Form NRSRO (the performance 
measurement statistics) be made freely available in writing when 
requested.\788\
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    \784\ 17 CFR 240.17g-1.
    \785\ See 15 U.S.C. 78o-7(q)(2)(D) and proposed amendments to 
paragraph (i) of Rule 17g-1; see also Section II.E.1.b of this 
release for a more detailed discussion of this proposal.
    \786\ See proposed amendments to paragraph (i) of Rule 17g-1.
    \787\ Id.
    \788\ Id.
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    Second, the Commission is proposing to amend paragraphs (e), (f), 
and (g) of Rule 17g-1 to require NRSROs to use the Commission's EDGAR 
system to electronically submit Form NRSRO and Exhibits 1 through 9 
with the Commission in the format required by the EDGAR Filer Manual, 
as defined in Rule 11 of Regulation S-T.\789\
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    \789\ See proposed amendments to paragraphs (e), (f), and (g) of 
Rule 17g-1; see also Section II.L of this release for a more 
detailed discussion of these proposals.
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2. Proposed Amendments to Instructions for Exhibit 1 to Form NRSRO
    The Commission is proposing to amend the instructions for Exhibit 1 
to Form NRSRO.\790\ The proposed amendments would be designed to 
implement rulemaking mandated in Section 15E(q) of the Exchange 
Act.\791\ In particular, the amendments would confine the disclosures 
in the Exhibit to transition and default rates and certain limited 
supplemental information.\792\ Moreover, the enhancements would 
standardize the production and presentation of the transition and 
default rates.\793\ Specifically, the amendments would require the 
transition and default rates in Exhibit 1 to be produced using a 
``single cohort approach.'' \794\ Under this approach, an applicant and 
NRSRO, on an annual basis, would be required to compute how the credit 
ratings assigned to obligors, securities, and money market instruments 
in a particular class or subclass of credit rating outstanding on the 
date 1, 3, and 10 years prior to the most recent calendar year-end

[[Page 33491]]

performed during respective 1, 3, and 10 year time periods.\795\
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    \790\ See Instruction H to Form NRSRO (as it relates to Exhibit 
1).
    \791\ See 15 U.S.C. 78o-7(q) and proposed amendments to the 
instructions for Exhibit 1; see also Section II.E.1.a of this 
release for a more detailed discussion of this proposal.
    \792\ See proposed amendments to the instructions for Exhibit 1.
    \793\ Id.
    \794\ Id.
    \795\ Id.
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    Under the amendments, the proposed new instructions would be 
divided into paragraphs (1), (2), (3), and (4), some of which would 
have subparagraphs.\796\ The proposed new paragraphs would contain 
specific instructions with respect to, among other things, how required 
information should be presented in the Exhibit (including the order of 
presentation) and how transition and default rates should be produced 
using a single cohort approach.\797\ As with all information that must 
be submitted in Form NRSRO and its Exhibits, applicants and NRSROs 
would be subject to these new requirements.\798\
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    \796\ See proposed paragraphs (1)-(4) of the instructions for 
Exhibit 1.
    \797\ Id.
    \798\ See, e.g., 17 CFR 240.17g-1; see also Instructions A.1, B, 
C, D, E, and F to Form NRSRO.
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3. Proposed Amendments to Rule 17g-2
    The Commission proposes a number of amendments to Rule 17g-2.\799\ 
First, the Commission proposes adding new paragraph (a)(9) to Rule 17g-
2 to identify the policies and procedures an NRSRO is required to 
establish, maintain, and enforce pursuant to Section 15E(h)(4)(A) of 
the Exchange Act and paragraph (c) of Rule 17g-8 as a record that must 
be made and retained.\800\ Second, the Commission proposes adding new 
paragraph (b)(12) to Rule 17g-2 to identify the internal control 
structure an NRSRO must establish, maintain, enforce, and document 
pursuant to Section 15E(c)(3)(A) of the Exchange Act as a record that 
must be retained.\801\ Third, the Commission proposes adding new 
paragraph (b)(13) to Rule 17g-2 to identify the policies and procedures 
an NRSRO is required to establish, maintain, enforce, and document 
pursuant to proposed paragraph (a) of new Rule 17g-8 as a record that 
must be retained.\802\ Fourth, the Commission proposes adding new 
paragraph (b)(14) to Rule 17g-2 to identify the policies and procedures 
an NRSRO must establish, maintain, enforce, and document pursuant to 
proposed paragraph (b) of new Rule 17g-8 as record that must be 
retained.\803\ Fifth, the Commission proposes adding new paragraph 
(b)(15) to Rule 17g-2 to identify the standards of training, 
experience, and competence an NRSRO must establish, maintain, enforce, 
and document pursuant to proposed new Rule 17g-9 as a record that must 
be retained.\804\
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    \799\ 17 CFR 240.17g-2.
    \800\ See proposed new paragraph (a)(9) to Rule 17g-2(a)(9); see 
also Section II.C.2 of this release for a more detailed discussion 
of this proposal.
    \801\ See proposed new paragraph (b)(12) of Rule 17g-2; see also 
Section II.A.2 of this release for a more detailed discussion of 
this proposal.
    \802\ See proposed new paragraph (b)(13) to Rule 17g-2; see also 
Section II.F.2 of this release for a more detailed discussion of 
this proposal.
    \803\ See proposed new paragraph (b)(14) to Rule 17g-2; see also 
Section II.J.2 of this release for a more detailed discussion of 
this proposal.
    \804\ See proposed new paragraph (b)(15) to Rule 17g-2; see also 
Section II.I.2 of this release for a more detailed discussion of 
this proposal.
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4. Proposed Amendments to Rule 17g-3
    The Commission proposes amending Rule 17g -3.\805\ First, the 
Commission proposes amending paragraphs (a) and (b) of Rule 17g-3 to 
implement the rulemaking mandated by Section 15E(c)(3)(B) of the 
Exchange Act.\806\ The proposed amendment to paragraph (a) would add a 
new paragraph (a)(7) to require an NRSRO to include an additional 
report--the report on the NRSRO's internal control structure--with its 
annual submission of reports pursuant to Rule 17g-3.\807\ Similar to 
the reports currently identified in paragraphs (a)(2) through (a)(6) of 
Rule 17g-3, the report identified in new paragraph (a)(7) would be 
unaudited.\808\ The proposed amendment to paragraph (b) of Rule 17g-3 
would implement Section 15E(c)(3)(B)(iii) of the Exchange Act, which 
provides that the annual internal controls report must contain an 
attestation of the NRSRO's CEO, or equivalent individual.\809\ 
Specifically, the Commission proposes amending paragraph (b) of Rule 
17g-3 to require that the NRSRO's CEO or, if the firm does not have a 
CEO, an individual performing similar functions, provide a signed 
statement that would be attached to the report.\810\
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    \805\ 17 CFR 240.17g-3.
    \806\ See 15 U.S.C. 78o-7(c)(3)(B) and proposed new paragraphs 
(a)(7) and (b)(2) of Rule 17g-3; see also Section II.A.3 of this 
release for a for a more detailed discussion of this proposal.
    \807\ See proposed new paragraph (a)(7) of Rule 17g-3.
    \808\ See 17 CFR 240.17g-3(a)(2)-(6).
    \809\ 15 U.S.C. 78o-7(c)(3)(B)(iii).
    \810\ See proposed new paragraph (b)(2) of Rule 17g-3.
---------------------------------------------------------------------------

    Second, the Commission is proposing that all the annual reports 
required to be submitted to the Commission pursuant to Rule 17g-3 be 
submitted through the EDGAR system.\811\ To implement this requirement, 
the Commission proposes, among other amendments, to add new paragraph 
(d) to Rule 17g-3. Proposed new paragraph (d) would provide that the 
reports required by the rule must be submitted electronically with the 
Commission in the format required by the EDGAR Filer Manual, as defined 
in Rule 11 of Regulation S-T.\812\
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    \811\ See proposed new paragraph (d) of Rule 17g-3; see also 
Section II.L of this release for a more detailed discussion of this 
proposal.
    \812\ See proposed new paragraph (d) of Rule 17g-3.
---------------------------------------------------------------------------

    Third, the Commission is proposing to add a new paragraph (a)(8) to 
Rule 17g-3 to identify the report of the NRSRO's designated compliance 
officer that an NRSRO is required to file with the Commission pursuant 
to Section 15E(j)(5)(B) of the Exchange Act as a report that must be 
filed with the other annual reports.\813\ Section 15E(j)(5)(B) further 
provides that the NRSRO ``shall file'' this report with the financial 
report required to be submitted to the Commission under Section 15E of 
the Exchange Act (i.e., the Rule 17g-3 annual reports).\814\ The 
Commission's proposal is intended to clarify how an NRSRO must adhere 
to the self-executing provisions in Section 15E(j)(5)(B) of the 
Exchange Act. Consequently, the Commission preliminary believes this 
requirement would not result in a collection of information requirement 
under the PRA because the requirement to file the report with the other 
annual reports required under Rule 17g-3 derives exclusively from 
Section 15E(j)(5)(B) of the Exchange Act (i.e., not from Commission 
rulemaking).\815\ Moreover, the Commission is not proposing to add any 
additional requirements with respect to the filing other than the 
proposed requirement that this report and the other annual reports be 
submitted through the EDGAR system, which is addressed separately in 
this PRA.\816\
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    \813\ See proposed new paragraph (a)(8) of Rule 17g-3; see also 
Section II.K of this release for a more detailed discussion of this 
proposal.
    \814\ See 15 U.S.C. 78o-7(j)(5)(B). Section 15E(k) of the 
Exchange Act provides that each NRSRO shall, on a confidential 
basis, file with the Commission, at intervals determined by the 
Commission, such financial statements, certified (if required by the 
rules or regulations of the Commission) by an independent public 
accountant, and information concerning its financial condition, as 
the Commission, by rule may prescribe as necessary or appropriate in 
the public interest or for the protection of investors. See 15 
U.S.C. 78o-7(k). The Commission implemented Section 15E(k) by 
adopting Rule 17g-3. See 17 CFR 240.17g-3; see also Oversight of 
Credit Rating Agencies Registered as Nationally Recognized 
Statistical Rating Organizations, 72 FR at 33590-33593 (June 18, 
2007).
    \815\ See 15 U.S.C. 78o-7(j)(5)(B).
    \816\ Compare 15 U.S.C. 78o-7(j)(5)(B), with proposed new 
paragraph (a)(8) of Rule 17g-3.

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[[Page 33492]]

5. Proposed Amendments to Rule 17g-7
    The Commission proposes to amend Rule 17g-7.\817\ First, the 
Commission is proposing to add new paragraphs (a)(1) and (2) to Rule 
17g-7 to implement rulemaking mandated in Sections 15E(s)(1), (2), (3), 
and (4)(D) of the Exchange Act.\818\ Proposed new paragraphs (a)(1) and 
(2) of Rule 17g-2 would require, respectively, an NRSRO when taking a 
rating action to publish a form containing information about the credit 
rating resulting from or subject to the rating action; and any 
certification of a provider third-party due diligence services received 
by the NRSRO that relates to the credit rating.\819\ Proposed paragraph 
(a)(1) of Rule 17g-7 would contain three primary components: paragraph 
(a)(1)(i) prescribing the format of the form; \820\ paragraph 
(a)(1)(ii) prescribing the content of the form; \821\ and paragraph 
(a)(1)(iii) prescribing an attestation requirement for the form.\822\ 
Proposed paragraph (a)(2) of Rule 17g-7 would identify a certification 
from a provider of third-party due diligence services as an item that 
must be published with a rating action.\823\
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    \817\ 17 CFR 240.17g-7.
    \818\ See 15 U.S.C. 78o-7(s)(1), (2), (3), and (4)(D) and 
proposed new paragraph (a) of Rule 17g-7; see also Sections II.G.1 
through G.5 of this release for a more detailed discussion of this 
proposal.
    \819\ See proposed new paragraphs (a)(1) and (2) of Rule 17g-7.
    \820\ See Section II.G.2 of this release for a detailed 
discussion of this proposal.
    \821\ See Section II.G.3 of this release for a detailed 
discussion of this proposal.
    \822\ See Section II.G.4 of this release for a detailed 
discussion of this proposal.
    \823\ See Section II.G.5 of this release for a detailed 
discussion of this proposal.
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    Second, the Commission is proposing to add new paragraph (b) to 
Rule 17g-7. This proposed amendment would implement rulemaking mandated 
in Section 15E(q) of the Exchange Act by: (1) Re-codifying in paragraph 
(b) of Rule 17g-7 requirements currently contained in paragraph (d)(3) 
of Rule 17g-2; and (2) substantially enhancing those requirements.\824\ 
More specifically, paragraph (d)(3) of Rule 17g-2 requires an NRSRO to, 
among other things, make publicly available on its corporate Internet 
Web site in an XBRL format the information required to be documented 
pursuant to paragraph (a)(8) of the rule with respect to any credit 
rating initially determined by the NRSRO on or after June 26, 2007, the 
effective date of the Rating Agency Act of 2006.\825\
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    \824\ See 15 U.S.C. 78o-7(q) and proposed new paragraph (b) of 
Rule 17g-7; see also Section II.E.2 of this release for a more 
detailed discussion of this proposal.
    \825\ 17 CFR 240.17-2(d)(3)(i)(A). Paragraph (a)(8) of Rule 17g-
2 requires an NRSRO to make and retain a record that, ``for each 
outstanding credit rating, shows all rating actions and the date of 
such actions from the initial credit rating to the current credit 
rating identified by the name of the rated security or obligor and, 
if applicable, the CUSIP of the rated security or the Central Index 
Key (``CIK'') number of the rated obligor.'' 17 CFR 240.17-2(a)(8).
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    These requirements would be enhanced in four ways. The first 
enhancement would make the disclosure easier for investors and other 
users of credit ratings to locate. Specifically, new proposed paragraph 
(b)(1) of Rule 17g-7 would require the NRSRO, among other things, to 
publicly disclose the ratings history information for free on an easily 
accessible portion of its corporate Internet Web site.\826\
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    \826\ See proposed new paragraph (b)(1) of Rule 17g-7.
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    The second enhancement would broaden the scope of credit ratings 
subject to the disclosure requirements. Specifically, proposed new 
paragraph (b)(1)(i) of Rule 17g-7 would require an NRSRO to disclose 
each credit rating assigned to an obligor, security, and money market 
instrument in every class of credit ratings for which the NRSRO is 
registered that was outstanding as of June 26, 2007 and any subsequent 
upgrades or downgrades of a credit rating assigned to the obligor, 
security, or money market instrument (including a downgrade to, or 
assignment of, default), any placements of a credit rating assigned to 
the obligor, security, or money market instrument on watch or review, 
any affirmation of a credit rating assigned to the obligor, security, 
or money market instrument, and a withdrawal of a credit rating 
assigned to the obligor, security, or money market instrument.\827\ 
With respect to credit ratings initially determined on or after June 
26, 2007, the amendments would clarify that the disclosure of the 
rating history information would be triggered when an NRSRO publishes 
any expected or preliminary credit rating assigned to an obligor, 
security, or money market instrument before the publication of an 
initial credit rating, and any subsequent upgrades or downgrades of a 
credit rating assigned to the obligor, security, or money market 
instrument (including a downgrade to, or assignment of, default), any 
placements of a credit rating assigned to the obligor, security, or 
money market instrument on watch or review, any affirmation of a credit 
rating assigned to the obligor, security, or money market instrument, 
and a withdrawal of a credit rating assigned to the obligor, security, 
or money market instrument.\828\
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    \827\ See proposed new paragraph (b)(1)(i) of Rule 17g-7.
    \828\ See proposed new paragraph (b)(1)(ii) of Rule 17g-7.
---------------------------------------------------------------------------

    The third enhancement would increase the scope of information that 
must be disclosed about a rating action. Specifically, proposed 
paragraph (b)(2) of Rule 17g-7 would identify 7 categories of data that 
would need to be disclosed when a credit rating action is published 
pursuant to proposed new paragraph (b)(1) of Rule 17g-7.\829\ The 
fourth enhancement would be to require that a rating history not be 
removed from the disclosure until 20 years after the NRSRO withdraws 
the credit rating assigned to the obligor, security, or money market 
instrument.\830\
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    \829\ See proposed new paragraph (b)(2) of Rule 17g-7.
    \830\ See proposed new paragraph (b)(5) of Rule 17g-7.
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6. Proposed New Rule 17g-8
    The Commission is proposing new Rule 17g-8 that would have 
paragraphs (a), (b), and (c) (each paragraph would have sub-
paragraphs). Proposed paragraph (a) of new Rule 17g-8 would implement 
rulemaking mandated in Section 15E(r) of the Exchange Act by requiring 
an NRSRO to have policies and procedures with respect to the procedures 
and methodologies the NRSRO uses to determine credit ratings.\831\ In 
particular, proposed paragraph (a)(1) would require the NRSRO to have 
policies and procedures that are reasonably designed to ensure that the 
procedures and methodologies, including qualitative and quantitative 
data and models, the NRSRO uses to determine credit ratings are 
approved by its board of directors or, if the NRSRO does not have a 
board of directors, a body performing a function similar to that of a 
board of directors.\832\ Proposed paragraph (a)(2) would require an 
NRSRO to have policies and procedures that are reasonably designed to 
ensure that the procedures and methodologies, including qualitative and 
quantitative data and models, the NRSRO uses to determine credit 
ratings are developed and modified in accordance with the policies and 
procedures of the NRSRO.\833\ Proposed paragraph (a)(3)(i) would 
require an NRSRO to have policies and procedures that are reasonably 
designed to ensure that material changes to the procedures and

[[Page 33493]]

methodologies, including changes to qualitative and quantitative data 
and models, the NRSRO uses to determine credit ratings are applied 
consistently to all credit ratings to which the changed procedures or 
methodologies apply.\834\ Proposed paragraph (a)(3)(ii) would require 
the NRSRO to have policies and procedures that are reasonably designed 
to ensure that material changes to the procedures and methodologies, 
including changes to qualitative and quantitative data and models, the 
NRSRO uses to determine credit ratings are, to the extent that the 
changes are to surveillance or monitoring procedures and methodologies, 
applied to then-current credit ratings within a reasonable period of 
time taking into consideration the number of ratings impacted, the 
complexity of the procedures and methodologies used to determine the 
credit ratings, and the type of obligor, security, or money market 
instrument being rated.\835\ Proposed paragraph (a)(4)(i) would require 
the NRSRO to have policies and procedures that are reasonably designed 
to ensure that the NRSRO promptly publishes on an easily accessible 
portion of its corporate Internet Web site material changes to the 
procedures and methodologies, including to qualitative models or 
quantitative inputs, the NRSRO uses to determine credit ratings, the 
reason for the changes, and the likelihood the changes will result in 
changes to any current ratings.\836\ Proposed paragraph (a)(4)(ii) 
would require the NRSRO to have policies and procedures that are 
reasonably designed to ensure the NRSRO promptly publishes on an easily 
accessible portion of its corporate Internet Web site significant 
errors identified in a procedure or methodology, including a 
qualitative or quantitative model, the NRSRO uses to determine credit 
ratings that may result in a change in current credit ratings.\837\ 
Finally, proposed paragraph (a)(5) would require the NRSRO to have 
policies and procedures that are reasonably designed to ensure that it 
discloses the version of a credit rating procedure or methodology, 
including the qualitative methodology or quantitative inputs, used with 
respect to a particular credit rating.\838\
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    \831\ See 15 U.S.C. 78o-7(r) and proposed new paragraph (a) of 
Rule 17g-8; see also Section II.F.1 of this release for a more 
detailed discussion of this proposal.
    \832\ See proposed paragraph (a)(1) of new Rule 17g-8.
    \833\ See proposed paragraph (a)(2) of new Rule 17g-8.
    \834\ See proposed paragraph (a)(3)(i) of new Rule 17g-8.
    \835\ See proposed paragraph (a)(3)(ii) of new Rule 17g-8.
    \836\ See proposed paragraph (a)(4)(i) of new Rule 17g-8.
    \837\ See proposed paragraph (a)(4)(ii) of new Rule 17g-8.
    \838\ See proposed paragraph (a)(5) of new Rule 17g-8.
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    Proposed paragraph (b) of new Rule 17g-8 would implement rulemaking 
mandated in Section 938(a) of the Dodd-Frank Act by requiring an NRSRO 
to have policies and procedures with respect to the symbols, numbers, 
or scores it uses to denote credit ratings.\839\ In particular, 
proposed paragraph (b)(1) of new Rule 17g-8 would require the NRSRO to 
have policies and procedures reasonably designed to assess the 
probability that an issuer of a security or money market instrument 
will default, fail to make timely payments, or otherwise not make 
payments to investors in accordance with the terms of the security or 
money market instrument.\840\ Proposed paragraph (b)(2) of new Rule 
17g-8 would require the NRSRO to have policies and procedures 
reasonably designed to clearly define the meaning of each symbol, 
number, or score in the rating scale used by the NRSRO to denote a 
credit rating category and notches within a category for each class and 
subclass of credit ratings for which the NRSRO is registered and to 
include such definitions in Exhibit 1 to Form NRSRO.\841\ Proposed 
paragraph (b)(3) of new Rule 17g-8 would require the NRSRO to have 
policies and procedures reasonably designed to apply any symbol, 
number, or score defined pursuant to paragraph (b)(2) of new Rule 17g-8 
in a manner that is consistent for all types of obligors, securities 
and money market instruments for which the symbol, number, or score is 
used.\842\
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    \839\ See Public Law 111-203 Sec.  938(a) and proposed paragraph 
(b) of new Rule 17g-8; see also Section II.J.1 of this release for a 
more detailed discussion of this proposal.
    \840\ See proposed paragraph (b)(1) of new Rule 17g-8.
    \841\ See proposed paragraph (b)(2) of new Rule 17g-8.
    \842\ See proposed paragraph (b)(1) of new Rule 17g-8.
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    Proposed paragraph (c) of new Rule 17g-8 would implement rulemaking 
mandated in Section 15E(h)(4)(A)(ii) of the Exchange Act by requiring 
the NRSRO to include certain policies and procedures in the policies 
and procedures the NRSRO is required to establish, maintain, and 
enforce pursuant to Section 15E(h)(4)(A) of the Exchange Act.\843\ 
Specifically, proposed paragraph (c) would require the NRSRO to have 
policies and procedures to address instances in which a look-back 
review determines that a conflict of interest influenced a credit 
rating assigned to an obligor, security, or money market instrument by 
including, at a minimum, procedures that are reasonably designed to 
ensure that the NRSRO will: (1) Immediately place the credit rating on 
credit watch and disclose certain information about the reason for the 
rating action; (2) promptly evaluate whether the credit rating must be 
revised to conform it to the NRSRO's documented procedures and 
methodologies for determining credit ratings (i.e., remove the 
influence of the conflict); and (3) promptly publish a revised credit 
rating, if appropriate, or affirm the credit rating, if appropriate, 
and, in either case, disclose certain information about the reason for 
the rating action.\844\
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    \843\ See 15 U.S.C. 78o-7(h)(4)(A)(ii) and proposed new 
paragraph (c) of Rule 17g-8; see also Section II.C.1 of this release 
for a more detailed discussion of this proposal.
    \844\ See proposed paragraphs (c)(1), (2) and (3) of new Rule 
17g-8.
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7. Proposed New Rule 17g-9
    The Commission is proposing new Rule 17g-9.\845\ This proposed rule 
would implement rulemaking mandated in Section 936 of the Dodd-Frank 
Act by requiring an NRSRO to establish, maintain, enforce, and document 
standards of training, experience, and competence for the individuals 
it employs to determine credit ratings.\846\ Proposed paragraph (a) of 
new Rule 17g-9 would require an NRSRO to establish, maintain, enforce, 
and document standards of training, experience, and competence for the 
individuals it employs to determine credit ratings that are reasonably 
designed to achieve the objective that such individuals produce 
accurate credit ratings in the classes and subclasses of credit ratings 
for which the NRSRO is registered.\847\ Proposed paragraph (b) would 
identify four factors the NRSRO must consider when designing the 
standards.\848\ Proposed paragraph (c) would prescribe two requirements 
an NRSRO must incorporate into its standards of training, experience, 
and competence.\849\
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    \845\ Proposed new Rule 17g-9 would be codified at 17 CFR 
240.17g-9, if adopted.
    \846\ See Public Law 111-203 Sec.  936 and proposed new Rule 
17g-9; see also Section II.I.1 of this release for a more detailed 
discussion of this proposal.
    \847\ See proposed paragraph (a) of new Rule 17g-9; see also 
Section II.I.1.a of this release for a more detailed discussion of 
this proposal.
    \848\ See proposed paragraphs (b)(1)-(4) of new Rule 17g-9; see 
also Section II.I.1.b of this release for a more detailed discussion 
of this proposal.
    \849\ See proposed paragraphs (c)(1) and (2) of new Rule 17g-9; 
see also Section II.I.1.c of this release for a more detailed 
discussion of this proposal.
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8. Proposed New Rule 17g-10 and Form ABS Due Diligence-15E
    The Commission is proposing new Rule 17g-10 and new Form ABS Due

[[Page 33494]]

Diligence-15E.\850\ The new rule and form would implement rulemaking 
mandated in Sections 15E(s)(4)(B) and (C) of the Exchange Act.\851\ 
Proposed new Rule 17g-10 would contain three paragraphs: (a), (b) and 
(c).\852\ Proposed paragraph (a) would provide that the written 
certifications of providers of third-party due diligence services 
required pursuant to Section 15E(s)(4)(B) of the Exchange Act must be 
made on Form ABS Due Diligence-15E.\853\ Proposed paragraph (b) of new 
Rule 17g-10 would provide that the written certification must be signed 
by an individual who is duly authorized by the person providing the 
third-party due diligence services to make such a certification.\854\ 
Proposed paragraph (c) of new Rule 17g-10 would contain four 
definitions to be used for the purposes of Section 15E(s)(4)(B) and 
Rule 17g-10; namely, a definition of ``due diligence services,'' \855\ 
``issuer,'' \856\ ``originator,'' \857\ and ``securitizer.'' \858\
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    \850\ Proposed new Rule 17g-10 would be codified at 17 CFR 
240.17g-10 and proposed new Form ABS Due Diligence-15E would be 
identified at 17 CFR 249b.400.
    \851\ See 15 U.S.C. 78o-7(s)(4)(B) and (C), proposed new Rule 
17g-10, and proposed new Form ABS Due Diligence-15E; see also 
Section II.H of this release for a more detailed discussion of this 
proposal.
    \852\ See proposed paragraphs (a), (b) and (c) of Rule 17g-10; 
see also Section II.H.2 of this release for a more detailed 
discussion of this proposal.
    \853\ See proposed paragraph (a) of new Rule 17g-10.
    \854\ See proposed paragraph (b) of Rule 17g-10.
    \855\ See proposed paragraph (c)(1) of new Rule 17g-10.
    \856\ See proposed paragraph (c)(2) of new Rule 17g-10.
    \857\ See proposed paragraph (c)(3) of new Rule 17g-10.
    \858\ See proposed paragraph (c)(4) of new Rule 17g-10.
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    Proposed Form ABS Due Diligence-15E would contain five line items 
identifying information the provider of third-party due diligence 
services would need to provide in the form.\859\ It also would contain 
a signature line with a corresponding representation.\860\ Item 1 would 
elicit the identity and address of the provider of third-party due 
diligence services.\861\ Item 2 would elicit the identity and address 
of the issuer, underwriter, or NRSRO that employed the provider of 
third-party due diligence services.\862\ Item 3 would instruct the 
provider of third-party due diligence services to identify each NRSRO 
whose published criteria for performing due diligence the provider of 
third-party due diligence services satisfied in performing the due 
diligence review.\863\ Item 4 would require the provider of third-party 
due diligence services to describe the scope and manner of the due 
diligence performed.\864\ Item 5 would require the provider of third-
party due diligence services to describe the findings and conclusions 
resulting from the review.\865\
---------------------------------------------------------------------------

    \859\ See proposed new Form ABS Due Diligence-15E; see also 
Section II.H.3 of this release for a more detailed discussion of 
this proposal.
    \860\ See proposed new Form ABS Due Diligence-15E.
    \861\ See Item 1 to proposed Form ABS Due Diligence-15E.
    \862\ See Item 2 to proposed Form ABS Due Diligence-15E.
    \863\ See Item 3 to proposed Form ABS Due Diligence-15E.
    \864\ See Item 4 to proposed Form ABS Due Diligence-15E.
    \865\ See Item 5 to proposed Form ABS Due Diligence-15E.
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9. Rule 15Ga-2 and Form ABS-15G
    The Commission is proposing new Rule 15Ga-2 and amendments to Form 
ABS-15G.\866\ The new rule and amended form would implement Section 
15E(s)(4)(A) of the Exchange Act.\867\ Proposed new Rule 15Ga-2 would 
require an issuer or underwriter of any Exchange Act-ABS that is to be 
rated by an NRSRO to furnish a Form ABS-15G on the EDGAR system 
containing the findings and conclusions of any third-party ``due 
diligence report'' obtained by the issuer or underwriter. The rule 
would define ``due diligence report'' as any report containing findings 
and conclusions relating to ``due diligence services'' as defined in 
proposed new Rule 17g-10.\868\ Under the proposal, the disclosure would 
be furnished using Form ABS-15G for both registered and unregistered 
offerings of Exchange Act-ABS. In addition, under the Commission's 
proposal, an issuer or underwriter would not need to furnish Form ABS-
15G if the issuer or underwriter obtains a representation from each 
NRSRO engaged to produce a credit rating for the Exchange Act-ABS that 
can be reasonably relied on that the NRSRO will publicly disclose the 
findings and conclusions of any third-party due diligence report 
obtained by the issuer or underwriter with the publication of the 
credit rating five business days prior to the first sale in the 
offering in an information disclosure form generated pursuant to 
proposed new paragraph (a)(1) of Rule 17g-7.\869\
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    \866\ See proposed new Rule 15Ga-2 and proposed amendments to 
Form ABS-15G.
    \867\ See 15 U.S.C. 78o-7(s)(4)(A), proposed new Rule 15Ga-2, 
and proposed amendments to Form ABS-15G; see also Section II.H.1 of 
this release for a more detailed discussion of this proposal.
    \868\ See proposed paragraph (c)(1) of new Rule 17g-10.
    \869\ See proposed new paragraph (a)(1) of Rule 17g-7.
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10. Proposed Amendments to Regulation S-T
    The Commission is proposing that certain Form NRSRO submissions and 
all Rule 17g-3 annual report submissions be submitted to the Commission 
using the EDGAR system.\870\ In order to implement this requirement, 
the Commission is proposing amendments to Rule 101 of Regulation S-T to 
require Form NRSROs and Exhibits 1 through 9 submitted pursuant to 
paragraphs (e), (f), and (g) of Rule 17g-1 and the annual reports 
submitted pursuant Rule 17g-3 be submitted through the EDGAR 
system.\871\ The Commission also is proposing to amend Rule 201 of 
Regulation S-T, which governs temporary hardship exemptions from 
electronic filing, to make this exemption unavailable for NRSRO 
filings.\872\
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    \870\ See proposed amendment of Rule 101 of Regulation S-T (17 
CFR 231.101); see also Section II.L of this release for a more 
detailed discussion of this proposal.
    \871\ See proposed new paragraph (a)(xiv) of Rule 101 of 
Regulation S-T.
    \872\ See proposed amendment to paragraph (a) of Rule 201 of 
Regulation S-T (17 CFR 231.201); see also Section II.L of this 
release for a more detailed discussion of this proposal.
---------------------------------------------------------------------------

    The Commission also is proposing amendments to Rule 314 of 
Regulation S-T to permit municipal securitizers of Exchange Act-ABS, or 
underwriters in the offering of municipal Exchange Act-ABS, to provide 
the information required by Form ABS-15G on EMMA, the Municipal 
Securities Rulemaking Board's centralized public database.\873\
---------------------------------------------------------------------------

    \873\ See proposed amendments to Rule 314 of Regulation S-T (17 
CFR 231.314); see also Section II.H.1 of this release for a more 
detailed discussion of this proposal.
---------------------------------------------------------------------------

11. Form ID
    NRSROs would need to file a Form ID with the Commission in order to 
gain access to the Commission's EDGAR system to make electronic filings 
with the Commission.\874\
---------------------------------------------------------------------------

    \874\ See Section II.L of this release for a more detailed 
discussion of these proposals.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the issuers and 
underwriters of Exchange Act-ABS that would need to furnish Form ABS-
15G to the Commission through the EDGAR system pursuant to proposed new 
Rule 15Ga-2 already have access to the EDGAR system because, for 
example, they need such access for the purpose of Rule 15Ga-1.

B. Proposed Use of Information

1. Proposed Amendments to Rule 17g-1
    The Commission proposes amending paragraph (i) of Rule 17g-1 to 
require

[[Page 33495]]

that an NRSRO make Form NRSRO and Exhibits 1 through 9 freely available 
on an easily accessible portion of its corporate Internet Web 
site.\875\ The proposed amendment to paragraph (i) also would remove 
the option for an NRSRO to make its Form NRSRO publicly available 
``through another comparable, readily accessible means'' as an 
alternative to Internet disclosure. In addition, the Commission is 
proposing amending paragraph (i) to provide that Exhibit 1 of Form 
NRSRO (the performance measurement statistics) be made freely available 
in writing when requested. Second, the Commission is proposing to amend 
paragraphs (e), (f), and (g) of Rule 17g-1 to require that NRSROs use 
the Commission's EDGAR system to electronically file or submit Form 
NRSRO with the Commission pursuant to these paragraphs in the format 
required by the EDGAR Filer Manual, as defined in Rule 11 of Regulation 
S-T.\876\
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    \875\ See proposed amendments to paragraph (i) of Rule 17g-1; 
see also Section II.E.1.b of this release for a more detailed 
discussion of this proposal.
    \876\ See proposed amendments to paragraphs (e), (f), and (g) of 
Rule 17g-1; see also Section II.L of this release for a more 
detailed discussion of these proposals.
---------------------------------------------------------------------------

    The proposed requirements that an NRSRO make Form NRSRO and 
Exhibits 1 through 9 freely available on an easily accessible portion 
of its corporate Internet Web site and file the Form through the EDGAR 
system are designed to make this information more readily accessible to 
investors and other users of credit ratings. As the Commission stated 
when adopting Form NRSRO, the Form will provide users of credit ratings 
with information that will assist them in comparing NRSROs and 
understanding how a given NRSRO conducts its business activities.\877\ 
In addition, the filing of the Form NRSROs on the EDGAR system would 
allow Commission examiners to more easily retrieve the submissions of a 
specific NRSRO to prepare for an examination. Furthermore, having the 
Forms filed and stored through the EDGAR system (i.e., in a centralized 
location), would assist the Commission from a records management 
perspective by establishing a more automated storage process and 
creating efficiencies in terms of reducing the volume of paper filings 
that must be manually processed and stored.
---------------------------------------------------------------------------

    \877\ See Oversight of Credit Rating Agencies Registered as 
Nationally Recognized Statistical Rating Organizations, 72 FR 33569-
335670 (June 18, 2007).
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2. Proposed Amendments to Instructions for Exhibit 1 to Form NRSRO
    The Commission is proposing to amend the instructions for Exhibit 1 
to Form NRSRO.\878\ The amendments would confine the disclosures in the 
Exhibit to transition and default rates and certain limited 
supplemental information.\879\ Moreover, the amendments would 
standardize the production and presentation of the transition and 
default rates. As the Commission stated when adopting Form NRSRO, the 
information provided in Exhibit 1 is an important indicator of the 
performance of an NRSRO in terms of its ability to assess the 
creditworthiness of issuers and obligors and, consequently, will be 
useful to users of credit ratings in evaluating an NRSRO.\880\ In 
addition, Commission staff would use the enhanced performance 
statistics provided in an applicant's initial application for 
registration and in an NRSRO's Form NRSRO to, among other things, 
assess whether the applicant or NRSRO has adequate financial and 
managerial resources to consistently produce credit ratings with 
integrity.\881\ For example, statistics indicating the applicant or 
NRSRO is performing poorly in determining credit ratings could be an 
indication the applicant or NRSRO fails to maintain adequate financial 
and managerial resources to consistently produce credit ratings with 
integrity in a particular class or subclass of credit ratings. Finally, 
the disclosure of the enhanced performance statistics in an applicant's 
initial application would allow the Commission staff to verify that the 
applicant, if granted registration, would publicly disclose the 
information in accordance with the proposed amendments to the 
Instructions for Exhibit 1.\882\
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    \878\ See Instruction H to Form NRSRO (as it relates to Exhibit 
1).
    \879\ See proposed amendments to the instructions for Exhibit 1 
to Form NRSRO (17 CFR 249b.300); see also Section II. E.1.a of this 
release for a more detailed discussion of this proposal.
    \880\ See Oversight of Credit Rating Agencies Registered as 
Nationally Recognized Statistical Rating Organizations, 72 FR at 
33574 (June 18, 2007); see also Amendments to Rules for Nationally 
Recognized Statistical Rating Organizations, 74 FR at 6474 (Feb. 9, 
2009) (``The amendments to the instructions to Exhibit 1 to Form 
NRSRO will require NRSROs to provide more detailed performance 
statistics and, thereby, make it easier for users of credit ratings 
to compare the performance of the NRSROs.'').
    \881\ See, e.g., 15 U.S.C. 78o-7(a)(2)(C) (setting forth grounds 
to deny an initial application) and 15 U.S.C. 78o-7(d)(1)(E) and 
(d)(2) (setting forth grounds to sanction an NRSRO, including 
revoking the NRSRO's registration); see also Oversight of Credit 
Rating Agencies Registered as Nationally Recognized Statistical 
Rating Organizations, 72 FR at 33612 (June 18, 2007) (``Form NRSRO 
requires that a credit rating agency provide information required 
under Section 15E(a)(1)(B) of the Exchange Act and certain 
additional information. The additional information will assist the 
Commission in making the assessment regarding financial and 
managerial resources required under Section 15E(a)(2)(C)(2)(ii)(I) 
of the Exchange Act.'').
    \882\ As indicated above, paragraph (i) requires an NRSRO to 
make Form NRSRO and Exhibits 1 through 9 publicly available within 
10 business days of being granted an initial registration. See 17 
CFR 240.17g-1(i). In addition, the public disclosure of Form NRSRO 
and Exhibits 1 through 9 could be accelerated if the Commission 
adopts the proposal that this information be filed through the EDGAR 
system upon registration.
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3. Proposed Amendments to Rule 17g-2
    The Commission proposes adding paragraph (a)(9) to Rule 17g-2 to 
identify the policies and procedures an NRSRO is required to establish, 
maintain, and enforce pursuant to Section 15E(h)(4)(A) of the Exchange 
Act and proposed paragraph (c) of new Rule 17g-8 as a record that must 
be made and retained.\883\ In addition, the Commission is proposing to 
add the following new paragraphs to Rule 17g-2 to identify additional 
records that must be retained: (1) Paragraph (b)(12) would identify the 
internal control structure an NRSRO must establish, maintain, enforce, 
and document pursuant to Section 15E(c)(3)(A); \884\ (2) paragraph 
(b)(13) would identify the policies and procedures an NRSRO is required 
to establish, maintain, enforce, and document pursuant to proposed 
paragraph (a) of new Rule 17g-8; \885\ (3) paragraph (b)(14) would 
identify the policies and procedures an NRSRO must establish, maintain, 
enforce, and document pursuant to proposed paragraph (b) of new Rule 
17g-8; \886\ and (4) paragraph (b)(15) would identify the standards of 
training, experience, and competence an NRSRO must establish, maintain, 
enforce, and document pursuant to proposed new Rule 17g-9.\887\
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    \883\ See proposed new paragraph (a)(9) to Rule 17g-2(a)(9); see 
also Section II.C.2 of this release for a more detailed discussion 
of this proposal.
    \884\ See proposed new paragraph (b)(12) of Rule 17g-2; see also 
Section II.A.2 of this release for a more detailed discussion of 
this proposal.
    \885\ See proposed new paragraph (b)(13) to Rule 17g-2; see also 
Section II.F.2 of this release for a more detailed discussion of 
this proposal.
    \886\ See proposed new paragraph (b)(14) to Rule 17g-2; see also 
Section II.J.2 of this release for a more detailed discussion of 
this proposal.
    \887\ See proposed new paragraph (b)(15) to Rule 17g-2; see also 
Section II.I.2 of this release for a more detailed discussion of 
this proposal.
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    The proposed requirement that a record of the policies and 
procedures identified in proposed new paragraph (a)(9) of Rule 17g-2 be 
made (i.e., documented) would promote better

[[Page 33496]]

understanding of them among the individuals within the organization 
and, therefore, promote compliance with such policies and procedures. 
The requirement that the policies and procedures identified in proposed 
new paragraphs (a)(9), (b)(12), (b)(13), (b)(14), and (b)(15) be 
retained would subject these records to the various retention and 
production requirements of paragraphs (c), (d), (e), and (f) of Rule 
17g-2.\888\ The Commission staff would use these records to review 
whether an NRSRO was complying with the provisions of the securities 
laws requiring the NRSRO to establish, maintain, enforce, and document 
these policies, procedures, and standards.\889\
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    \888\ See 17 CFR 240.17g-2(c), (d), (e) and (f). Paragraph (c) 
of Rule 17g-2 requires an NRSRO to retain the records identified in 
paragraphs (a) and (b) for three years after the date the record is 
made or received. 17 CFR 240.17g-2(c). Paragraph (d) requires, among 
other things, that an NRSRO maintain each record required to be 
retained pursuant to paragraphs (a) and (b) in a manner that makes 
the original record or copy easily accessible to the principal 
office of the NRSRO. 17 CFR 240.17g-2(d). Paragraph (e) sets forth 
the requirements that apply when an NRSRO uses a third-party 
custodian to maintain its records. 17 CFR 240.17g-2(e). Paragraph 
(f) requires an NRSRO to promptly furnish the Commission with 
legible, complete, and current copies, and, if specifically 
requested, English translations, of those records of the NRSRO 
required to be retained pursuant to paragraphs (a) and (b), or any 
other records of the NRSRO subject to examination under Section 
17(b) of the Exchange Act. See 17 CFR 240.17g-2(f); see also 15 
U.S.C. 78q(b).
    \889\ See Oversight of Credit Rating Agencies Registered as 
Nationally Recognized Statistical Rating Organizations, 72 FR at 
33582 (June 18, 2007) (``The Commission designed [Rule 17g-2] based 
on its experience with recordkeeping rules for other regulated 
entities. These other books and records rules have proven integral 
to the Commission's investor protection function because the 
preserved records are the primary means of monitoring compliance 
with applicable securities laws. Rule 17g-2 is designed to ensure 
that an NRSRO makes and retains records that will assist the 
Commission in monitoring, through its examination authority, whether 
an NRSRO is complying with the provisions of Section 15E of the 
Exchange Act and the rules thereunder.'') (footnotes omitted).
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4. Proposed Amendments to Rule 17g-3
    The Commission proposes amending paragraphs (a) and (b) of Rule 
17g-3 to implement the rulemaking mandated by Section 15E(c)(3)(B) of 
the Exchange Act.\890\ The proposed amendment to paragraph (a) would 
add a new paragraph (a)(7) to require an NRSRO to include an additional 
report--a report on the NRSRO's internal control structure--with its 
annual submission of reports pursuant to Rule 17g-3. The proposed 
amendment to paragraph (b) of Rule 17g-3 would require that the NRSRO's 
CEO or, if the firm does not have a CEO, an individual performing 
similar functions, provide a signed statement that would be attached to 
the report. The Commission staff would use this report along with the 
other Rule 17g-3 annual reports to monitor the NRSRO's compliance with 
applicable securities laws.\891\ For example, Section 15E(c)(3)(A) of 
the Exchange Act requires an NRSRO to ``establish, maintain, enforce, 
and document an effective internal control structure governing the 
implementation of and adherence to policies, procedures, and 
methodologies for determining credit ratings.'' \892\ Among other 
things, the annual report that an NRSRO would file pursuant to proposed 
new paragraph (a)(7) of Rule 17g-3 would require the NRSRO to provide 
an assessment by management of the effectiveness of the internal 
control structure. Consequently, Commission staff could use the report 
as a starting point to assess whether the NRSRO is complying with 
Section 15E(c)(3)(A) of the Exchange Act.\893\
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    \890\ See proposed new paragraphs (a)(7) and (b)(2) of Rule 17g-
3; see also Section II.A.3 of this release for a for a more detailed 
discussion of this proposal.
    \891\ See, e.g., Oversight of Credit Rating Agencies Registered 
as Nationally Recognized Statistical Rating Organizations, 72 FR at 
33612-33613 (June 18, 2007) (``[Rule 17g-3] will aid the Commission 
in monitoring whether the initiation of a proceeding under Section 
15E(d) of the Exchange Act will be appropriate because the NRSRO 
`fails to maintain adequate financial and managerial resources to 
consistently produce credit ratings with integrity. In addition, the 
financial reports also will assist the Commission in monitoring 
potential conflicts of interest of a financial nature arising from 
the operation of an NRSRO.'') (footnotes omitted); see also 
Amendments to Rules for Nationally Recognized Statistical Rating 
Organizations, 74 FR at 6465 (Feb. 9, 2009) (``[The amendment to 
Rule 17g-3] will assist the Commission in its examination function 
of NRSROs.'').
    \892\ 15 U.S.C. 78o-7(c)(3)(A).
    \893\ Id.
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    The Commission also is proposing that all the annual reports 
required to be submitted to the Commission pursuant to Rule 17g-3 be 
submitted through the EDGAR system.\894\ The submission of the annual 
reports through the EDGAR system would allow Commission examiners to 
more easily retrieve the reports of a specific NRSRO to prepare for an 
examination. Moreover, having these reports submitted and stored 
through the EDGAR system (i.e., in a centralized location), would 
assist the Commission from a records management perspective by 
establishing a more automated storage process and creating efficiencies 
in terms of reducing the volume of paper submissions that must be 
manually processed and stored.
---------------------------------------------------------------------------

    \894\ See proposed new paragraph (d) of Rule 17g-3; see also 
Section II.L of this release for a more detailed discussion of this 
proposal.
---------------------------------------------------------------------------

5. Proposed Amendments to Rule 17g-7
    The Commission proposes to amend Rule 17g-7.\895\ First, the 
Commission is proposing to add new paragraphs (a)(1) and (2) to Rule 
17g-7 to implement rulemaking mandated in Sections 15E(s)(1), (2), (3), 
and (4)(D) of the Exchange Act.\896\ Proposed new paragraphs (a)(1) and 
(2) of Rule 17g-2 would require, respectively, an NRSRO when taking a 
rating action to publish a form containing information about the credit 
rating resulting from or subject to the rating action; and any 
certification of a provider of third-party due diligence services 
received by the NRSRO that relates to the credit rating.\897\ As stated 
in Section 15E(s)(1)(B) of the Exchange Act, the purpose of the 
disclosures required in the form would be to provide information that 
can be used by investors and other users of credit ratings to better 
understand credit ratings in each class of credit rating issued by the 
NRSRO.\898\ Furthermore, as stated in Section 15E(s)(4)(D) of the 
Exchange Act, the purpose of the disclosure of the certification would 
be to allow the public to determine the adequacy and level of due 
diligence services provided by a third-party.\899\
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    \895\ 17 CFR 240.17g-7.
    \896\ See 15 U.S.C. 78o-7(s)(1), (2), (3), and (4)(D) and 
proposed new paragraph (a) of Rule 17g-7; see also Sections II.G.1 
through G.5 of this release for a more detailed discussion of this 
proposal.
    \897\ See proposed new paragraphs (a)(1) and (2) of Rule 17g-7.
    \898\ See 15 U.S.C. 78o-7(s)(1)(B).
    \899\ See 15 U.S.C. 78o-7(s)(4)(D).
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    Second, the Commission is proposing to add new paragraph (b) to 
Rule 17g-7.\900\ The proposed amendments would: (1) Re-codify in 
paragraph (b) of Rule 17g-7 requirements currently contained in 
paragraph (d)(3) of Rule 17g-2; and (2) substantially enhance those 
requirements. Under the current and proposed enhanced requirements, an 
NRSRO is (and would be) required to disclose certain historical 
information about its credit ratings. As the Commission stated when 
adopting the current disclosure requirement, the ``intent of the rule 
is to facilitate comparisons of credit rating accuracy across all 
NRSROs--including direct comparisons of different NRSROs' treatment of 
the same obligor or instrument--in order to enhance NRSRO 
accountability, transparency, and competition.'' \901\ The proposals 
also

[[Page 33497]]

are designed to provide persons with the ``raw data'' necessary to 
generate statistical information about the performance of each NRSRO's 
credit ratings.\902\ Finally, the proposals are designed to implement 
provisions of Section 15E(q)(2) of the Exchange Act, which provides, 
among other things, that the Commission's rules shall require NRSROs to 
disclose information about the performance of credit ratings that is 
comparable among NRSROs, to allow users of credit ratings to compare 
the performance of credit ratings across NRSROs.\903\
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    \900\ See proposed new paragraph (b) of Rule 17g-7; see also 
Section II.E.2 of this release for a more detailed discussion of 
this proposal.
    \901\ See Amendments to Rules for Nationally Recognized 
Statistical Rating Organizations, 74 FR at 63838 (Dec. 4, 2009) 
(``Ratings history information for outstanding credit ratings is the 
most direct means of comparing the performance of two or more 
NRSROs. It allows an investor or other user of credit ratings to 
compare how all NRSROs that maintain a credit rating for a 
particular obligor or instrument initially rated that obligor or 
instrument and, thereafter, how and when they adjusted their credit 
rating over time.''). The Commission notes that under the proposals 
the disclosures would not contain complete histories for many credit 
ratings because the NRSRO would not need to include information 
about rating actions taken before June 26, 2007. However, the 
Commission believes that the disclosures would still be used to 
compare how different NRSROs rated a particular obligor, security, 
or money market instrument beginning as of June 26, 2007 and from 
that date forward.
    \902\ See Amendments to Rules for Nationally Recognized 
Statistical Rating Organizations, 74 FR at 63837-63838 (Dec. 4, 
2009) (``The raw data to be provided by NRSROs pursuant to the new 
ratings history disclosure requirements[hellip]will enable market 
participants to develop performance measurement statistics that 
would supplement those required to be published by NRSROs themselves 
in Exhibit 1, tapping into the expertise of credit market observers 
and participants in order to create better and more useful means to 
compare the credit ratings performance of NRSROs.'').
    \903\ See 15 U.S.C. 78o-7(q)(2).
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6. Proposed New Rule 17g-8
    The Commission is proposing new Rule 17g-8 that would have 
paragraphs (a), (b), and (c) (each paragraph would have sub-
paragraphs). Paragraph (a) of new Rule 17g-8 would implement Section 
15E(r) of the Exchange Act by requiring an NRSRO to have policies and 
procedures with respect to the procedures and methodologies the NRSRO 
uses to determine credit ratings.\904\ These policies and procedures 
would be used by the NRSRO to achieve the objectives identified in 
Section 15E(r) of the Exchange Act,\905\ namely, that the NRSRO:
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    \904\ See 15 U.S.C. 78o-7(r) and proposed new paragraph (a) of 
Rule 17g-8; see also Section II.F.1 of this release for a more 
detailed discussion of this proposal.
    \905\ See 15 U.S.C. 78o-7(r)(1)-(3).
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     determines credit ratings using procedures and 
methodologies, including qualitative and quantitative data and models, 
that are approved by the board of the NRSRO, or a body performing a 
function similar to that of a board;\906\
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    \906\ See 15 U.S.C. 78o-7(r)(1)(A).
---------------------------------------------------------------------------

     determines credit ratings using procedures and 
methodologies, including qualitative and quantitative data and models, 
that are in accordance with the policies and procedures of the NRSRO 
for the development and modification of credit rating procedures and 
methodologies; \907\
---------------------------------------------------------------------------

    \907\ See 15 U.S.C. 78o-7(r)(1)(B).
---------------------------------------------------------------------------

     when material changes are made to credit rating procedures 
and methodologies (including changes to qualitative and quantitative 
data and models), applies the changes consistently to all credit 
ratings to which the changed procedures and methodologies apply; \908\
---------------------------------------------------------------------------

    \908\ See 15 U.S.C. 78o-7(r)(2)(A).
---------------------------------------------------------------------------

     when material changes are made to credit rating procedures 
and methodologies (including changes to qualitative and quantitative 
data and models), to the extent that changes are made to credit rating 
surveillance procedures and methodologies, applies the changes to then-
current credit ratings within a reasonable time period determined by 
the Commission, by rule; \909\
---------------------------------------------------------------------------

    \909\ 15 U.S.C. 78o-7(r)(2)(B).
---------------------------------------------------------------------------

     when material changes are made to credit rating procedures 
and methodologies (including changes to qualitative and quantitative 
data and models), the NRSRO publicly discloses the reason for the 
change; \910\
---------------------------------------------------------------------------

    \910\ See 15 U.S.C. 78o-7(r)(2)(C).
---------------------------------------------------------------------------

     notifies users of credit ratings of the version of a 
procedure or methodology, including the qualitative methodology or 
quantitative inputs, used with respect to a particular credit 
rating.\911\
---------------------------------------------------------------------------

    \911\ 15 U.S.C. 78o-7(r)(3)(A).
---------------------------------------------------------------------------

     notifies users of credit ratings when a material change is 
made to a procedure or methodology, including to a qualitative model or 
quantitative input;) \912\
---------------------------------------------------------------------------

    \912\ See 15 U.S.C. 78o-7(r)(3)(B).
---------------------------------------------------------------------------

     notifies users of credit ratings when a significant error 
is identified in a procedure or methodology, including a qualitative or 
quantitative model, that may result in credit rating actions; \913\ and
---------------------------------------------------------------------------

    \913\ See 15 U.S.C. 78o-7(r)(3)(C).
---------------------------------------------------------------------------

     notifies users of credit ratings when a material change is 
made to a procedure or methodology, including to a qualitative model or 
quantitative input, of the likelihood the change will result in a 
change in current credit ratings.\914\
---------------------------------------------------------------------------

    \914\ See 15 U.S.C. 78o-7(r)(3)(D).
---------------------------------------------------------------------------

    Proposed paragraph (b) of new Rule 17g-8 would implement Section 
938(a) of the Dodd-Frank Act by requiring an NRSRO to have policies and 
procedures with respect to the symbols, numbers, or scores it uses to 
denote credit ratings.\915\ These policies and procedures would be used 
by the NRSRO to achieve the objectives mandated in Sections 938(a)(1) 
through (3) of the Dodd-Frank Act.\916\ Namely, that the NRSRO 
establishes, maintains, and enforces written policies and procedures 
to: (1) Assess the probability that an issuer of a security or money 
market instrument will default, fail to make timely payments, or 
otherwise not make payments to investors in accordance with the terms 
of the security or money market instrument; \917\ (2) clearly define 
and disclose the meaning of any symbol used by the NRSRO to denote a 
credit rating; \918\ and (3) apply any symbol described in item (2) in 
a manner that is consistent for all types of securities and money 
market instruments for which the symbol is used.\919\
---------------------------------------------------------------------------

    \915\ See Public Law 111-203 Sec.  938(a) and proposed paragraph 
(b) of new Rule 17g-8; see also Section II.J.1 of this release for a 
more detailed discussion of this proposal.
    \916\ See Public Law 111-203 Sec. Sec.  938(a)(1)-(3).
    \917\ See Public Law 111-203 Sec.  938(a)(1).
    \918\ See Public Law 111-203 Sec.  938(a)(2).
    \919\ See Public Law 111-203 Sec.  938(a)(3).
---------------------------------------------------------------------------

    Proposed paragraph (c) of new Rule 17g-8 would implement Section 
15E(h)(4)(A)(ii) of the Exchange Act by requiring the NRSRO to include 
certain policies and procedures in the policies and procedures the 
NRSRO is required to establish, maintain, and enforce under Section 
15E(h)(4)(A) of the Exchange Act.\920\ These policies and procedures 
would be used by the NRSRO: (1) To achieve the objective specified in 
Section 15E(h)(4)(A)(ii) of the Exchange Act to revise a credit rating, 
if appropriate, when a look-back review determines the credit rating 
was influenced by the conflict of interest of the credit analyst 
seeking employment with the person subject to the credit rating or the 
issuer, underwriter, or sponsor of a security or money market 
instrument subject to the credit rating; \921\ and (2) to make the 
disclosures that would be required in proposed new paragraph 
(a)(1)(ii)(J)(3) of Rule 17g-7.\922\
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    \920\ See 15 U.S.C. 78o-7(h)(4)(A)(ii) and proposed new 
paragraph (c) of Rule 17g-8; see also Section II.C.1 of this release 
for a more detailed discussion of this proposal.
    \921\ See 15 U.S.C. 78o-7(h)(4)(A)(ii).
    \922\ See proposed paragraph (a)(1)(ii)(J)(3) of Rule 17g-7.

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[[Page 33498]]

7. Proposed New Rule 17g-9
    The Commission is proposing new Rule 17g-9.\923\ This rule would 
implement Section 936 of the Dodd-Frank Act by requiring an NRSRO to 
establish, maintain, enforce, and document standards of training, 
experience, and competence for the individuals it employs to determine 
credit ratings.\924\ These standards would be used by the NRSRO to 
achieve the objectives specified in Sections 936(1) and (2) of the 
Dodd-Frank Act that any person employed by the NRSRO to perform credit 
ratings produces accurate ratings for the categories of issuers whose 
securities the person rates and is tested for knowledge of the credit 
rating process.\925\
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    \923\ Proposed new Rule 17g-9 would be codified at 17 CFR 
240.17g-9, if adopted.
    \924\ See Public Law 111-203 Sec.  936 and proposed new Rule 
17g-9; see also Section II.I.1 of this release for a more detailed 
discussion of this proposal.
    \925\ Public Law 111-203 Sec. Sec.  936(1) and (2).
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8. Proposed New Rule 17g-10 and Form ABS Due Diligence-15E
    The Commission is proposing new Rule 17g-10 and new Form ABS Due 
Diligence-15E.\926\ Proposed new Rule 17g-10 would implement rulemaking 
mandated in Sections 15E(s)(4)(B) and (C) of the Exchange Act by 
requiring that the written certification a provider of third-party due 
diligence services must provide to an NRSRO be made on Form ABS Due 
Diligence-15E.\927\ Proposed new Rule 17g-10 and proposed new Form ABS 
Due Diligence-15E would be designed to achieve the objective stated in 
Section 15E(s)(4)(B) of the Exchange Act; namely, that the provider of 
third-party due diligence services conducts a thorough review of data, 
documentation, and other relevant information necessary for an NRSRO to 
provide an accurate credit rating.\928\ They also would be designed--in 
combination with the disclosure requirement in proposed new paragraph 
(a)(2) of Rule 17g-7--to achieve the objective stated in Section 
15E(s)(4)(D) of the Exchange Act; namely, to allow the public to 
determine the adequacy and level of due diligence services provided by 
a third party.\929\
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    \926\ Proposed new Rule 17g-10 would be codified at 17 CFR 
240.17g-10 and proposed new Form ABS Due Diligence-15E would be 
identified at 17 CFR 249b.400.
    \927\ See 15 U.S.C. 78o-7(s)(4)(B) and (C), proposed new Rule 
17g-10, and proposed new Form ABS Due Diligence-15E; see also 
Sections II.H of this release for a more detailed discussion of this 
proposal.
    \928\ See 15 U.S.C. 78o-7(s)(4)(B).
    \929\ See 15 U.S.C. 78o-7(s)(4)(D); see also Sections II.G.5 of 
this release for a more detailed discussion of proposed new 
paragraph (a)(2) of Rule 17g-7.
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9. Rule 15Ga-2 and Form ABS-15G
    The Commission is proposing new Rule 15Ga-2 and amendments to Form 
ABS-15G.\930\ The new rule and amended form would implement Section 
15E(s)(4)(A) of the Exchange Act.\931\ Proposed new Rule 15Ga-2 would 
require an issuer or underwriter of any Exchange Act-ABS that is to be 
rated by an NRSRO to furnish a Form ABS-15G on the EDGAR system 
containing the findings and conclusions of any third-party ``due 
diligence report'' obtained by the issuer or underwriter. Under the 
proposal, the disclosure would be furnished using Form ABS-15G for both 
registered and unregistered offerings of Exchange Act-ABS. In addition, 
under the Commission's proposal, an issuer or underwriter would not 
need to furnish Form ABS-15G if the issuer or underwriter obtains a 
representation from each NRSRO engaged to produce a credit rating for 
the Exchange Act-ABS that can be reasonably relied on that the NRSRO 
will publicly disclose the findings and conclusions of any third-party 
due diligence report obtained by the issuer or underwriter with the 
publication of the credit rating five business days prior to the first 
sale in the offering in an information disclosure form generated 
pursuant to proposed new paragraph (a)(1) of Rule 17g-7.
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    \930\ See proposed new Rule 15Ga-2 and proposed amendments to 
Form ABS-15G.
    \931\ See 15 U.S.C. 78o-7(s)(4)(A); see also Section II.H.1 of 
this release for a more detailed discussion of this proposal.
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    The information proposed to be disclosed under these requirements 
would be used by investors and other users of credit ratings to 
determine the adequacy and level of due diligence services provided by 
a third party. In addition, if no disclosure is made, investors and 
other users of credit ratings would be put on notice that the issuer or 
underwriter did not employ a provider of third-party due diligence 
services in connection with the offering of an Exchange Act-ABS.
10. Proposed Amendments to Regulation S-T
    As noted above, the Commission is proposing that certain Form NRSRO 
submissions and all Rule 17g-3 annual report submissions be made 
through the EDGAR system. In order to implement this requirement, the 
Commission is proposing amendments to Rule 101 of Regulation S-T to 
require that the EDGAR system be used to submit Form NRSRO pursuant to 
paragraphs (e), (f), and (g) of Rule 17g-1 and the annual reports 
pursuant Rule 17g-3.\932\ The Commission also is proposing to amend 
Rule 201 of Regulation S-T, which governs temporary hardship exemptions 
from electronic filings, to make this exemption unavailable for NRSRO 
submissions.\933\
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    \932\ See proposed amendment of Rule 101 of Regulation S-T (17 
CFR 231.101); see also Section II.L of this release for a more 
detailed discussion of this proposal.
    \933\ See proposed amendment of Rule 201 of Regulation S-T (17 
CFR 231.201); see also Section II.L of this release for a more 
detailed discussion of this proposal.
---------------------------------------------------------------------------

    These proposed requirements would implement the proposals that 
NRSROs use the EDGAR system to submit Form NRSROs pursuant to 
paragraphs (e), (f), and (g) of Rule 17g-1 and the annual reports 
pursuant to Rule 17g-3. With respect to the Form NRSROs, the proposal 
is designed to make the information contained in the Form more readily 
accessible to investors and other users of credit ratings. As the 
Commission stated when adopting Form NRSRO, the Form will provide users 
of credit ratings with information that will assist them in comparing 
NRSROs and understanding how a given NRSRO conducts its business 
activities.\934\ In addition, the filing of the Form NRSROs and annual 
reports on the EDGAR system would allow Commission examiners to more 
easily retrieve the Forms of a specific NRSRO to prepare for an 
examination. Moreover, having the Forms and annual reports filed and 
stored through the EDGAR system (i.e., in a centralized location), 
would assist the Commission from a records management perspective by 
establishing a more automated storage process and creating efficiencies 
in terms of reducing the volume of paper filings that must be manually 
processed and stored.
---------------------------------------------------------------------------

    \934\ See Oversight of Credit Rating Agencies Registered as 
Nationally Recognized Statistical Rating Organizations, 72 FR 33569-
335670 (June 18, 2007).
---------------------------------------------------------------------------

    The Commission also is proposing amendments to Rule 314 of 
Regulation S-T that would permit municipal securitizers of Exchange 
Act-ABS, or underwriters in the offering of municipal Exchange Act-ABS, 
to provide the information required by Form ABS-15G on EMMA, the 
Municipal Securities Rulemaking Board's centralized public 
database.\935\ This would allow investors and other market participants 
to access the information required in Form ABS-15G

[[Page 33499]]

along with other information on EMMA about the municipal Exchange Act-
ABS.
---------------------------------------------------------------------------

    \935\ See proposed amendments to Rule 314 of Regulation S-T (17 
CFR 231.314); see also Section II.H.1 of this release for a more 
detailed discussion of this proposal.
---------------------------------------------------------------------------

11. Form ID
    NRSROs would need to file a Form ID with the Commission in order to 
gain access to the Commission's EDGAR system to electronically submit 
Form NRSROs submitted pursuant to paragraphs (e), (f), and (g) of Rule 
17g-1 and the annual reports submitted pursuant to Rule 17g-3 through 
the EDGAR system with the Commission.\936\ The use of this information 
is addressed in Sections IV.D.1, IV.D.4 and IV.A.10 of this release.
---------------------------------------------------------------------------

    \936\ See Section II.L of this release for a more detailed 
discussion of these proposals.
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C. Respondents

    In adopting the first rules under the Rating Agency Act of 2006, 
the Commission estimated that approximately 30 credit rating agencies 
ultimately would be registered as NRSROs.\937\ Since that time, 10 
credit rating agencies have registered with the Commission as 
NRSROs.\938\ This number has remained constant for several years. 
Consequently, while the Commission expects several more credit rating 
agencies may become registered as NRSROs over the next few years, the 
Commission preliminarily believes that the actual number of NRSROs 
should be used for purposes of the PRA.
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    \937\ See Oversight of Credit Rating Agencies Registered as 
Nationally Recognized Statistical Rating Organizations, 72 FR at 
33607 (June 18, 2007).
    \938\ A.M. Best Company, Inc., DBRS Ltd., Egan-Jones Rating 
Company, Fitch, Inc., Japan Credit Rating Agency, Ltd., Kroll Bond 
Rating Agency, Inc. (formerly LACE Financial Corp.), Moody's 
Investors Service, Inc., Rating and Investment Information, Inc., 
Realpoint LLC, and Standard & Poor's Ratings Services.
---------------------------------------------------------------------------

    The Commission notes the current industry-wide annual burden 
estimates for the NRSRO Rules are based on 30 respondents. 
Consequently, these estimates would need to be adjusted to reflect the 
Commission's use of the actual number of NRSROs (i.e., 10 respondents). 
In this regard, the current OMB approved industry-wide annual hour 
burdens are: 6,400 hours for Rule 17g-1 and Form NRSRO; 12,000 hours 
for Rule 17g-2; 7,900 hours for Rule 17g-3; and 96,948 hours for Rule 
17g-7. Adjusting for 10 respondents, these industry-wide annual hour 
burdens would be: 2,133 hours for Rule 17g-1 and Form NRSRO; \939\ 
4,000 hours for Rule 17g-2;\940\ 2,633 hours for Rule 17g-3; \941\ and 
92,948 hours for Rule 17g-7.\942\ For the purposes of the PRA 
discussion below and the economic analysis in Section V of this 
release, the Commission uses the adjusted current industry-wide annual 
hour burdens above (the ``adjusted industry-wide annual hour 
burdens''). For example, when discussing how a proposed amendment would 
increase an industry-wide annual hour burden, the Commission adds the 
increased hour burden to the applicable rule's adjusted current 
industry-wide annual hour burden.
---------------------------------------------------------------------------

    \939\ The current OMB approved total industry-wide annual hour 
burden for Rule 17g-1 and Form NRSRO of 6,400 hours is based on 30 
respondents preparing and filing Form NRSROs. See Oversight of 
Credit Rating Agencies Registered as Nationally Recognized 
Statistical Rating Organizations, 72 FR at 33607-33609 (June 18, 
2007); Amendments to Rules for Nationally Recognized Statistical 
Rating Organizations, 74 FR at 6470 (Feb. 9, 2009), and Proposed 
Rules for Nationally Recognized Statistical Rating Organizations, 74 
FR at 63889-63890 (Dec. 4, 2009). Consequently, the adjusted current 
industry-wide annual hour burden for Rule 17g-1 and Form NRSRO would 
be 2,133 hours (6,400 hours/30 NRSROs = 213 hours; 10 NRSROs x 213 
hours = 2,133 hours).
    \940\ The current OMB approved total industry-wide annual hour 
burden for Rule 17g-2 of 12,000 hours is based on 30 respondents 
making and retaining the required records identified in paragraphs 
(a) and (b) of Rule 17g-2 and making the required disclosures in 
paragraphs (d)(2) and (d)(3) (except the hour burden resulting from 
paragraph (d)(2) of Rule 17g-2 was allocated across 7 NRSROs; 
however, the impact on the per firm total of allocating to 7 as 
opposed to 10 firms is minimal). See Oversight of Credit Rating 
Agencies Registered as Nationally Recognized Statistical Rating 
Organizations, 72 FR at 33609-33610 (June 18, 2007); Amendments to 
Rules for Nationally Recognized Statistical Rating Organizations, 74 
FR at 6473 (Feb. 9, 2009), and Proposed Rules for Nationally 
Recognized Statistical Rating Organizations, 74 FR at 63888-63889 
(Dec. 4, 2009). Consequently, the adjusted current industry-wide 
annual hour burden for Rule 17g-2 would be 4,000 hours (12,000 
hours/30 NRSROs = 400 hours; 10 NRSROs x 400 hours = 4,000 hours).
    \941\ The current OMB approved total industry-wide annual hour 
burden for Rule 17g-3 of 7,900 hours is based on 30 respondents 
preparing and filing the annual reports. See Oversight of Credit 
Rating Agencies Registered as Nationally Recognized Statistical 
Rating Organizations, 72 FR at 33610 (June 18, 2007); Amendments to 
Rules for Nationally Recognized Statistical Rating Organizations, 74 
FR at 6473 (Feb. 9, 2009), and Proposed Rules for Nationally 
Recognized Statistical Rating Organizations, 74 FR at 63888-63889 
(Dec. 4, 2009). Consequently, the adjusted current industry-wide 
annual hour burden for Rule 17g-3 would be 2,633 hours (7,900 hours/
30 NRSROs = 263 hours; 10 NRSROs x 263 hours = 2,633 hours).
    \942\ Of the 96,948 hours in the current OMB approved total 
industry-wide annual hour burden for Rule 17g-7, 90,948 hours are 
based on the number of Exchange Act-ABS transactions per year for 
which the disclosure requirement in the rule would apply (i.e., not 
based on the number of respondents). See Disclosure for Asset-Backed 
Securities Required by Section 943 of the Dodd-Frank Wall Street 
Reform and Consumer Protection Act, 76 FR at 4507-4508 (Jan. 26, 
2011). However, 6,000 hours in that total are based on the number of 
respondents. Id. Consequently, the adjusted current industry-wide 
annual hour burden for Rule 17g-7 would be 92,948 hours (6,000 
hours/30 NRSROs = 200 hours; 10 NRSROs x 200 hours = 2,000 hours; 
90,948 hours + 2,000 hours = 92,948 hours).
---------------------------------------------------------------------------

    The Commission preliminarily believes there are approximately 10 
firms that provide, or would begin providing, third-party ``due 
diligence services'' to issuers and underwriters of Exchange Act-ABS as 
the term ``due diligence services'' would be defined in paragraph (a) 
of proposed new Rule 17g-10.\943\ As discussed in Section II.H.2 of 
this release, the Commission preliminarily believes that the firms 
providing third-party ``due diligence services'' as that term would be 
defined in proposed new Rule 17g-10 concentrate mostly on providing 
such services for RMBS. Consequently, given the low issuance rate for 
RMBS, the number of active firms may be small but it could grow if 
issuance volume increases.
---------------------------------------------------------------------------

    \943\ See, e.g., Testimony of Vicki Beal, Senior Vice President, 
Clayton Holdings, before the Financial Crisis Inquiry Commission 
(Sept. 23, 2010).
---------------------------------------------------------------------------

    The Commission preliminarily believes there are 270 unique 
securitizers that would be subject to the proposed requirements in new 
Rule 15Ga-2 and the amendments to Form ABS-15G.\944\ This estimate is 
based on the Commission's estimate of the number of securitizers that 
would be subject to requirements in Rule 15Ga-1 and Form ABS-15G.\945\
---------------------------------------------------------------------------

    \944\ See proposed new Rule 15Ga-2 and the amendments to Form 
ABS-15G; see also Section II.H.1 of this release for a more detailed 
discussion of this proposal.
    \945\ See Disclosure for Asset-Backed Securities Required by 
Section 943 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, 76 FR at 4506-4507 (Jan. 26, 2011)
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of these 
estimates of the number of respondents. In addition, the Commission 
requests specific comments on the following:
    1. Is it reasonable for the Commission to use the actual number of 
NRSROs for purposes of the PRA? Alternatively, should the Commission 
either use, for purposes of the PRA, the estimate of 30 NRSROs it has 
used in the past or develop and use a new estimate of the expected 
eventual number of NRSROs? Explain any choices made with respect to the 
number of NRSROs that should be used for the purposes of the PRA, 
including any data and analysis supporting the choice.
    2. Identify any sources of industry information that could be used 
to estimate the number of NRSROs that may become registered with the 
Commission over the next few years for purposes of the PRA.

[[Page 33500]]

    3. Is the estimate that 10 firms will be operate as third-party 
``due diligence service'' providers over the next few years reasonable? 
Alternatively, should the Commission use some other number? Explain any 
choices made with respect to the number of third-party ``due diligence 
service'' providers that should be used for the purposes of the PRA, 
including any data and analysis supporting the choice.
    4. Identify any sources of industry information that could be used 
to estimate the number of third-party ``due diligence service'' 
providers for purposes of the PRA.

D. Total Initial and Annual Recordkeeping and Reporting Burdens

    Unless otherwise noted, the one-time and annual hour burden 
estimates per NRSRO described below are averages across all types of 
NRSROs that would be subject to the proposed amendments and new rules. 
The NRSROs vary, in terms of size and complexity, from small entities 
that employ less than 20 credit analysts to complex global 
organizations that employ over a thousand credit analysts.\946\ Given 
the variance in size between the largest NRSROs and the smallest 
NRSROs, the burden estimates, as averages across all NRSROs, are skewed 
higher because the largest firms currently dominate in terms of size 
and the volume of credit rating issuance.\947\
---------------------------------------------------------------------------

    \946\ See, e.g., Annual Report on Nationally Recognized 
Statistical Rating Organizations. Commission (Jan. 2011), pp. 4-9.
    \947\ Based on data collected from the NRSROs in their Form 
NRSROs and Rule 17g-3 annual reports, the Commission has used the 
Herfindahl-Hirschmann Index (HHI) to analyze market concentration 
among the 10 NRSROs. Id. HHI is calculated by squaring the market 
share of each firm competing in the market and then summing the 
resulting number. Id. The HHI is measured on a scale of 0 to 10,000 
and approaches zero when a market consists of a large number of 
firms of relatively equal size. The HHI increases both as the number 
of firms in the market decreases and as the disparity in size 
between those firms increases. Id. According to the U.S. Department 
of Justice, markets in which the HHI is between 1,000 and 1,800 
points are considered to be moderately concentrated, and those in 
which the HHI is in excess of 1,800 points are considered to be 
concentrated. Id. The Commission has calculated an HHI number using 
the number credit ratings outstanding per NRSRO and that number is 
3,495, which is equivalent to there being approximately 2.86 equally 
sized firms. Id. The HHI using earnings reported by NRSROs in the 
Rule 17g-3 annual reports is 3,926, which the equivalent of 2.55 
equally sized firms. Id. The inverse of the HHI (``HHI Inverse'') is 
a measure of the number of equally sized firms which would 
constitute a comparable level of concentration for a given HHI and 
is calculated by dividing 10,000 by the HHI. Id.
---------------------------------------------------------------------------

    As discussed below, with respect to some burden estimates, the 
Commission preliminarily believes it would be reasonable to use the 
approximate number of credit ratings outstanding or the number of 
credit analysts employed based on the most recently submitted annual 
certifications of the NRSROs.\948\ These data are presented in Figure 2 
and Figure 3 below, respectively.
---------------------------------------------------------------------------

    \948\ See, Annual Report on Nationally Recognized Statistical 
Rating Organizations. Commission (Jan. 2011), pp. 4-9.

                                 Figure 2--Outstanding Credit Ratings Reported by NRSROs on Form NRSRO by Ratings Class
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                            Government,
                          NRSRO                              Financial       Insurance       Corporate     Asset-backed     municipal &    Total ratings
                                                           institutions      companies        issuers       securities       sovereign
--------------------------------------------------------------------------------------------------------------------------------------------------------
A.M. Best...............................................               3           5,364           2,246              54               0           7,667
DBRS....................................................          16,630             120           5,350           8,430          12,400          42,930
EJR.....................................................              82              45             853              14              13           1,007
Fitch...................................................          72,311           4,599          12,613          69,515         352,697         511,735
JCR.....................................................             156              31             518              64              53             822
Kroll...................................................          17,263              60           1,000               0              61          18,384
Moody's.................................................          76,801           5,455          31,008         106,337         862,240       1,081,841
R&I.....................................................             100              30             543             186             123             982
Realpoint...............................................               0               0               0           8,856               0           8,856
S&P.....................................................          52,500           8,600          41,400         124,600       1,004,500       1,231,600
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................         235,846          24,304          95,531         318,056       2,232,087       2,905,824
                                                         ================-------------------------------------------------------------------------------
HHI.....................................................           2,599           2,601           3,145           3,145           3,767           3,495
HHI Inverse.............................................            3.85            3.84            3.18            3.18            2.65            2.86
--------------------------------------------------------------------------------------------------------------------------------------------------------



   Figure 3--Credit Analysts Employed Reported by NRSROs on Form NRSRO
------------------------------------------------------------------------
                                                              Credit
                    NRSRO                        Credit       analyst
                                                analysts    supervisors
------------------------------------------------------------------------
A.M. Best....................................        134              42
DBRS.........................................         67              20
EJR..........................................          5               3
Fitch........................................      1,035             345
JCR..........................................         61              27
Kroll........................................          7               4
Moody's......................................      1,096             143
R&I..........................................         81               6
Realpoint....................................         15               7
S&P..........................................      1,019             223
                                              --------------------------
    Total....................................      3,520             820
------------------------------------------------------------------------

1. Proposed Amendments to Rule 17g-1
    The Commission is proposing several amendments to Rule 17g-1. As 
discussed below, the Commission preliminarily estimates that these 
proposals would result in additional one-time and annual hour burdens 
for NRSROs.
    The Commission proposes amending paragraph (i) of Rule 17g-1 to 
require that an NRSRO make Form NRSRO and Exhibits 1 through 9 freely 
available on an easily accessible portion of its corporate Internet Web 
site.\949\ The proposed amendment would remove the option for an NRSRO 
to make the Form publicly available ``through another comparable, 
readily accessible means'' as an alternative to Internet Web site 
disclosure. The Commission preliminarily estimates that there would be 
a minimal one-time hour burden attributable to requiring that an NRSRO 
make Form NRSRO and Exhibits 1 through 9 freely available on an easily

[[Page 33501]]

accessible portion of its corporate Internet Web site and removing the 
option for an NRSRO to make its Form NRSRO and Exhibits 1 through 9 
available through another comparable, readily accessible means. 
Currently, all NRSROs make Form NRSRO and Exhibits 1 through 9 
available on their corporate Internet Web sites.\950\ However, as noted 
earlier, the Commission preliminarily believes that a Form NRSRO and 
Exhibits 1 through 9 would be ``easily accessible'' if they could be 
accessed through a clearly and prominently labeled hyperlink on the 
home page of the NRSRO's corporate Internet Web site. All NRSROs would 
need to make changes to their corporate Internet Web sites to place 
clearly and prominently labeled hyperlinks on the Web sites to Form 
NRSRO and Exhibits 1 through 9. Based on staff experience, the 
Commission preliminarily estimates that re-configuring a corporate 
Internet Web site for this purpose would take an average of 
approximately 5 hours. For these reasons, the Commission preliminarily 
estimates that the proposed requirement would result in an average one-
time hour burden to each NRSRO of approximately 5 hours, resulting in 
an average one-time industry-wide hour burden of approximately 50 
hours.\951\ The Commission preliminarily estimates that NRSROs would 
prepare these responses internally using their own corporate Internet 
Web site administrators. The Commission preliminarily does not believe 
the proposed requirement would result in an increase in the industry-
wide annual hour burden attributable to Rule 17g-1 and Form NRSRO.
---------------------------------------------------------------------------

    \949\ See proposed amendments to paragraph (i) of Rule 17g-1; 
see also Section II.E.1.b of this release for a more detailed 
discussion of this proposal.
    \950\ See, e.g., Annual Report on Nationally Recognized 
Statistical Rating Organizations. Commission (Jan. 2011), pp. 18-19.
    \951\ 10 NRSROs x 5 hours = 50 hours.
---------------------------------------------------------------------------

    The Commission also is proposing to amend paragraph (i) of Rule 
17g-1 to require that Exhibit 1 be made freely available in writing 
when requested. This would implement rulemaking mandated in Section 
15E(q)(2)(D) of the Exchange Act.\952\ With respect to making Exhibit 1 
freely available in writing, the Commission notes that, under the 
proposed amendments to paragraph (i) of Rule 17g-1, Form NRSRO and 
Exhibits 1 through 9 would need to be made freely available on an 
easily accessible portion of the NRSRO's corporate Internet Web site. 
Moreover, as noted above, NRSROs currently comply with paragraph (i) of 
Rule 17g-1 by making their Form NRSROs and Exhibits 1 through 9 
available on their corporate Internet Web sites. Consequently, an 
individual with access to the Internet and a printer can (and would be 
able to) obtain Exhibit 1 immediately through the Internet and could 
print the Exhibit if the individual wanted to have it in paper form. 
Therefore, the Commission preliminarily estimates that the instances in 
which an individual would request an NRSRO to provide a written copy of 
Exhibit 1 would be rare, given that the individual would need to wait 
for the request to be processed by the NRSRO and the Exhibit to arrive 
by mail as opposed to accessing it immediately via the Internet. 
Nonetheless, the Commission preliminarily estimates that some number of 
individuals may request an NRSRO to provide Exhibit 1 in writing.
---------------------------------------------------------------------------

    \952\ See 15 U.S.C. 78o-7(q)(2)(D).
---------------------------------------------------------------------------

    The Commission preliminarily estimates that the proposed 
requirement would result in a one-time hour burden to each NRSRO as 
they would need to establish procedures and protocols for receiving and 
processing these requests. Based on staff experience, the Commission 
preliminarily estimates that each NRSRO would spend an average of 
approximately 48 hours establishing such procedures and protocols, 
resulting in an average industry-wide one-time hour burden of 
approximately 480 hours.\953\
---------------------------------------------------------------------------

    \953\ 10 NRSROs x 48 hours = 480 hours.
---------------------------------------------------------------------------

    In terms of annual hour burden, the Commission notes it is 
difficult to quantify the number of requests an NRSRO would receive 
each year. However, the Commission preliminarily estimates each NRSRO 
would on average receive approximately 200 requests per year and would 
spend an average of 20 minutes processing each request. The estimate of 
200 requests is intended to serve as a ``placeholder'' for PRA purposes 
and the Commission will revise this estimate based on information 
provided by NRSROs and other commenters. For these reasons, the 
Commission estimates that the average annual hour burden to each NRSRO 
would be approximately 67 hours,\954\ resulting in a total industry-
wide annual hour burden of approximately 670 hours.\955\ The Commission 
preliminarily estimates that NRSROs would prepare these responses 
internally.
---------------------------------------------------------------------------

    \954\ 200 requests x 20 minutes per request = 67 hours per year.
    \955\ 10 NRSROs x 67 hours per year = 670 hours per year.
---------------------------------------------------------------------------

    The Commission also is proposing to amend paragraphs (e), (f), and 
(g) of Rule 17g-1 to require that an NRSRO use the Commission's EDGAR 
system to electronically submit Form NRSRO and Exhibits 1 through 9 
with the Commission pursuant to these paragraphs in the format required 
by the EDGAR Filer Manual, as defined in Rule 11 of Regulation S-
T.\956\ NRSROs currently submit these documents to the Commission in 
paper form.
---------------------------------------------------------------------------

    \956\ See proposed amendments to paragraphs (e), (f), and (g) of 
Rule 17g-1; see also Section II.L of this release for a more 
detailed discussion of these proposals.
---------------------------------------------------------------------------

    The Commission preliminarily estimates that each NRSRO would spend 
an average of approximately 5 hours becoming familiar with the EDGAR 
filing system and completing and submitting Form ID, which is necessary 
to access the system. As discussed below, the Commission preliminarily 
estimates that the one-time hour burden for each NRSRO to complete Form 
ID would be 15 minutes.\957\ In addition, as discussed above and below, 
the Commission is proposing that the Rule 17g-3 annual report also be 
submitted using the EDGAR system.\958\ The Commission's preliminary 
estimate of 5 hours to become familiar with the EDGAR system would 
include developing an understanding of how to use the system for both 
submitting Form NRSROs and submitting the Rule 17g-3 annual reports. 
Consequently, for purposes of the PRA and the Economic Analysis in 
Section V of this release, the Commission is allocating this one-time 
hour burden and corresponding cost solely to Rule 17g-1. In addition, 
because the hour burden of 15 minutes for Form ID is addressed below, 
the Commission estimates that each NRSRO would spend an average of 4.75 
hours becoming familiar with how to use the EDGAR system, resulting in 
an industry-wide one-time hour burden of approximately 47.5 hours.\959\
---------------------------------------------------------------------------

    \957\ See Section IV.D.11 of this release.
    \958\ See proposed amendments to Regulation S-T and Rule 17g-3; 
see also Section II.L of this release for a more detailed discussion 
of this proposal.
    \959\ 10 NRSROs x 4.75 hours = 47.5 hours.
---------------------------------------------------------------------------

    The Commission does not believe changing the method of submitting 
Form NRSRO and Exhibits 1 through 9 from a paper submission to an 
electronic submission would increase the current annual hour burden for 
Rule 17g-1. In particular, the Commission believes that both the amount 
of time it currently takes an NRSRO to send these materials, once 
compiled, to the Commission's headquarters by mail, messenger, or hand-
delivery by a representative of the NRSRO and the time it would take to 
submit them electronically through the EDGAR system are de minimus.

[[Page 33502]]

    For the foregoing reasons, the Commission estimates that the total 
industry-wide one-time hour burden resulting from the proposed 
amendments to Rule 17g-1 would be approximately 577.5 hours \960\ and 
the total industry-wide annual burden would be approximately 670 
hours.\961\
---------------------------------------------------------------------------

    \960\ 480 hours + 50 + 47.5 hours = 577.5 hours.
    \961\ This estimate would increase the adjusted industry-wide 
annual hour burden for Rule 17g-1 and Form NRSRO from 2,133 hours to 
2,803 hours (2,133 hours + 670 hours = 2,803 hours).
---------------------------------------------------------------------------

2. Proposed Amendments to Form NRSRO Instructions
    The Commission is proposing to amend the instructions for Exhibit 1 
to Form NRSRO.\962\ The amendments would confine the disclosures in the 
Exhibit to transition and default rates and certain limited 
supplemental information.\963\ Moreover, the amendments would 
standardize the production and presentation of the transition and 
default statistics. As discussed below, the Commission preliminarily 
estimates that these proposals would result in additional one-time and 
annual hour burdens for NRSROs.
---------------------------------------------------------------------------

    \962\ See Instruction H to Form NRSRO (as it relates to Exhibit 
1).
    \963\ See proposed amendments to the instructions for Exhibit 1 
to Form NRSRO (17 CFR 249b.300); see also Section II.E.1.a of this 
release for a more detailed discussion of this proposal.
---------------------------------------------------------------------------

    The Commission notes that an NRSRO currently is required to provide 
transition and default rates in Exhibit 1 for each class of credit 
rating for which it is registered and for 1, 3, and 10-year periods. 
The Commission preliminarily estimates that an NRSRO would use the 
internal information technology systems and expertise and other 
resources it currently devotes to processing the information necessary 
to monitor credit ratings and calculate transition and default 
statistics in order to program a system to comply with the proposed 
amendments to the Instructions for Exhibit 1. At the same time, the 
Commission notes that, under the proposed amendments, NRSROs would be 
required to adhere to specific requirements that may not be the same as 
their current methods for calculating and presenting transition and 
default rates. Consequently, the Commission preliminarily estimates 
that the proposed amendments requiring standardized Transition/Default 
Matrices would result in a one-time hour burden to program existing 
systems to create the Transition/Default Matrices that would be 
required under the proposed amendments and an increase in the annual 
hour burden to comply with the proposed instructions to Exhibit 1.
    As noted above, the size and complexity of the NRSROs varies 
greatly. The magnitude of this variance is reflected in the number of 
credit ratings each NRSRO has outstanding.\964\ For example, two NRSROs 
have over 1,000,000 credit ratings outstanding in the classes of credit 
ratings for which they are registered; others have fewer than 1,000 
such ratings.\965\ The hour burden associated with calculating and 
presenting these performance statistics would depend in large part on 
the number of obligors, securities, and money market instruments 
assigned credit ratings by the NRSRO.\966\ Consequently, the one-time 
and annual burdens per NRSRO would vary widely.
---------------------------------------------------------------------------

    \964\ See Figure 2 in Section IV.D of this release.
    \965\ Id.
    \966\ For example, as discussed in more detail in Section 
II.E.1.a of this release, the applicant or NRSRO, in producing a 
Transition/Default Matrix, would need to determine a start-date 
cohort consisting of the obligors, securities, and money market 
instruments in the applicable class or subclass of credit ratings 
that were assigned a credit rating that was outstanding as of the 
start date for the applicable period (i.e., the date 1, 3, or 10 
years prior to the most recently ended calendar year). The applicant 
or NRSRO also would need to group the obligors, securities, and 
money market instruments in the start-date cohort based on the 
credit rating assigned to them as of the start date and determine 
the outcome for each such obligor, security, and money market 
instrument in the group during, or as of the end of, the relevant 
period. This exercise would be more time-consuming for an NRSRO that 
has over 1,000,000 credit ratings outstanding than for an NRSRO that 
has fewer than 10,000 credit ratings outstanding (2 NRSROs have over 
1,000,000 credit ratings outstanding and 5 NRSROs have fewer than 
10,000 credit ratings outstanding). See Figure 2 in Section IV.D of 
this Release.
---------------------------------------------------------------------------

    In order to account for this variance, the Commission preliminarily 
believes that the one-time and annual hour burden estimates should be 
based on the number of credit ratings outstanding. Based on the annual 
certifications submitted by the NRSROs for the 2009 calendar year-end, 
there were approximately 2,905,824 credit ratings outstanding across 
all 10 NRSROs.\967\ The Commission preliminarily estimates that the 
one-time industry-wide hour burden to establish systems to process the 
relevant information necessary to calculate the Transition/Default 
Matrices and make the necessary calculations would be approximately 3 
seconds per outstanding credit rating, which would result in a one-time 
industry-wide hour burden of approximately 2,420 hours.\968\ Moreover, 
because of the wide variance in the number of credit ratings 
outstanding among the NRSROs, the Commission preliminarily estimates 
that this one-time hour burden of 2,420 hours would be allocated to the 
10 NRSROs based on the number of credit ratings each has outstanding 
(although larger NRSROs may realize economies of scale). For example, 
the two largest NRSROs had just over 1,000,000 credit ratings 
outstanding, the next largest had approximately 500,000 credit ratings 
outstanding, and the remaining 7 NRSROs had amounts ranging from 42,930 
credit ratings outstanding to 982 credit ratings outstanding.\969\
---------------------------------------------------------------------------

    \967\ Id.
    \968\ 2,905,824 credit ratings x 3 seconds = 2,421.52 hours 
(rounded to 2,420 hours).
    \969\ See Figure 2 in Section IV.D of this release.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the annual hour burden 
to comply with the proposed amendments to the Instructions for Exhibit 
1 would be less than the one-time hour burden since the NRSROs would 
have established systems to process the necessary information to 
produce the required Transition/Default Matrices. Consequently, the 
Commission preliminarily estimates that the annual hour burden to each 
NRSRO to calculate the Transition/Default Matrices would be 
approximately 1.5 seconds per outstanding credit rating, resulting in 
an industry-wide annual hour burden of approximately 1,210 hours.\970\ 
Moreover, although larger NRSROs may realize economies of scale, the 
Commission preliminarily estimates that the industry-wide annual hour 
burden of 1,210 hours would be allocated to each NRSRO based on the 
number of credit ratings the firm had outstanding.\971\
---------------------------------------------------------------------------

    \970\ 2,905,824 credit ratings x 1.5 seconds = 1,210.76 hours 
(rounded to 1,210 hours).
    \971\ See Figure 2 in Section IV.D of this release.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission estimates that the total 
industry-wide one-time hour burden resulting from the proposed 
amendments to the instructions for Exhibit 1 to Form NRSRO would be 
approximately 2,420 hours and the total industry-wide annual burden 
would be approximately 1,210 hours.\972\
---------------------------------------------------------------------------

    \972\ These estimates would increase the adjusted industry-wide 
annual hour burden for Rule 17g-1 and Form NRSRO from 2,133 hours to 
3,343 hours (2,133 hours + 1,210 hours = 3,343 hours). Combined with 
the industry-wide annual burden hour increase of 670 hours resulting 
from the proposed amendments to Rule 17g-1 discussed above in 
Section IV.D.2 of this release, the total increase to the adjusted 
industry-wide annual hour burden for Rule 17g-1 and Form NRSRO would 
be from 2,133 hours to 4,013 hours (2,133+670 hours + 1,210 hours = 
4,013 hours). The Commission notes that the adjusted industry-wide 
annual hour burden for all of Rule 17g-1 and Form NRSRO (which 
includes providing the transition and default rates required in 
Exhibit 1 under the existing instructions) is 2,133 hours. 
Consequently, the Commission preliminarily believes these estimates 
of the incremental burden that would result from the proposed 
amendments to the Instructions for Exhibit 1 are conservatively 
large.

---------------------------------------------------------------------------

[[Page 33503]]

3. Proposed Amendments to Rule 17g-2
    The Commission proposes adding paragraph (a)(9) to Rule 17g-2 to 
identify the policies and procedures an NRSRO is required to establish, 
maintain, and enforce pursuant to Section 15E(h)(4)(A) of the Exchange 
Act and proposed paragraph (c) of Rule 17g-8 as a record that must be 
made and retained.\973\ In addition, the Commission is proposing to add 
the following new paragraphs to Rule 17g-2 to identify records that 
must be retained: (1) paragraph (b)(12) would identify the internal 
control structure an NRSRO must establish, maintain, enforce, and 
document pursuant to Section 15E(c)(3)(A); \974\ (2) paragraph (b)(13) 
would identify the policies and procedures an NRSRO is required to 
establish, maintain, enforce, and document pursuant to proposed 
paragraph (a) of new Rule 17g-8; \975\ (3) paragraph (b)(14) would 
identify the policies and procedures an NRSRO must establish, maintain, 
enforce, and document pursuant to proposed paragraph (b) of new Rule 
17g-8; \976\ and (4) paragraph (b)(15) would identify the standards of 
training, experience, and competence for credit analysts an NRSRO must 
establish, maintain, enforce, and document pursuant to proposed new 
Rule 17g-9.\977\ As discussed below, the Commission preliminarily 
estimates that these proposals would result in additional one-time and 
annual hour burdens for NRSROs.
---------------------------------------------------------------------------

    \973\ See proposed new paragraph (a)(9) to Rule 17g-2(a)(9); see 
also Section II.C.2 of this release for a more detailed discussion 
of this proposal.
    \974\ See proposed new paragraph (b)(12) of Rule 17g-2; see also 
Section II.A.2 of this release for a more detailed discussion of 
this proposal.
    \975\ See proposed new paragraph (b)(13) to Rule 17g-2; see also 
Section II.F.2 of this release for a more detailed discussion of 
this proposal.
    \976\ See proposed new paragraph (b)(14) to Rule 17g-2; see also 
Section II.J.2 of this release for a more detailed discussion of 
this proposal.
    \977\ See proposed new paragraph (b)(15) to Rule 17g-2; see also 
Section II.I.2 of this release for a more detailed discussion of 
this proposal.
---------------------------------------------------------------------------

    The Commission is providing preliminary estimates below in Section 
IV.D.5 of this release of the one-time and annual hour burdens that 
would result from establishing, maintaining, enforcing, and documenting 
the policies and procedures required by Section 15E(h)(4)(A) of the 
Exchange Act and proposed paragraph (c) of Rule 17g-8. Because the 
requirement to document these procedures would be the same as the 
requirement in proposed paragraph (a)(9) of Rule 17g-2 to make this 
record, the PRA burdens associated with that aspect of the making of 
the record are addressed below in Section IV.D.5 of this release.
    Consequently, for the purposes of Rule 17g-2, the Commission is 
providing preliminary estimates of the one-time and annual hour burdens 
resulting from the requirement to retain the records that would be 
identified in new paragraphs (a)(9), (b)(12), (b)(13), (b)(14), and 
(b)(15) of Rule 17g-2. The Commission preliminarily estimates that the 
one-time hour burden would result from the NRSRO needing to update its 
record retention policies and procedures to incorporate these new 
records that would need to be retained. Based on staff experience, the 
Commission preliminarily estimates that each NRSRO would spend an 
average of approximately 20 hours updating its record retention 
policies and procedures, resulting in an industry-wide one-time hour 
burden of approximately 200 hours.\978\
---------------------------------------------------------------------------

    \978\ 10 NRSROs x 20 hours = 200 hours.
---------------------------------------------------------------------------

    In terms of annual hour burden, the Commission notes that the 
adjusted industry-wide annual hour burden attributable to Rule 17g-2 is 
4,000 hours, resulting in an average annual burden of 400 hours per 
NRSRO.\979\ This burden amount is attributable to 8 different types of 
records that must be made and retained by the NRSRO, 11 types of 
records that must be retained if made or received, and to the 
disclosure requirements in paragraphs (d)(2) and (d)(3) of Rule 17g-
2.\980\ The Commission preliminarily believes that most of the hour 
burden is attributable to making the records identified in paragraph 
(a) of the Rule 17g-2 and making the disclosures required in paragraph 
(d) of Rule 17g-2 as this work is substantially more labor intensive 
than retaining a record. Consequently, the Commission preliminarily 
estimates that the burden associated with retaining the 5 new records 
that would be identified in new paragraphs (a)(9), (b)(12), (b)(13), 
(b)(14), and (b)(15) of Rule 17g-2 would be minimal because NRSROs 
already should have well-established procedures with respect to the 
records they must make and retain pursuant to Rule 17g-2. In addition, 
the Commission does not expect the new records would change frequently 
given that they would be the NRSRO's internal control structure 
required pursuant to Section 15E(c)(3)(A) of the Exchange Act,\981\ 
various types of policies and procedures, and the standards of 
training, experience, and competence for credit analysts an NRSRO must 
establish, maintain, enforce, and document pursuant to proposed new 
Rule 17g-9. Accordingly, once the original record is retained, the need 
to expend resources to retain updated versions of the original record 
would be infrequent. Therefore, the Commission preliminarily estimates 
that it would take approximately one hour per record each year to 
retain updated versions of these records. For these reasons, the 
Commission preliminarily estimates that the annual hour burden for each 
NRSRO attributable to these proposals would be approximately 5 
hours,\982\ resulting in an industry-wide annual hour burden of 
approximately 50 hours.\983\
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    \979\ 4,000 hours/10 NRSROs = 400 hours.
    \980\ See 17 CFR 240.17g-2(a), (b), (d)(2), and (d)(3).
    \981\ See 15 U.S.C. 78o-7(c)(3)(A).
    \982\ 5 records x 1 hour = 5 hours.
    \983\ 10 NRSROs x 5 hours = 50 hours.
---------------------------------------------------------------------------

    The Commission is proposing to repeal paragraph (d)(2) of Rule 17g-
2 and re-codify and enhance the requirements in paragraph (d)(3) of 
Rule 17g-2 in proposed new paragraph (b) of Rule 17g-7.\984\ The 
Commission preliminarily estimates that the repeal and re-codification 
would result in de minimis one-time hour burdens to each NRSRO.\985\ 
The one-time and annual hour burden resulting from the proposed 
enhancements to the requirements currently codified in paragraph (d)(3) 
are discussed below in Section V.D.4 of this release, which addresses 
the one-time and annual hour burdens resulting from the proposed 
amendments to Rule 17g-7.
---------------------------------------------------------------------------

    \984\ See proposed amendments to paragraphs (d)(2) and (3) of 
Rule 17g-2 and proposed new paragraph (b) of Rule 17g-7; see also 
Section II.E.2 of this release for a more detailed discussion of 
this proposal.
    \985\ For example, each NRSRO likely would remove the 
disclosures required pursuant to paragraph (d)(2) Rule 17g-2 from 
its corporate Internet Web sites (though such a removal would not be 
mandatory).
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission estimates that the total 
industry-wide one-time hour burden resulting from the proposed 
amendments to Rule 17g-2 would be approximately 200 hours and the total 
industry-wide annual hour burden would be approximately 50 hours.\986\
---------------------------------------------------------------------------

    \986\ The adjusted industry-wide annual hour burden for Rule 
17g-2 is 4,000 hours. The elimination of the requirements in 
paragraph (d)(2) of Rule 17g-7 would subtract 70 hours from that 
amount. See Amendments to Rules for Nationally Recognized 
Statistical Rating Organizations, 74 FR at 6472 (Feb. 9, 2009). In 
addition, the re-codification of paragraph (d)(3) of Rule 17g-2 in 
proposed new paragraph (b) of Rule 17g-7 would subtract an 
additional 450 hours from the adjusted industry-wide annual hour 
burden for Rule 17g-2. See Amendments to Rules for Nationally 
Recognized Statistical Rating Organizations, 74 FR at 63853 (Dec. 4, 
2009). Consequently, after these subtractions, the adjusted 
industry-wide annual hour burden for Rule 17g-2 would be 3,480 hours 
(4,000 hours-70 hours-450 hours = 3,480 hours). The proposed 
amendments to add paragraphs (a)(9), (b)(12), (b)(13), (b)(14), and 
(b)(15) to Rule 17g-2 would, as discussed above, add approximately 
50 hours to the adjusted industry-wide annual hour burden resulting 
in a total adjusted industry-wide annual hour burden of 3,530 hours 
(3,480 hours + 50 hours = 3,530 hours).

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[[Page 33504]]

4. Proposed Amendments to Rule 17g-3
    The Commission proposes amending paragraphs (a) and (b) of Rule 
17g-3 to implement the rulemaking mandated by Section 15E(c)(3)(B) of 
the Exchange Act.\987\ As discussed below, the Commission preliminarily 
estimates that these proposals would result in additional one-time and 
annual hour burdens for NRSROs.
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    \987\ See proposed new paragraphs (a)(7) and (b)(2) of Rule 17g-
3; see also Section II.A.3 of this release for a for a more detailed 
discussion of this proposal.
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    The proposed amendment to paragraph (a) would add a new paragraph 
(a)(7) to require an NRSRO to include an additional report--a report on 
the NRSRO's internal control structure--with its annual submission of 
reports pursuant to Rule 17g-3. The proposed amendment to paragraph (b) 
of Rule 17g-3 would require the NRSRO's CEO or, if the firm does not 
have a CEO, an individual performing similar functions, to provide a 
signed statement that would be attached to the report. The Commission 
preliminarily estimates that the proposed amendments would result in 
one-time and annual hour burdens.
    The Commission notes that NRSROs already should have developed 
processes and protocols to prepare the annual reports required by Rule 
17g-3. Consequently, the Commission preliminarily estimates that the 
internal hour burden associated with the first submission of the report 
would not be materially different than the hour burden associated with 
submitting subsequent reports, although the time required to prepare 
subsequent reports could decrease incrementally over time as the NRSRO 
gains experience with the requirement. The Commission, however, 
preliminarily estimates that an NRSRO likely would engage outside 
counsel to analyze the requirements for the report and assist in 
drafting and reviewing the first report, given that it must be signed 
by the NRSRO's CEO or an individual performing a similar function. The 
time an outside attorney would spend on this work would depend on the 
size and complexity of the NRSRO. The Commission preliminarily 
estimates that an attorney would spend an average of approximately 100 
hours assisting an NRSRO and its CEO or other qualified individual in 
drafting and reviewing the first report, resulting in an industry-wide 
external one-time hour burden of approximately 1,000 hours.\988\ Based 
on industry sources, the Commission estimates that the cost of an 
outside counsel would be approximately $400 per hour.\989\ For these 
reasons, the Commission estimates that the average one-time cost to an 
NRSRO would be approximately $40,000,\990\ resulting in an industry-
wide one-time cost of approximately $400,000.\991\
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    \988\ 10 NRSROs x 20 hours = 200 hours.
    \989\ See Disclosure for Asset-Backed Securities Required by 
Section 943 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, 76 FR at 4507-4506 (Jan. 26, 2011) (providing an 
estimate of $400 an hour to engage outside professionals) and 
Proposed Rules for Nationally Recognized Statistical Rating 
Organizations, 74 FR 63889 (Dec. 4, 2009) (providing an estimate of 
$400 per hour to engage an outside attorney).
    \990\ 100 hours x $400 = $40,000. See also, Proposed Rules for 
Nationally Recognized Statistical Rating Organizations, 74 FR 63889 
(Dec. 4, 2009) (providing an estimate of $400 per hour to engage an 
attorney).
    \991\ 10 NRSROs x $40,000 = $400,000.
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    The Commission preliminarily estimates, based on staff experience, 
that each NRSRO would spend on average approximately 150 hours 
preparing the internal control report to be included with the other 
annual reports filed with the Commission, resulting in an industry-wide 
annual burden of approximately 1,500 hours.\992\
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    \992\ 10 NRSROs x 150 hours = 1,500 hours.
---------------------------------------------------------------------------

    In addition, the Commission preliminarily estimates that an NRSRO 
likely would continue to engage outside counsel to assist in preparing 
the report. As noted above, the time an outside attorney would spend on 
this work would depend on the size and complexity of the NRSRO. In 
addition, the Commission preliminarily estimates that the time an 
outside attorney would spend assisting in the preparation of subsequent 
reports would be less than the time spent on preparing the first report 
since the counsel's work would not need to include an initial analysis 
of the new requirements. Consequently, the Commission estimates that an 
attorney would spend an average of approximately 50 hours assisting an 
NRSRO and its CEO or other qualified individual in drafting and 
reviewing the report, resulting in an industry-wide annual hour burden 
of approximately 500 hours.\993\ As stated above, the Commission 
estimates that the cost of an outside counsel would be approximately 
$400 per hour. For these reasons, the Commission estimates that the 
average annual cost to an NRSRO to comply with this requirement would 
be approximately $20,000,\994\ resulting in an industry-wide annual 
cost of approximately $200,000.\995\
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    \993\ 10 NRSROs x 20 hours = 200 hours.
    \994\ 50 hours x $400 = $20,000. See also, Proposed Rules for 
Nationally Recognized Statistical Rating Organizations, 74 FR 63889 
(Dec. 4, 2009) (providing an estimate of $400 per hour to engage an 
attorney).
    \995\ 10 NRSROs x $20,000 = $200,000.
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    The amendments also would require that the Rule 17g-3 annual 
reports be submitted electronically on the Commission's EDGAR 
system.\996\ As discussed in Section IV.D.1 of this release, the 
Commission preliminarily estimates each NRSRO would spend 5 hours 
becoming familiar with how to use the EDGAR system and to complete Form 
ID for the purposes of submitting Form NRSRO (and Exhibits 1 through 9) 
and the Rule 17g-3 annual reports. For the purposes of this PRA and the 
Economic Analysis section below, the Commission is allocating that time 
to Rule 17g-1 and Form ID.
---------------------------------------------------------------------------

    \996\ See proposed new paragraph (d) of Rule 17g-3; see also 
Section II.L of this release for a more detailed discussion of this 
proposal.
---------------------------------------------------------------------------

    In addition, the Commission does not believe that changing the 
method of submitting the annual reports from a paper submission to an 
electronic submission would increase the current hour burden for Rule 
17g-3. For example, the Commission does not believe the amount of time 
it currently takes an NRSRO to gather these materials and send them to 
the Commission's headquarters by mail, messenger, or hand-delivery 
would be less than the time it would take to submit them electronically 
through the EDGAR system.
    For the foregoing reasons, the Commission preliminarily estimates 
that the proposed amendments to Rule 17g-3 would result in a total 
industry-wide one-time cost of approximately $400,000, a total 
industry-wide annual hour burden of approximately 1,500 hours, and a 
total industry-wide annual cost of approximately $200,000.\997\
---------------------------------------------------------------------------

    \997\ This estimate would increase the adjusted industry-wide 
annual hour burden for Rule 17g-3 from 2,633 hours to 4,133 hours.
---------------------------------------------------------------------------

5. Proposed New Rule 17g-7
    The Commission is proposing to add new paragraphs (a) and (b) to 
Rule 17g-7, which would contain substantial new requirements.\998\ As 
discussed below, the Commission preliminarily estimates that these 
proposals would result in additional one-time and annual hour burdens 
for NRSROs.
---------------------------------------------------------------------------

    \998\ 17 CFR 240.17g-7.
---------------------------------------------------------------------------

    The Commission is proposing to add new paragraphs (a)(1) and (2) to 
Rule 17g-7 to implement rulemaking

[[Page 33505]]

mandated in Sections 15E(s)(1), (2), (3), and (4)(D) of the Exchange 
Act.\999\ Proposed new paragraphs (a)(1) and (2) of Rule 17g-2 would 
require, respectively, an NRSRO, when taking a rating action, to 
publish a form containing information about the credit rating resulting 
from, or subject to, the rating action and any certification of a 
provider of third-party due diligence services received by the NRSRO 
relating to the credit rating.\1000\
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    \999\ See 15 U.S.C. 78o-7(s)(1), (2), (3), and (4)(D) and 
proposed new paragraph (a) of Rule 17g-7; see also Sections II.G.1 
through G.5 of this release for a more detailed discussion of this 
proposal.
    \1000\ See proposed new paragraphs (a)(1) and (2) of Rule 17g-7.
---------------------------------------------------------------------------

    The Commission preliminarily believes that much of the information 
required to be disclosed in the form could be standardized based on the 
class and subclass of credit rating. For example, an NRSRO could 
develop a set of standardized disclosures for structured finance 
products based on whether the credit rating was issued for an RMBS, 
CMBS, CDO, CLO, ABCP, or other type of structured finance product. 
Similarly, for corporate issuers, the NRSRO could develop a set of 
standardized disclosures depending on factors such as the industry 
sector and geographic location of the rated issuer. In addition, the 
Commission believes that much of the information, particularly as it 
relates to the specific obligor, security, or money market instrument 
that is subject to the rating action, already would be generated or 
collected through the credit rating process. Finally, the Commission 
notes that globally active NRSROs are subject to similar 
requirements.\1001\
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    \1001\ See, e.g., Regulation no. 1060/2009 of the European 
Parliament and of the Council of 16 September 2009 on credit rating 
agencies, Article 8.2 and Annex 1, Section D.
---------------------------------------------------------------------------

    Consequently, the Commission estimates that the proposal would 
result in a one-time hour burden to develop the standardized 
disclosures and to create systems, protocols, and procedures for 
populating the form with information generated and collected during the 
rating process. In addition, the NRSRO would need to develop procedures 
designed to ensure that all the information required to be included in 
the form is input into the form prior to the publication of the credit 
rating, that any certifications received from a provider of third-party 
due diligence services are attached to the form, and that the form and 
certifications are published with the credit rating.
    The Commission preliminarily estimates that the one-time hour 
burden to develop these standardized disclosures would vary 
considerably among NRSROs based on the number of credit ratings they 
issue and monitor and the number of classes and subclasses of credit 
ratings for which they issue and monitor credit ratings. Specifically, 
the larger NRSROs that issue and monitor a high volume of credit 
ratings across multiple classes and subclasses of credit ratings would 
bear a significantly greater burden than smaller NRSROs that may need 
to develop standardized disclosures for far fewer classes and 
subclasses of credit ratings. The Commission estimates that an NRSRO 
would spend an average of approximately 5,000 hours to develop the 
standardized disclosures and create the systems, protocols, and 
procedures for populating the form with information generated and 
collected during the rating process.\1002\ However, the Commission 
preliminarily estimates that this amount is heavily skewed upward by 
the number of credit ratings issued, as well as the breadth of the 
classes and subclasses rated, by the three largest NRSROs as compared 
to the seven smaller NRSROs. Given the 5,000 hours per NRSRO 
preliminary estimate, the Commission preliminarily estimates that the 
proposal would result in a one-time industry wide hour burden of 
approximately 50,000 hours.\1003\ In addition, the Commission 
preliminarily allocates 75% of these burden hours (37,500 hours) to 
internal burden and the remaining 25% (12,500 hours) to external burden 
to hire outside professionals to assist in setting up the process to 
generate the forms and publish them with applicable credit 
ratings.\1004\ The Commission preliminarily estimates $400 per hour for 
retaining outside professionals such as attorneys and information 
technology consultants, resulting in an industry-wide one-time cost of 
approximately $5,000,000.\1005\
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    \1002\ This estimate is based on the Commission's estimate for 
the amount of time it would take a securitizer to set-up a system to 
make the disclosures required by Form ABS-15G. See Disclosure for 
Asset-Backed Securities Required by Section 943 of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act, 76 FR at 4507-4506 
(Jan. 26, 2011). The Commission significantly increases the estimate 
for Form ABS-15G because the form required pursuant to Rule 17g-7 
would contain substantially more qualitative information for which 
the NRSRO would need to develop standardized disclosures.
    \1003\ 10 NRSROs x 5,000 hours = 50,000 hours.
    \1004\ 50,000 hours x 0.75 = 37,500 hours; 50,000 hours x 0.25 = 
12,500 hours. This allocation is based on the Commission's 
allocation of the industry-wide hour burden for the amount of time 
it would take a securitizer to set-up a system to make the 
disclosures required by Form ABS-15G. See Disclosure for Asset-
Backed Securities Required by Section 943 of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act, 76 FR at 4507-4506 (Jan. 
26, 2011).
    \1005\ 12,500 hours x $400 = $5,000,000. See Disclosure for 
Asset-Backed Securities Required by Section 943 of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act, 76 FR at 4507-4506 
(Jan. 26, 2011) (providing an estimate of $400 an hour engage 
outside professionals) and Proposed Rules for Nationally Recognized 
Statistical Rating Organizations, 74 FR 63889 (Dec. 4, 2009) 
(providing an estimate of $400 per hour to engage an outside 
attorney).
---------------------------------------------------------------------------

    With respect to the annual hour burden, the Commission 
preliminarily estimates that the estimate should be divided into two 
components. The first component would constitute the amount of time an 
NRSRO would spend to update its standardized disclosures. The 
Commission preliminarily estimates an NRSRO would spend substantially 
less time updating the disclosures than the one-time estimate of 
approximately 5,000 hours per NRSRO to initially establish the 
standardized disclosures and the systems, protocols, and processes to 
generate the forms. Consequently, the Commission preliminarily 
estimates that each NRSRO would spend an average of approximately 500 
hours per year updating the standardized disclosures, resulting in an 
annual industry-wide hour burden of approximately 5,000 hours. The 
Commission preliminarily estimates that the update process would be 
handled by the NRSROs internally.
    The second component would constitute the amount of time an NRSRO 
would spend generating and publishing each form and attaching 
applicable certifications to the form. The Commission preliminarily 
believes that this estimate should be based on the number of rating 
actions taken per year by the NRSROs because the requirement to 
generate and publish the form and attach the certifications would be 
triggered upon the taking of a rating action. Based on information 
submitted to the Commission by NRSROs pursuant to paragraph (a)(6) of 
Rule 17g-3, the Commission preliminarily estimates that NRSROs took 
approximately 2,000,000 credit rating actions in 2009, consisting of 
upgrades, downgrades, placements on credit watch, and withdrawals of 
credit ratings.\1006\
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    \1006\ See 17 CFR 240.17g-7(a)(6).
---------------------------------------------------------------------------

    The Commission notes this figure does not include the following 
rating actions: Expected or preliminary credit ratings, initial credit 
ratings, and affirmations of existing credit ratings.\1007\ Based on 
staff experience,

[[Page 33506]]

the Commission preliminarily believes expected or preliminary credit 
ratings are published primarily (but not exclusively) with respect to 
new issuances of structured finance products. In the PRA for the 
adoption of Rule 17g-7, the Commission estimated that there would be an 
average of approximately 2,067 Exchange Act-ABS offerings per 
year.\1008\ The Commission, based on staff experience, believes 
expected or preliminary credit ratings are used in other types of 
offerings as well and, therefore, is increasing that estimate by 100% 
or to 4,134 preliminary or expected credit ratings per year.\1009\
---------------------------------------------------------------------------

    \1007\ As discussed in more detail in Section II.G.1 of this 
release, the Commission is proposing that the requirement to publish 
the form and any certifications would be triggered when an NRSRO 
takes the following rating actions: Publication of an expected or 
preliminary credit rating assigned to an obligor, security, or money 
market instrument before the publication of an initial credit 
rating; an initial credit rating; an upgrade or downgrade of an 
existing credit rating (including a downgrade to, or assignment of, 
default); a placement of an existing credit rating on credit watch 
or review; an affirmation of an existing credit rating; and a 
withdrawal of an existing credit rating.
    \1008\ See Disclosure for Asset-Backed Securities Required by 
Section 943 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, 76 FR at 4507-4508 (Jan. 26, 2011).
    \1009\ 2,067 offerings x 2 = 4,134 offerings.
---------------------------------------------------------------------------

    In terms of estimating the number initial credit ratings, the 
Commission notes that there were approximately 2,905,824 credit ratings 
outstanding across all 10 NRSROs as of the 2009 calendar year-
end.\1010\ Based on staff experience, the Commission estimates that the 
average maturity of rated securities and money market instruments is 
approximately 7 years. Consequently, assuming 2,905,824 is the 
approximate average number of credit ratings outstanding at any given 
time, the Commission preliminarily estimates that approximately 415,117 
initial credit rating are issued per year.\1011\
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    \1010\ See Figure 2 in Section IV.D of this Release.
    \1011\ 2,905,824 credit ratings/7 = 415,117 credit ratings. In 
other words, the Commission estimates that issuers pay off in full 
all outstanding principal and interest outstanding with respect to 
approximately 415,117 rated securities or money market instruments 
and, consequently, the credit ratings for these securities and money 
market instruments are withdrawn. Those withdrawn credit ratings, in 
turn, are replaced by 415,117 initial (or new) credit ratings. The 
Commission notes that outstanding credit ratings assigned to 
securities and money market instruments are withdrawn for other 
reasons, including the security or money market instrument went into 
default. In addition, the Commission notes that a percent of the 
outstanding credit ratings are assigned to obligors as entities and, 
therefore, these credit ratings would not be withdrawn because an 
obligation was extinguished. However, they might be withdrawn for 
other reasons, including the obligor went into default. Nonetheless, 
the Commission preliminarily believes these estimates are reasonable 
approximations of the number of initial credit ratings determined 
per year.
---------------------------------------------------------------------------

    Finally, with respect to affirmations of existing credit ratings, 
the Commission preliminarily believes that NRSROs generally affirm 
existing credit ratings at least once a year. Consequently, the 
Commission preliminarily estimates that the number of affirmations 
would be the total number of credit ratings outstanding (2,905,824), 
less the number of credit ratings subject to other types of rating 
actions, excluding expected or preliminary ratings (2,000,000), and 
less the number of credit ratings assigned to securities or money 
market instruments that are paid off in full during the year (415,117). 
Consequently, the Commission preliminarily estimates that the number of 
affirmations per year is approximately 490,707.\1012\
---------------------------------------------------------------------------

    \1012\ [2,905,824 outstanding credit ratings] - [2,000,000 
credit ratings that are upgraded, downgraded, placed on watch, or 
withdrawn] - [415,117 rated securities and money market instruments 
that pay off in full] = 490,707 affirmations.
---------------------------------------------------------------------------

    Based on these estimates, the Commission preliminarily estimates 
that the 10 NRSROs take approximately 2,909,958 credit rating actions 
per year.\1013\ The Commission preliminarily estimates that the time it 
would take to generate a form by populating it with the required 
disclosures and to publish the form with the credit rating would be 
approximately 15 minutes on average, resulting in an industry-wide 
annual hour burden of approximately 727,490 hours.\1014\ Moreover, 
although larger NRSROs may realize economies of scale, the Commission 
preliminarily estimates that the annual burden would be allocated to 
the 10 NRSROs based on the number of credit ratings they have 
outstanding.\1015\
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    \1013\ [2,000,000 credit rating actions constituting upgrades, 
downgrades, placements on credit watch, and withdrawals] + [4,134 
preliminary or expected credit ratings] + [415,117 initial credit 
ratings] + [490,707 affirmations of existing credit ratings] = 
2,909,958 rating actions per year.
    \1014\ 2,909,958 rating actions x .25 hours = 727,489.5 hours 
(rounded to 727,490 hours).
    \1015\ See Figure 2 in Section IV.D of this release.
---------------------------------------------------------------------------

    The Commission also is proposing to add new paragraph (b) to Rule 
17g-7. The proposed amendments would: (1) Re-codify in paragraph (b) of 
Rule 17g-7 requirements currently contained in paragraph (d)(3) of Rule 
17g-2; and (2) substantially enhance those requirements.\1016\ The 
Commission notes that NRSROs currently are required to provide ratings 
history information for each credit rating initially determined on or 
after June 26, 2007. The Commission preliminarily estimates that NRSROs 
could use the internal information technology systems and expertise and 
other resources they currently devote to complying with this 
requirement to implement the proposed enhancements. At the same time, 
the Commission notes that, under the proposed amendments, NRSROs would 
be required to add substantially more ratings histories to the 
disclosures and provide more information about each rating action in 
the ratings history for a given obligor, security, or money market 
instrument. Consequently, the Commission preliminarily estimates that 
the proposed amendments would result in a one-time hour burden to 
program existing systems and initially add the ratings histories for 
all outstanding credit ratings as of June 26, 2007, and an incremental 
increase in the annual hour burden to comply with the enhanced 
requirements.
---------------------------------------------------------------------------

    \1016\ See proposed new paragraph (b) of Rule 17g-7; see also 
Section II.E.2 of this release for a more detailed discussion of 
this proposal.
---------------------------------------------------------------------------

    When adopting paragraph (d)(3) of Rule 17g-2, the Commission 
estimated that the average one-time hour burden per NRSRO would be 
approximately 45 hours.\1017\ Based on that estimate, the Commission 
estimates that the proposed amendments to this disclosure requirement 
would result in an average one-time hour burden for each NRSRO of 
approximately 135 hours, resulting in an industry-wide one-time hour 
burden of approximately 1,350 hours.\1018\ In addition, when adopting 
paragraph (d)(3) of Rule 17g-2, the Commission estimated the average 
annual burden per NRSRO would be approximately 15 hours.\1019\ Based on 
that estimate, the Commission preliminarily estimates that the proposed 
enhancements would require each NRSRO to spend an average of 45 hours 
per year making the disclosures, resulting in an industry-wide annual 
hour burden of approximately 450 hours.\1020\
---------------------------------------------------------------------------

    \1017\ Amendments to Rules for Nationally Recognized Statistical 
Rating Organizations, 74 FR at 63853 (Dec. 4, 2009).
    \1018\ 10 NRSRO x 135 hours = 1,350 hours.
    \1019\ Amendments to Rules for Nationally Recognized Statistical 
Rating Organizations, 74 FR at 63853 (Dec. 4, 2009).
    \1020\ 10 NRSRO x 45 hours = 450 hours.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission estimates that the 
proposed amendments to Rule 17g-7 would result in a total industry-wide 
one-time hour burden of approximately 51,350 hours,\1021\ a total 
industry-wide one-time cost of approximately $5,000,000,\1022\ and a 
total industry-wide annual hour burden of approximately 732,940 
hours.\1023\
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    \1021\ 50,000 hours + 1,350 hours = 51,350 hours.
    \1022\ 12,500 hours x $400 = $5,000,000.
    \1023\ 727,490 hours + 5,000 hours + 450 hours = 732,940 hours. 
This estimate would increase the adjusted industry-wide annual hour 
burden for Rule 17g-7 from 92,948 hours to 820,888 hours (732,940 
hours + 92,948 = 825,888 hours). In addition, the annual hour burden 
per NRSRO resulting from the existing requirements in paragraph 
(d)(3) of Rule 17g-2 is 15 hours, which would result in an adjusted 
industry-wide annual hour burden of 150 hours (10 NRSROs x 15 hours 
= 150 hours). This amount would need to be transferred to the 
industry-wide annual hour burden for Rule 17g-7 resulting in a total 
industry-wide annual hour burden of 826,038 hours (825,888 hours + 
150 hours = 826,038 hours).

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[[Page 33507]]

6. Proposed New Rule 17g-8
    The Commission is proposing new Rule 17g-8, which would have three 
paragraphs (a), (b), and (c).\1024\ As discussed below, the Commission 
preliminarily estimates that these proposals would result in additional 
one-time and annual hour burdens for NRSROs.
---------------------------------------------------------------------------

    \1024\ New Rule 17g-8, if adopted, would be codified at 17 CFR 
240.17g-8.
---------------------------------------------------------------------------

    Proposed paragraph (a) of new Rule 17g-8 would implement Section 
15E(r) of the Exchange Act by requiring an NRSRO to have policies and 
procedures with respect to the procedures and methodologies the NRSRO 
uses to determine credit ratings.\1025\ The Commission preliminarily 
estimates that the proposed requirement in paragraph (a) of new Rule 
17g-8 would result in one-time and annual hour burdens for NRSROs. In 
this regard, the Commission notes that Section 15E(g)(1) of the 
Exchange Act requires an NRSRO to establish, maintain, and enforce 
written policies and procedures reasonably designed, taking into 
consideration the nature of the business of the NRSRO, to prevent the 
misuse of material, nonpublic information by the NRSRO or any person 
associated with the NRSRO.\1026\ The Commission supplemented this 
statutory requirement by adopting Rule 17g-4, which provides that the 
policies and procedures under Section 15E(g) of the Exchange Act must 
include policies and procedures reasonably designed to prevent: (1) The 
inappropriate dissemination within and outside the NRSRO of material 
nonpublic information obtained in connection with the performance of 
credit rating services; (2) a person within the NRSRO from purchasing, 
selling, or otherwise benefiting from any transaction in securities or 
money market instruments when the person is aware of material nonpublic 
information obtained in connection with the performance of credit 
rating services that affects the securities or money market 
instruments; and (3) the inappropriate dissemination within and outside 
the NRSRO of a pending credit rating action before issuing the credit 
rating on the Internet or through another readily accessible 
means.\1027\
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    \1025\ See 15 U.S.C. 78o-7(r) and proposed new paragraph (a) of 
Rule 17g-8; see also Section II.F.1 of this release for a more 
detailed discussion of this proposal.
    \1026\ See 15 U.S.C. 78o-7(g).
    \1027\ See 17 CFR 240.17g-4; see also Oversight of Credit Rating 
Agencies Registered as Nationally Recognized Statistical Rating 
Organizations, 72 FR at 33593-33595 (June 18, 2007).
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    When adopting Rule 17g-4, the Commission assumed NRSROs already had 
procedures in place to address the specific misuses of material 
nonpublic information identified in Rule 17g-4.\1028\ Nonetheless, the 
Commission expected that some NRSROs might need to modify their 
procedures to comply with the rule.\1029\ Based on staff experience, 
the Commission estimated that it would take approximately 50 hours for 
an NRSRO to establish procedures in conformance with the rule.\1030\ 
Given the specificity of paragraph (a) proposed Rule 17g-8 as well as 
the fact that unlike the policies and procedures required under Rule 
17g-4, the policies and procedures that would be required under 
paragraph (a) of proposed Rule 17g-8 would not be supplementing 
policies and procedures that are required under a separate self-
executing statutory provision (i.e., the requirement would be based 
solely on the Commission's rule), the Commission preliminarily believes 
that paragraph (a) of proposed Rule 17g-8 would result in a greater 
hour burden for an NRSRO. For these reasons, the Commission 
preliminarily estimates that an NRSRO would spend an average of 
approximately 200 hours establishing the policies and procedures, 
resulting in an industry-wide one-time hour burden of approximately 
2,000 hours.\1031\ In addition, the Commission preliminarily estimates 
an NRSRO would spend an average of approximately 50 hours per year 
reviewing the policies and procedures and updating them (if necessary), 
resulting in an industry-wide annual hour burden of approximately 500 
hours.\1032\
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    \1028\ See Oversight of Credit Rating Agencies Registered as 
Nationally Recognized Statistical Rating Organizations, 72 FR at 
33610-33611 (June 18, 2007).
    \1029\ Id.
    \1030\ Id.
    \1031\ 10 NRSROs x 200 hours = 2,000 hours.
    \1032\ 10 NRSROs x 50 hours = 500 hours.
---------------------------------------------------------------------------

    Proposed paragraph (b) of new Rule 17g-8 would implement Section 
938(a) of the Dodd-Frank Act by requiring an NRSRO to have policies and 
procedures with respect to the symbols, numbers, or scores it uses to 
denote credit ratings.\1033\ These policies and procedures would be 
used by the NRSRO to achieve the objectives specified in Sections 
938(a)(1) through (3) of the Dodd-Frank Act.\1034\ For the reasons 
stated above with respect to proposed paragraph (a) of new Rule 17g-8, 
the Commission estimates that an NRSRO would spend an average of 
approximately 200 hours establishing the policies and procedures, 
resulting in an industry-wide one-time hour burden of approximately 
2,000 hours.\1035\ In addition, the Commission preliminarily estimates 
an NRSRO would spend an average of approximately 50 hours per year 
reviewing the policies and procedures and updating them (if necessary), 
resulting in an industry-wide annual hour burden of approximately 500 
hours.\1036\
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    \1033\ See Public Law 111-203 Sec.  938(a) and proposed 
paragraph (b) of new Rule 17g-8; see also Section II.J.1 of this 
release for a more detailed discussion of this proposal.
    \1034\ See Public Law 111-203 Sec. Sec.  938(a)(1)-(3).
    \1035\ 10 NRSROs x 200 hours = 2,000 hours.
    \1036\ 10 NRSROs x 50 hours = 500 hours.
---------------------------------------------------------------------------

    Proposed paragraph (c) of new Rule 17g-8 would implement Section 
15E(h)(4)(A)(ii) of the Exchange Act by requiring the NRSRO to 
establish, maintain, and enforce certain policies and procedures 
pursuant to Section 15E(h)(4)(A) of the Exchange Act.\1037\ The 
Commission preliminarily believes that the hour burdens resulting from 
this proposal would be closer to the one-time hour burden estimate for 
Rule 17g-4 because these policies and procedures would supplement 
policies and procedures that are required under a separate self-
executing statutory provision. However, the Commission also believes 
there would be new policies and procedures and, therefore, as with the 
proposed requirements in paragraphs (a) and (b) of new Rule 17g-8, the 
NRSRO would need to establish new policies and procedures. For these 
reasons, the Commission preliminarily estimates an NRSRO would spend an 
average of approximately 100 hours establishing the policies and 
procedures, resulting in an industry-wide one-time hour burden of 
approximately 1,000 hours.\1038\ In addition, the Commission 
preliminarily estimates an NRSRO would spend an average of 
approximately 25 hours per year reviewing the policies and procedures 
and updating them (if necessary), resulting in an average industry-wide 
annual hour burden of approximately 250 hours.\1039\
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    \1037\ See 15 U.S.C. 78o-7(h)(4)(A)(ii) and proposed new 
paragraph (c) of Rule 17g-8; see also Section II.C.1 of this release 
for a more detailed discussion of this proposal.
    \1038\ 10 NRSROs x 100 hours = 1,000 hours.
    \1039\ 10 NRSROs x 25 hours = 250 hours.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission estimates that the total 
industry-wide one-time hour burden to the NRSROs resulting from the 
proposed amendments to Rule 17g-8

[[Page 33508]]

would be approximately 5,000 hours\1040\ and the total industry-wide 
annual hour burden would be approximately 1,250 hours.\1041\
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    \1040\ 2,000 hours + 2,000 + 1,000 hours = 5,000 hours.
    \1041\ 500 hours + 500 hours + 250 hours = 1,250 hours.
---------------------------------------------------------------------------

7. Proposed New Rule 17g-9
    The Commission is proposing new Rule 17g-9.\1042\ This rule would 
implement Section 936 of the Dodd-Frank Act by requiring an NRSRO to 
establish, maintain, enforce, and document standards of training, 
experience, and competence for the individuals it employs to determine 
credit ratings.\1043\ As discussed below, the Commission preliminarily 
estimates that these proposals would result in additional one-time and 
annual hour burdens for NRSROs.
---------------------------------------------------------------------------

    \1042\ Proposed new Rule 17g-9 would be codified at 17 CFR 
240.17g-9, if adopted.
    \1043\ See Public Law 111-203 Sec.  936 and proposed new Rule 
17g-9; see also Section II.I.1 of this release for a more detailed 
discussion of this proposal.
---------------------------------------------------------------------------

    In this regard, the Commission preliminarily believes that several 
of the NRSROs already have implemented standards of training, 
experience, and competence for the individuals they employ to determine 
credit ratings. For example, Section 1.4 of the Code of Conduct 
Fundamentals for Credit Rating Agencies of the International 
Organization of Securities Commissions (``IOSCO Code'') provides that 
credit rating agencies ``should use people who, individually or 
collectively (particularly where rating committees are used) have 
appropriate knowledge and experience in developing a rating opinion for 
the type of credit being applied.''\1044\ A number of NRSROs disclose 
that they have implemented the IOSCO Code.\1045\ In addition, some 
NRSROs disclose in the Exhibits to their Form NRSROs that they have 
standards of training, experience, competence, continuing education, 
and testing programs for their credit analysts.\1046\
---------------------------------------------------------------------------

    \1044\ Code of Conduct Fundamentals for Credit Rating Agencies, 
Technical Committee of IOSCO (May 2008).
    \1045\ The following NRSROs, for example, reported in Exhibit 5 
to Form NRSRO that they comply with the IOSCO Code: A.M. Best 
Company, Inc., DBRS Ltd., Kroll Bond Rating Agency, Inc., Moody's 
Investors Service, Inc., Rating and Investment Information, Inc., 
Realpoint LLC, and Standard & Poor's Ratings Services.
    \1046\ For example, Fitch, Inc., Moody's Investors Service, 
Inc., and Standard & Poor's Ratings Services reported in Exhibit 8 
to Form NRSRO that they had standards of experience and competence 
for their credit analysts, and Moody's Investors Service, Inc. 
reported in Exhibit 5 to Form NRSRO that its analysts were required 
to complete 20 hours of coursework annually.
---------------------------------------------------------------------------

    As noted above, the size and complexity of the NRSROs varies 
greatly. The magnitude of this variance is reflected in the number of 
credit analysts and credit analyst supervisors each NRSRO employs 
(hereinafter collectively referred to as ``credit analysts'') as shown 
in Figure 3 above.\1047\ For example, three NRSROs employed over 1,000 
credit analysts as of calendar year-end 2009 and three NRSROs employed 
fewer than 30 credit analysts.
---------------------------------------------------------------------------

    \1047\ These figures are based on the annual certifications on 
Form NRSRO submitted to the Commission and publicly disclosed by the 
NRSROs for the calendar year-end 2009. See Annual Report on 
Nationally Recognized Statistical Rating Organizations, Commission 
(Jan. 2011), p. 5.
---------------------------------------------------------------------------

    The Commission preliminarily estimates that the degree of the one-
time and annual hour burdens resulting from proposed new Rule 17g-9 
would depend on the number of credit analysts an NRSRO employs as well 
as the range and complexity of the obligors, securities, and money 
market instruments it rates. Consequently, the one-time and annual hour 
burdens per NRSRO would vary widely.
    In order to account for this variance, the Commission preliminarily 
believes that the one-time and annual hour burden estimates should be 
based on the number of credit rating analysts employed by the NRSROs. 
Based on the 2009 annual certifications, the Commission estimates that 
the NRSROs currently employ approximately 3,520 credit analysts.\1048\ 
In addition, as noted above, the Commission preliminarily believes some 
of the NRSROs have established standards of training, experience, and 
competence for their credit analysts. Consequently, for purposes of 
this estimate, the Commission preliminarily believes these firms would 
be required to augment or modify existing standards to comply with the 
proposed rule as opposed to developing a set of completely new 
standards. For these reasons, the Commission preliminarily estimates 
that the one-time burden to establish the standards required pursuant 
to proposed new Rule 17g-9 would be approximately 5 hours per credit 
analyst, resulting in an industry-wide one-time hour burden of 
approximately 17,600 hours.\1049\ In addition, the Commission 
preliminarily allocates 75% of these burden hours (13,200 hours) to 
internal burden and the remaining 25% (4,400 hours) to external burden 
to hire outside professionals to assist in setting up training 
programs.\1050\ The Commission preliminarily estimates $400 per hour 
for external costs for retaining outside consultants, resulting in an 
industry-wide cost of approximately $1,760,000.\1051\ Although larger 
NRSROs may realize economies of scale, the Commission preliminarily 
estimates that the industry-wide annual hour burden of 17,600 hours, 
including the external burden costs, would be allocated to each NRSRO 
based on the number of credit analysts the firm employs.\1052\
---------------------------------------------------------------------------

    \1048\ NRSROs reported that they have a total of 3,520 credit 
analysts and 820 credit analyst supervisors. See Figure 3. As 
discussed above in Section II.M.4.b of this release, some NRSROs 
included credit analyst supervisors in the number of credit analysts 
they reported; whereas others may not have included the supervisors. 
Based on staff experience, the Commission preliminarily believes 
that the majority of NRSROs included credit analyst supervisors in 
the number of reported credit analysts. Consequently, for the 
purposes of the PRA, the Commission is using a total of 3,520 credit 
analysts across the 10 NRSROs.
    \1049\ 3,520 credit analysts x 5 hours = 17,600 hours.
    \1050\ 17,600 hours x 0.75 = 13,200 hours; 17,600 hours x 0.25 = 
4,400 hours.
    \1051\ 4,400 hours x $400 = $1,760,000. See Disclosure for 
Asset-Backed Securities Required by Section 943 of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act, 76 FR at 4507-4506 
(Jan. 26, 2011) (providing an estimate of $400 an hour to engage 
outside professionals) and Proposed Rules for Nationally Recognized 
Statistical Rating Organizations, 74 FR 63889 (Dec. 4, 2009) 
(providing an estimate of $400 per hour to engage an outside 
attorney).
    \1052\ See Figure 3.
---------------------------------------------------------------------------

    The Commission believes that the annual hour burden to comply with 
proposed new Rule 17g-9 would be less than the one-time hour burden 
since NRSROs would have established the standards of training, 
experience, and competence for the individuals they employ to determine 
credit ratings. The annual hour burden would arise from reviewing and 
updating the standards. Consequently, the Commission preliminarily 
estimates that the annual industry-wide hour burden to update the 
standards would be approximately 1 hour per credit analyst employed, 
resulting in an industry-wide annual hour burden of approximately 3,520 
hours across all NRSROs.\1053\ In addition, the Commission 
preliminarily allocates 75% of these burden hours (2,640 hours) to 
internal burden and the remaining 25% (880 hours) to external burden to 
hire outside professionals to assist in reviewing and updating training 
programs.\1054\ The Commission preliminarily estimates $400 per hour 
for external costs for retaining outside consultants, resulting in an 
industry-wide cost of $352,000.\1055\ Finally,

[[Page 33509]]

although larger NRSROs may realize economies of scale, the Commission 
estimates that the industry-wide annual hour burden of 3,520 hours, 
including the external costs, would be allocated to each NRSRO based on 
the number of credit analysts the firm employs.\1056\
---------------------------------------------------------------------------

    \1053\ 3,520 credit analysts x 1 hour = 3,520 hours.
    \1054\ 3,520 hours x 0.75 = 2,640 hours; 3,520 hours x 0.25 = 
880 hours.
    \1055\ 880 hours x $400 = $352,000. See Disclosure for Asset-
Backed Securities Required by Section 943 of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act, 76 FR at 4507-4506 (Jan. 
26, 2011) (providing an estimate of $400 an hour to engage outside 
professionals) and Proposed Rules for Nationally Recognized 
Statistical Rating Organizations, 74 FR 63889 (Dec. 4, 2009) 
(providing an estimate of $400 per hour to engage an outside 
attorney).
    \1056\ See Figure 3.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission estimates that proposed 
new Rule 17g-9 would result in a total industry-wide one-time hour 
burden of approximately 17,600 hours,\1057\ a total industry-wide one-
time cost of approximately $1,760,000, a total industry-wide annual 
hour burden of approximately 3,520 hours, and a total industry-wide 
annual external cost of approximately $352,000.
---------------------------------------------------------------------------

    \1057\ 2,000 hours + 2,000 + 1,000 hours = 5,000 hours.
---------------------------------------------------------------------------

8. Proposed New Rule 17g-10 and Form ABS Due Diligence-15E
    The Commission is proposing new Rule 17g-10 and new Form ABS Due 
Diligence-15E.\1058\ Proposed new Rule 17g-10 would implement 
rulemaking mandated in Sections 15E(s)(4)(B) and (C) of the Exchange 
Act by requiring that the written certification a provider of third-
party due diligence services must provide to an NRSRO be made on Form 
ABS Due Diligence-15E.\1059\ As discussed below, the Commission 
preliminarily estimates that these proposals would result in additional 
one-time and annual hour burdens for providers of third-party due 
diligence services.
---------------------------------------------------------------------------

    \1058\ Proposed new Rule 17g-10 would be codified at 17 CFR 
240.17g-10 and proposed new Form ABS Due Diligence-15E would be 
identified at 17 CFR 249b.400.
    \1059\ See 15 U.S.C. 78o-7(s)(4)(B) and (C), proposed new Rule 
17g-10, and proposed new Form ABS Due Diligence-15E; see also 
Sections II.H of this release for a more detailed discussion of this 
proposal.
---------------------------------------------------------------------------

    In terms of one-time hour burdens, the Commission preliminarily 
estimates that providers of third-party due diligence services would 
need to develop processes and protocols to provide the required 
information in new Form ABS Due Diligence-15E and submit the 
certifications to NRSROs. The Commission preliminarily estimates that 
providers of third-party due diligence services would spend an average 
of approximately 300 hours per firm developing these processes and 
protocols, resulting in a one-time industry-wide hour burden of 3,000 
hours.\1060\ In addition, the Commission preliminarily allocates 75% of 
these burden hours (2,250 hours) to internal burden and the remaining 
25% (750 hours) to external burden to hire outside attorneys to provide 
legal advice on the requirements of new Rule 17g-10 and Form ABS Due 
Diligence-15E.\1061\ The Commission preliminarily estimates $400 per 
hour for external costs for retaining outside consultants, resulting in 
an industry-wide one-time cost of $300,000.\1062\
---------------------------------------------------------------------------

    \1060\ 10 Providers of third-party due diligence services x 300 
hours = 3,000 hours. This estimate is based on the Commission's 
estimate for the amount of time it would take a securitizer to set 
up a system to make the disclosures required by Form ABS-15G. See 
Disclosure for Asset-Backed Securities Required by Section 943 of 
the Dodd-Frank Wall Street Reform and Consumer Protection Act, 76 FR 
at 4507-4506 (Jan. 26, 2011). The Commission, however, has reduced 
the hour estimate of 850 hours used for Form ABS-15G by 
approximately two-thirds because information required to be provided 
in proposed new Form ABS Due Diligence-15E is substantially less 
detailed and complex than the information required in Form ABS-15G.
    \1061\ 3,000 hours x 0.75 = 2,250 hours; 3,000 hours x 0.25 = 
750 hours.
    \1062\ 750 hours x $400 = $300,000. See Disclosure for Asset-
Backed Securities Required by Section 943 of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act, 76 FR at 4507-4506 (Jan. 
26, 2011) (providing an estimate of $400 an hour to engage outside 
professionals) and Proposed Rules for Nationally Recognized 
Statistical Rating Organizations, 74 FR 63889 (Dec. 4, 2009) 
(providing an estimate of $400 per hour to engage an outside 
attorney).
---------------------------------------------------------------------------

    With respect to the annual burden, the Commission preliminarily 
believes that the estimate should be based on the number of issuances 
per year of Exchange Act-ABS because the requirement to produce the 
certification and provide it to NRSROs would be triggered when an 
issuer, underwriter, or NRSRO hires a provider of third-party due 
diligence services for transactions.\1063\ In the PRA for the adoption 
of Rule 17g-7, the Commission estimated, on average, there would be 
approximately 2,067 Exchange Act-ABS offerings per year.\1064\ In 
addition, the Commission preliminarily estimates that a provider of 
third-party due diligence services would spend approximately 30 minutes 
completing and submitting Form ABS Due Diligence-15E. The Commission 
bases this preliminary estimate on the fact that the first three Items 
in the form require basic information and the fourth Item (the due 
diligence performed) and the fifth Item (the findings and conclusions 
of the review) could be drawn directly from the due diligence reports 
the Commission expects that providers of third-party due diligence 
services generate with respect to their performance of due diligence 
services. Therefore, the Commission preliminarily estimates that the 
industry-wide annual hour burden resulting from proposed new Rule 17g-
10 and Form ABS Due Diligence-15E would be approximately 1,034 
hours.\1065\
---------------------------------------------------------------------------

    \1063\ See 15 U.S.C. 78o-7(s)(4)(B) and (C), and proposed new 
Rule 17g-10.
    \1064\ See Disclosure for Asset-Backed Securities Required by 
Section 943 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, 76 FR at 4507-4508 (Jan. 26, 2011). The Commission 
notes that issuers, underwriters, and NRSROs may not use providers 
of third-party due diligence services with respect to every issuance 
of Exchange Act-ABS. For example, as discussed in Section II.H of 
this release, the Commission preliminarily believes that providers 
of third-party due diligence services are used primarily for RMBS 
transactions. However, the Commission's estimate uses the total 
number of estimated Exchange Act-ABS offerings (as opposed to a 
lesser amount based on an estimate of RMBS offerings) because the 
use of providers of third-party due diligence services may migrate 
to other types of Exchange Act-ABS. This also makes the Commission's 
estimates more conservative.
    \1065\ 2,067 Exchange Act-ABS offerings x 30 minutes = 1,034 
hours.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission estimates proposed new 
Rule 17g-8 would result in a total industry-wide one-time burden of 
approximately 3,000 hours, a total industry-wide one-time cost of 
approximately $300,000, and a total industry-wide annual hour burden of 
approximately 1,034 hours.
9. Rule 15Ga-2 and Form ABS-15G
    The Commission is proposing new Rule 15Ga-2 and amendments to Form 
ABS-15G.\1066\ The new rule and amended form would implement Section 
15E(s)(4)(A) of the Exchange Act.\1067\ As discussed below, the 
Commission preliminarily estimates that these proposals would result in 
additional one-time and annual hour burdens for issuers and 
underwriters of the Exchange Act-ABS.
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    \1066\ See proposed new Rule 15Ga-2 and proposed amendments to 
Form ABS-15G.
    \1067\ See 15 U.S.C. 78o-7(s)(4)(A); see also Section II.H.1 of 
this release for a more detailed discussion of this proposal.
---------------------------------------------------------------------------

    Proposed new Rule 15Ga-2 would require an issuer or underwriter of 
any Exchange Act-ABS that is to be rated by an NRSRO to furnish a Form 
ABS-15G on the EDGAR system containing the findings and conclusions of 
any third-party ``due diligence report'' obtained by the issuer or 
underwriter. Under the proposal, the disclosure would be furnished 
using Form ABS-15G for both registered and unregistered offerings of 
Exchange Act-ABS. In addition, under the Commission's proposal, an 
issuer or underwriter would not need to furnish Form ABS-15G if the 
issuer or underwriter obtains a representation

[[Page 33510]]

from each NRSRO engaged to produce a credit rating for the Exchange 
Act-ABS that can be reasonably relied on that the NRSRO will publicly 
disclose the findings and conclusions of any third-party due diligence 
report obtained by the issuer or underwriter with the publication of 
the credit rating five business days prior to the first sale in the 
offering in an information disclosure form generated pursuant to 
proposed new paragraph (a)(1) of Rule 17g-7.
    The Commission preliminarily believes that this proposal would 
result in a one-time hour burden to issuers and underwriters in 
offerings of registered and unregistered Exchange Act-ABS in connection 
with developing processes and protocols to provide the required 
information to comply with new Rule 15Ga-2, including modifying their 
existing Form ABS-15G processes and protocols to accommodate the 
requirements of Rule 15Ga-2. In the adopting release for Form ABS-15G, 
the Commission estimated that 270 unique securitizers would be required 
to file the form.\1068\ The Commission preliminarily estimates that 
each securitizer would require approximately 100 hours to develop 
processes and protocols to comply with new Rule 15Ga-2 and to modify 
their existing Form ABS-15G processes and protocols to provide for the 
disclosure of the information required pursuant to Rule 15Ga-2, 
resulting in an industry-wide total of 27,000 hours.\1069\ The 
Commission believes that this work would be done internally by issuers 
and underwriters.
---------------------------------------------------------------------------

    \1068\ See Disclosure for Asset-Backed Securities Required by 
Section 943 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, 76 FR at 4506 (Jan. 26, 2011).
    \1069\ 270 unique securitizers x 100 hours = 27,000 hours. This 
estimate is based on the Commission's estimate for the amount of 
time it would take a securitizer to set up a system to make the 
disclosures required by Form ABS-15G as originally adopted by the 
Commission. See Disclosure for Asset-Backed Securities Required by 
Section 943 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, 76 FR at 4507-4506 (Jan. 26, 2011). The Commission, 
however, believes that the hour burden for amending existing Form 
ABS-15G processes and protocols will be significantly lower than the 
estimate of 850 hours used to initially develop those processes and 
protocols.
---------------------------------------------------------------------------

    The PRA burden assigned to Form ABS-15G reflects the cost of 
preparing and furnishing the form on EDGAR. As noted above, the 
proposed amendment to Form ABS-15G would require that it be furnished 
by issuers and underwriters in offerings of registered and unregistered 
Exchange Act-ABS. Consequently, the Commission preliminarily believes 
that the estimate of the annual hour burden for furnishing Form ABS-15G 
should be based on an estimate of the number of Exchange Act-ABS 
offerings per year. As noted above, in the PRA for the adoption of Rule 
17g-7, the Commission estimated, on average, there would be 
approximately 2,067 Exchange Act-ABS offerings per year.\1070\ In 
addition, the Commission preliminarily estimates that an issuer or 
underwriter would spend approximately one hour completing and 
submitting Form ABS-15G for purposes of meeting the requirement in Rule 
15Ga-2. The Commission bases this preliminary estimate on the fact that 
Form ABS-15G would elicit much less information when used solely for 
the purpose of complying with proposed new Rule 15Ga-2. In addition, 
the information required in the form could be drawn directly from the 
due diligence reports the Commission expects providers of third-party 
due diligence services generate with respect to their performance of 
due diligence services. Therefore, the Commission preliminarily 
estimates that the industry-wide annual hour burden resulting from 
proposed new Rule 15Ga-2 and the amendments to Form ABS-15G would be 
approximately 2,067 hours.\1071\ In addition, the Commission 
preliminarily believes that this work would be done internally by 
issuers and underwriters of Exchange Act-ABS.
---------------------------------------------------------------------------

    \1070\ See Disclosure for Asset-Backed Securities Required by 
Section 943 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, 76 FR at 4507-4508 (Jan. 26, 2011). As noted above, 
issuers, underwriters, and NRSROs may not use providers of third-
party due diligence services with respect to every issuance of 
Exchange Act-ABS. For example, as discussed in Section II.H of this 
release, the Commission preliminarily believes that providers of 
third-party due diligence services are used primarily for RMBS 
transactions. However, the Commission's estimate uses the total 
number of estimated Exchange Act-ABS offerings (as opposed to a 
lesser amount based on an estimate of RMBS offerings) because the 
use of providers of third-party due diligence services may migrate 
to other types of Exchange Act-ABS. This also makes the Commission's 
estimates more conservative.
    \1071\ 2,067 Exchange Act-ABS transactions x 1 hour = 2,067 
hours.
---------------------------------------------------------------------------

    To avoid duplicative disclosure, however, the Commission notes that 
an issuer or underwriter would not need to furnish Form ABS-15G if the 
issuer or underwriter obtains a representation from each NRSRO engaged 
to produce a credit rating for the Exchange Act-ABS that can be 
reasonably relied on that the NRSRO will publicly disclose the findings 
and conclusions of any third-party due diligence report obtained by the 
issuer or underwriter with the publication of the credit rating five 
business days prior to the first sale in the offering in an information 
disclosure form generated pursuant to proposed new paragraph (a)(1) of 
Rule 17g-7. The Commission anticipates that issuers and underwriters 
subject to this proposed requirement likely will seek to obtain such 
representations from the NRSROs engaged to produce credit ratings for 
Exchange Act-ABS. Consequently, the PRA burden for issuers and 
underwriters may be reduced substantially. However, to be conservative, 
the Commission preliminarily allocates the PRA burden for complying 
with proposed new Rule 15Ga-2 and the proposed amendments to Form ABS-
15G to the issuers and underwriters.
    In addition, the Commission also is proposing to permit issuers of 
municipal Exchange Act-ABS, or underwriters in such offerings, to 
provide the information required by Form ABS-15G on EMMA. The 
Commission believes this would limit the PRA burden on issuers and 
underwriters of municipal Exchange Act-ABS subject to the proposed 
rule, as well as provide the disclosure for investors in the same 
location as other disclosures regarding municipal Exchange Act-ABS.
    For the foregoing reasons, the Commission preliminarily estimates 
that proposed new Rule 15Ga-2 and the proposed amendments to Form ABS-
15G would result in a total industry-wide one-time hour burden of 
approximately 27,000 hours and a total industry-wide annual hour burden 
of approximately 2,067 hours.
10. Proposed Amendments to Regulation S-T
    The Commission is proposing that certain Form NRSRO submissions and 
all Rule 17g-3 annual report submissions be submitted to the Commission 
using the EDGAR system. In order to implement this requirement, the 
Commission is proposing amendments to Rule 101 of Regulation S-T to 
require the electronic submission using the EDGAR system of Form NRSRO 
pursuant to paragraphs (e), (f), and (g) of Rule 17g-1 and the annual 
reports pursuant to Rule 17g-3.\1072\ The Commission also is proposing 
to amend Rule 201 of Regulation S-T, which governs temporary hardship 
exemptions from electronic filing, to make this exemption unavailable 
for NRSRO submissions.\1073\
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    \1072\ See proposed amendment of Rule 101 of Regulation S-T (17 
CFR 231.101); see also Section II.L of this release for a more 
detailed discussion of this proposal.
    \1073\ See proposed amendment of Rule 201 of Regulation S-T (17 
CFR 231.201); see also Section II.L of this release for a more 
detailed discussion of this proposal.

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[[Page 33511]]

    The Commission is proposing new Rule 15Ga-2, which would require an 
issuer or underwriter of any Exchange Act-ABS that is to be rated by an 
NRSRO to furnish a Form ABS-15G on the EDGAR system containing the 
findings and conclusions of any third-party ``due diligence report'' 
obtained by the issuer or underwriter.\1074\
---------------------------------------------------------------------------

    \1074\ See proposed new Rule 15Ga-2 and proposed amendments to 
Form ABS-15G; see also Section II.H.1 of this release for a more 
detailed discussion of this proposal.
---------------------------------------------------------------------------

    OMB requires the Commission to assign a burden of one hour to 
Regulation S-T and to indicate that the Regulation has one respondent 
so that the automated OMB system will be able to handle approval of the 
Regulation. OMB has already approved a burden of one hour for one 
respondent to the Regulation.
11. Form ID
    The Commission expects that NRSROs would need to file a Form ID 
with the Commission in order to gain access to the EDGAR system. Form 
ID is used to request the assignment of access codes to make 
submissions on EDGAR. The current OMB approved hour burden for Form ID 
is 15 minutes per respondent.\1075\ Thus, the Commission estimates that 
the total one-time hour burden resulting from filing Form ID would be 
approximately 2.5 hours.\1076\
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    \1075\ See Form ID (OMB Number 3235-0328).
    \1076\ 10 NRSROs x 15 minutes = 150 minutes; 150 minutes/60 
minutes = 2.5 hours.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the issuers and 
underwriters of Exchange Act-ABS that would need to furnish Form ABS-
15G to the Commission through the EDGAR system pursuant to proposed new 
Rule 15Ga-2 already have access to the EDGAR system because, for 
example, they need such access for the purpose of Rule 15Ga-1.
12. Total Paperwork Burdens
    Based on the foregoing, the Commission estimates that the total 
recordkeeping burden for NRSRO respondents resulting from the proposed 
rule amendments and proposed new rules would be approximately 77,150 
industry-wide one-time hours, $7,160,000 industry-wide external one-
time costs, 741,140 industry-wide annual hours, and $552,000 industry-
wide external annual costs.
    Based on the foregoing, the Commission estimates that the total 
recordkeeping burden for respondents that are providers of third-party 
due diligence services resulting from the rule amendments and proposed 
new rules would be approximately 3,000 industry-wide one-time hours, 
$300,000 industry-wide external one-time costs, and 1,034 industry-wide 
annual hours.
    Based on the foregoing, the Commission estimates that the total 
recordkeeping burden for issuer and underwriter respondents resulting 
from the rule amendments and proposed new rules would be approximately 
27,000 industry-wide one-time hours and 2,067 industry-wide annual 
hours.

E. Collection of Information Is Mandatory

    The collections of information pursuant to the proposed amendments 
and new rules are mandatory, as applicable, for NRSROs, providers of 
third-party due diligence services, and issuers and underwriters.

F. Confidentiality

    Other than information for which an NRSRO, provider of third-party 
due diligence services, or issuer or underwriter requests confidential 
treatment, or as may otherwise be kept confidential by the Commission, 
and which may be withheld from the public in accordance with the 
provisions of FOIA, the collection of information requirements 
resulting from the proposed amendments and new rules would not be 
confidential and would be publicly available.\1077\
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    \1077\ See 15 U.S.C. 552 et seq.
---------------------------------------------------------------------------

G. Retention Period of Recordkeeping Requirements

    All records an NRSRO is required to retain under Rule 17g-3 
(including records that would need to be made or received by an NRSRO 
under the proposed amendments and new rules) must be retained for three 
years after the record is made or retained.\1078\
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    \1078\ See 17 CFR 240.17g-2(a), (b), and (c).
---------------------------------------------------------------------------

    The Dodd-Frank Act did not establish record retention requirements 
for providers of third-party due diligence services.
    The records issuers and underwriters are required to make and 
furnish to the Commission pursuant to the requirements in proposed new 
Rule 15Ga-2 and the proposed amendments to Form ABS-15G would be 
mandatory. Responses to the information collections will not be kept 
confidential and there is no mandatory retention period for the 
collections of information.

H. Request for Comment

    Pursuant to 44 U.S.C. 3505(c)(2)(B), the Commission solicits 
comment to:
    1. Evaluate whether the proposed collection of information 
requirements are necessary for the performance of the functions of the 
Commission, including whether the information shall have practical 
utility;
    2. Evaluate the accuracy of the Commission's estimates of the 
burden of the proposed collection of information requirements;
    3. Determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected; and
    4. Minimize the burden of the collection of information 
requirements on those who are to respond, including through the use of 
automated collection techniques or other forms of information 
technology.
    Persons wishing to submit comments on the collection of information 
requirements should direct them to the following persons: (1) Desk 
Officer for the Securities and Exchange Commission, Office of 
Information and Regulatory Affairs, OMB, Room 3208, New Executive 
Office Building, Washington, DC 20503; and (2) Secretary, Securities 
and Exchange Commission, Station Place, 100 F Street, NE., Washington, 
DC 20549-1090 with reference to File No. S7-18-11. OMB is required to 
make a decision concerning the collection of information between 30 and 
60 days after publication, so a comment to OMB is best assured of 
having its full effect if OMB receives it within 30 days of 
publication. The Commission has submitted the proposed collection of 
information to OMB for approval. Requests for the materials submitted 
to OMB by the Commission with regard to this collection of information 
should be in writing, refer to File No. S7-18-11, and be submitted to 
the Securities and Exchange Commission, Office of Investor Education 
and Advocacy, Station Place, 100 F Street, NE., Washington, DC 20549-
0213.

V. Economic Analysis

    The Commission is sensitive to the costs imposed by its rules. To 
the extent possible, the discussion below focuses on the benefits and 
costs of the decisions made by the Commission to fulfill the mandates 
of the Dodd-Frank Act within its permitted discretion, rather than the 
benefits and costs of the mandates of the Dodd-Frank Act itself. 
However, as discussed below, to the extent that the Commission 
exercises discretion in implementing the provisions of the Dodd-Frank 
Act, the benefits and costs arising from the Commission's exercise of 
its discretion and the benefits and costs arising directly from the 
requirements of the Dodd-Frank Act are not entirely separable. 
Accordingly, where the

[[Page 33512]]

Commission believes that it has exercised some discretion in 
implementing the Dodd-Frank Act, hour burden estimates and dollar cost 
estimates in the above PRA analysis are included in full below, even 
where a portion--in most cases, the significantly greater portion--of 
the anticipated costs are attributable to the rulemaking mandates of 
the Dodd-Frank Act and not the exercise of the Commission's discretion 
in how to implement those requirements.\1079\ Where the Commission 
believes, however, that it has not exercised discretion in implementing 
the rulemaking mandates of the Dodd-Frank Act and that any anticipated 
benefits and costs are entirely attributable to those mandates, those 
anticipated benefits and costs are not addressed in the discussion 
below. Finally, as used below, the term ``incremental costs'' refers to 
costs attributable to the exercise of the Commission's rulemaking 
discretion that are in addition to costs attributable to the rulemaking 
mandates of the Dodd-Frank Act.
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    \1079\ For purposes of this economic analysis, the Commission's 
salary figures are from SIFMA's Management & Professional Earnings 
in the Securities Industry 2010, modified by Commission staff to 
account for an 1800-hour work year and multiplied by 5.35 to account 
for bonuses, firm size, employee benefits, and overhead.
---------------------------------------------------------------------------

    In addition, the Commission notes that Section 3(f) of the Exchange 
Act requires the Commission, whenever it engages in rulemaking and is 
required to consider or determine whether an action is necessary or 
appropriate in the public interest, to consider, in addition to the 
protection of investors, whether the action would promote efficiency, 
competition, and capital formation.\1080\ Furthermore, Section 23(a)(2) 
of the Exchange Act requires the Commission, when issuing rules under 
the Exchange Act, to consider the impact such rules would have on 
competition.\1081\ Section 23(a)(2) prohibits the Commission from 
adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act.\1082\ The Commission's analysis under these requirements as 
applied to the proposed amendments to existing rules and proposed new 
rules is included below in the discussions of the benefits and the 
costs of the proposals where appropriate. In this regard, the 
Commission's analysis focuses on the discretionary component of the 
Commission's proposals and the incremental costs resulting from that 
discretion.
---------------------------------------------------------------------------

    \1080\ See 15 U.S.C. 78c(f).
    \1081\ See 15 U.S.C. 78w(a)(2).
    \1082\ See id.
---------------------------------------------------------------------------

    Unless otherwise noted, the total one-time and annual cost 
estimates per NRSRO for PRA purposes as used in this section are 
averages across all types of NRSROs that would be subject to the 
proposed amendments and new rules. The NRSROs vary, in terms of size 
and complexity, from small entities that employ less than 20 credit 
analysts to complex global organizations that employ over a thousand 
credit analysts.\1083\ Given the variance in size between the largest 
NRSROs and the smallest NRSROs, the cost estimates, as averages across 
all NRSROs, are skewed higher because the largest firms currently 
dominate in terms of size and the volume of credit rating 
activities.\1084\
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    \1083\ See, e.g., Annual Report on Nationally Recognized 
Statistical Rating Organizations. Commission (January 2011), pp. 4-
9.
    \1084\ As discussed above in Section IV.D of this release, based 
on data collected from the NRSROs in their Form NRSROs and Rule 17g-
3 annual reports, the Commission has calculated an HHI number using 
the number credit ratings outstanding per NRSRO and that number is 
3,495, which is equivalent to there being approximately 2.86 equally 
sized firms. The HHI using earnings reported by NRSROs in the Rule 
17g-3 annual reports is 3,926, which the equivalent of 2.55 equally 
sized firms.
---------------------------------------------------------------------------

    The Commission's estimates of the benefits and costs of the 
proposals, as well as the anticipated effects on efficiency, 
competition and capital formation, are described below. The Commission 
recognizes that there may be benefits and costs resulting from the 
proposals that are not required to be described or otherwise identified 
below. The Commission generally requests that commenters identify and 
describe any such benefits and costs.

A. Internal Control Structure

    Section 932(a)(2)(B) of the Dodd-Frank Act added paragraph (3) to 
Section 15E(c) of the Exchange Act.\1085\ Section 15E(c)(3)(A) requires 
an NRSRO to ``establish, maintain, enforce, and document an effective 
internal control structure governing the implementation of and 
adherence to policies, procedures, and methodologies for determining 
credit ratings, taking into consideration such factors as the 
Commission may prescribe by rule.'' \1086\ Section 15E(c)(3)(B) of the 
Exchange Act provides that the Commission shall prescribe rules 
requiring an NRSRO to submit an annual internal controls report to the 
Commission, which shall contain: (1) A description of the 
responsibility of management in establishing and maintaining an 
effective internal control structure; (2) an assessment of the 
effectiveness of the internal control structure; and (3) the 
attestation of the CEO or equivalent individual.\1087\ The Commission 
proposes to implement this rulemaking by: (1) Adding a new paragraph 
(b)(12) to Rule 17g-2; \1088\ and (2) amending paragraphs (a) and (b) 
of Rule 17g-3.\1089\
---------------------------------------------------------------------------

    \1085\ See Public Law 111-203 Sec.  932(a)(2)(B) and 15 U.S.C. 
78o-7(c)(3)(A); see also Section II.A.1 of this release for a more 
detailed discussion of this provision.
    \1086\ Id.
    \1087\ See 15 U.S.C. 78o-7(c)(3)(B)(i)-(iii).
    \1088\ See proposed new paragraph (b)(12) to Rule 17g-2; see 
also Section II.A.2 of this release for a more detailed discussion 
of this proposal.
    \1089\ See proposed new paragraphs (a)(7) and of Rule 17g-3; see 
also Section II.A.3 of this release for a for a more detailed 
discussion of these proposals.
---------------------------------------------------------------------------

    Proposed new paragraph (b)(12) of Rule 17g-2 would identify the 
internal control structure an NRSRO, among other things, must document 
pursuant to Section 15E(c)(3)(A) of the Exchange Act as a record that 
must be retained.\1090\ As a result, the various retention and 
production requirements of paragraphs (c), (d), (e), and (f) of Rule 
17g-2 in its current form would apply to the documented internal 
control structure.\1091\
---------------------------------------------------------------------------

    \1090\ See proposed new paragraph (b)(12) of Rule 17g-2.
    \1091\ See 17 CFR 240.17g-2(c), (d), (e) and (f).
---------------------------------------------------------------------------

    Proposed new paragraph (a)(7) of Rule 17g-3 would require an NRSRO 
to include with the other reports required under that rule a report 
regarding the NRSRO's internal control structure established pursuant 
to Section 15E(c)(3)(A) of the Exchange Act.\1092\ The proposed 
amendment would mirror the text of Section 15E(c)(3)(B) of the Exchange 
Act by requiring that the report contain: (1) A description of the 
responsibility of management in establishing and maintaining an 
effective internal control structure; and (2) an assessment by 
management of the effectiveness of the internal control 
structure.\1093\ The Commission's proposed amendment to paragraph (b) 
of Rule 17g-3 would require that the NRSRO's CEO, or, if the firm does 
not have a CEO, an individual performing similar functions, provide a 
signed statement that would need to be attached to the report.\1094\ 
The CEO or other individual would need to state, among other things, 
that the report fairly presents, in all material respects, a 
description of the responsibility of management in establishing and

[[Page 33513]]

maintaining an effective internal control structure and an assessment 
of the effectiveness of the internal control structure.
---------------------------------------------------------------------------

    \1092\ See proposed new paragraph (a)(7) of Rule 17g-3.
    \1093\ Compare 15 U.S.C. 78o-7(c)(3)(B)(i) and (ii) and proposed 
new paragraphs (a)(7)(i) and (ii) of Rule 17g-3.
    \1094\ See proposed amendments to paragraph (b) of Rule 17g-3.
---------------------------------------------------------------------------

1. Benefits
    Section 15E(c)(3)(A) of the Exchange Act requires an NRSRO to 
establish, maintain, enforce, and document an effective internal 
control structure governing the implementation of and adherence to 
policies, procedures, and methodologies for determining credit 
ratings.\1095\ The Commission proposes to further implement this 
provision by applying the record retention and production requirements 
of Rule 17g-2 to the documented internal control structure by adding 
new paragraph (b)(12).\1096\ Recordkeeping rules such as Rule 17g-2 
have proven integral to the Commission's investor protection function 
because the preserved records are the primary means of monitoring 
compliance with applicable securities laws.\1097\ Rule 17g-2 is 
designed to ensure that an NRSRO makes and retains records that will 
assist the Commission in monitoring, through its examination authority, 
whether an NRSRO is complying with applicable securities laws, 
including the provisions of Section 15E of the Exchange Act and the 
rules thereunder.\1098\ The proposed amendment to Rule 17g-2 is 
designed to assist the Commission in monitoring an NRSRO's compliance 
with the requirement in Section 15E(c)(3)(A) of the Exchange Act to 
establish, maintain, enforce, and document an effective internal 
control structure governing the implementation of and adherence to 
policies, procedures, and methodologies for determining credit ratings.
---------------------------------------------------------------------------

    \1095\ See 15 U.S.C. 78o-7(c)(3)(A).
    \1096\ See 17 CFR 240.17g-2(c), (d), (e) and (f).
    \1097\ See Oversight of Credit Rating Agencies Registered as 
Nationally Recognized Statistical Rating Organizations, 72 FR at 
33582 (June 18, 2007).
    \1098\ Id.
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    The Commission preliminarily believes that implementing the 
internal control structure reporting requirement through an amendment 
to Rule 17g-3 would facilitate the Commission's oversight of NRSROs. 
First, it would assist the Commission in monitoring an NRSRO's 
compliance with the requirement in Section 15E(c)(3)(A) of the Exchange 
Act to establish, maintain, enforce, and document an effective internal 
control structure governing the implementation of and adherence to 
policies, procedures, and methodologies for determining credit ratings. 
Second, it would specify the format, manner, and timeframe in which the 
report must be submitted to the Commission, thereby facilitating the 
Commission's processing of the report. Furthermore, the Commission 
preliminarily believes that proposed amendments to Rules 17g-2 and 17g-
3 would provide an efficient process for NRSROs by allowing them to 
file the internal control report with the other annual reports required 
under Rule 17g-3.
2. Costs
    The Commission preliminarily estimates that, although the costs 
resulting from the proposed amendment to Rule 17g-2, discussed below, 
would largely be attributable to the Commission's discretionary 
rulemaking, those incremental costs would be minimal. An NRSRO already 
should have recordkeeping and control systems in place to comply with 
the existing requirements in Rule 17g-2 to make and retain or to retain 
documents listed in the rule.
    The Commission preliminarily estimates that the Commission's 
exercise of rulemaking discretion with respect to the amendments to 
Rule 17g-3 would also impose minimal incremental costs. The Commission 
preliminarily estimates that the costs resulting from the proposed 
amendments to Rule 17g-3 would largely be attributable to the 
rulemaking mandated by the Dodd-Frank Act.\1099\
---------------------------------------------------------------------------

    \1099\ Compare 15 U.S.C. 78o-7(c)(3)(B)(i) and (ii) with 
proposed new paragraphs (a)(7)(i), (a)(7)(ii), and (b)(2) of Rule 
17g-3.
---------------------------------------------------------------------------

    An NRSRO already should have control systems in place to comply 
with the existing requirements of Rule 17g-3. Consequently, the 
Commission preliminarily estimates that the internal hour burden 
associated with the first filing of the internal control report would 
not be materially different than the hour burden associated with filing 
subsequent reports (though the time spent on subsequent reports may 
decrease incrementally over time as the NRSRO gains experience with the 
requirement). The Commission, however, preliminarily believes that an 
NRSRO likely would engage outside counsel to analyze the requirements 
for the report and assist in drafting and reviewing the first report, 
given that it must be signed by the NRSRO's CEO or an individual 
performing a similar function. The time an outside attorney would spend 
on this work would depend on the size and complexity of the NRSRO.
    In addition, as discussed above in Section IV.D.4 of this release 
with respect to the PRA, the Commission preliminarily believes an NRSRO 
likely would continue to engage outside counsel to assist in the 
process of preparing the report on an annual basis and that the time an 
outside attorney would spend on this work would depend on the size and 
complexity of the NRSRO but in all cases be less than time spent on the 
first report.
    In sum, limiting the analysis to the elements of the proposals over 
which the Commission exercised discretion, the Commission acknowledges 
that the proposals would entail some compliance burdens for NRSROs. 
Some of the compliance effects are estimated for the industry in 
Sections Section IV.D.3 and Section IV.D.4 as $600,000 for the use of 
outside counsel and 1,550 internal burden hours for creating and 
retaining documents and complying with management's assessment of the 
internal control structure. However, the Commission preliminarily 
believes these compliance effects would result largely from the 
rulemaking mandated by the Dodd-Frank Act rather than the Commission's 
exercise of discretion.
    The Commission preliminarily believes that the incremental cost 
resulting from the proposed amendments would not impact competition or 
impose a burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act.
Request for Comment
    The Commission requests comment on all aspects of the costs and 
benefits associated with proposed new paragraph (b)(12) of Rule 17g-2 
and proposed new paragraphs (a)(7) and (b)(2) of Rule 17g-3.

B. Conflicts of Interest Relating to Sales and Marketing

    Section 932(a)(4) of the Dodd-Frank Act added new paragraph (3) to 
Section 15E(h) of the Exchange Act.\1100\ Section 15E(h)(3)(A) of the 
Exchange Act provides that the Commission shall issue rules to prevent 
the sales and marketing considerations of an NRSRO from influencing the 
production of credit ratings by the NRSRO.\1101\ The Commission is 
proposing to implement this provision by identifying a new conflict of 
interest in paragraph (c) of Rule 17g-5.\1102\ The existing 
requirements in paragraph (c) prohibit a person within an NRSRO (which

[[Page 33514]]

includes the NRSRO) \1103\ from having any of the conflicts of interest 
identified in the paragraph under all circumstances.\1104\ Proposed new 
paragraph (c)(8) of Rule 17g-5 would identify a new absolute 
prohibition: an NRSRO issuing or maintaining a credit rating where a 
person within the NRSRO who participates in the sales or marketing of a 
product or service of the NRSRO or a product or service of a person 
associated with the NRSRO also participates in determining or 
monitoring the credit rating or developing or approving procedures or 
methodologies used for determining the credit rating, including 
qualitative or quantitative models.\1105\
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    \1100\ Public Law 111-203 Sec.  932(a)(4) and 15 U.S.C. 78o-
7(h)(3).
    \1101\ 15 U.S.C. 78o-7(h)(3)(A).
    \1102\ See proposed new paragraph (c)(8) of Rule 17g-5; see also 
Section II.B.1 of this release for a more detailed discussion of 
this proposal.
    \1103\ See paragraph (d) of Rule 17g-5 defining ``person within 
an NRSRO'' for purposes of the rule. 17 CFR 240.17g-5(d).
    \1104\ See 17 CFR 240.17g-5(c)(1)-(7).
    \1105\ See proposed new paragraph (c)(8) of Rule 17g-5.
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    Section 15E(h)(3)(B) of the Exchange Act provides that the 
Commission's rules must contain two additional provisions.\1106\ First, 
Section 15E(h)(3)(B)(i) requires that the Commission's rules shall 
provide for exceptions for small NRSROs with respect to which the 
Commission determines that the separation of the production of ratings 
and sales and marketing activities is not appropriate.\1107\ To 
implement this provision, the Commission is proposing to amend Rule 
17g-5 by adding a new paragraph (f).\1108\ Proposed paragraph (f) would 
provide a mechanism for a small NRSRO to apply in writing for an 
exemption from the absolute prohibition proposed in new paragraph 
(c)(8). In particular, proposed new paragraph (f) of Rule 17g-5 would 
provide that upon written application by an NRSRO, the Commission may 
exempt, either conditionally or unconditionally or on specified terms 
and conditions, such NRSRO from the provisions of paragraph (c)(8) of 
Rule 17g-5 if the Commission finds that due to the small size of the 
NRSRO it is not appropriate to require the separation within the NRSRO 
of the production of credit ratings from sales and marketing activities 
and such exemption is in the public interest.\1109\
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    \1106\ 15 U.S.C. 78o-7(h)(3)(B)(i) and (ii).
    \1107\ 15 U.S.C. 78o-7(h)(3)(B)(i).
    \1108\ See proposed new paragraph (f) of Rule 17g-5; see also 
Section II.B.2 of this release for a more detailed discussion of 
this proposal.
    \1109\ See proposed new paragraph (f) of Rule 17g-5.
---------------------------------------------------------------------------

    Second, Section 15E(h)(3)(B)(ii) requires that the Commission's 
rules shall provide for the suspension or revocation of the 
registration of an NRSRO if the Commission finds, on the record, after 
notice and opportunity for a hearing, that the NRSRO has committed a 
violation of a rule issued under Section 15E(h) of the Exchange Act; 
and (2) the violation affected a rating.\1110\ The Commission proposes 
to implement this provision by adding new paragraph (g) of Rule 17g-
5.\1111\ This paragraph would provide that in a proceeding pursuant to 
Section 15E(d) or Section 21C of the Exchange Act, the Commission shall 
suspend or revoke the registration of an NRSRO if the Commission finds 
in such proceeding that the NRSRO has violated a rule issued under 
Section 15E(h) of the Exchange Act, the violation affected a rating, 
and that suspension or revocation is necessary for the protection of 
investors and in the public interest.
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    \1110\ 15 U.S.C. 78o-7(h)(3)(B)(ii).
    \1111\ See proposed new paragraph (g) of Rule 17g-5; see also 
Section II.B.3 of this release for a more detailed discussion of 
this proposal.
---------------------------------------------------------------------------

1. Benefits
    The Commission preliminarily believes that the proposed new 
absolute prohibition in proposed paragraph (c)(8) of Rule 17g-5 would 
provide benefits to investors by mitigating the potential that undue 
influences based on sales and marketing considerations could impact the 
objectivity of the NRSRO's credit rating process.\1112\ As discussed 
above in Section II.B.1 of this release, Commission staff found as part 
of its 2007-2008 examination of the activities of the three largest 
NRSROs in rating asset-backed securities linked to subprime mortgages 
that it appeared that marketing personnel discussed with other 
employees, including those responsible for credit rating criteria 
development, business concerns they had related to those 
criteria.\1113\ The rule proposal would be designed to insulate 
individuals within the NRSRO responsible for determining credit ratings 
from such pressures. In addition, the bright line on prohibited 
behavior is likely to allow the company to effectively comply with the 
proposed rules. The Commission believes that this could benefit 
investors by increasing the integrity of credit ratings and the 
procedures and methodologies used to determine credit ratings.
---------------------------------------------------------------------------

    \1112\ See Oversight of Credit Rating Agencies Registered as 
Nationally Recognized Statistical Rating Organizations, 72 FR at 
33598-33599, 33613 (June 18, 2007) (discussing objectives and 
benefits of paragraph (c) of Rule 17g-5 when it was adopted); see 
also Amendments to Rules for Nationally Recognized Statistical 
Rating Organizations, 74 FR at 6465-6469, 6474-6475 (February 9, 
2009) (discussing objectives and benefits of paragraph (c) of Rule 
17g-5 when it was amended).
    \1113\ See Summary Report of Issues Identified in the Commission 
Staff's Examination of Select Credit Rating Agencies, Commission 
(July 2008), pp. 25-26.
---------------------------------------------------------------------------

    With respect to the proposal for the suspension or revocation of 
the registration of an NRSRO after a violation of a rule, the 
Commission preliminarily believes that it would provide the Commission 
with more flexibility in determining appropriate sanctions for 
violations of the securities laws. This could act as a deterrent 
against violations by NRSROs and could motivate them to strengthen 
their internal controls to manage conflicts of interest.
    The Commission preliminarily believes that codifying these 
requirements mandated by the Dodd-Frank Act in Rule 17g-5 may promote 
efficiency. NRSROs should already have developed a system of controls 
to comply with the existing requirements relating to conflicts of 
interest that are codified in Rule 17g-5. In addition, the Commission 
believes proposed paragraph (g) may promote efficiency by incorporating 
existing processes for sanctioning NRSROs (i.e., those provided for 
Sections 15E(d) or Section 21C of the Exchange Act).
2. Costs
    The Commission preliminarily estimates that the Commission's 
exercise of rulemaking discretion with respect to the proposed 
amendments to Rule 17g-5 would impose minimal incremental costs. 
However, the Commission preliminarily estimates that the costs 
discussed below resulting from the proposed amendments to Rule 17g-5 
would be attributable largely to the rulemaking mandated by Dodd-Frank 
Act.\1114\
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    \1114\ Compare 15 U.S.C. 78o-7(h)(3)(A), (B)(i), and (B)(ii) 
with proposed new paragraphs (c)(8), (f), and (g) of Rule 17g-5.
---------------------------------------------------------------------------

    The Commission notes that, when it adopted three new absolutely 
prohibited conflicts by amending paragraph (c) of Rule 17g-5 in 2009, 
the Commission provided estimates of one-time and annual compliance 
costs for NRSROs resulting from the amendments.\1115\ Moreover, one of 
those amendments resulted in an absolute prohibition that is similar to 
the Commission's proposed new absolute prohibition in that it prohibits 
an NRSRO from issuing or maintaining a credit rating where the fee paid 
for the rating was negotiated, discussed, or arranged by a person 
within the NRSRO who has responsibility for participating in 
determining credit ratings or for

[[Page 33515]]

developing or approving procedures or methodologies used for 
determining credit ratings, including qualitative and quantitative 
models.\1116\ With respect to the 2009 amendments, the Commission 
estimated that the costs to the three largest NRSROs as a result of the 
three new prohibited conflicts would be approximately $5,442,100 per 
firm in one-time costs and $1,563,800 per firm in annual costs.\1117\ 
In addition, the Commission estimated that the costs to the seven 
smaller NRSROs would be approximately $47,600 per firm in one-time 
costs and $13,760 per firm in annual costs.\1118\ The Commission 
preliminarily believes that the compliance cost for the new absolute 
prohibition proposed in this release would be proportionally less than 
the estimates provided above for the three 2009 prohibitions. The 
Commission also preliminarily believes that granting an exemption from 
the proposed new absolute prohibition for a small NRSRO that applied in 
writing for such exemption could reduce potential costs for a smaller 
NRSRO for which the complete separation of sales and marketing 
activities from the analytical function would not be appropriate.
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    \1115\ See Amendments to Rules for Nationally Recognized 
Statistical Rating Organizations, 74 FR at 6479 (February 9, 2009).
    \1116\ See Amendments to Rules for Nationally Recognized 
Statistical Rating Organizations, 74 FR at 6479 (February 9, 2009) 
and 17 CFR 240.17g-5(c)(6).
    \1117\ See Amendments to Rules for Nationally Recognized 
Statistical Rating Organizations, 74 FR at 6479 (February 9, 2009).
    \1118\ Id.
---------------------------------------------------------------------------

    The Commission therefore preliminarily believes any incremental 
cost resulting from the amendments would not impact competition or 
impose a burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act.
Request for Comment
    The Commission requests comment on all aspects of the costs and 
benefits associated with proposed new paragraphs (c)(8), (f), and (g) 
of Rule 17g-5.

C. ``Look-Back'' Review

    Section 932(a)(4) of the Dodd-Frank Act amended Section 15E(h) of 
the Exchange Act to add a new paragraph (4).\1119\ The Commission is 
proposing to implement the rulemaking required in Section 
15E(h)(4)(A)(ii) of the Exchange Act through proposed paragraph (c) of 
new Rule 17g-8.\1120\ Proposed paragraph (c) would require that the 
policies and procedures the NRSRO establishes, maintains, and enforces 
pursuant to Section 15E(h)(4)(A) of the Exchange Act must address 
instances in which a review conducted pursuant to those policies and 
procedures determines that a conflict of interest influenced a credit 
rating assigned to an obligor, security, or money market instrument by 
including, at a minimum, procedures that are reasonably designed to 
ensure the NRSRO will: (1) Immediately place the credit rating on 
credit watch; (2) promptly determine whether the credit rating must be 
revised so it no longer is influenced by a conflict of interest and is 
solely the product of the NRSRO's documented procedures and 
methodologies for determining credit ratings; and (3) promptly publish 
a revised credit rating, if appropriate, or affirm the credit rating if 
appropriate.\1121\
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    \1119\ See Public Law 111-203 Sec.  932(a)(4) and 15 U.S.C. 78o-
7(h)(4).
    \1120\ See proposed paragraph (c) of new Rule 17g-8; see also 
Section II.C.1 of this release for a more detailed discussion of 
this proposal. Sections 15E(h)(4)(A)(i) and (ii) of the Exchange Act 
require an NRSRO to establish, maintain, and enforce policies and 
procedures reasonably designed to ensure that, in any case in which 
an employee of a person subject to a credit rating of the NRSRO or 
the issuer, underwriter, or sponsor of a security or money market 
instrument subject to a credit rating of the NRSRO, was employed by 
the NRSRO and participated in any capacity in determining credit 
ratings for the person or the securities or money market instruments 
during the 1-year period preceding the date an action was taken with 
respect to the credit rating, the NRSRO shall: (1) Conduct a review 
to determine whether any conflicts of interest of the employee 
influenced the credit rating; and (2) take action to revise the 
rating if appropriate, in accordance with such rules as the 
Commission shall prescribe. See 15 U.S.C. 78o-7(h)(4)(A)(i) and 
(ii).
    \1121\ See proposed paragraphs (c)(1), (2) and (3) of new Rule 
17g-8.
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    In addition, the Commission proposes adding paragraph (a)(9) to 
Rule 17g-2 to identify the policies and procedures an NRSRO is required 
to establish, maintain, and enforce pursuant to Section 15E(h)(4)(A) of 
the Exchange Act and proposed paragraph (c) of new Rule 17g-8 as a 
record an NRSRO must make and retain.\1122\ As a result, the policies 
and procedures would need to be documented in writing and subject to 
the record retention and production requirements in paragraphs (c) 
through (f) of Rule 17g-2.\1123\
---------------------------------------------------------------------------

    \1122\ See proposed new paragraph (a)(9) to Rule 17g-2; see also 
Section II.C.2 of this release for a more detailed discussion of 
this proposal.
    \1123\ See 17 CFR 240.17g-2(c)-(f).
---------------------------------------------------------------------------

1. Benefits
    The Commission preliminarily believes that the proposed look-back 
review provisions would provide three primary benefits. First, they 
would implement the rulemaking mandate in a way that would require an 
NRSRO to notify users of its credit ratings that a prior rating action 
was subject to a conflict and to review whether the credit rating 
should be revised. This would help ensure as quickly as possible that 
the credit rating assigned to the obligor, security, or money market 
instrument is solely a product of the NRSRO's procedures and 
methodologies for determining credit ratings. In addition, by 
prescribing the steps an NRSRO must take to remove the uncertainty 
surrounding the credit rating, the rule proposal could limit the 
potential that investors and other users of credit ratings might make 
investment or other credit based decisions based on incomplete, biased 
or inaccurate information.
    Second, the Commission preliminarily believes that the proposal 
could operate within the existing framework of an NRSRO's policies and 
procedures for taking rating actions and procedures and methodologies 
for determining credit ratings. Placing a rated obligor, security, or 
money market instrument on credit watch and subsequently affirming or 
revising (i.e., upgrading or downgrading the rating) are among the 
rating actions NRSRO's commonly take with respect to their credit 
ratings. In addition, in terms of revising the conflicted credit 
rating, the proposal would rely on an NRSRO's policies and procedures 
for determining credit ratings and not require revisions that are 
contrary to those policies and procedures. The Commission preliminarily 
believes that the approach in proposed paragraph (c) of new Rule 17g-8 
appropriately avoids regulating the substance of credit ratings or the 
procedures and methodologies an NRSRO uses to determine credit ratings 
but, at the same time, requires an NRSRO to have procedures reasonably 
designed to ensure that it promptly addresses a credit rating that is 
subject to a conflict of interest.\1124\
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    \1124\ The Commission also notes an NRSRO would violate Section 
15E(h) of the Exchange Act (15 U.S.C. 78o-7(h)) and Rule 17g-5, 
among other rules, if it continued to assign an obligor, security, 
or money, market instrument a credit rating that, absent the undue 
influence of the conflict of interest, would be different because 
the NRSRO could not be deemed to have policies and procedures 
reasonably designed to address and manage conflicts of interest that 
can arise from its business under such a circumstance. See 15 U.S.C. 
78o-7(h) and 17 CFR 17g-5.
---------------------------------------------------------------------------

    Third, the Commission preliminarily believes that having these 
policies and procedures in writing would promote better understanding 
of them among the individuals within the NRSRO and, therefore, promote 
compliance with the policies and procedures. In addition, the record 
retention requirements would facilitate Commission oversight of NRSROs. 
In this regard, recordkeeping rules such as Rule 17g-2 have proven

[[Page 33516]]

integral to the Commission's investor protection function because the 
preserved records are the primary means of monitoring compliance with 
applicable securities laws.\1125\
---------------------------------------------------------------------------

    \1125\ See Oversight of Credit Rating Agencies Registered as 
Nationally Recognized Statistical Rating Organizations, 72 FR at 
33582 (June 18, 2007).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the proposed 
implementation of Section 15E(h)(4)(A)(ii) of the Exchange Act as 
mandated by the Dodd-Frank Act may promote efficiency. As noted above, 
the proposal would be designed to work within the existing processes 
NRSROs have for taking rating actions and would not interfere with 
their procedures and methodologies for determining credit ratings.
2. Costs
    The Commission preliminarily estimates that the Commission's 
exercise of rulemaking discretion with respect to proposed paragraph 
(c) of new Rule 17g-8 would impose minimal incremental costs. The 
Commission preliminarily estimates that the costs resulting from 
proposed paragraph (c) of new Rule 17g-8 would be attributable largely 
to the rulemaking mandated by Dodd-Frank Act.\1126\ As discussed above 
in Section IV.D.6, the Commission preliminarily estimates that for PRA 
purposes, the average annual cost to each NRSRO would be approximately 
$7,000, resulting in an industry-wide annual cost of approximately 
$70,000.\1127\
---------------------------------------------------------------------------

    \1126\ Compare 15 U.S.C. 78o-7(h)(4)(A) with proposed paragraph 
(c) of new Rule 17g-8.
---------------------------------------------------------------------------

    The Commission preliminarily estimates that the costs resulting 
from the proposed amendment to Rule 17g-2 discussed below largely would 
be attributable to the Commission's discretionary rulemaking. As 
discussed above in Section IV.D.3 of this release with respect to the 
PRA, the Commission preliminary believes applying the recordkeeping 
requirements of Rule 17g-2 to five new types of records would result in 
one-time and annual hour burdens for NRSROs in connection with updating 
their record retention policies and procedures to account for and 
retain these new records. Also, as discussed above in Section IV.D.3 of 
this release with respect to the PRA, based on staff experience, the 
Commission preliminarily estimates that the additional one-time hour 
burden for each NRSRO to update its record retention policies and 
procedures to account for the new records that would need to be 
retained under proposed new paragraphs (a)(9), (b)(12), (b)(13), 
(b)(14), and (b)(15) of Rule 17g-2 would be 20 hours. Based on that 
estimate, the Commission preliminary believes that the one-time hour 
burden resulting from proposed new paragraph (a)(9) of Rule 17g-2 would 
be approximately 4 hours per NRSRO, resulting in an industry-wide hour 
burden of approximately 40 hours.\1128\ As discussed above in Section 
IV.D.3 of this release with respect to the PRA, the Commission 
preliminarily estimates it would take an average of approximately one 
hour each year for an NRSRO to retain updated versions of the internal 
control structure, resulting in an annual industry-wide hour burden of 
10 hours.\1129\
---------------------------------------------------------------------------

    \1128\ 20 hours/5 new required records = 4 hours; 10 NRSROs x 4 
hours = 40 hours.
    \1129\ 10 NRSROs x 1 hour = 10 hours.
---------------------------------------------------------------------------

    The Commission believes that in addition to the compliance costs 
calculated above for PRA purposes, there could be other potential 
economic effects resulting from the proposed release that are hard to 
quantify. For example, former subscribers, who bought on the basis of 
the original rating but who no longer subscribe to the rating service, 
would not be notified when a rating has been revised.
    For the foregoing reasons, the Commission preliminarily believes 
any incremental cost resulting from the amendments would not impact 
competition or impose a burden on competition not necessary or 
appropriate in furtherance of the purposes of the Exchange Act.
Request for Comment
    The Commission requests comment on all aspects of the costs and 
benefits associated with proposed paragraph (c) of new Rule 17g-8 and 
proposed new paragraph (a)(9) of Rule 17g-2.

D. Fines and Other Penalties

    Section 932(a)(8) of the Dodd-Frank Act amended Section 15E of the 
Exchange Act to add new subsection (p), which contains four paragraphs: 
(1), (2), (3), and (4).\1130\ Section 15E(p)(4)(A) provides that the 
Commission shall establish, by rule, fines and other penalties 
applicable to any NRSRO that violates the requirements of Section 15E 
of the Exchange Act and the rules under the Exchange Act.\1131\ The 
Commission proposes to amend the instructions to Form NRSRO by adding 
new Instruction A.10.\1132\ This new instruction would provide notice 
to credit rating agencies applying for registration and NRSROs that an 
NRSRO is subject to the fine and penalty provisions, and other 
available sanctions contained in Sections 15E, 21, 21A, 21B, 21C, and 
32 of the Exchange Act for violations of the securities laws.\1133\
---------------------------------------------------------------------------

    \1130\ See Public Law 111-203 Sec.  932(a)(8) and 15 U.S.C. 78o-
7(p)(1)-(4).
    \1131\ See 15 U.S.C. 78o-7(p)(4)(A).
    \1132\ See proposed new Instruction A.10 to Form NRSRO; see also 
Section II.D of this release for a more detailed discussion of this 
proposal.
    \1133\ See 15 U.S.C. 78o-7, 15 U.S.C. 78u, 15 U.S.C. 78u-1, 15 
U.S.C. 78u-2, 15 U.S.C. 78u-3 and 15 U.S.C. 78ff, respectively.
---------------------------------------------------------------------------

1. Benefits
    The Commission preliminarily believes this amendment to Form NRSRO 
would benefit credit rating agencies applying for registration as 
NRSROs and NRSROs because it would notify them of the potential 
consequences of violating provisions of the Exchange Act and Commission 
rules. The Commission also believes that this notification could 
potentially cause the NRSROs to enhance their compliance and compliance 
procedures, which would benefit investors and other users of credit 
ratings. In addition, the Commission believes implementing the rule in 
this manner would create efficiencies by relying on existing authority 
to seek fines, penalties, and other available sanctions contained in 
Sections 15E, 21, 21A, 21B, 21C, and 32 of the Exchange Act for 
violations of the securities laws.\1134\
---------------------------------------------------------------------------

    \1134\ Id.
---------------------------------------------------------------------------

2. Costs
    The Commission preliminarily estimates that the proposed amendment 
to the instructions to Form NRSRO would not result in additional 
regulatory obligations for NRSROs. Consequently, the Commission 
preliminarily believes it would not impact competition or impose a 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Exchange Act.
Request for Comment
    The Commission requests comment on all aspects of the benefits and 
costs associated with the proposal to amend the instructions to Form 
NRSRO by adding new Instruction A.10.

E. Proposed Enhancements to Disclosures of Performance Statistics

    Section 932(a)(8) of the Dodd-Frank Act amended Section 15E of the 
Exchange Act to add new subsection (q), which contains paragraphs (1) 
and (2).\1135\ Section 15E(q)(1) provides that

[[Page 33517]]

the Commission shall, by rule, require each NRSRO to publicly disclose 
information on the initial credit ratings determined by the NRSRO for 
each type of obligor, security, and money market instrument, and any 
subsequent changes to such credit ratings, for the purpose of allowing 
users of credit ratings to evaluate the accuracy of ratings and compare 
the performance of ratings by different NRSROs.\1136\ Section 15E(q)(2) 
provides that the Commission's rules shall require, at a minimum, 
disclosures that, among other things: (1) Are comparable among NRSROs, 
to allow users of credit ratings to compare the performance of credit 
ratings across NRSROs;\1137\ (2) are clear and informative for 
investors having a wide range of sophistication who use or might use 
credit ratings;\1138\ (3) include performance information over a range 
of years and for a variety of types of credit ratings, including for 
credit ratings withdrawn by the NRSRO;\1139\ and (4) are appropriate to 
the business model of an NRSRO.\1140\
---------------------------------------------------------------------------

    \1135\ See Public Law 111-203 Sec.  932(a)(8) and 15 U.S.C. 78o-
7(q)(1) and (2).
    \1136\ See 15 U.S.C. 78o-7(q)(1).
    \1137\ See 15 U.S.C. 78o-7(q)(2)(A).
    \1138\ See 15 U.S.C. 78o-7(q)(2)(B).
    \1139\ See 15 U.S.C. 78o-7(q)(2)(C).
    \1140\ See 15 U.S.C. 78o-7(q)(2)(E).
---------------------------------------------------------------------------

    The Commission proposes to implement the rulemaking mandated in 
Section 15E(q) of the Exchange Act, in part, by significantly enhancing 
the requirements applicable to NRSROs with respect to generating and 
disclosing performance statistics in Exhibit 1 of Form NRSRO.\1141\ 
Among other things, the amendments would confine the disclosures in the 
Exhibit to transition and default rates and certain limited 
supplemental information.\1142\ Moreover, the amendments would 
standardize the production and presentation of the transition and 
default rates.\1143\ Specifically, the amendments would require the 
transition and default rates in Exhibit 1 to be produced using a 
``single cohort approach.'' \1144\ Under this approach, an applicant 
and NRSRO, on an annual basis, would be required to compute how the 
credit ratings assigned to obligors, securities, and money market 
instruments in a particular class or subclass of credit rating 
outstanding on the date 1, 3, and 10 years prior to the most recent 
calendar year-end performed during those respective 1, 3, and 10-year 
time periods.\1145\
---------------------------------------------------------------------------

    \1141\ See proposed amendments to Instruction H to Form NRSRO 
(as it relates to Exhibit 1); see also Section II.E.1.a of this 
release for a more detailed discussion of this proposal.
    \1142\ See proposed amendments to the instructions for Exhibit 
1.
    \1143\ Id.
    \1144\ Id.
    \1145\ Id.
---------------------------------------------------------------------------

    Under the amendments, the proposed new instructions would be 
divided into paragraphs (1), (2), (3), and (4), some of which would 
have subparagraphs.\1146\ The proposed new paragraphs would contain 
specific instructions with respect to, among other things, how required 
information should be presented in the Exhibit (including the order of 
presentation) and how transition and default rates should be produced 
using a single cohort approach.\1147\ As with all information that must 
be submitted in Form NRSRO and its Exhibits, applicants and NRSROs 
would be subject to these new requirements.\1148\
---------------------------------------------------------------------------

    \1146\ See proposed paragraphs (1)-(4) of the instructions for 
Exhibit 1.
    \1147\ Id.
    \1148\ See, e.g., 17 CFR 240.17g-1; see also Instructions A.1, 
B, C, D, E, and F to Form NRSRO.
---------------------------------------------------------------------------

    The Commission also is proposing implementing Section 15E(q)(2)(D) 
of the Exchange Act, which requires that the Commission's rules must 
require NRSROs to make its performance statistics freely available and 
disclose them on an easily accessible portion of its Web site, and in 
writing when requested, by amending paragraph (i) of Rule 17g-1.\1149\ 
The amendment would require an NRSRO to make Form NRSRO and Exhibits 1 
through 9 ``freely available on an easily accessible portion of its Web 
site.'' The proposed amendment to paragraph (i) also would remove the 
option for an NRSRO to make its Form NRSRO publicly available ``through 
another comparable, readily accessible means'' as an alternative to Web 
site disclosure.
---------------------------------------------------------------------------

    \1149\ A detailed discussion of this proposal is at Section 
II.E.1.b of this release.
---------------------------------------------------------------------------

1. Benefits
    Section 15E(q)(1) of the Exchange Act provides that the Commission 
shall, by rule, require each NRSRO to publicly disclose information on 
the initial credit ratings determined by the NRSRO for each type of 
obligor, security, and money market instrument, and any subsequent 
changes to such credit ratings, for the purpose of allowing users of 
credit ratings to evaluate the accuracy of ratings and compare the 
performance of ratings by different NRSROs.\1150\ The Commission is 
proposing to implement this rulemaking mandate, in part, through 
amendments to the instructions for Exhibit 1 to Form NRSRO. The 
amendments would be designed to meet the goal in Section 15E(q)(1) that 
the information disclosed by NRSROs allows users of credit ratings to 
evaluate the accuracy of credit ratings and compare the performance of 
credit ratings by different NRSROs. In this regard, the amendments are 
designed to make disclosures simply presented, easy to understand, 
uniform in appearance, and comparable across NRSROs.\1151\
---------------------------------------------------------------------------

    \1150\ 15 U.S.C. 78o-7(q)(1).
    \1151\ See Section 15E(q)(2)(A) of the Exchange Act, which 
provides that the disclosure of information about the performance of 
credit ratings should be comparable among NRSROs, to allow users of 
credit ratings to compare the performance of credit ratings across 
NRSROs. 15 U.S.C. 78o-7(q)(2)(A). See also Section 15E(q)(2)(B) of 
the Exchange Act, which provides that the disclosure of information 
about the performance of credit ratings should be clear and 
informative for investors having a wide range of sophistication who 
use or might use credit ratings. 15 U.S.C. 78o-7(q)(2)(B).
---------------------------------------------------------------------------

    As the Commission stated when originally adopting Form NRSRO, the 
information provided in Exhibit 1 is an important indicator of the 
performance of an NRSRO in terms of its ability to assess the 
creditworthiness of issuers and obligors and, consequently, will be 
useful to users of credit ratings in evaluating an NRSRO.\1152\ The 
performance statistics required to be disclosed in Exhibit 1 of Form 
NRSRO were designed to allow users of the credit ratings to compare the 
credit ratings quality of different NRSROs and, thereby, make it easier 
for users of credit ratings to compare the ratings performance of the 
NRSROs. The performance statistics also were designed to allow an NRSRO 
to demonstrate that it has a superior ratings methodology or competence 
and, thereby, attract clients. In doing so, the Commission believed, 
the performance statistics would therefore enhance competition in the 
credit ratings industry.\1153\ The proposed amendments to the 
instructions to Exhibit 1 of Form NRSRO are designed to improve the 
utility of the required performance statistics disclosure to investors 
and other users of credit ratings and facilitate comparisons between

[[Page 33518]]

NRSROs, thereby amplifying this positive effect on competition.
---------------------------------------------------------------------------

    \1152\ See Oversight of Credit Rating Agencies Registered as 
Nationally Recognized Statistical Rating Organizations, 72 FR at 
33574 (June 18, 2007); see also Amendments to Rules for Nationally 
Recognized Statistical Rating Organizations, 74 FR at 6474 (Feb. 9, 
2009) (``The amendments to the instructions to Exhibit 1 to Form 
NRSRO will require NRSROs to provide more detailed performance 
statistics and, thereby, make it easier for users of credit ratings 
to compare the performance of the NRSROs. In addition, these 
amendments will make it easier for an NRSRO to demonstrate that it 
has a superior ratings methodology or competence and, thereby, 
attract clients.'').
    \1153\ See Oversight of Credit Rating Agencies Registered as 
Nationally Recognized Statistical Rating Organizations, 72 FR at 
33612 (June 18, 2007); Amendments to Rules for Nationally Recognized 
Statistical Rating Organizations, 74 FR at 6474 (Feb. 9, 2009).
---------------------------------------------------------------------------

    In addition, the proposed amendments could improve the Commission's 
ability to carry out its oversight function for NRSRO which, in turn, 
would benefit investors. For example, the enhanced utility of the 
performance statistics provided in an applicant's initial application 
for registration and in an NRSRO's Form NRSRO could aid the Commission 
in, among other things, assessing whether the applicant or NRSRO has 
adequate financial and managerial resources to consistently produce 
credit ratings with integrity.\1154\ Furthermore, the disclosure of the 
enhanced performance statistics in an applicant's initial application 
would allow the Commission staff to verify that the applicant, if 
granted registration, would publicly disclose the information in 
accordance with the proposed amendments to the Instructions for Exhibit 
1.\1155\
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    \1154\ See, e.g., 15 U.S.C. 78o-7(a)(2)(C) (setting forth 
grounds to deny an initial application) and 15 U.S.C. 78o-7(d)(1)(E) 
and (d)(2) (setting forth grounds to sanction an NRSRO, including 
revoking the NRSRO's registration); see also Oversight of Credit 
Rating Agencies Registered as Nationally Recognized Statistical 
Rating Organizations, 72 FR at 33612 (June 18, 2007) (``Form NRSRO 
requires that a credit rating agency provide information required 
under Section 15E(a)(1)(B) of the Exchange Act and certain 
additional information. The additional information will assist the 
Commission in making the assessment regarding financial and 
managerial resources required under Section 15E(a)(2)(C)(2)(ii)(I) 
of the Exchange Act.'').
    \1155\ As indicated above, paragraph (i) requires an NRSRO to 
make Form NRSRO and Exhibits 1 through 9 publicly available within 
10 business days of being granted an initial registration. See 17 
CFR 240.17g-1(i). In addition, the public disclosure of Form NRSRO 
and Exhibits 1 through 9 could be accelerated if the Commission 
adopts the proposal that this information be filed through the EDGAR 
system upon registration.
---------------------------------------------------------------------------

    In addition, the Commission preliminarily believes that applying 
the requirement to disclose Form NRSRO and Exhibits 1 through 9 on an 
``easily accessible'' portion of the NRSRO's Web site would assist 
investors and other users of credit ratings by making it easier to 
locate a Form NRSRO. The Commission also believes that amending 
paragraph (i) to provide that Exhibit 1 be made freely available in 
writing when requested \1156\ would benefit those investors who do not 
have access to the Internet.
---------------------------------------------------------------------------

    \1156\ See proposed amendments to paragraph (i) of Rule 17g-1.
---------------------------------------------------------------------------

    The Commission preliminarily believes that enhancing the existing 
requirements in Exhibit 1 to Form NRSRO is an efficient means of 
implementing the rulemaking mandated through Section 15E(q) of the 
Exchange Act. An NRSRO already should have in place information 
technology systems to meet the existing requirements of the 
instructions for Exhibit 1 to Form NRSRO, which it could adjust to 
comply with the proposed new disclosure requirements.
2. Costs
    The Commission preliminarily estimates that the Commission's 
exercise of rulemaking discretion in proposing amendments to the 
instructions for Exhibit 1 of Form NRSRO would impose incremental 
costs. The Commission preliminarily estimates, however, that the costs 
discussed below would be attributable largely to the rulemaking 
mandated by the Dodd-Frank Act \1157\ and that the incremental costs 
would be minimal.
---------------------------------------------------------------------------

    \1157\ Compare 15 U.S.C. 78o-7(q) with the proposed amendments 
to the instructions for Exhibit 1 to Form NRSRO; see also GAO Report 
10-782, pp. 27-40 (indicating the current requirements for 
disclosing performance statistics in Exhibit 1 to Form NRSRO may not 
achieve the objectives of 15 U.S.C. 78o-7(q)).
---------------------------------------------------------------------------

    An NRSRO should already have in place information technology 
systems to meet the existing requirements of the instructions to 
Exhibit 1 of Form NRSRO, which it could adjust to comply with the 
proposed new disclosure requirements. NRSROs are already subject to 
substantial performance statistic disclosure requirements, including 
the requirement to provide transition and default rates in Exhibit 1 
for each class of credit rating for which they are registered and for 
1, 3, and 10-year periods. The Commission preliminarily believes that 
NRSROs could use the internal information technology systems and 
expertise and other resources they currently devote to processing the 
information necessary to monitor credit ratings and calculate 
transitions and default statistics in order to program a system to 
comply with the proposed amendments to the Instructions for Exhibit 1.
    At the same time, the Commission notes that under the proposed 
amendments, NRSROs would be required to adhere to specific requirements 
that may not follow their traditional practices for calculating and 
presenting transitions and default rates. Consequently, the Commission 
preliminarily estimates that the proposed amendments requiring 
standardized Transition/Default Matrices would result in one-time costs 
to program existing systems to create the Transition/Default Matrices 
that would be required under the proposed amendments and annual costs 
to comply with the requirement to update the transition and default 
rates in Exhibit 1.
    As discussed above in Section IV.D.2, the Commission preliminarily 
believes that the one-time and annual hour burden estimates for 
implementing these changes should be based on the number of credit 
ratings outstanding. Based on the annual certifications submitted by 
the NRSROs for the 2009 calendar year-end, there were approximately 
2,905,824 credit ratings outstanding across all 10 NRSROs.\1158\ The 
Commission preliminarily estimates that the one-time industry-wide 
burden to establish systems to process the relevant information 
necessary to calculate the Transition/Default Matrices and make the 
necessary calculations would be an average of approximately 3 seconds 
per outstanding credit rating, resulting in a one-time industry-wide 
hour burden of approximately 2,420 hours.\1159\
---------------------------------------------------------------------------

    \1158\ Id.
    \1159\ 2,905,824 credit ratings x 3 seconds = 2,421.52 hours 
(rounded to 2,420 hours).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the annual hours burden 
to comply with the proposed amendments to the Instructions for Exhibit 
1 would be less than the one-time burden since the NRSROs would have 
established systems to process the necessary information to produce the 
required Transition/Default Matrices. As discussed above in Section 
IV.D.2 of this release with respect to the PRA, the Commission 
preliminarily estimates that the annual industry-wide hour burden to 
calculate the Transition/Default Matrices would be an average of 
approximately 1.5 seconds per outstanding credit rating, resulting in 
an industry-wide annual hour burden of approximately 1,210 hours.\1160\
---------------------------------------------------------------------------

    \1160\ 2,905,824 credit ratings x 1.5 seconds = 1,210.76 hours 
(rounded to 1,210 hours).
---------------------------------------------------------------------------

    As discussed above in Section IV.D.1 of this release with respect 
to the PRA, the Commission preliminarily estimates that there would be 
a minimal one-time hour burden attributable to requiring that an NRSRO 
make Form NRSRO and Exhibits 1 through 9 freely available on an easily 
accessible portion of its corporate Internet Web site and removing the 
option for an NRSRO to make its Form NRSRO and Exhibits 1 through 9 
available through another comparable, readily accessible means. 
Currently, all NRSROs make Form NRSRO and Exhibits 1 through 9 
available on their corporate Internet Web sites.\1161\ However, the 
Commission preliminarily believes that

[[Page 33519]]

a Form NRSRO and Exhibits 1 through 9 would be ``easily accessible'' if 
they could be accessed through a clearly and prominently labeled 
hyperlink on the home page of the NRSRO's corporate Internet Web site. 
Consequently, NRSROs may need to make changes to their corporate 
Internet Web sites to disclose the information on an ``easily 
accessible'' portion of the Web site. The Commission preliminarily 
estimates re-configuring a corporate Internet Web site for this purpose 
would take an NRSRO an average of approximately 5 hours. For these 
reasons, the Commission preliminarily estimates that the proposed 
requirement would result in an average one-time hour burden of 5 hours 
per NRSRO, resulting in a one-time industry-wide hour burden of 50 
hours.\1162\
---------------------------------------------------------------------------

    \1161\ See, e.g., Annual Report on Nationally Recognized 
Statistical Rating Organizations. Commission (Jan. 2011), pp. 18-19.
    \1162\ 10 NRSROs x 5 hours = 50 hours.
---------------------------------------------------------------------------

    Also as discussed in Section IV.D.1 with respect to the PRA, the 
Commission expects that the proposed requirement that an NRSRO provide 
a written copy of Exhibit 1 on request would result in a one-time hour 
burden for each NRSRO to establish procedures and protocols for 
receiving and processing these requests. The Commission preliminarily 
estimates that each NRSRO would spend an average of approximately 48 
hours establishing such procedures and protocols, resulting in an 
industry-wide one-time hour burden of approximately 480 hours.\1163\
---------------------------------------------------------------------------

    \1163\ 10 NRSROs x 48 hours = 480 hours.
---------------------------------------------------------------------------

    Also as discussed in Section IV.D.1 with respect to the PRA, the 
Commission preliminarily estimates that an NRSRO would receive an 
average of 200 requests per year to provide Exhibit 1 in writing and 
that it would take an average of 20 minutes to respond to each request. 
Therefore, the Commission preliminarily estimates that the average 
annual hour burden to each NRSRO would be approximately 67 hours, 
resulting in an annual industry-wide burden of approximately 670 hours. 
\1164\
---------------------------------------------------------------------------

    \1164\ 200 requests x \1/3\ hours = 67 hours per NRSRO; 10 
NRSROs x 67 hours = 670 hours.
---------------------------------------------------------------------------

    In addition, the Commission preliminarily estimates that the 
incremental cost resulting from implementing the rulemaking mandated by 
Section 15E(q) of the Exchange Act in this manner would be minimal and, 
as noted above, the proposal would have substantial benefits. 
Consequently, the Commission preliminarily believes any incremental 
cost resulting from the amendments would not impact competition or 
impose a burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act.
Request for Comment
    The Commission requests comment on all aspects of the benefits and 
costs associated with the proposals to amend the Instructions to 
Exhibit 1 of Form NRSRO and paragraph (i) of Rule 17g-1.

F. Proposed Enhancements to Rating Histories Disclosures

    As discussed above, Section 932(a)(8) of the Dodd-Frank Act amended 
Section 15E of the Exchange Act to add new subsection (q), which 
contains paragraphs (1) and (2).\1165\ In addition to the proposed 
amendments to the Instructions for Exhibit 1 discussed in the preceding 
section, the Commission proposes to further implement the rulemaking 
mandated in Section 15E(q) of the Exchange Act, in part, by adding new 
paragraph (b) to Rule 17g-7.\1166\ This proposed amendment would 
implement rulemaking mandated in Section 15E(q) of the Exchange Act by: 
(1) Re-codifying in paragraph (b) of Rule 17g-7 requirements currently 
contained in paragraph (d)(3) of Rule 17g-2; and (2) substantially 
enhancing those requirements.\1167\ More specifically, paragraph (d)(3) 
of Rule 17g-2 requires an NRSRO to, among other things, make publicly 
available on its corporate Internet Web site in an XBRL format the 
information required to be documented pursuant to paragraph (a)(8) of 
the rule with respect to any credit rating initially determined by the 
NRSRO on or after June 26, 2007, the effective date of the Rating 
Agency Act of 2006.\1168\
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    \1165\ See Public Law 111-203 Sec.  932(a)(8) and 15 U.S.C. 78o-
7(q)(1) and (2). See Section
    \1166\ See proposed new paragraph (b) of Rule 17g-7; see also 
Section II.E.2 of this release for a more detailed discussion of 
this proposal.
    \1167\ See 15 U.S.C. 78o-7(q) and proposed new paragraph (b) of 
Rule 17g-7; see also Section II.E.2 of this release for a more 
detailed discussion of this proposal.
    \1168\ 17 CFR 240.17-2(d)(3)(i)(A). Paragraph (a)(8) of Rule 
17g-2 requires an NRSRO to make and retain a record that, ``for each 
outstanding credit rating, shows all rating actions and the date of 
such actions from the initial credit rating to the current credit 
rating identified by the name of the rated security or obligor and, 
if applicable, the CUSIP of the rated security or the Central Index 
Key (``CIK'') number of the rated obligor.'' 17 CFR 240.17-2(a)(8).
---------------------------------------------------------------------------

    These requirements would be enhanced in four ways. The first 
enhancement would make the disclosure easier for investors and other 
users of credit ratings to locate. Specifically, new proposed paragraph 
(b)(1) of Rule 17g-7 would require the NRSRO, among other things, to 
publicly disclose the ratings history information for free on an easily 
accessible portion of its corporate Internet Web site.\1169\
---------------------------------------------------------------------------

    \1169\ See proposed new paragraph (b)(1) of Rule 17g-7.
---------------------------------------------------------------------------

    The second enhancement would broaden the scope of credit ratings 
subject to the disclosure requirements. Specifically, proposed new 
paragraph (b)(1)(i) of Rule 17g-7 would require an NRSRO to disclose 
each credit rating assigned to an obligor, security, and money market 
instrument in every class of credit ratings for which the NRSRO is 
registered that was outstanding as of June 26, 2007 and any subsequent 
upgrades or downgrades of a credit rating assigned to the obligor, 
security, or money market instrument (including a downgrade to, or 
assignment of, default), any placements of a credit rating assigned to 
the obligor, security, or money market instrument on watch or review, 
any affirmation of a credit rating assigned to the obligor, security, 
or money market instrument, and a withdrawal of a credit rating 
assigned to the obligor, security, or money market instrument.\1170\ 
With respect to credit ratings initially determined on or after June 
26, 2007, the amendments would clarify that the disclosure of the 
rating history information would be triggered when an NRSRO publishes 
an initial credit rating, and any subsequent upgrades or downgrades of 
a credit rating assigned to the obligor, security, or money market 
instrument (including a downgrade to, or assignment of, default), any 
placements of a credit rating assigned to the obligor, security, or 
money market instrument on watch or review, any affirmation of a credit 
rating assigned to the obligor, security, or money market instrument, 
and a withdrawal of a credit rating assigned to the obligor, security, 
or money market instrument.\1171\
---------------------------------------------------------------------------

    \1170\ See proposed new paragraph (b)(1)(i) of Rule 17g-7.
    \1171\ See proposed new paragraph (b)(1)(ii) of Rule 17g-7.
---------------------------------------------------------------------------

    The third enhancement would increase the scope of information that 
must be disclosed about a rating action. Specifically, proposed 
paragraph (b)(2) of Rule 17g-7 would identify 7 categories of data that 
would need to be disclosed when a credit rating action is published 
pursuant to proposed new paragraph (b)(1) of Rule 17g-7.\1172\ The 
fourth enhancement, contained in proposed new paragraph (b)(5) to Rule 
17g-7, would be to require that a rating history not be removed from 
the disclosure until 20 years after the NRSRO withdraws the credit 
rating

[[Page 33520]]

assigned to the obligor, security, or money market instrument.\1173\
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    \1172\ See proposed new paragraph (b)(2) of Rule 17g-7.
    \1173\ See proposed new paragraph (b)(5) of Rule 17g-7.
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1. Benefits
    Section 15E(q)(1) of the Exchange Act provides that the Commission 
shall, by rule, require each NRSRO to publicly disclose information on 
the initial credit ratings determined by the NRSRO for each type of 
obligor, security, and money market instrument, and any subsequent 
changes to such credit ratings, for the purpose of allowing users of 
credit ratings to evaluate the accuracy of ratings and compare the 
performance of ratings by different NRSROs.\1174\ The Commission is 
proposing to implement this rulemaking mandate, in part, through 
proposed new paragraph (b) of Rule 17g-7. The amendments would be 
designed to meet the goal in Section 15E(q)(1) that the information 
disclosed by NRSROs allows users of credit ratings to evaluate the 
accuracy of credit ratings and compare the performance of credit 
ratings by different NRSROs.
---------------------------------------------------------------------------

    \1174\ 15 U.S.C. 78o-7(q)(1).
---------------------------------------------------------------------------

    As the Commission stated when adopting the current ratings history 
disclosure requirement, the ``intent of the rule is to facilitate 
comparisons of credit rating accuracy across all NRSROs--including 
direct comparisons of different NRSROs' treatment of the same obligor 
or instrument--in order to enhance NRSRO accountability, transparency, 
and competition.'' \1175\ The proposals also are designed to provide 
persons with the ``raw data'' necessary to generate statistical 
information about the performance of each NRSRO's credit ratings.\1176\ 
Finally, the proposals also are designed to implement provisions of 
Section 15E(q)(2) of the Exchange Act, which provides, among other 
things, that the Commission's rules shall require NRSROs to disclose 
information about the performance of credit ratings that is comparable 
among NRSROs, to allow users of credit ratings to compare the 
performance of credit ratings across NRSROs.\1177\
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    \1175\ See Amendments to Rules for Nationally Recognized 
Statistical Rating Organizations, 74 FR at 63838 (Dec. 4, 2009) 
(``Ratings history information for outstanding credit ratings is the 
most direct means of comparing the performance of two or more 
NRSROs. It allows an investor or other user of credit ratings to 
compare how all NRSROs that maintain a credit rating for a 
particular obligor or instrument initially rated that obligor or 
instrument and, thereafter, how and when they adjusted their credit 
rating over time.''). The Commission notes that under the proposals 
the disclosures would not contain complete histories for many credit 
ratings because the NRSRO would not need to include information 
about rating actions taken before June 26, 2007. However, the 
Commission believes that the disclosures would still be used to 
compare how different NRSROs rated a particular obligor, security, 
or money market instrument beginning as of June 26, 2007 and from 
that date forward.
    \1176\ See Amendments to Rules for Nationally Recognized 
Statistical Rating Organizations, 74 FR at 63837-63838 (Dec. 4, 
2009) (``The raw data to be provided by NRSROs pursuant to the new 
ratings history disclosure requirements * * * will enable market 
participants to develop performance measurement statistics that 
would supplement those required to be published by NRSROs themselves 
in Exhibit 1, tapping into the expertise of credit market observers 
and participants in order to create better and more useful means to 
compare the credit ratings performance of NRSROs.'').
    \1177\ See 15 U.S.C. 78o-7(q)(2).
---------------------------------------------------------------------------

    The Commission preliminarily believes that implementing the 
rulemaking mandated through Section 15E(q) of the Exchange Act through 
proposed new paragraph (b) of Rule 17g-7 would promote an efficient 
process for NRSROs. An NRSRO already should have in place information 
technology systems to meet the existing requirements of paragraph 
(d)(3) of Rule 17g-2, which it could adjust to comply with the proposed 
new disclosure requirements.
2. Costs
    The Commission preliminarily estimates that the Commission's 
exercise of rulemaking discretion in proposing new paragraph (b) of 
Rule 17g-7 would impose incremental costs. However, the Commission 
preliminarily estimates that the costs discussed below resulting from 
the proposed new paragraph would be attributable largely to the 
rulemaking mandated by Dodd-Frank Act \1178\ and that the incremental 
costs would be minimal.
---------------------------------------------------------------------------

    \1178\ Compare 15 U.S.C. 78o-7(q) with proposed new paragraph 
(b) of Rule 17g-7; see also GAO Report 10-782, pp. 40-46 (indicating 
the current requirements of paragraph (d)(3) of Rule 17g-2 may not 
achieve the objectives of 15 U.S.C. 78o-7(q)).
---------------------------------------------------------------------------

    The Commission preliminarily believes that requiring an NRSRO to 
make ratings histories available on an ``easily accessible'' portion of 
its Web site would result in the same burden as re-configuring a 
corporate Internet Web site for the purpose of making Form NRSRO and 
Exhibits 1 through 9 ``easily accessible.'' The Commission, therefore, 
preliminarily believes that the hour burden estimates discussed above 
in Section V.F.2 of this release with respect to the PRA would be 
appropriate for estimating the costs resulting from this requirement. 
Consequently, the Commission preliminarily estimates that requiring an 
NRSRO to make ratings histories available on an ``easily accessible'' 
portion of its corporate Internet Web site would take each NRSRO an 
average of approximately 5 hours, resulting in a one-time industry-wide 
hour burden of 50 hours.\1179\
---------------------------------------------------------------------------

    \1179\ 10 NRSROs x 5 hours = 50 hours.
---------------------------------------------------------------------------

    Pursuant to paragraph (d)(3) of Rule 17g-2, NRSROs currently are 
required to provide ratings history information for each credit rating 
initially determined on or after June 26, 2007. Proposed new paragraph 
(b) of Rule 17g-7 would incorporate the requirements currently 
contained in paragraph (d)(3) of Rule 17g-2 with substantial 
enhancements that would require NRSROs to add more ratings histories to 
their disclosures and provide more information about each rating action 
in the ratings history for each given obligor, security, or money 
market instrument.\1180\ The Commission preliminarily estimates that 
NRSROs would meet the requirements of new paragraph (b) of Rule 17g-7 
by adapting the internal information technology systems and expertise 
and other resources they currently devote to complying with paragraph 
(d)(3) of Rule 17g-2, which would result in one-time costs to NRSROs. 
Consequently, the Commission preliminarily estimates that the proposed 
amendments would result in one-time costs to reprogram existing systems 
as well as to add the required information for all credit ratings 
outstanding as of (as opposed to initially determined on or after) June 
26, 2007. As discussed in section IV.D.5 of this release with respect 
to the PRA, the Commission preliminarily estimates that the proposed 
enhancements to the current disclosure requirements would result in an 
average one-time hour burden to each NRSRO of approximately 135 hours, 
resulting in an industry-wide one-time hour burden of approximately 
1,350 hours.\1181\ The Commission preliminarily believes that NRSROs 
would implement the required changes internally.
---------------------------------------------------------------------------

    \1180\ See proposed new paragraph (b) of Rule 17g-7; see also 
Section II.E.2 of this release for a more detailed discussion of 
this proposal.
    \1181\ 10 NRSRO x 135 hours = 1,350 hours.
---------------------------------------------------------------------------

    In addition, as discussed in section IV.D.5 of this release with 
respect to the PRA, the Commission preliminarily estimates that the 
proposed enhanced disclosure requirements would result in an average 
annual hour burden per NRSRO of approximately 45 hours, resulting in an 
industry-wide annual hour burden of approximately 450 hours.\1182\
---------------------------------------------------------------------------

    \1182\ 10 NRSRO x 45 hours = 450 hours.
---------------------------------------------------------------------------

    Finally, the Commission preliminarily believes any incremental cost 
resulting from the amendments would not impact competition or impose a 
burden on

[[Page 33521]]

competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act.
Request for Comment
    The Commission requests comment on all aspects of the benefits and 
costs associated with proposed new paragraph (b) of Rule 17g-7.

G. Credit Rating Methodologies

    Section 932(a)(8) of the Dodd-Frank Act amends Section 15E of the 
Exchange Act to add new subsection (r).\1183\ Section 15E(r) of the 
Exchange Act provides that the Commission shall prescribe rules, for 
the protection of investors and in the public interest, with respect to 
the procedures and methodologies, including qualitative and 
quantitative data and models, used by NRSROs that require each NRSRO to 
ensure a number of objectives.\1184\ The Commission is proposing to 
implement Section 15E(r) of the Exchange Act through paragraph (a) of 
proposed new Rule 17g-8.\1185\
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    \1183\ See Public Law 111-203 Sec.  932(a)(8) and 15 U.S.C. 78o-
7(r).
    \1184\ See 15 U.S.C. 78o-7(r)(1)-(3).
    \1185\ See proposed paragraph (a) of new Rule 17g-8; see also 
Section II.F.1 of this release for a more detailed discussion of 
this proposal.
---------------------------------------------------------------------------

    In particular, proposed paragraph (a)(1) would require the NRSRO to 
have policies and procedures that are reasonably designed to ensure 
that the procedures and methodologies, including qualitative and 
quantitative data and models, the NRSRO uses to determine credit 
ratings are approved by its board of directors or, if the NRSRO does 
not have a board of directors, another body performing a function 
similar to that of a board of directors.\1186\ Proposed paragraph 
(a)(2) would require an NRSRO to have policies and procedures that are 
reasonably designed to ensure that the procedures and methodologies, 
including qualitative and quantitative data and models, the NRSRO uses 
to determine credit ratings are developed and modified in accordance 
with the policies and procedures of the NRSRO.\1187\ Proposed paragraph 
(a)(3)(i) would require an NRSRO to have policies and procedures that 
are reasonably designed to ensure that material changes to the 
procedures and methodologies, including changes to qualitative and 
quantitative data and models, the NRSRO uses to determine credit 
ratings are applied consistently to all credit ratings to which the 
changed procedures or methodologies apply.\1188\ Proposed paragraph 
(a)(3)(ii) would require the NRSRO to have policies and procedures that 
are reasonably designed to ensure that material changes to the 
procedures and methodologies, including changes to qualitative and 
quantitative data and models, the NRSRO uses to determine credit 
ratings, to the extent that the changes are to surveillance or 
monitoring procedures and methodologies, are applied to then-current 
credit ratings within a reasonable period of time taking into 
consideration the number of ratings impacted, the complexity of the 
procedures and methodologies used to determine the credit ratings, and 
the type of obligor, security, or money market instrument being 
rated.\1189\ Proposed paragraph (a)(4)(i) would require the NRSRO to 
have policies and procedures that are reasonably designed to ensure 
that the NRSRO promptly publishes on an easily accessible portion of 
its corporate Internet Web site material changes to the procedures and 
methodologies, including to qualitative models or quantitative inputs, 
the NRSRO uses to determine credit ratings, the reason for the changes, 
and the likelihood the changes will result in changes to any current 
ratings.\1190\ Proposed paragraph (a)(4)(ii) would require the NRSRO to 
have policies and procedures that are reasonably designed to ensure the 
NRSRO promptly publishes on its corporate Internet Web site significant 
errors identified in a procedure or methodology, including a 
qualitative or quantitative model, the NRSRO uses to determine credit 
ratings that may result in a change in current credit ratings.\1191\ 
Finally, proposed paragraph (a)(5) would require the NRSRO to have 
policies and procedures that are reasonably designed to ensure that it 
discloses the version of a credit rating procedure or methodology, 
including the qualitative methodology or quantitative inputs, used with 
respect to a particular credit rating.\1192\
---------------------------------------------------------------------------

    \1186\ See proposed paragraph (a)(1) of new Rule 17g-8.
    \1187\ See proposed paragraph (a)(2) of new Rule 17g-8.
    \1188\ See proposed paragraph (a)(3)(i) of new Rule 17g-8.
    \1189\ See proposed paragraph (a)(3)(ii) of new Rule 17g-8.
    \1190\ See proposed paragraph (a)(4)(i) of new Rule 17g-8.
    \1191\ See proposed paragraph (a)(4)(ii) of new Rule 17g-8.
    \1192\ See proposed paragraph (a)(5) of new Rule 17g-8.
---------------------------------------------------------------------------

    The Commission also is proposing that the policies and procedures 
required pursuant to proposed paragraph (a) of new Rule 17g-8 be 
subject to the record retention and production requirements of Rule 
17g-2.\1193\ Consequently, the Commission proposes adding new paragraph 
(b)(13) to Rule 17g-2 to identify the policies and procedures an NRSRO 
is required to establish, maintain, enforce, and document pursuant to 
proposed paragraph (a) of new Rule 17g-8 as a record that must be 
retained.\1194\
---------------------------------------------------------------------------

    \1193\ 17 CFR 240.17g-2.
    \1194\ See proposed new paragraph (b)(13) to Rule 17g-2; see 
also Section II.F.2 of this release for a more detailed discussion 
of this proposal.
---------------------------------------------------------------------------

1. Benefits
    The Commission is proposing to implement Sections 15E(r) of the 
Exchange Act through paragraph (a) of proposed new Rule 17g-8. The 
Commission preliminarily believes that the proposals would provide 
several primary benefits for investors and other users of credit 
ratings. First, having the NRSRO's board of directors or a body 
performing a function similar to a board approve the NRSRO's procedures 
and methodologies for determining credit ratings could promote the 
quality and consistency of the procedures and methodologies.\1195\ In 
addition, taking steps to ensure that such procedures and methodologies 
are developed and modified pursuant to the NRSRO's policies and 
procedures also could promote the quality and consistency of the 
procedures and methodologies.\1196\
---------------------------------------------------------------------------

    \1195\ See proposed paragraph (a)(1) of new Rule 17g-8.
    \1196\ See proposed paragraph (a)(2) of new Rule 17g-8.
---------------------------------------------------------------------------

    Furthermore, taking steps to ensure that material changes to the 
procedures and methodologies, including changes to qualitative and 
quantitative data and models, the NRSRO uses to determine credit 
ratings are applied consistently to all credit ratings to which the 
changed procedures or methodologies apply could promote consistent and 
timely application of such changes, which could benefit investors and 
other users of credit ratings.\1197\ Similarly, the consistent and 
timely application of changes to procedures and methodologies for 
determining credit ratings could be promoted by an NRSRO taking steps 
to ensure that material changes to the procedures and methodologies, 
including changes to qualitative and quantitative data and models, the 
NRSRO uses to determine credit ratings are, to the extent that the 
changes are to surveillance or monitoring procedures and methodologies, 
applied to then-current credit ratings within a reasonable period of 
time taking into consideration the number of ratings impacted, the

[[Page 33522]]

complexity of the procedures and methodologies used to determine the 
credit ratings, and the type of obligor, security, or money market 
instrument being rated.\1198\
---------------------------------------------------------------------------

    \1197\ See proposed paragraph (a)(3)(i) of new Rule 17g-8.
    \1198\ See proposed paragraph (a)(3)(ii) of new Rule 17g-8.
---------------------------------------------------------------------------

    In addition, the Commission preliminarily believes the proposal 
would benefit investors and other users of credit ratings by improving 
the transparency of an NRSRO's procedures and methodologies for 
determining credit ratings. Specifically, investors and other users of 
credit ratings would benefit from the transparency arising from 
requiring that an NRSRO promptly publishes on an easily accessible 
portion of its corporate Internet Web site material changes to the 
procedures and methodologies, including to qualitative models or 
quantitative inputs, the reason for the changes, and the likelihood the 
changes will result in changes to any current ratings as well as 
significant errors identified in a procedure or methodology, including 
a qualitative or quantitative model.\1199\ Finally, transparency also 
would be promoted by requiring that an NRSRO disclose the version of a 
credit rating procedure or methodology, including the qualitative 
methodology or quantitative inputs, used with respect to a particular 
credit rating.\1200\
---------------------------------------------------------------------------

    \1199\ See proposed paragraph (a)(4) of new Rule 17g-8.
    \1200\ See proposed paragraph (a)(5) of new Rule 17g-8.
---------------------------------------------------------------------------

    The Commission preliminarily believes that an additional benefit of 
the proposal is that implementing Section 15E(r) of the Exchange Act by 
requiring the NRSRO to have policies and procedures designed to achieve 
the objectives set forth in that section would provide the NRSRO with 
flexibility to integrate the required policies and procedure with its 
procedures and methodologies for determining credit ratings. In other 
words, the proposal would rely on the NRSRO's policies and procedures 
for determining credit ratings and not require revisions that are 
contrary to those policies and procedures. The Commission preliminarily 
believes this approach appropriately avoids regulating the substance of 
credit ratings or the procedures and methodologies an NRSRO uses to 
determine credit ratings but, at the same time, requires an NRSRO to 
have procedures reasonably designed to achieve the objectives set forth 
in Section 15E(r) of the Exchange Act.
    The Commission preliminarily believes this proposed implementation 
of Section 15E(r) of the Exchange Act would promote an efficient 
process for NRSROs to comply with the requirements. As noted above, the 
proposal would be designed to provide the NRSRO with flexibility to 
integrate the required policies and procedure with its procedures and 
methodologies for determining credit ratings.
    The Commission proposes to further implement Section 15E(r) of the 
Exchange Act by adding new paragraph (b)(13) to Rule 17g-2 to apply the 
record retention and production requirements of Rule 17g-2 to the 
policies and policies and procedures required pursuant to paragraph (a) 
of proposed new Rule 17g-8.\1201\ The record retention requirements 
would promote efficiency by facilitating Commission oversight of 
NRSROs. In this regard, recordkeeping rules such as Rule 17g-2 have 
proven integral to the Commission's investor protection function 
because the preserved records are the primary means of monitoring 
compliance with applicable securities laws.\1202\ Rule 17g-2 is 
designed to ensure that an NRSRO makes and retains records that will 
assist the Commission in monitoring, through its examination authority, 
whether an NRSRO is complying with the provisions of Section 15E of the 
Exchange Act and the rules thereunder.\1203\ The proposed amendment to 
Rule 17g-2 is designed to assist the Commission in monitoring an 
NRSRO's compliance with paragraph (a) of proposed new Rule 17g-8.
---------------------------------------------------------------------------

    \1201\ See 17 CFR 240.17g-2(a), (c), (d), (e) and (f).
    \1202\ See Oversight of Credit Rating Agencies Registered as 
Nationally Recognized Statistical Rating Organizations, 72 FR at 
33582 (June 18, 2007).
    \1203\ Id.
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2. Costs
    The Commission preliminarily estimates that the Commission's 
exercise of rulemaking discretion in proposed paragraph (a) of new Rule 
17g-8 would impose incremental costs. However, the Commission 
preliminarily estimates that the costs discussed below resulting from 
proposed paragraph (a) of new Rule 17g-8 would be attributable largely 
to the rulemaking mandated by Dodd-Frank Act \1204\ and that the 
incremental costs would be minimal.
---------------------------------------------------------------------------

    \1204\ Compare 15 U.S.C. 78o-7(r)(1)-(3), with proposed 
paragraph (a) of new Rule 17g-8.
---------------------------------------------------------------------------

    As discussed in Section IV.D.6 of this release with respect to the 
PRA, the Commission preliminarily estimates that an NRSRO would spend 
an average of approximately 200 hours establishing the policies and 
procedures that would be required under paragraph (a) of proposed new 
Rule 17g-8, resulting in an industry-wide one-time hour burden of 
approximately 2,000 hours.\1205\ In addition, as discussed in Section 
IV.D.6 of this release with respect to the PRA, the Commission 
preliminarily estimates an NRSRO would spend an average of 
approximately 50 hours annually reviewing and updating the policies and 
procedures required under proposed paragraph (a) of Rule 17g-8, 
resulting in an annual industry-wide hour burden of approximately 500 
hours.\1206\
---------------------------------------------------------------------------

    \1205\ 10 NRSROs x 200 hours = 2,000 hours.
    \1206\ 10 NRSROs x 50 hours = 500 hours.
---------------------------------------------------------------------------

    As noted above, the Commission preliminarily estimates that the 
costs resulting from proposed new paragraph (b)(13) of new Rule 17g-2 
largely would be attributable to the Commission's discretionary 
rulemaking. As discussed above in Section IV.D.3 of this release with 
respect to the PRA, the Commission preliminary believes applying the 
recordkeeping requirements of Rule 17g-2 to five new types of records 
would result in one-time and annual hour burdens for NRSROs in 
connection with updating their record retention policies and procedures 
to account for and retain these new records. As discussed above in 
Section IV.D.3 of this release with respect to the PRA, based on staff 
experience, the Commission preliminarily estimates that the additional 
one-time hour burden for each NRSRO to update its record retention 
policies and procedures to account for the new records that would need 
to be retained under proposed new paragraphs (a)(9), (b)(12), (b)(13), 
(b)(14), and (b)(15) of Rule 17g-2 would be 20 hours. Based on that 
estimate, the Commission preliminary believes that the average one-time 
hour burden resulting from proposed new paragraph (b)(13) to Rule 17g-2 
would be approximately 4 hours per NRSRO, resulting an industry-wide 
one-time hour burden of approximately 40 hours.\1207\ As discussed 
above in Section IV.D.3 of this release with respect to the PRA, the 
Commission preliminarily estimates it would take an average of 
approximately one hour each year for an NRSRO to retain updated 
versions of the information required pursuant to paragraph (a) of new 
Rule 17g-8 resulting in an annual industry-wide burden of 10 
hours.\1208\
---------------------------------------------------------------------------

    \1207\ 20 hours/5 new required records = 4 hours; 10 NRSROs x 4 
hours = 40 hours.
    \1208\ 10 NRSROs x 1 hour = 10 hours.
---------------------------------------------------------------------------

    For the foregoing reasons, Commission preliminarily believes any 
incremental cost resulting from the amendments would not impact 
competition or impose a burden on

[[Page 33523]]

competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act.
Request for Comment
    The Commission requests comment on all aspects of the costs and 
benefits associated with proposed new paragraph (a)(8) of Rule 17g-8 
and proposed new paragraph (b)(13) of Rule 17g-2.

H. Form and Certification to Accompany Credit Ratings

    Section 932(a)(8) of the Dodd-Frank Act amended Section 15E of the 
Exchange Act to add new paragraph (s).\1209\ Sections 15E(s)(1) through 
(4), among other things, set forth provisions specifying Commission 
rulemaking with respect to disclosures an NRSRO must make with the 
publication of a credit rating.\1210\ The Commission proposes to 
implement these provisions by adding new paragraph (a) to Rule 17g-
7.\1211\ As discussed in detail below, the prefatory text of proposed 
new paragraph (a) would require an NRSRO to publish two items when 
taking a rating action: (1) A form containing information about the 
credit rating resulting from or subject to the rating action; \1212\ 
and (2) any certification of a provider of third-party due diligence 
services received by the NRSRO that relates to the credit rating.\1213\ 
Proposed paragraph (a)(1) of Rule 17g-7 would contain three primary 
components: Paragraph (a)(1)(i) prescribing the format of the form; 
\1214\ paragraph (a)(1)(ii) prescribing the content of the form; \1215\ 
and paragraph (a)(1)(iii) prescribing an attestation requirement for 
the form.\1216\ Proposed paragraph (a)(2) of Rule 17g-7 would identify 
the certification from a provider of third-party due diligence services 
as an item to be published with the rating action.\1217\
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    \1209\ See 15 U.S.C. 78o-7(s).
    \1210\ See 15 U.S.C. 78o-7(s)(1)-(4).
    \1211\ See proposed new paragraph (a) of Rule 17g-7. See also 
Sections II.G.1 through G.5 of this release for a more detailed 
discussion of this proposal.
    \1212\ See proposed new paragraph (a)(1) of Rule 17g-7. This 
paragraph would implement, in large part, rulemaking specified in 
Sections 15E(s)(1), (2), and (3) of the Exchange Act. See 15 U.S.C. 
78o-7(s)(1), (2), and (3).
    \1213\ See proposed new paragraph (a)(2) of Rule 17g-7. This 
paragraph would implement, in part, rulemaking specified in Section 
15E(s)(4) of the Exchange Act. See 15 U.S.C. 78o-7(s)(4).
    \1214\ See proposed new paragraph (a)(1)(i) of Rule 17g-7. This 
paragraph would implement, in large part, rulemaking specified in 
Section 15E(s)(2) of the Exchange Act. See 15 U.S.C. 78o-7(s)(2).
    \1215\ See proposed new paragraph (a)(1)(ii) of Rule 17g-7. This 
paragraph would implement, in large part, rulemaking specified in 
Section 15E(s)(3) of the Exchange Act. See 15 U.S.C. 78o-7(s)(3). It 
would also incorporate the existing text of Rule 17g-7 as adopted by 
the Commission on January 20, 2011 to implement Section 943 of the 
Dodd-Frank Act. See Disclosure for Asset-Backed Securities Required 
by Section 943 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, Securities Act of 1933 (``Securities Act'') Release 
No. 9175 (Jan. 20, 2011), 76 FR 4489 (Jan. 26, 2011) and 17 CFR 
240.17g-7.
    \1216\ See proposed new paragraph (a)(1)(iii) of Rule 17g-7. 
This paragraph would implement, in large part, rulemaking specified 
in Section 15E(q)(2)(F) of the Exchange Act. See 15 U.S.C. 78o-
7(q)(2)(F). Section 15E(q)(2)(F) of the Exchange Act requires that 
the Commission's rules require an NRSRO to include an attestation 
with any credit rating it issues affirming that no part of the 
rating was influenced by any other business activities, that the 
rating was based solely on the merits of the instruments being 
rated, and that such rating was an independent evaluation of the 
risks and merits of the instrument. See 15 U.S.C. 78o-7(q)(2)(F). 
Proposed paragraph (a)(1)(iii) of Rule 17g-7 would require the NRSRO 
to attach to the form a signed statement by a person within the 
NRSRO who has responsibility for the credit rating affirming that: 
(1) No part of the credit rating was influenced by any other 
business activities; (2) the credit rating was based solely upon the 
merits of the instruments being rated; and (3) the credit rating was 
an independent evaluation of the risks and merits of the instrument. 
Thus, the proposed requirement would mirror the statutory text in 
terms of the representations that would need to be made in the 
attestation. Compare proposed new paragraphs (a)(1)(iii)(A) through 
(C) of Rule 17g-7, with 15 U.S.C. 78o-7(q)(2)(F).
    \1217\ See proposed paragraph (a)(2) of Rule 17g-7.
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1. Benefits
    The Commission preliminarily believes that the proposed 
implementation of the rulemaking mandated by Sections 15E(s)(1), (2), 
(3), and (4)(D) through disclosure requirements in proposed new 
paragraph (a) of Rule 17g-7 could be used by investors and other users 
of credit ratings to better understand credit ratings in each class of 
credit rating issued by the NRSRO and to determine the adequacy and 
level of due diligence services provided by a third party with respect 
to an issuance of Exchange Act-ABS.\1218\ As the Commission has noted 
previously, the NRSRO credit ratings of structured finance products 
such as Exchange Act-ABS played a role in the recent credit 
crisis.\1219\ The proposed information to be disclosed in the form, 
including information about the limitations of credit ratings and 
information regarding the due diligence performed on Exchange Act-ABS, 
could promote more prudent use of credit ratings by investors and other 
users of credit ratings, and discourage undue reliance by investors and 
other users of credit ratings in making investment and other credit 
based decisions.
---------------------------------------------------------------------------

    \1218\ See 15 U.S.C. 78o-7(s)(1)(B).
    \1219\ See Proposed Rules for Nationally Recognized Statistical 
Rating Organizations, 73 FR 36212 (June 25, 2008).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the proposed 
implementation of Section 15E(s) of the Exchange Act as mandated by the 
Dodd-Frank Act may promote efficiency. As noted above, the proposal 
would be designed to enable investors and other users of credit ratings 
to better understand the credit ratings and, thereby, promote more 
prudent use of credit ratings in terms of not unduly relying on credit 
ratings in making investment and other credit based decisions.
2. Costs
    The Commission preliminarily estimates that the Commission's 
exercise of rulemaking discretion in proposed new paragraph (a) of Rule 
17g-7 would impose incremental costs. However, the Commission 
preliminarily estimates that the costs discussed below resulting from 
the proposed new paragraph (a) of Rule 17g-7 would be attributable 
largely to the rulemaking mandated by Dodd-Frank Act and that the 
incremental costs would be minimal.\1220\
---------------------------------------------------------------------------

    \1220\ Compare 15 U.S.C. 78o-7(s)(1), (2), (3) and (4)(D) with 
proposed new paragraph (a) of Rule 17g-7.
---------------------------------------------------------------------------

    The Commission preliminarily estimates that proposed new paragraph 
(a) to Rule 17g-7 would result in a one-time cost to develop the 
standardized disclosures and establish systems, protocols, and 
procedures for generating the new information as well as protocols, 
procedures, and systems designed to ensure that all the information 
required to be included in the form is input into a form prior to the 
publication of the credit rating, that any certifications received from 
a provider of third-party due diligence services are attached to the 
form, and that the form and certifications are published with the 
credit rating.
    As discussed in above in Section IV.D.5 of this release with 
respect to the PRA, the Commission preliminarily estimates that the 
one-time hour burden to develop the required disclosures and establish 
systems, protocols, and procedures would be approximately 5,000 hours, 
resulting in a one-time industry-wide hour burden of approximately 
50,000 hours.\1221\ In addition, the Commission preliminarily allocates 
75% of these burden hours (37,500 hours) to internal burden and the 
remaining 25% (12,500 hours) to external burden to hire outside 
professionals to assist in setting up the process to generate the forms 
and publish them with applicable credit ratings.\1222\ The Commission

[[Page 33524]]

preliminarily estimates $273 per hour for internal costs \1223\ and 
$400 per hour for external costs for retaining outside professionals 
such as attorneys and information technology consultants,\1224\ 
resulting in an industry-wide one-time cost of approximately 
$15,237,500.\1225\
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    \1221\ 10 NRSROs x 5,000 hours = 50,000 hours.
    \1222\ 50,000 hours x 0.75 = 37,500 hours; 50,000 hours x 0.25 = 
12,500 hours. This allocation is based on the Commission's 
allocation of the industry-wide hour burden for the amount of time 
it would take a securitizer to set-up a system to make the 
disclosures required by Form ABS-15G. See Disclosure for Asset-
Backed Securities Required by Section 943 of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act, 76 FR at 4507-4506 (Jan. 
26, 2011).
    \1223\ The $273 per hour figure is based on the salary for 
compliance managers from SIFMA's Management & Professional Earnings 
in the Securities Industry 2010, modified by Commission staff to 
account for an 1800-hour work-year and multiplied by 5.35 to account 
for bonuses, firm size, employee benefits, and overhead.
    \1224\ See Disclosure for Asset-Backed Securities Required by 
Section 943 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, 76 FR at 4507-4506 (Jan. 26, 2011) (providing an 
estimate of $400 an hour engage outside professionals) and Proposed 
Rules for Nationally Recognized Statistical Rating Organizations, 74 
FR 63889 (Dec. 4, 2009) (providing an estimate of $400 per hour to 
engage an outside attorney).
    \1225\ 37,500 hours x $273 = $10,237,500; 12,500 hours x $400 = 
$5,000,000; $10,237,500 + $5,000,000 = $15,237,500.
---------------------------------------------------------------------------

    With respect to the annual costs, the Commission preliminarily 
believes that the estimate should be broken into two components. The 
first component would constitute the cost to an NRSRO to update its 
standardized disclosures. As discussed in above in Section IV.D.5 of 
this release with respect to the PRA, the Commission preliminarily 
believes an NRSRO would spend substantially less time updating the 
disclosures than the one-time estimate of approximately 5,000 hours per 
NRSRO to initially develop the standardized disclosures and establish 
the systems, protocols, and procedures to generate the forms. 
Consequently, the Commission preliminarily estimates that each NRSRO 
would spend an average of approximately 500 hours per year updating the 
standardized disclosures, resulting in an annual industry-wide burden 
of approximately 5,000 hours. The Commission preliminarily believes 
that the update process would be handled by the NRSROs internally.
    The second component would constitute the amount of time an NRSRO 
would spend generating and publishing each form and attaching to the 
form applicable certifications. The Commission preliminarily believes 
this estimate should be based on the number of rating actions taken per 
year by the NRSROs because the requirement to generate and publish the 
form and attach the certifications would be triggered upon the taking 
of a rating action. As discussed above in Section IV.D.5 of this 
release with respect to the PRA, the Commission preliminarily estimates 
that the 10 NRSROs take approximately 2,909,958 credit rating actions 
per year.\1226\ The Commission preliminarily estimates that the time it 
would take to generate a form by populating it with the required 
disclosures (most of which would have been pre-established) and to 
publish the form and any applicable certifications with the credit 
rating would be 15 minutes, resulting in an industry-wide annual hour 
burden of approximately 727,490.\1227\ Moreover, although larger NRSROs 
may realize economies of scale, the Commission preliminarily believes 
that the annual hour burden would be allocated to the 10 NRSROs based 
on the number of credit ratings they have outstanding.
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    \1226\ [2,000,000 credit rating actions constituting upgrades, 
downgrades, placements on credit watch, and withdrawals] + [4,134 
preliminary or expected credit ratings] + [415,117 initial credit 
ratings] + [490,707 affirmations of existing credit ratings] = 
2,909,958 rating actions per year. See Section IV.D.5 of this 
release for an extensive discussion and explanation of these 
numbers.
    \1227\ 2,909,958 rating actions x .25 hours = 727,489.5 hours 
(rounded to 727,490 hours).
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of the costs and 
benefits associated with proposed new paragraph (a) of Rule 17g-7.

I. Rule 15GA-2 and Form ABS-15G

    The Commission is proposing new Rule 15Ga-2 and amendments to Form 
ABS-15G.\1228\ The new rule and amended form would implement Section 
15E(s)(4)(A) of the Exchange Act.\1229\ Proposed new Rule 15Ga-2 would 
require an issuer or underwriter of any Exchange Act-ABS that is to be 
rated by an NRSRO to furnish a Form ABS-15G on the EDGAR system 
containing the findings and conclusions of any third-party ``due 
diligence report'' obtained by the issuer or underwriter. Under the 
proposal, the disclosure would be furnished using Form ABS-15G for both 
registered and unregistered offerings of Exchange Act-ABS. In addition, 
under the Commission's proposal, an issuer or underwriter would not 
need to furnish Form ABS-15G if the issuer or underwriter obtains a 
representation from each NRSRO engaged to produce a credit rating for 
the Exchange Act-ABS that can be reasonably relied on that the NRSRO 
will publicly disclose the findings and conclusions of any third-party 
due diligence report obtained by the issuer or underwriter with the 
publication of the credit rating five business days prior to the first 
sale in the offering in an information disclosure form generated 
pursuant to proposed new paragraph (a)(1) of Rule 17g-7.
---------------------------------------------------------------------------

    \1228\ See proposed new Rule 15Ga-2 and proposed amendments to 
Form ABS-15G.
    \1229\ See 15 U.S.C. 78o-7(s)(4)(A); see also Section II.H.1 of 
this release for a more detailed discussion of this proposal.
---------------------------------------------------------------------------

1. Benefits
    The proposed rulemaking would provide a standardized format for an 
issuer or underwriter to make the disclosures required by Section 
15E(s)(4)(A). In addition, the Commission proposes to permit an issuer 
or underwriter to rely on an NRSRO to make the required disclosure. 
This would avoid duplicate disclosures. The Commission preliminarily 
believes these proposals would give effect to the objective in Section 
15E(s)(4)(A) of the Exchange Act that there be public disclosure of the 
findings and conclusions of a provider of third-party due diligence 
services. In addition to directly using the summaries of due diligence 
findings contained in the disclosure to evaluate the Exchange Act-ABS, 
investors and other users of credit ratings could benefit by being able 
to review that disclosure to determine the adequacy and the level of 
due diligence services provided by a third party. The required 
increased transparency regarding the due diligence process could 
promote greater rigor and discipline in that process, to the benefit of 
investors. In addition, if no disclosure is made, investors and other 
users of credit ratings would be put on notice that the issuer or 
underwriter did not employ a provider of third-party due diligence 
services in connection with the offering of an Exchange Act-ABS.
    The Commission also is proposing amendments to Rule 314 of 
Regulation S-T that would permit municipal securitizers of Exchange 
Act-ABS, or underwriters in the offering of municipal Exchange Act-ABS, 
to provide the information required by Form ABS-15G on EMMA, the 
Municipal Securities Rulemaking Board's centralized public 
database.\1230\ The Commission preliminarily believes that the use of 
this pre-existing database would promote an efficient process for 
municipal securitizers of Exchange Act-ABS or underwriters in the 
offering of municipal Exchange Act-ABS, who would use it to file the 
required information, as well as for investors and other market 
participants, who would

[[Page 33525]]

use it to access that information. The Commission preliminarily 
believes that the proposed implementation of Section 15E(s)(4)(A) of 
the Exchange Act would promote an efficient process for issuers and 
underwriters by requiring an issuer or underwriter to use a 
standardized form to make the disclosure. It also would permit an 
issuer or underwriter to rely on an NRSRO to make the disclosures, 
thereby eliminating duplicate disclosure requirements.
---------------------------------------------------------------------------

    \1230\ See proposed amendments to Rule 314 of Regulation S-T (17 
CFR 231.314); see also Section II.H.1 of this release for a more 
detailed discussion of this proposal.
---------------------------------------------------------------------------

2. Costs
    The Commission preliminarily estimates that the costs arising from 
proposed new Rule 15Ga-2 and the proposed amendments to Form ABS-15G 
would be attributable largely to the requirements set forth in Section 
15E(s)(4)(A) of the Exchange Act.\1231\ Specifically, the Commission 
believes that the costs to issuers and underwriters arising from 
preparing a summary of the findings and conclusions of any third-party 
due diligence report they obtained would be directly attributable to 
the Dodd-Frank Act, while the incremental costs associated with placing 
such summaries into Form ABS-15G and furnishing the form on EDGAR (or 
EMMA, as appropriate) would be attributable to the Commission's 
rulemaking. As noted above, however, the Commission's rulemaking would 
provide issuers and underwriters with guidelines as to how they can 
meet the requirements of Section 15E(s)(4)(A) of the Exchange Act, 
which the Commission believes would eliminate costs that could 
potentially arise from uncertainty as to how those requirements could 
be fulfilled.
---------------------------------------------------------------------------

    \1231\ Compare 15 U.S.C. 78o-7(s)(4)(A), with proposed new Rule 
15Ga-2 and the proposed amendments to Form ABS-15G.
---------------------------------------------------------------------------

    As discussed above in Section IV.D.9 of this release with respect 
to the PRA, the Commission preliminarily estimates that proposed new 
Rule 15Ga-2 and the proposed amendments to Form ABS-15G would result in 
one-time and annual costs for issuers and underwriters in offerings of 
registered and unregistered Exchange Act-ABS.\1232\ The Commission 
preliminarily estimates that issuers and underwriters would incur a 
one-time cost in connection with developing processes and protocols to 
provide the required information to comply with new Rule 15Ga-2, 
including modifying their existing Form ABS-15G processes and protocols 
to accommodate the requirements of Rule 15Ga-2. In the adopting release 
for Form ABS-15G, the Commission estimated that 270 unique securitizers 
would be required to file the form.\1233\ The Commission preliminarily 
estimates that each securitizer would spend an average of approximately 
100 hours to develop processes and protocols to comply with new Rule 
15Ga-2 and to modify their existing Form ABS-15G processes and 
protocols to provide for the disclosure of the information required 
pursuant to Rule 15Ga-2, resulting in an industry-wide one-time hour 
burden of approximately 27,000 hours.\1234\ The Commission further 
believes that this work would be done internally.
---------------------------------------------------------------------------

    \1232\ As discussed above in Section IV.D.9, although issuers 
and underwriters likely will seek to obtain representations from 
NRSROs engaged to produce a credit rating for Exchange Act-ABS that 
the NRSRO will publicly disclose the findings and conclusions of any 
third-party due diligence report obtained by the issuer or 
underwriter with the publication of the credit rating five business 
days prior to the first sale in the offering in an information 
disclosure form generated pursuant to proposed new paragraph (a)(1) 
of Rule 17g-7, thus removing the need for the issuer or underwriter 
to do so. Consequently, the PRA burden for issuers and underwriters 
may be reduced substantially. However, to be conservative, the 
Commission preliminarily allocates the PRA burden for complying with 
proposed new Rule 15Ga-2 and the proposed amendments to Form ABS-15G 
to the issuers and underwriters. The Commission also is proposing to 
permit issuers of municipal Exchange Act-ABS, or underwriters in 
such offerings, to provide the information required by Form ABS-15G 
on EMMA, which would also limit the PRA burden on issuers and 
underwriters of municipal Exchange Act-ABS subject to the proposed 
rule.
    \1233\ See Disclosure for Asset-Backed Securities Required by 
Section 943 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, 76 FR at 4506 (Jan. 26, 2011).
    \1234\ 270 unique securitizers x 100 hours = 27,000 hours. This 
estimate is based on the Commission's estimate for the amount of 
time it would take a securitizer to set up a system to make the 
disclosures required by Form ABS-15G as originally adopted by the 
Commission. See Disclosure for Asset-Backed Securities Required by 
Section 943 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, 76 FR at 4507-4506 (Jan. 26, 2011). The Commission, 
however, believes that the hour burden for amending existing Form 
ABS-15G processes and protocols will be significantly lower than the 
estimate of 850 hours used to initially develop those processes and 
protocols.
---------------------------------------------------------------------------

    As discussed above in Section IV.D.9 of this release with respect 
to the PRA, the Commission has preliminarily based its estimate of the 
annual hour burden for preparing and furnishing Form ABS-15G on an 
estimate of the total number of Exchange Act-ABS offerings per year. In 
the adopting release for Rule 17g-7, the Commission estimated that 
there would be an average of approximately 2,067 Exchange Act-ABS 
offerings per year.\1235\ The Commission preliminarily estimates that 
an issuer or underwriter would spend an average of approximately one 
hour completing and submitting each Form ABS-15G for purpose of meeting 
the requirement in Rule 15Ga-2. The Commission bases this preliminary 
estimate on the fact that the information that would be required to be 
included in Form ABS-15G pursuant to proposed new Rule 15Ga-2 could be 
drawn directly from the due diligence reports the Commission expects 
providers of third-party due diligence services to generate with 
respect to their performance of due diligence services. Therefore, the 
Commission preliminarily estimates that the industry-wide annual hour 
burden resulting from proposed new Rule 15Ga-2 and the amendments to 
Form ABS-15G would be approximately 2,067 hours.\1236\ The Commission 
believes that this work would be done internally.
---------------------------------------------------------------------------

    \1235\ See Disclosure for Asset-Backed Securities Required by 
Section 943 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, 76 FR at 4507-4508 (Jan. 26, 2011). As noted above, 
issuers, underwriters, and NRSROs may not use providers of third-
party due diligence services with respect to every issuance of 
Exchange Act-ABS. For example, as discussed in Section II.H of this 
release, the Commission preliminarily believes that providers of 
third-party due diligence services are used primarily for RMBS 
transactions. However, the Commission's estimate uses the total 
number of estimated Exchange Act-ABS offerings (as opposed to a 
lesser amount based on an estimate of RMBS offerings) because the 
use of providers of third-party due diligence services may migrate 
to other types of Exchange Act-ABS. This also makes the Commission's 
estimates more conservative.
    \1236\ 2,067 Exchange Act-ABS transactions x 1 hour = 2,067 
hours.
---------------------------------------------------------------------------

    The Commission preliminarily believes any incremental cost 
resulting from the amendments would not impact competition or impose a 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Exchange Act.
Request for Comment
    The Commission requests comment on all aspects of the costs and 
benefits associated with proposed new Rule 15Ga-2 and the proposed 
amendments to Form ABS-15G.

J. Third-Party Due Diligence for Asset-Backed Securities

    Section 932(a)(8) of the Dodd-Frank Act amended Section 15E of the 
Exchange Act to add new paragraph (s)(4).\1237\ The Commission is 
proposing new Rule 17g-10 and new Form ABS Due Diligence-15E to 
implement rulemaking mandated in Sections 15E(s)(4)(B) and (C) of the 
Exchange Act.\1238\ Proposed new Rule 17g-10 would contain three 
paragraphs: (a), (b)

[[Page 33526]]

and (c).\1239\ Proposed paragraph (a) would provide that the written 
certification of a provider of third-party due diligence services 
required pursuant to Section 15E(s)(4)(B) of the Exchange Act must be 
made on Form ABS Due Diligence-15E.\1240\ Proposed paragraph (b) of new 
Rule 17g-10 would provide that the written certification must be signed 
by an individual who is duly authorized by the person providing the 
third-party due diligence services to make such a certification.\1241\ 
Proposed paragraph (c) of new Rule 17g-10 would contain four 
definitions to be used for the purposes of Section 15E(s)(4)(B) and 
Rule 17g-10; namely, a definition of ``due diligence services,'' \1242\ 
``issuer,'' \1243\ ``originator,'' \1244\ and ``securitizer.'' \1245\
---------------------------------------------------------------------------

    \1237\ See Public Law 111-203 Sec.  932(a)(8) and 15 U.S.C. 78o-
7(s)(4).
    \1238\ See proposed new Rule 17g-10, and proposed new Form ABS 
Due Diligence-15E; see also Sections II.H.2 and II.H.3 of this 
release for a more detailed discussion of this proposal.
    \1239\ See proposed paragraphs (a), (b) and (c) of Rule 17g-10 
see also Sections II.H.2 of this release for a more detailed 
discussion of this proposal.
    \1240\ See proposed paragraph (a) of new Rule 17g-10.
    \1241\ See proposed paragraph (b) of Rule 17g-10.
    \1242\ See proposed paragraph (c)(1) of new Rule 17g-10.
    \1243\ See proposed paragraph (c)(2) of new Rule 17g-10.
    \1244\ See proposed paragraph (c)(3) of new Rule 17g-10.
    \1245\ See proposed paragraph (c)(4) of new Rule 17g-10.
---------------------------------------------------------------------------

    Proposed Form ABS Due Diligence-15E would contain five line items 
identifying information the provider of third-party due diligence 
services would need to provide in the form.\1246\ It also would contain 
a signature line with a corresponding representation.\1247\ Item 1 
would elicit the identity and address of the provider of third-party 
due diligence services.\1248\ Item 2 would elicit the identity and 
address of the issuer, underwriter, or NRSRO that employed the provider 
of third-party due diligence services.\1249\ Item 3 would instruct the 
provider of third-party due diligence services to identify each NRSRO 
whose published criteria for performing due diligence the provider of 
third-party due diligence services satisfied in performing the due 
diligence review.\1250\ Item 4 would require the provider of third-
party due diligence services to describe the scope and manner of the 
due diligence performed.\1251\ Item 5 would require the provider of 
third-party due diligence services to describe the findings and 
conclusions resulting from the review.\1252\
---------------------------------------------------------------------------

    \1246\ See proposed new Form ABS Due Diligence-15E; see also 
Section II.H.3 of this release for a more detailed discussion of 
this proposal.
    \1247\ See proposed new Form ABS Due Diligence-15E.
    \1248\ See Item 1 to proposed Form ABS Due Diligence-15E.
    \1249\ See Item 2 to proposed Form ABS Due Diligence-15E.
    \1250\ See Item 3 to proposed Form ABS Due Diligence 15E.
    \1251\ See Item 4 to proposed Form ABS Due Diligence 15E.
    \1252\ See Item 5 to proposed Form ABS Due Diligence 15E.
---------------------------------------------------------------------------

1. Benefits
    The proposed rulemaking would be designed to promote a thorough 
review by the provider of third-party due diligence services of data, 
documentation, and other relevant information necessary for an NRSRO to 
provide an accurate credit rating.\1253\ The Commission also 
preliminarily believes that, in combination with the proposed 
requirement in proposed new paragraph (a)(2) of Rule 17g-7 that the 
NRSRO disclose the certifications, the proposed rulemaking would allow 
the public to determine the adequacy and level of due diligence 
services provided by a third party.
---------------------------------------------------------------------------

    \1253\ See 15 U.S.C. 78o-7(s)(4)(B).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the proposed 
implementation of Section 15E(s)(4)(C) of the Exchange Act as mandated 
by the Dodd-Frank Act would promote an efficient process for NRSROs by 
establishing a standardized format for the certification and providing 
clarity through the definition of ``due diligence services'' as to when 
the requirement was triggered.
2. Costs
    The Commission preliminarily estimates that the Commission's 
exercise of rulemaking discretion with respect to proposed new Rule 
17g-10 and new Form ABS Due Diligence-15E would impose incremental 
costs. However, the Commission preliminarily estimates that the costs 
discussed below resulting from proposed new Rule 17g-10 and new Form 
ABS Due Diligence-15E would be attributable largely to the rulemaking 
mandated by Dodd-Frank Act \1254\ and that the incremental costs would 
be minimal.
---------------------------------------------------------------------------

    \1254\ Compare 15 U.S.C. 78o-7(s)(4)(B) and (C), with proposed 
new Rule 17g-10 and proposed new Form ABS Due Diligence-15E.
---------------------------------------------------------------------------

    As discussed above in Section IV.D.8 of this release with respect 
to the PRA, the Commission preliminarily estimates that the proposed 
new rule and form would result in one-time hour burdens for providers 
of third-party due diligence services to develop processes and 
protocols to provide the required information in new Form ABS Due 
Diligence-15E and submit the certifications to NRSROs. The Commission 
preliminarily estimates that there are approximately 10 firms that 
provide, or would begin providing, third-party ``due diligence 
services'' to issuers and underwriters of Exchange Act-ABS as the term 
``due diligence services'' would be defined in paragraph (a) of 
proposed new Rule 17g-10. The Commission preliminarily estimates that 
each of these providers of third-party due diligence services would 
spend approximately 300 hours to develop these processes and protocols, 
resulting in a one-time industry-wide burden of 3,000 hours.\1255\ In 
addition, the Commission preliminarily allocates 75% of these burden 
hours (2,250 hours) to internal burden and the remaining 25% (750 
hours) to external burden to hire outside attorneys to provide legal 
advice on the requirements of new Rule 17g-10 and Form ABS Due 
Diligence-15E.\1256\ The Commission, therefore, preliminarily estimates 
that the average one-time cost to each provider third-party due 
diligence services would be $91,425, resulting in an industry-wide one-
time cost of $914,250.\1257\
---------------------------------------------------------------------------

    \1255\ 10 Providers of third-party due diligence services x 300 
hours = 3,000 hours. This estimate is based on the Commission's 
estimate for the amount of time it would take a securitizer to set 
up a system to make the disclosures required by Form ABS-15G as 
originally adopted by the Commission. See Disclosure for Asset-
Backed Securities Required by Section 943 of the Dodd-Frank Wall 
Street Reform and Consumer Protection Act, 76 FR at 4507-4506 (Jan. 
26, 2011). The Commission, however, reduces the hour estimate of 850 
hours originally used for Form ABS-15G by approximately two-thirds 
because information required to provided in proposed new Form ABS 
Due Diligence-15E is substantially less detailed and complex than 
the information required in Form ABS-15G as initially adopted by the 
Commission.
    \1256\ 3,000 hours x 0.75 = 2,250 hours; 3,000 hours x 0.25 = 
750 hours.
    \1257\ 2,250 hours x $273 = $614,250; 750 hours x $400 = 
$300,000; $614,250 + $300,000 = $914,250; $914,250/10 providers of 
third-party due diligence services = $91,250. The $273 per hour 
figure is based on the rate for compliance managers from SIFMA's 
Management & Professional Earnings in the Securities Industry 2010, 
modified by Commission staff to account for an 1800-hour work-year 
and multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead. The $400 figure is based on the Commission's 
estimate of $400 per hour to engage an outside attorney. See 
Proposed Rules for Nationally Recognized Statistical Rating 
Organizations, 74 FR 63889 (Dec. 4, 2009).
---------------------------------------------------------------------------

    With respect to the annual cost, the Commission preliminarily 
believes that the estimate should be based on the number of issuances 
per year of Exchange Act-ABS, since the requirement to produce the 
certification and provide it to NRSROs would be triggered when an 
issuer, underwriter, or NRSRO hires a provider of third-party due 
diligence services with respect to such transactions.\1258\ In the 
adopting release for Rule 17g-7, the

[[Page 33527]]

Commission estimated there would be an average of approximately 2,067 
Exchange Act-ABS offerings per year.\1259\ In addition, the Commission 
preliminarily estimates that a provider of third-party due diligence 
services would spend approximately 30 minutes completing and submitting 
Form ABS Due Diligence-15E. The Commission bases this preliminary 
estimate on the fact that first three Items in the form require basic 
information and the fourth Item (the due diligence performed) and the 
fifth Item (the findings and conclusions of the review) could be drawn 
directly from the due diligence reports the Commission expects 
providers of third-party due diligence services generate with respect 
to their performance of due diligence services. Therefore, the 
Commission preliminarily estimates that the industry-wide annual hour 
burden resulting from proposed new Rule 17g-10 and Form ABS Due 
Diligence-15E would be approximately 1,034 hours.\1260\ The Commission 
believes that completing and submitting Form ABS Due Diligence-15E 
would be done internally.
---------------------------------------------------------------------------

    \1258\ See 15 U.S.C. 78o-7(s)(4)(B) and (C), and proposed new 
Rule 17g-10.
    \1259\ See Disclosure for Asset-Backed Securities Required by 
Section 943 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, 76 FR at 4507-4508 (Jan. 26, 2011). The Commission 
notes that issuers, underwriters, and NRSROs may not use providers 
of third-party due diligence services with respect to every issuance 
of Exchange Act-ABS. For example, as discussed in Section II.H of 
this release, the Commission preliminarily believes that providers 
of third-party due diligence services are used primarily for RMBS 
transactions. However, the Commission's estimate uses the total 
number of estimated Exchange Act-ABS offerings (as opposed to a 
lesser amount based on an estimate of RMBS offerings) because the 
use of providers of third-party due diligence services may migrate 
to other types of Exchange Act-ABS. This also makes the Commission's 
estimates more conservative.
    \1260\ 2,067 Exchange Act-ABS offerings x 30 minutes = 1,034 
hours.
---------------------------------------------------------------------------

    The Commission preliminarily believes any incremental cost 
resulting from the amendments would not impact competition or impose a 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Exchange Act.
Request for Comment
    The Commission requests comment on all aspects of the costs and 
benefits associated with proposed new Rule 17g-10 and new Form ABS Due 
Diligence-15E.

K. Standards of Training, Experience, and Competence

    Section 936 of the Dodd-Frank Act provides that the Commission 
shall issue rules that are reasonably designed to ensure that any 
person employed by an NRSRO to perform credit ratings: (1) Meets 
standards of training, experience, and competence necessary to produce 
accurate ratings for the categories of issuers whose securities the 
person rates; \1261\ and (2) is tested for knowledge of the credit 
rating process.\1262\ The Commission proposes to implement Section 936 
by proposing new Rule 17g-9 and amending Rule 17g-2.\1263\
---------------------------------------------------------------------------

    \1261\ See Public Law 111-203 Sec.  936(1).
    \1262\ See Public Law 111-203 Sec.  936(2).
    \1263\ See proposed new Rule 17g-9 and proposed new paragraph 
(b)(15) of Rule 17g-2.
---------------------------------------------------------------------------

    Proposed paragraph (a) of new Rule 17g-9 would require an NRSRO to 
establish, maintain, enforce, and document standards of training, 
experience, and competence for the individuals it employs to determine 
credit ratings that are reasonably designed to achieve the objective 
that such individuals produce accurate credit ratings in the classes 
and subclasses of credit ratings for which the NRSRO is 
registered.\1264\
---------------------------------------------------------------------------

    \1264\ See proposed paragraph (a) of new Rule 17g-9; see also 
Section II.I.1.a of this release for a more detailed discussion of 
this proposal.
---------------------------------------------------------------------------

    Proposed paragraph (b) would identify factors the NRSRO must 
consider when designing the standards.\1265\ Specifically, the NRSRO 
would need to consider:
---------------------------------------------------------------------------

    \1265\ See proposed paragraph (b) of new Rule 17g-9; see also 
Section II.I.1.b of this release for a more detailed discussion of 
this proposal.
---------------------------------------------------------------------------

     If the credit rating procedures and methodologies used by 
the individual involve qualitative analysis, the knowledge necessary to 
effectively evaluate and process the data relevant to the 
creditworthiness of the obligor being rated or the issuer of the 
securities or money market instruments being rated;
     If the credit rating procedures and methodologies used by 
the individual involve quantitative analysis, the technical expertise 
necessary to understand any models and model inputs that are a part of 
the procedures and methodologies;
     The classes and subclasses of credit ratings for which the 
individual participates in determining credit ratings and the factors 
relevant to such classes and subclasses, including the geographic 
location, sector, industry, regulatory and legal framework, and 
underlying assets, applicable to the obligors or issuers in the classes 
and subclasses; and
     The complexity of the obligors, securities, or money 
market instruments being rated by the individuals.
    Proposed paragraph (c) of new Rule 17g-9 would prescribe two 
requirements that an NRSRO must incorporate into its standards of 
training, experience, and competence.\1266\ Proposed paragraph (c)(1) 
of new Rule 17g-9 would provide that the standards of training, 
experience, and competence must include a requirement for periodic 
testing of the individuals employed by the NRSRO to determine credit 
ratings on their knowledge of the procedures and methodologies used by 
the NRSRO to determine credit ratings in the classes or subclasses of 
credit ratings for which the individual is responsible for determining 
credit ratings.\1267\ Proposed paragraph (c)(2) of new Rule 17g-9 would 
provide that the standards of training, experience, and competence must 
include a requirement that at least one individual with three years or 
more experience in performing credit analysis participates in the 
determination of a credit rating.\1268\
---------------------------------------------------------------------------

    \1266\ See proposed paragraphs (c)(1) and (2) of new Rule 17g-9; 
see also Section II.I.1.c of this release for a more detailed 
discussion of this proposal.
    \1267\ See proposed paragraph (c)(1) of new Rule 17g-9.
    \1268\ See proposed paragraph (c)(2) of new Rule 17g-9.
---------------------------------------------------------------------------

    In addition, the Commission proposes adding new paragraph (b)(15) 
to Rule 17g-2 to identify the standards of training, experience, and 
competence the NRSRO must establish, maintain, enforce, and document 
pursuant to proposed new Rule 17g-9 as a record that must be 
retained.\1269\ As a result, the procedures would be subject to the 
record retention and production requirements in paragraphs (c) through 
(f) of Rule 17g-2.\1270\
---------------------------------------------------------------------------

    \1269\ See proposed new paragraph (b)(15) to Rule 17g-2.
    \1270\ See 17 CFR 240.17g-2; see also Section II.I.2 of this 
release for a more detailed discussion of this proposal.
---------------------------------------------------------------------------

1. Benefits
    The Commission is proposing to implement rulemaking mandated by 
Section 936 of the Dodd-Frank Act through proposed new Rule 17g-9. The 
proposed rule would be designed to achieve the objectives in Section 
936 that any person employed by an NRSRO to perform credit ratings: (1) 
Meets standards of training, experience, and competence necessary to 
produce accurate ratings for the categories of issuers whose securities 
the person rates; \1271\ and (2) is tested for knowledge of the credit 
rating process.\1272\ The Commission preliminarily believes that the 
proposed new rule could promote the integrity of the ratings process to 
the benefit of

[[Page 33528]]

investors and other users of credit ratings.
---------------------------------------------------------------------------

    \1271\ See Public Law 111-203 Sec.  936(1).
    \1272\ See Public Law 111-203 Sec.  936(2).
---------------------------------------------------------------------------

    Paragraph (a) of proposed new Rule 17g-9 would require the NRSRO to 
design its own standards but provide that they must be reasonably 
designed to achieve the common objective that individuals employed by 
the NRSRO to determine credit ratings produce accurate credit ratings 
in the classes of credit ratings for which the NRSRO is registered. 
This could benefit NRSROs by providing flexibility to allow each NRSRO 
to customize the standards according to its unique procedures and 
methodologies for determining credit ratings and its size.
    Paragraph (b) of proposed new Rule 17g-9 would identify factors the 
NRSRO must consider when designing the standards.\1273\ This would 
provide guidance to NRSROs about the Commission's expectations for the 
design of the standards of training, experience, and competence. It 
also could serve an investor protection function by providing 
benchmarks that Commission examiners could use to evaluate whether a 
given NRSRO's standards are reasonably designed to meet the objective 
that individuals employed by the NRSRO to determine credit ratings 
produce accurate credit ratings in the classes of credit ratings for 
which the NRSRO is registered.
---------------------------------------------------------------------------

    \1273\ See proposed paragraph (b) of new Rule 17g-9.
---------------------------------------------------------------------------

    Paragraph (c)(1) of proposed new Rule 17g-9 would provide that the 
standards of training, experience, and competence must include a 
requirement for periodic testing of the individuals employed by the 
NRSRO to determine credit ratings on their knowledge of the procedures 
and methodologies used by the NRSRO to determine credit ratings in the 
classes or subclasses of credit ratings for which the individual 
participates in determining credit ratings.\1274\ The rule could 
benefit NRSROs by allowing each NRSRO to establish the frequency and 
manner of testing its analysts. These considerations may depend on the 
number of analysts the NRSRO employs, the complexity of the products 
that are being rated, and the varying levels of experience of the 
analysts.
---------------------------------------------------------------------------

    \1274\ Id.
---------------------------------------------------------------------------

    Paragraph (c)(2) of proposed new Rule 17g-9 would provide that the 
standards of training, experience, and competence must include a 
requirement that at least one individual with three years or more 
experience in performing credit analysis participates in the 
determination of a credit rating.\1275\ This would establish a minimum 
requirement that someone with experience performing credit analysis is 
involved in determining the credit rating.
---------------------------------------------------------------------------

    \1275\ Id.
---------------------------------------------------------------------------

2. Costs
    The Commission preliminarily estimates that the Commission's 
exercise of rulemaking discretion with respect to proposed new Rule 
17g-9 would impose incremental costs. However, the Commission 
preliminarily estimates that the costs discussed below resulting from 
proposed new Rule 17g-9 would be attributable largely to the rulemaking 
mandated by Dodd-Frank Act and that the incremental costs would be 
minimal.\1276\
---------------------------------------------------------------------------

    \1276\ Compare Public Law 111-203 Sec.  936 with proposed new 
Rule 17g-9.
---------------------------------------------------------------------------

    As discussed above in Section IV.D.7 of this release with respect 
to the PRA, the Commission preliminary estimates that an NRSRO would 
incur one-time and annual hour burdens as a result of proposed new Rule 
17g-9. Also, the Commission preliminarily estimates that the degree of 
the one-time and annual hour burdens resulting from proposed Rule 17g-9 
would depend on the number of credit analysts an NRSRO employs as well 
as the range and complexity of the obligors, securities, and money 
market instruments it rates. Thus, hour burdens in the PRA and the 
costs estimated below are based on the number of credit rating analysts 
employed by the NRSROs.
    As discussed above in Section IV.D.7 of this release with respect 
to the PRA, the Commission preliminarily estimates that the one-time 
hour burden to establish the standards that would be required under 
proposed new Rule 17g-9 would be approximately 5 hours per credit 
analyst. Based on the 2009 annual certifications, the Commission 
estimates that the NRSROs currently employ approximately 3,520 credit 
analysts,\1277\ resulting in an industry-wide one-time hour burden of 
17,600 hours.\1278\ In addition, the Commission estimates that 75% of 
the burden hours (13,200 hours) would be internal and the remaining 25% 
(4,400 hours) would be external to hire outside professionals to assist 
in setting up training programs.\1279\ Consequently, the Commission 
preliminarily estimates that the industry-wide one-time internal cost 
would be approximately $3,603,000.\1280\ With respect to the external 
costs associated with the proposal, the Commission preliminarily 
estimates that outside professionals would charge approximately $400 
per hour.\1281\ Consequently, the Commission preliminarily estimates 
that the industry-wide external cost would be approximately 
$1,760,000.\1282\ The Commission, therefore, preliminarily estimates 
that the total industry-wide one-time cost of proposed Rule 17g-9 would 
be approximately $5,363,000.\1283\ The Commission preliminarily 
estimates that this cost would be allocated to the 10 NRSROs based on 
the number of credit analysts each employs.
---------------------------------------------------------------------------

    \1277\ See Figure 3.
    \1278\ 3,520 credit analysts x 5 hours = 17,600 hours.
    \1279\ 17,600 hours x 0.75 = 13,200 hours; 17,600 hours x 0.25 = 
4,400 hours.
    \1280\ 13,200 hours x $273 = $3,603,600. The $273 per hour 
figure is based on the rate for compliance managers from SIFMA's 
Management & Professional Earnings in the Securities Industry 2010, 
modified by Commission staff to account for an 1800-hour work-year 
and multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead.
    \1281\ See Disclosure for Asset-Backed Securities Required by 
Section 943 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, 76 FR at 4507-4506 (Jan. 26, 2011) (providing an 
estimate of $400 an hour engage outside professionals) and Proposed 
Rules for Nationally Recognized Statistical Rating Organizations, 74 
FR 63889 (Dec. 4, 2009) (providing an estimate of $400 per hour to 
engage an outside attorney).
    \1282\ 4,400 hours x $400 = $1,760,000.
    \1283\ $1,760,000 + $3,603,000 = $5,363,000.
---------------------------------------------------------------------------

    As discussed above in Section IV.D.7 of this release with respect 
to the PRA, the Commission believes that the annual cost to comply with 
proposed new Rule 17g-9 would be less than the one-time cost since 
NRSROs already would have established the standards of training, 
experience, and competence for the individuals they employ to determine 
credit ratings and, therefore, only would need to update them. The 
Commission preliminarily estimates that reviewing and updating the 
standards as appropriate would take approximately 1 hour per credit 
analyst, resulting in an annual industry-wide hour burden of 
approximately 3,520 hours.\1284\ The Commission estimates that 
approximately 75% of these burden hours (2,640 hours) would be internal 
and the remaining 25% (880 hours) would be external to hire outside 
professionals to assist in updating the training programs. 
Consequently, the Commission preliminarily estimates that the industry-
wide annual internal costs would be approximately $720,720.\1285\ With 
respect to the external costs, the Commission preliminarily estimates 
that outside

[[Page 33529]]

professionals would charge approximately $400 per hour.\1286\ 
Consequently, the Commission preliminarily estimates that the annual 
industry-wide external costs would be approximately $352,000.\1287\ The 
Commission, therefore, preliminarily estimates that the total industry-
wide annual cost would be approximately $1,072,720.\1288\ The 
Commission preliminarily estimates that this cost would be allocated to 
the 10 NRSROs based on the number of credit analysts each employs.
---------------------------------------------------------------------------

    \1284\ 3,520 credit analysts x 1 hour = 3,520 hours.
    \1285\ 2,640 hours x $273 = $720,720. The $273 per hour figure 
is based on the rate for compliance managers from SIFMA's Management 
& Professional Earnings in the Securities Industry 2010, modified by 
Commission staff to account for an 1800-hour work-year and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead.
    \1286\ See Disclosure for Asset-Backed Securities Required by 
Section 943 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, 76 FR at 4507-4506 (Jan. 26, 2011) (providing an 
estimate of $400 an hour engage outside professionals) and Proposed 
Rules for Nationally Recognized Statistical Rating Organizations, 74 
FR 63889 (Dec. 4, 2009) (providing an estimate of $400 per hour to 
engage an outside attorney).
    \1287\ 880 hours x $400 = $352,000.
    \1288\ $720,720 + $352,000 = $1,072,072.
---------------------------------------------------------------------------

    The Commission acknowledges that the three-year analyst experience 
requirement proposed in paragraph (c)(2) of proposed new Rule 17g-9 
could impose a barrier to entry to becoming an NRSRO. It is possible 
that this requirement, as well as the increased training standards in 
general, could increase labor costs for NRSROs by increasing the 
competition for credit analysts with the requisite amount of 
experience. The Commission further understands that the effects could 
likely be more pronounced with existing smaller NRSROs, as well as with 
new NRSRO entrants, as these smaller firms would presumably be less 
able to bear the costs. This could, in turn, decrease competition 
amongst NRSROs. The Commission requests comment on this potential 
effect of the proposed rulemaking.
    The Commission preliminarily estimates that, although the costs 
resulting from proposed new paragraph (b)(15) of new Rule 17g-2 would 
be attributable to the Commission's discretionary rulemaking, those 
incremental costs would be minimal. As discussed above in Section 
IV.D.3 of this release with respect to the PRA, the Commission 
preliminary believes that applying the recordkeeping requirements of 
Rule 17g-2 to five new types of records would result in one-time and 
annual hour burdens for NRSROs in connection with updating their record 
retention policies and procedures to retain these new records. As 
discussed above in Section IV.D.3 of this release with respect to the 
PRA, based on staff experience, the Commission preliminarily estimates 
that the additional one-time hour burden for each NRSRO to update its 
record retention policies and procedures for the new records that would 
need to be retained under proposed new paragraphs (a)(9), (b)(12), 
(b)(13), (b)(14), and (b)(15) of Rule 17g-2 would be 20 hours. Based on 
that estimate, the Commission preliminary believes that the average 
one-time hour burden attributable to proposed new paragraph (b)(15) of 
Rule 17g-2 would be approximately 4 hours per NRSRO, resulting in an 
industry-wide hour burden of approximately 40 hours.\1289\ As discussed 
above in Section IV.D.3 of this release with respect to the PRA, the 
Commission preliminarily estimates it would take an average of 
approximately one hour each year for an NRSRO to retain updated 
versions of the information required pursuant to proposed new paragraph 
(b)(15) of Rule 17g-2, resulting in an industry-wide hour burden of 10 
hours.\1290\
---------------------------------------------------------------------------

    \1289\ 20 hours/5 new required records = 4 hours; 10 NRSROs x 4 
hours = 40 hours.
    \1290\ 10 NRSROs x 1 hour = 10 hours.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of the costs and 
benefits associated with proposed new Rule 17g-9 and new paragraph 
(b)(15) of Rule 17g-2.

L. Universal Rating Symbols

    Section 938(a) of the Dodd-Frank Act provides that the Commission 
shall require, by rule, each NRSRO to establish, maintain, and enforce 
written policies and procedures that: (1) Assess the probability that 
an issuer of a security or money market instrument will default, fail 
to make timely payments, or otherwise not make payments to investors in 
accordance with the terms of the security or money market instrument; 
\1291\ (2) clearly define and disclose the meaning of any symbol used 
by the NRSRO to denote a credit rating; \1292\ and (3) apply any symbol 
described in item (2) in a manner that is consistent for all types of 
securities and money market instruments for which the symbol is 
used.\1293\
---------------------------------------------------------------------------

    \1291\ See Public Law 111-203 Sec.  938(a)(1).
    \1292\ See Public Law 111-203 Sec.  938(a)(2).
    \1293\ See Public Law 111-203 Sec.  938(a)(3).
---------------------------------------------------------------------------

    The Commission proposes to implement this rulemaking mandate 
through paragraph (b) of proposed new Rule 17g-8. In particular, 
paragraph (b)(1) of proposed new Rule 17g-8 would require the NRSRO to 
have policies and procedures reasonably designed to assess the 
probability that an issuer of a security or money market instrument 
will default, fail to make timely payments, or otherwise not make 
payments to investors in accordance with the terms of the security or 
money market instrument.\1294\ Paragraph (b)(2) of proposed new Rule 
17g-8 would require the NRSRO to have policies and procedures 
reasonably designed to clearly define the meaning of each symbol, 
number, or score in the rating scale used by the NRSRO to denote a 
credit rating category and notches within a category for each class and 
subclass of credit ratings for which the NRSRO is registered and to 
include such definitions in Exhibit 1 to Form NRSRO.\1295\ Paragraph 
(b)(3) of proposed new Rule 17g-8 would require the NRSRO to have 
policies and procedures reasonably designed to apply any symbol, 
number, or score defined pursuant to paragraph (b)(2) of new Rule 17g-8 
in a manner that is consistent for all types of obligors, securities, 
and money market instruments for which the symbol, number, or score is 
used.\1296\
---------------------------------------------------------------------------

    \1294\ See proposed paragraph (b)(1) of new Rule 17g-8.
    \1295\ See proposed paragraph (b)(2) of new Rule 17g-8.
    \1296\ See proposed paragraph (b)(1) of new Rule 17g-8.
---------------------------------------------------------------------------

    The Commission also is proposing that the policies and procedures 
required pursuant to proposed paragraph (b) of new Rule 17g-8 be 
subject to the record retention and production requirements of Rule 
17g-2.\1297\ Consequently, the Commission proposes adding new paragraph 
(b)(14) to Rule 17g-2 to identify the policies and procedures an NRSRO 
is required to establish, maintain, enforce, and document pursuant to 
proposed paragraph (b) of new Rule 17g-8 as a record that must be 
retained.\1298\
---------------------------------------------------------------------------

    \1297\ 17 CFR 240.17g-2.
    \1298\ See proposed new paragraph (b)(13) to Rule 17g-2; see 
also Section II.F.2 of this release for a more detailed discussion 
of this proposal.
---------------------------------------------------------------------------

1. Benefits
    The proposal could facilitate investor understanding of credit 
ratings by promoting a consistent application of rating methodologies 
to particular credit ratings, at least within a class of credit 
ratings. In addition, the proposed requirement for NRSROs to disclose 
the meaning of credit rating symbols, numbers, and scores could benefit 
investors and other users of credit ratings by promoting a better 
understanding of credit rating terminology and allowing them to better 
compare the various ratings issued by a single NRSRO.

[[Page 33530]]

2. Costs
    The Commission preliminarily estimates that the Commission's 
exercise of rulemaking discretion with respect to proposed paragraph 
(b) of new Rule 17g-8 would impose incremental costs. However, the 
Commission preliminarily estimates that the costs discussed below 
resulting from proposed paragraph (b) of new Rule 17g-8 would be 
attributable largely to the rulemaking mandated by Dodd-Frank Act 
\1299\ and that the incremental costs would be minimal.
---------------------------------------------------------------------------

    \1299\ Compare Public Law 111-203 Sec.  938, with proposed new 
Rule 17g-9.
---------------------------------------------------------------------------

    As discussed in above in Section IV.D.6 with respect to the PRA, 
the Commission preliminarily estimates each NRSRO would spend an 
average of approximately 200 hours establishing the policies and 
procedures that would be required under paragraph (b) of proposed new 
Rule 17g-8, resulting in an industry-wide one-time hour burden of 2,000 
hours.\1300\ In addition, as discussed in above in Section IV.D.6 with 
respect to the PRA, the Commission preliminarily estimates an NRSRO 
would spend an average of approximately 50 hours annually reviewing and 
updating those policies and procedures, resulting in an industry-wide 
annual burden of 500 hours.\1301\
---------------------------------------------------------------------------

    \1300\ 10 NRSROs x 200 hours = 2000 hours.
    \1301\ 10 NRSROs x 50 hours = 500 hours.
---------------------------------------------------------------------------

    The Commission preliminarily estimates that, although the costs 
resulting from proposed new paragraph (b)(14) of new Rule 17g-2 would 
be attributable to the Commission's discretionary rulemaking, those 
incremental costs would be minimal. As discussed above in Section 
IV.D.3 of this release with respect to the PRA, the Commission 
preliminary believes applying the recordkeeping requirements of Rule 
17g-2 to five new types of records would result in one-time and annual 
hour burdens for NRSROs in connection with updating their record 
retention policies and procedures to account for and retain these new 
records. As discussed above in Section IV.D.3 of this release with 
respect to the PRA, based on staff experience, the Commission 
preliminarily estimates that the additional one-time hour burden for 
each NRSRO to update its record retention policies and procedures to 
account for the new records that would need to be retained under 
proposed new paragraphs (a)(9), (b)(12), (b)(13), (b)(14), and (b)(15) 
of Rule 17g-2 would be 20 hours. Based on that estimate, the Commission 
preliminary believes that the average one-time hour burden attributable 
to proposed new paragraph (b)(14) of Rule 17g-2 would be approximately 
4 hours per NRSRO, resulting in an industry-wide hour burden of 
approximately 40 hours.\1302\
---------------------------------------------------------------------------

    \1302\ 20 hours/5 new required records = 4 hours; 10 NRSROs x 4 
hours = 40 hours.
---------------------------------------------------------------------------

    As discussed above in Section IV.D.3 of this release with respect 
to the PRA, the Commission preliminarily estimates it would take an 
average of approximately one hour each year for an NRSRO to retain 
updated versions of the information required pursuant to proposed new 
paragraph (b)(14) of Rule 17g-2, resulting in an industry-wide hour 
burden of 10 hours.\1303\
---------------------------------------------------------------------------

    \1303\ 10 NRSROs x 1 hour = 10 hours.
---------------------------------------------------------------------------

    The Commission preliminarily believes any incremental cost 
resulting from the amendments would not impact competition or impose a 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Exchange Act.
Request for Comment
    The Commission requests comment on all aspects of the costs and 
benefits associated with proposed paragraph (b) of new Rule 17g-8.

M. Annual Report of Designated Compliance Officer

    Section 932(a)(5) of the Dodd-Frank Act amended Section 15E(j) of 
the Exchange Act to re-designate paragraph (j) as paragraph (j)(1) and 
to add new paragraphs (j)(2) through (j)(5).\1304\ Section 15E(j)(1) of 
the Exchange Act contains a self-executing provision that an NRSRO 
designate an individual responsible for administering the policies and 
procedures that are required to be established pursuant to Sections 
15E(g) and (h) of the Exchange Act,\1305\ and for compliance with the 
securities laws and the rules and regulations thereunder, including 
those promulgated by the Commission under Section 15E of the Exchange 
Act.\1306\ Section 15E(j)(5)(A) of the Exchange Act requires the 
designated compliance officer to submit to the NRSRO an annual report 
on the compliance of the NRSRO with the securities laws and the 
policies and procedures of the NRSRO that includes: (1) A description 
of any material changes to the code of ethics and conflict of interest 
policies of the NRSRO; and (2) a certification that the report is 
accurate and complete.\1307\ Section 15E(j)(5)(B) of the Exchange Act 
provides that the NRSRO shall file the report required pursuant to 
Section 15E(j)(5)(A) together with the financial report that is 
required to be submitted to the Commission under Section 15E of the 
Exchange Act.\1308\
---------------------------------------------------------------------------

    \1304\ See 15 U.S.C. 78o-7(j)(1) through (5).
    \1305\ See 15 U.S.C 780-7(g) and (h).
    \1306\ See 15 U.S.C. 78o-7(j)(1).
    \1307\ See 15 U.S.C. 78o-7(j)(5)(A).
    \1308\ See 15 U.S.C. 78o-7(j)(5)(B).
---------------------------------------------------------------------------

    As discussed above in Section II.A.3 of this release, Rule 17g-3 
requires an NRSRO to submit five or, in certain cases, six separate 
reports not more than 90 days after the end of the NRSRO's fiscal year 
and identifies the reports to be submitted to the Commission.\1309\ In 
order to further clarify the self-executing requirement in Section 
15E(j)(5)(B) of the Exchange Act, the Commission is proposing to amend 
Rule 17g-3 to identify the annual report of the designated compliance 
officer as one of the reports that must be submitted to the 
Commission.\1310\ Specifically, the Commission proposes adding a new 
paragraph (a)(8) to Rule 17g-3 to identify the report on the compliance 
of the NRSRO with the securities laws and the policies and procedures 
of the NRSRO required pursuant to Section 15E(j)(5)(B) of the Exchange 
Act.\1311\ The Commission preliminarily estimates that the costs and 
benefits of this proposal are entirely attributable to the mandates of 
the Dodd-Frank Act, and are not a result of decisions made by the 
Commission to fulfill the mandates of the Dodd-Frank Act within its 
permitted discretion. Proposed new paragraph (a)(8) to Rule 17g-3 is 
intended only to clarify how an NRSRO must adhere to the self-executing 
provisions in Section 15E(j)(5)(B) of the Exchange Act and would result 
in no additional costs. Moreover, the Commission is not proposing to 
add any additional requirements with respect to the filing other than 
the proposed requirement that this report and the other annual reports 
be filed through the EDGAR system, which is addressed separately below.
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    \1309\ See 17 CFR 240.17g-3(a)(1)-(6). As discussed above in 
Section II.A.3 of this release, the Commission is proposing that 
Rule 17g-3 be amended to add a new paragraph (a)(7) to implement 
Section 15E(c)(3)(B) of the Exchange Act by requiring an NRSRO to 
file the annual internal controls report. See 15 U.S.C. 78o-
7(c)(3)(B).
    \1310\ See proposed new paragraph (a)(8) of Rule 17g-3.
    \1311\ Id.
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Request for Comment
    The Commission requests comment on all aspects of the costs and 
benefits associated with proposed new paragraph (a)(8) to Rule 17g-3.

[[Page 33531]]

N. Electronic Submission of Form NRSRO and the Rule 17g-3 Annual 
Reports

    The Commission is proposing that certain Form NRSRO submissions and 
all Rule 17g-3 annual report submissions be submitted to the Commission 
using the EDGAR system. In order to implement this requirement, the 
Commission is proposing amendments to Rule 101 of Regulation S-T to 
require the electronic submission using the EDGAR system of Form NRSRO 
pursuant to paragraphs (e), (f), and (g) of Rule 17g-1 and the annual 
reports pursuant Rule 17g-3.\1312\ The Commission also is proposing to 
amend Rule 201 of Regulation S-T, which governs temporary hardship 
exemptions from electronic filing, to make this exemption unavailable 
for NRSRO submissions.\1313\
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    \1312\ See proposed amendment of Rule 101 of Regulation S-T (17 
CFR 231.101); see also Section II.L of this release for a more 
detailed discussion of this proposal.
    \1313\ See proposed amendment of Rule 201 of Regulation S-T (17 
CFR 231.201); see also Section II.L of this release for a more 
detailed discussion of this proposal.
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1. Benefits
    One of the primary goals of the EDGAR system since its inception is 
to facilitate the rapid dissemination of financial and business 
information in connection with filings the Commission receives. 
Although paragraph (i) of Rule 17g-1 currently requires NRSROs to make 
the public portions of their current Form NRSROs publicly available 
within 10 business days after submission to the Commission, the 
Commission believes that having all such information available 
immediately upon submission in one location would make the information 
more easily available and searchable to investors and other users of 
credit ratings. Further, the Commission believes that submissions made 
to the Commission are more valuable to investors and other users of 
credit ratings if they are available in electronic form and that adding 
the Form NRSRO submissions to the EDGAR database would provide a more 
complete picture for the public. The Commission preliminarily estimates 
that, as a result of the proposals, the EDGAR page of the Commission's 
Web site,\1314\ in conjunction with the NRSRO page of the Commission's 
Web site,\1315\ would be a comprehensive source from which to find most 
public information submitted to the Commission, as well as other 
information, related to NRSROs. The Commission preliminarily believes 
that the electronic submission of Form NRSRO would benefit investors 
and other users of credit ratings by increasing the efficiency of 
retrieving and comparing NRSRO public submissions and enabling the 
investors and other users of credit ratings to access information more 
quickly.
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    \1314\ http://www.sec.gov/investor/pubs/edgarguide.htm.
    \1315\ http://www.sec.gov/divisions/marketreg/ratingagency.htm.
---------------------------------------------------------------------------

    In addition, while the Rule 17g-3 annual reports would not be made 
public on EDGAR, having them submitted on EDGAR would assist the 
Commission in its oversight of NRSROs. For example, Commission 
examiners could easily retrieve the annual reports of a specific NRSRO 
to prepare for an examination. Moreover, having these records submitted 
and stored through EDGAR in a centralized location would assist the 
Commission from a records management perspective by establishing a more 
automated storage process and creating efficiencies in terms of 
reducing the volume of paper submissions that must be manually 
processed and stored.
    Moreover, the Commission preliminarily believes that the electronic 
submission of the Form NRSROs and the Rule 17g-3 annual reports would 
benefit NRSROs. For example, NRSROs would avoid the uncertainties, 
delay, and expense related to the manual delivery of paper submissions. 
Further, NRSROs would benefit from no longer having to submit multiple 
paper copies of these submissions to the Commission.
    The Commission preliminarily believes that the proposed requirement 
that Form NRSROs and Exhibits 1 through 9 and the Rule 17g-3 annual 
reports be submitted through the EDGAR system would promote efficiency. 
As noted above, the proposal would provide a central location for an 
investor or other user of credit ratings to access the Forms and 
Exhibits. It also would assist the Commission staff in storing and 
accessing these records in furtherance of the Commission's NRSRO 
oversight function. Furthermore, it would provide NRSROs with a more 
efficient way to submit these forms and reports to the Commission.
2. Costs
    The Commission preliminarily estimates that, although the 
Commission's exercise of rulemaking discretion with respect to the 
proposed amendments to Rules 101 and 201 of Regulation S-T, Rule 17g-1, 
and Rule 17g-3 would impose incremental costs, those incremental costs 
would be minimal.
    As discussed in Section IV.D.1 of this release with respect to the 
PRA, the Commission preliminarily estimates that each NRSRO would spend 
an average of approximately 5 hours becoming familiar with the EDGAR 
filing system and completing and submitting Form ID.\1316\ The 
Commission preliminarily estimates that the annual cost attributable to 
submitting the Form NRSROs and Rule 17g-3 annual reports through the 
EDGAR system would be no greater than the annual costs attributable to 
submitting them in paper form.
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    \1316\ An NRSRO would need to complete Form ID in order to be 
eligible to submit documents using the EDGAR system. However, 
completing Form ID is a simple process. The Commission has noted in 
the past that the burden associated with Form ID is 15 minutes. See 
Securities Exchange Act Release No. 57280 (Feb. 6, 2008), 73 FR 
10592, 10610 (Feb. 27, 2008). Thus, the Commission preliminarily 
estimates that the one-time hour burden per NRSRO associated with 
the filing of Form ID would be 15 minutes, resulting in an industry-
wide burden of 1.5 hours.
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    The Commission preliminarily believes any incremental cost 
resulting from the amendments would not impact competition or impose a 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Exchange Act.
Request for Comment
    The Commission requests comment on all aspects of the costs and 
benefits associated with the proposed amendments to Rules 101 and 201 
of Regulation S-T, Rule 17g-1, and Rule 17g-3.

O. Other Amendments

    The Commission is proposing additional amendments to several of the 
NRSRO rules in response to amendments the Dodd-Frank Act made to 
sections of the Exchange Act that authorize or otherwise are relevant 
to these rules. The Commission preliminarily estimates that these 
proposals would not result in any one-time or annual incremental costs 
to NRSROs. Furthermore, the Commission preliminarily believes these 
proposals would benefit NRSROs and Commission staff be making terms in 
Commission rules applicable to NRSROs consistent with terms in Section 
15E of the Exchange. This could promote greater clarity as to the 
requirements in the rules and remove potential ambiguity caused by 
inconsistent terms.
    The Commission preliminarily believes that the proposals would 
promote efficiency. As noted above, the proposals would be designed to 
promote greater clarity as to the requirements in the rules and remove 
potential

[[Page 33532]]

ambiguity caused by inconsistent terms. In addition, as discussed 
above, the Commission preliminarily estimates that the proposals would 
not result in any one-time or annual incremental costs to NRSROs and 
would have substantial benefits. Consequently, the Commission 
preliminarily believes that the proposals would not impact competition 
or impose a burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act.
1. Changing ``Furnish'' To ``File''
    In accordance with the Dodd-Frank Act, the Commission is proposing 
amending certain provisions of Rule 17g-1 and Rule 17g-3 to replace the 
word ``furnish'' with the word ``file''.\1317\ The Commission also is 
proposing to make conforming amendments to Form NRSRO and the 
instructions for Form NRSRO.
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    \1317\ See Section II.M.1 of this release.
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Request for Comment
    The Commission requests comment on all aspects of the costs and 
benefits associated with these proposed amendments, including whether 
they would result in one-time or annual incremental costs to NRSROs.
2. Amended Definition of ``NRSRO''
    The definition of ``nationally recognized statistical rating 
organization'' in Section 3(a)(62) of the Exchange Act, prior to being 
amended by the Dodd-Frank Act, included a condition in Section 
3(a)(62)(A) that the entity ``has been in business as a credit rating 
agency for at least the 3 consecutive years immediately preceding the 
date of its application for registration under Section 15E''.\1318\ 
Section 932(b) of the Dodd-Frank Act struck subparagraph (A) of Section 
3(a)(62).\1319\ Form NRSRO contains a definition of ``NRSRO'' that 
tracks Section 3(a)(62) as originally enacted. The Commission proposes 
amending this definition to conform it to Section 3(a)(62) as amended 
by the Dodd-Frank Act.\1320\ The Commission does not believe these 
proposals would result in any incremental costs to NRSROs.
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    \1318\ See Section 3(a)(62)(A) of the Exchange Act (15 U.S.C. 
78c(a)(62)(A)) added by the Rating Agency Act of 2006.
    \1319\ The Dodd-Frank Act did not, however, amend Section 
15E(a)(1)(C), which requires that the certifications from qualified 
institutional buyers that are required to be submitted with an 
application for registration as an NRSRO under Section 15E(a)(1)(B), 
include a representation that the qualified institutional buyer 
``has used the credit ratings of the applicant for at least the 3 
years immediately preceding the date of the certification in the 
subject category or categories of obligors.''
    \1320\ See Section II.M.2 of this release.
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Request for Comment
    The Commission requests comment on all aspects of the costs and 
benefits associated with these proposed amendments, including whether 
they would result in one-time or annual incremental costs to NRSROs.
3. Definition of Asset-Backed Security
    Section 941(a) of the Dodd-Frank Act amended Section 3 of the 
Exchange Act to add Section 3(a)(77), which defines ``asset-backed 
security.'' \1321\ In response, the Commission is proposing that 
certain language in Exchange Act Rules 17g-2(a)(2)(iii); 17g-2(a)(7); 
17g-5(a)(3); 17g-5(b)(9); 17g-6(a)(4); and Form NRSRO be amended to 
reflect this new definition.\1322\ The Commission preliminarily 
estimates that these proposals would result in no incremental costs to 
NRSROs.
---------------------------------------------------------------------------

    \1321\ 15 U.S.C. 78c(a)(77).
    \1322\ See Section II.M.3 of this release.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of the costs and 
benefits associated with these proposed amendments, including whether 
they would result in one-time or annual incremental costs to NRSROs.
4. Other Amendments to Form NRSRO
    The Commission is proposing a number of additional amendments to 
the Instructions to Form NRSRO to clarify certain requirements because 
the instructions, as written, have created some confusion among NRSROs. 
The Commission preliminarily estimates that these proposals would not 
result in any one-time or annual incremental costs to NRSROs as they 
would clarify existing requirements (not create new requirements). 
Furthermore, the Commission preliminarily believes these proposals 
would benefit NRSROs and Commission staff by addressing parts of the 
instructions that have led to inconsistent interpretations among the 
NRSROs as to the requirements.
    The Commission preliminarily believes that the proposals would 
promote efficiency. As noted above, the proposals would be designed to 
promote greater clarity as to the requirements in the instructions. In 
addition, as discussed above, the Commission preliminarily estimates 
that the proposals would not result in any one-time or annual 
incremental costs to NRSROs and would have substantial benefits. 
Consequently, the Commission preliminarily believes that the proposals 
would not impact competition or impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act.
a. Clarification With Respect to Items 6 and 7
    The Commission is proposing amendments to Form NRSRO and the 
Instructions for Form NRSRO to remove potential ambiguity as to how an 
applicant and NRSRO must determine the approximate number of credit 
ratings outstanding for the purposes of Items 6 and 7. In particular, 
the Commission is proposing to amend the text in Items 6.A and 7.A of 
Form NRSRO to clarify that an applicant or NRSRO must provide the 
approximate number of obligors, securities, and money market 
instruments in each class of credit ratings for which the applicant or 
NRSRO has an outstanding credit rating.\1323\
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    \1323\ See proposed amendments to the text in Items 6.A and 7.A 
respectively.
---------------------------------------------------------------------------

    In addition, the Commission is proposing to amend Instruction H to 
Form NRSRO (as it relates to Items 6.A and 7.A) in four ways. First, in 
conformity with the proposed amendments to the text of Items 6.A and 
7.A in the Form, the Instructions would be amended to provide that the 
applicant or NRSRO must, for each class of credit ratings, provide in 
the appropriate box the approximate number of obligors, securities, and 
money market instruments in that class for which the applicant or NRSRO 
presently has a credit rating outstanding as of the date of the 
application (Item 6.A) or had a credit rating outstanding as of the end 
of the most recently ended calendar year (Item 7.A).
    Second, Instruction H would be amended to provide that the 
applicant or NRSRO must treat as a separately rated security or money 
market instrument each individually rated security and money market 
instrument that, for example, is assigned a distinct CUSIP or other 
unique identifier, has distinct credit enhancement features as compared 
with other securities or money market instruments of the same issuer, 
or has a different maturity date as compared with other securities or 
money market instruments of the same issuer. This proposed instruction 
would be designed to clarify that each security or money market 
instrument of an issuer must be included in the count if it is assigned 
a credit rating by the applicant or NRSRO.
    Third, Instruction H would be amended to provide that the applicant 
or NRSRO must not include an obligor,

[[Page 33533]]

security, or money market instrument in more than one class of credit 
rating. In other words, the applicant or NRSRO cannot double count an 
obligor, security, or money market instrument by including it in total 
credit ratings outstanding for two or more classes. Fourth, Instruction 
H would be amended to provide that the applicant or NRSRO must include 
in the class of credit ratings described in Section 3(a)(62)(B)(iv) of 
the Exchange Act (issuers of asset-backed securities) to the extent not 
described in Section 3(a)(62)(B)(iv), any rated security or money 
market instrument issued by an asset pool or as part of any asset-
backed securities transaction. As discussed above in Section II.M.3 of 
this release, Section 3(a)(62)(B)(iv) contains a narrower definition of 
``asset-backed security'' than the Commission uses for the purposes of 
its NRSRO rules.\1324\
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    \1324\ Compare 15 U.S.C. 78c(a)(62)(B)(iv) with: Instructions 
for Exhibit 1 to Form NRSRO; paragraphs (a)(2)(iii), (a)(7), and 
(b)(9) of Rule 17g-2; paragraph (a)(6) of Rule 17g-3; paragraphs 
(a)(3) and (b)(9) of Rule 17g-5; and paragraph (a)(4) of Rule 17g-6.
---------------------------------------------------------------------------

Request for Comment
    The Commission requests comment on all aspects of the costs and 
benefits associated with these proposed amendments, including whether 
they would result in one-time or annual incremental costs to NRSROs.
b. Clarification With Respect to Exhibit 8
    The Commission proposes to amend Instruction H to Form NRSRO as it 
relates to Exhibit 8. Exhibit 8 requires an applicant and NRSRO to 
provide the number of credit analysts it employs and the number of 
credit analyst supervisors. The Commission is proposing two amendments 
to the instructions for Exhibit 8. The first amendment would delete a 
parenthesis in the instructions that provides that the applicant or 
NRSRO should ``see definition below'' of the term ``credit analyst.'' 
There is no such definition. The second amendment would clarify that 
the applicant or NRSRO, in providing the number of credit analysts, 
should include the number of credit analyst supervisors. This would be 
designed to ensure that the disclosures in Form NRSRO are comparable 
across NRSROs by avoiding the situation in which some NRSROs include 
credit analyst supervisors in the total number of credit analysts and 
some NRSROs do not include credit analyst supervisors in that amount.
Request for Comment
    The Commission requests comment on all aspects of the costs and 
benefits associated with these proposed amendments, including whether 
they would result in one-time or annual incremental costs to NRSROs.
c. Clarification With Respect to Exhibits 10 through 13
    The Commission proposes to amend Instruction H in several places to 
add a ``Note'' instructing that after registration, Exhibits 10 through 
13 are not required to be made publicly available by the NRSRO pursuant 
to Rule 17g-1(i) and they should not be updated with the filing of the 
annual certification. The ``Note'' further would instruct that similar 
information is required in the annual reports that must be filed with 
the Commission not more than 90 days after the end of each fiscal year 
under Rule 17g-3.\1325\
---------------------------------------------------------------------------

    \1325\ See ``Notes'' proposed to be added to Instruction H to 
Form NRSRO.
---------------------------------------------------------------------------

    The Commission preliminarily believes that none of these proposed 
clarifications entail any changes to the existing requirements of the 
Commission's rules, but instead merely explain more clearly what those 
rules already require. Therefore, Commission does not attribute any 
costs or benefits to these clarifications.
Request for Comment
    The Commission requests comment on all aspects of the costs and 
benefits associated with these proposed amendments, including whether 
they would result in one-time or annual incremental costs to NRSROs.

VI. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,'' \1326\ the Commission must advise OMB as to 
whether the proposed regulation constitutes a ``major'' rule. Under 
SBREFA, a rule is considered ``major'' where, if adopted, it results or 
is likely to result in: (1) An annual effect on the economy of $100 
million or more (either in the form of an increase or a decrease); (2) 
a major increase in costs or prices for consumers or individual 
industries; or (3) significant adverse effect on competition, 
investment or innovation. If a rule is ``major,'' its effectiveness 
will generally be delayed for 60 days pending Congressional review.
---------------------------------------------------------------------------

    \1326\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

    The Commission requests comment on the potential impact of the 
proposed amendments to existing rules and proposed new rules on the 
economy on an annual basis, on the costs or prices for consumers or 
individual industries, and on competition, investment or innovation. 
Commenters are requested to provide empirical data and other factual 
support for their view to the extent possible.

VII. Initial Regulatory Flexibility Analysis

    The Commission has prepared this Initial Regulatory Flexibility 
Analysis (IRFA) in accordance with Section 603(a) of the Regulatory 
Flexibility Act (RFA).\1327\ This IRFA relates to the Commission's 
proposed new requirements for NRSROs that would result from the 
amendments to Rule 101 of Regulation S-T, Rule 201 of Regulation S-T, 
Rule 17g-1, Rule 17g-2, Rule 17g-3, Rule 17g-5, Rule 17g-6, Rule 17g-7, 
and Form NRSRO, and proposed new Rule 17g-8 and new Rule 17g-9. In 
addition, the IRFA relates to the Commission's proposed new 
requirements for providers of third-party due diligence services that 
would result from new Rule 17g-10 and new Form ABS Due Diligence-15E. 
Finally, this IRFA relates to the Commission's proposed new 
requirements for issuers and underwriters of Exchange Act-ABS that 
would result from the amendments to Rule 314 of Regulation S-T and Form 
ABS-15G, and new Rule 15Ga-2.
---------------------------------------------------------------------------

    \1327\ See 5 U.S.C. 603(a).
---------------------------------------------------------------------------

A. Reasons and Objectives

    Section II of this release describes the reasons and objectives of 
the proposed amendments to existing rules and proposed new rules. In 
addition, Section IV.B of this release describes the intended use of 
the collection of information requirements that would result from the 
proposed amendments to existing rules and proposed new rules. Moreover, 
as described in Section II of this release, these proposed amendments 
and proposed new rules would implement rulemaking mandated in Title IX, 
Subtitle C of the Dodd-Frank Act.\1328\ In Section 931 of Title IX, 
Subtitle C of the Dodd-Frank Act, Congress made the following findings:
---------------------------------------------------------------------------

    \1328\ See Public Law 111-203 Sec. Sec.  931-939H.
---------------------------------------------------------------------------

     Because of the systemic importance of credit ratings and 
the reliance placed on credit ratings by individual and institutional 
investors and financial regulators, the activities and performances of 
credit rating agencies, including NRSROs, are matters of national 
public interest, as credit rating agencies are central to capital 
formation, investor confidence, and the efficient

[[Page 33534]]

performance of the United States economy.\1329\
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    \1329\ Public Law 111-203 Sec.  931(1).
---------------------------------------------------------------------------

     Credit rating agencies, including NRSROs, play a critical 
``gatekeeper'' role in the debt market that is functionally similar to 
that of securities analysts, who evaluate the quality of securities in 
the equity market, and auditors, who review the financial statements of 
firms. Such role justifies a similar level of public oversight and 
accountability.\1330\
---------------------------------------------------------------------------

    \1330\ Public Law 111-203 Sec.  931(2).
---------------------------------------------------------------------------

     Because credit rating agencies perform evaluative and 
analytical services on behalf of clients, much as other financial 
``gatekeepers'' do, the activities of credit rating agencies are 
fundamentally commercial in character and should be subject to the same 
standards of liability and oversight as apply to auditors, securities 
analysts, and investment bankers.\1331\
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    \1331\ Public Law 111-203 Sec.  931(3).
---------------------------------------------------------------------------

     In certain activities, particularly in advising arrangers 
of structured financial products on potential ratings of such products, 
credit rating agencies face conflicts of interest that need to be 
carefully monitored and that therefore should be addressed explicitly 
in legislation in order to give clearer authority to the Securities and 
Exchange Commission.\1332\
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    \1332\ Public Law 111-203 Sec.  931(4).
---------------------------------------------------------------------------

     In the recent financial crisis, the ratings on structured 
financial products have proven to be inaccurate. This inaccuracy 
contributed significantly to the mismanagement of risks by financial 
institutions and investors, which in turn adversely impacted the health 
of the economy in the United States and around the world. Such 
inaccuracy necessitates increased accountability on the part of credit 
rating agencies.\1333\
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    \1333\ Public Law 111-203 Sec.  931(5).
---------------------------------------------------------------------------

B. Legal Basis

    The Commission's proposed amendments to existing rules and proposed 
new rules are made pursuant to the Exchange Act,\1334\ particularly 
Sections 15E, 17(a) and 36 of the Exchange Act,\1335\ and Sections 936 
and 938(a) of the Dodd-Frank Act.\1336\
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    \1334\ 15 U.S.C. 78a et seq.
    \1335\ 15 U.S.C. 78o-7, 78q and 78mm.
    \1336\ Public Law 111-203 Sec. Sec.  936 and 938(a).
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C. Small Entities Subject to the Rule

1. NRSROs and Providers of Third-Party Due Diligence Services
    Under section 601(3) of the RFA, the term ``small business'' is 
defined as having ``the same meaning as the term `small business 
concern' under Section 3 of the Small Business Act, unless an agency, 
after consultation with the Office of Advocacy of the Small Business 
Administration and after opportunity for public comment, establishes 
one or more definitions of such term which are appropriate to the 
activities of the agency and publishes such definition(s) in the 
Federal Register.'' \1337\ The Commission's rules do not define ``small 
business'' or ``small organization'' with respect to NRSROs. However, 
paragraph (a) of Rule 0-10 provides that for purposes of the RFA, a 
small entity ``[w]hen used with reference to an `issuer' or a `person' 
other than an investment company'' means ``an `issuer' or `person' 
that, on the last day of its most recent fiscal year, had total assets 
of $5 million or less.'' \1338\ The Commission has stated in the past 
that an NRSRO with total assets of $5 million or less would qualify as 
a ``small'' entity for purposes of the RFA.\1339\ The Commission 
continues to believe this threshold of total assets of $5 million or 
less would qualify an NRSRO as ``small'' for purposes of the RFA. In 
addition, the Commission preliminarily believes this would be an 
appropriate threshold for determining whether a provider of third-party 
due diligence services is ``small'' for purposes of the RFA.
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    \1337\ 5 U.S.C. 601(3).
    \1338\ 17 CFR 240.0-10(a).
    \1339\ See e.g., Oversight of Credit Rating Agencies Registered 
as Nationally Recognized Statistical Rating Organizations, 72 FR 
33618 (June 18, 2007); Amendments to Rules for Nationally Recognized 
Statistical Rating Organizations, 74 FR at 6481 (Feb. 9, 2009); and 
Amendments to Rules for Nationally Recognized Statistical Rating 
Organizations, 74 FR at 63863 (Dec. 4, 2009).
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    Currently, there are 10 NRSROs and, based on their most recently 
filed annual reports pursuant to Rule 17g-3, one NRSRO is a small 
entity under the above definition. For purposes of the PRA, the 
Commission preliminarily estimates that there will be 10 providers of 
third-party due diligence services subject to the proposed new 
requirements.\1340\ Of these 10 respondents, the Commission estimates 
that all 10 would be ``small'' entities.
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    \1340\ See Section VI.C of this release.
---------------------------------------------------------------------------

2. Issuers and Underwriters
    The proposing release for Form ABS-15G certified that the form 
would not have a significant economic impact on a substantial number of 
small entities.\1341\ As discussed above in Section V.I.2 of this 
release, the Commission believes that the costs to the issuers and 
underwriters subject to proposed new Rule 15Ga-2 and the proposed 
amendments to Form ABS-15G would be less than those arising from the 
adoption of Form ABS-15G. The Commission, therefore, certifies pursuant 
to 5 U.S.C. 605(b) that proposed new Rule 15Ga-2 and the proposed 
amendments to Form ABS-15G contained in this release, if adopted, would 
not have a significant economic impact on a substantial number of small 
entities. The proposals relate to disclosure requirements for Exchange 
Act-ABS. As noted above, Rule 0-10(a) \1342\ defines an issuer, other 
than an investment company, to be a ``small business'' or ``small 
organization'' if it had total assets of $5 million or less on the last 
day of its most recent fiscal year. The Commission's data indicates 
that only one sponsor could meet the definition of a small broker-
dealer for purposes of the Regulatory Flexibility Act.\1343\ 
Accordingly, the Commission does not believe that proposed new Rule 
15Ga-2 and the proposed amendments to Form ABS-15G, if adopted, would 
have a significant economic impact on a substantial number of small 
entities.
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    \1341\ See Disclosure for Asset-Backed Securities Required by 
Section 943 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act, Securities Act Release No. 9148 (Oct. 4, 2010), 75 
FR 62718 at 62734 (Oct. 13, 2010).
    \1342\ 17 CFR 240.0-10(a).
    \1343\ This is based on data from Asset-Backed Alert.
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D. Reporting, Recordkeeping, and Other Compliance Requirements

    The proposed amendments and proposed new rules would impose certain 
reporting, recordkeeping, and other compliance requirements on small 
NRSROs and small providers of third-party due diligence services. 
Preliminary estimates of the costs attributable to these proposals are 
discussed in detail in Section V of this release. As discussed in 
Section V of this release, the Commission preliminarily estimates that 
the costs are largely attributable to rulemaking mandates in the Dodd-
Frank Act and not to the exercise of Commission discretionary 
rulemaking.
    The Commission is providing summary information below about the 
preliminary cost estimates in Section V of this release to estimate the 
impact the proposals would have on the one small NRSRO and the 10 small 
providers of third-party due diligence services. In some cases, the 
Commission preliminarily believes it is appropriate to estimate the 
one-time and annual costs per small NRSRO using average costs across 
all NRSROs that would be subject to the proposed amendments and new 
rules. The NRSROs vary, in terms of size and complexity, from

[[Page 33535]]

small entities that employ less than 20 credit analysts to complex 
global organizations that employ over a thousand credit analysts.\1344\ 
Given the variance in size between the largest NRSROs and the smallest 
NRSROs, the average costs are skewed higher because the largest firms 
currently dominate in terms of size and the volume of credit rating 
activities.\1345\ In other cases, as described below, the Commission 
preliminarily believes it is appropriate to estimate the one-time and 
annual costs per small NRSRO based on the number of credit ratings 
outstanding or the number of credit analysts employed by the seven 
smaller NRSROs.\1346\ In a cost estimate based on the number of credit 
ratings outstanding, the Commission preliminarily proposes to use the 
number of credit ratings outstanding of the 7 smaller NRSROs.\1347\ In 
a cost estimate based on the number of credit analysts, the Commission 
preliminarily proposes to use the number of credit analysts employed by 
the 7 smaller NRSROs.\1348\
---------------------------------------------------------------------------

    \1344\ See, e.g., Annual Report on Nationally Recognized 
Statistical Rating Organizations. Commission (Jan. 2011), pp. 4-9.
    \1345\ As discussed above in Section IV.D of this release, based 
on data collected from the NRSROs in their Form NRSROs and Rule 17g-
3 annual reports, the Commission has calculated an HHI number using 
the number credit ratings outstanding per NRSRO and that number is 
3,495, which is equivalent to there being approximately 2.86 equally 
sized firms. The HHI using earnings reported by NRSROs in the Rule 
17g-3 annual reports is 3,926, which the equivalent of 2.55 equally 
sized firms.
    \1346\ The seven smaller NRSROs are: A.M. Best Company, Inc., 
DBRS Ltd., Egan-Jones Rating Company, Japan Credit Rating Agency, 
Ltd., Kroll Bond Rating Agency, Inc. (formerly LACE Financial 
Corp.), Rating and Investment Information, Inc., and Realpoint LLC. 
See Figures 2 and 3. The small NRSRO is one these NRSROs.
    \1347\ 80,648 (total credit ratings outstanding for the seven 
smaller NRSROs)/2,905,825 (total credit ratings outstanding for all 
ten NRSROs)/7 (the number of smaller NRSROs) = 0.00396. See Figure 
2.
    \1348\ 370 (the total number of credit analysts employed by the 
seven smaller NRSROs)/3,520 (the total number of credit analysts 
employed by all ten NRSROs)/7 (the number of smaller NRSROs) = 
.01502. See Figure 3.
---------------------------------------------------------------------------

    As discussed above in Section V.A.2 of this release, the Commission 
preliminarily estimates that the proposed amendments to Rule 17g-3 
would result in one-time and annual costs to NRSROs.\1349\ In 
particular, the Commission preliminarily estimates that the proposal 
would result in an average one-time cost to each NRSRO of approximately 
$40,000 and an average annual cost to each NRSRO of approximately 
$60,950.\1350\
---------------------------------------------------------------------------

    \1349\ See proposed new paragraph (a)(7) and proposed amendments 
to paragraph (b) of Rule 17g-3; see also Section II.A.1 of this 
release for a more detailed discussion of these provisions.
    \1350\ See Section V.A.2 of this release for a more detailed 
discussion of the basis for these cost estimates.
---------------------------------------------------------------------------

    As discussed above in Section V.B.2 of this release, the Commission 
preliminarily estimates that the proposed amendments to Rule 17g-5 
would result in one-time and annual costs to each NRSRO.\1351\ 
Moreover, the Commission provides separate preliminary cost estimates 
for the three larger NRSROs and the seven smaller NRSROs. In 
particular, the Commission preliminarily estimates that the proposal 
would result in an average one-time cost to each of the seven smaller 
NRSROs of approximately $15,867 and an average annual cost to each of 
the seven smaller NRSROs of approximately $4,587.\1352\
---------------------------------------------------------------------------

    \1351\ See proposed new paragraph (c)(8) of Rule 17g-5; see also 
Section II.B.1 of this release for a more detailed discussion of 
this proposal.
    \1352\ See Section V.B.2 of this release for a more detailed 
discussion of the basis for these cost estimates.
---------------------------------------------------------------------------

    As discussed above in Section V.C.2 of this release, the Commission 
preliminarily estimates proposed paragraph (c) to new Rule 17g-8 would 
result in one-time and annual costs to each NRSRO.\1353\ In particular, 
the Commission preliminarily estimates that the proposal would result 
in an average one-time cost to each NRSRO of approximately $27,300 and 
an average annual cost to each NRSRO of approximately $6,825.\1354\
---------------------------------------------------------------------------

    \1353\ See proposed paragraph (c) of new Rule 17g-8; see also 
Section II.C.1 of this release for a more detailed discussion of 
this proposal.
    \1354\ See Section V.C.2 of this release for a more detailed 
discussion of the basis for these cost estimates.
---------------------------------------------------------------------------

    As discussed above in Section V.E.2 of this release, the Commission 
preliminarily estimates that the proposed amendments to the 
instructions to Exhibit 1 of Form NRSRO would result in one-time and 
annual costs to each NRSRO.\1355\ Based on the total number of ratings 
outstanding across all 10 NRSROs, the Commission preliminarily 
estimates an industry-wide one-time cost of approximately $735,680 and 
an industry-wide annual cost of approximately $367,840.\1356\ Moreover, 
because of the wide variance in the number of credit ratings 
outstanding among the NRSROs, the Commission preliminarily believes 
that it is appropriate to allocate these costs to NRSROs based on the 
number of credit ratings each has outstanding (although larger NRSROs 
may realize economies of scale). Consequently, the Commission 
preliminarily estimates that the proposal would result in an average 
one-time cost to the small NRSRO of approximately $2,913 and an average 
annual cost to the small NRSRO of approximately $1,457.\1357\
---------------------------------------------------------------------------

    \1355\ See proposed amendments to Instruction H to Form NRSRO 
(as it relates to Exhibit 1); see also Section II.E.1.a of this 
release for a more detailed discussion of this proposal.
    \1356\ See Section V.E.2 of this release for a more detailed 
discussion of the basis for these cost estimates.
    \1357\ $735,680 x .00396 = $2,913.29, rounded to $2,913; 
$367,840 x .00396 = $1,456.65, rounded to $1,457.
---------------------------------------------------------------------------

    As discussed above in Section V.E.2 of this release, the Commission 
preliminarily estimates that the proposed amendments to Rule 17g-1 
would result in one-time and annual costs to each NRSRO.\1358\ First, 
the Commission preliminarily estimates that the proposal to require an 
NRSRO to it make its Form NRSRO and Exhibits 1 through 9 freely 
available on an ``easily accessible'' portion of its corporate Internet 
Web site would result in an average one-time cost to each NRSRO of 
approximately $1,125.\1359\ Second, the Commission preliminarily 
estimates that the proposal to require an NRSRO to provide, when 
requested, a written copy of Exhibit 1 would result in an average one-
time cost to each NRSRO of approximately $13,104 and an average annual 
cost to each NRSRO of approximately $18,291.\1360\
---------------------------------------------------------------------------

    \1358\ See proposed amendments to paragraph (i) of Rule 17g-1; 
see also Section II.E.1.b of this release for a more detailed 
discussion of this proposal.
    \1359\ See Section V.E.2 of this release for a more detailed 
discussion of the basis for this cost estimate.
    \1360\ Id.
---------------------------------------------------------------------------

    As discussed above in Section V.F.2 of this release, the Commission 
preliminarily estimates that proposed new paragraph (b) of Rule 17g-7 
would result in one-time and annual costs to each NRSRO.\1361\ First, 
the Commission preliminarily estimates that the proposal to make the 
ratings histories available on an ``easily accessible'' portion of the 
NRSRO's corporate Internet Web site would result in an average one-time 
cost to each NRSRO of approximately $1,125.\1362\ Second, the 
Commission preliminarily estimates that the proposed enhancements to 
the current ratings history disclosure requirements would result in an 
average one-time cost to each NRSRO of approximately $30,375 and an 
average

[[Page 33536]]

annual cost to each NRSRO of approximately $10,125.\1363\
---------------------------------------------------------------------------

    \1361\ See proposed new paragraph (b) of Rule 17g-7; see also 
Section II.E.2 of this release for a more detailed discussion of 
this proposal.
    \1362\ See Section V.F.2 of this release for a more detailed 
discussion of the basis for this cost estimate.
    \1363\ See Section V.F.2 of this release for a more detailed 
discussion of the basis for these cost estimates.
---------------------------------------------------------------------------

    As discussed above in Section V.G.2 of this release, the Commission 
preliminarily estimates that paragraph (a) of proposed new Rule 17g-8 
would result in one-time and annual costs to each NRSRO.\1364\ In 
particular, the Commission preliminarily estimates that the proposal 
would result in an average one-time cost to each NRSRO of approximately 
$54,600 and an average annual cost to each NRSRO of approximately 
$13,650.\1365\
---------------------------------------------------------------------------

    \1364\ See paragraph (a) of new Rule 17g-8; see also Section 
II.F.1 of this release for a more detailed discussion of this 
proposal.
    \1365\ See Section V.G.2 of this release for a more detailed 
discussion of the basis for these cost estimates.
---------------------------------------------------------------------------

    As discussed above in Section V.H.2 of this release, the Commission 
preliminarily estimates that proposed new paragraph (a) of Rule 17g-7 
would result in one-time and annual costs to each NRSRO.\1366\ Based on 
the total number of ratings outstanding across all 10 NRSROs, the 
Commission preliminarily estimates an industry-wide one-time cost of 
approximately $15,237,500 and an industry-wide annual cost of 
approximately $115,580,930.\1367\ Moreover, the Commission 
preliminarily estimates that the one-time and annual costs would vary 
considerably among NRSROs based on the number of credit ratings they 
issue and monitor and the number of classes and subclasses of credit 
ratings for which they issue and monitor credit ratings. Consequently, 
the Commission preliminarily estimates that the proposal would result 
in an average one-time cost to the small NRSRO of approximately $60,340 
and an average annual cost to the small NRSRO of approximately 
$457,700.\1368\
---------------------------------------------------------------------------

    \1366\ See proposed new paragraph (a) of Rule 17g-7 see also 
Sections II.G.1 through G.5 of this release for a more detailed 
discussion of this proposal.
    \1367\ See Section V.H.2 of this release for a more detailed 
discussion of the basis for these cost estimates.
    \1368\ $15,237,500 x .00396 = $60,340.50, rounded to $60,340; 
$115,580,930 x .00396 = $457,700.48, rounded to $457,700.
---------------------------------------------------------------------------

    As discussed above in Section V.K.2 of this release, the Commission 
preliminarily estimates that proposed new Rule 17g-9 would result in 
one-time and annual costs to each NRSRO.\1369\ Based on the total 
number of credit rating analysts employed by the 10 NRSROs, the 
Commission preliminarily estimates an industry-wide one-time cost of 
approximately $5,363,000 and an industry-wide annual cost of 
approximately $1,072,720.\1370\ Moreover, the Commission preliminarily 
estimates that these costs would be allocated to the 10 NRSROs based on 
the number of credit analysts each employs. Consequently, the 
Commission preliminarily estimates that the proposal would result in an 
average one-time cost to the small NRSRO of approximately $80,552 and 
an average annual cost to the small NRSRO of approximately 
$16,112.\1371\
---------------------------------------------------------------------------

    \1369\ See proposed new Rule 17g-9; see also Section II.I.1 of 
this release for a more detailed discussion of this proposal.
    \1370\ See Section V.K.2 of this release for a more detailed 
discussion of the basis for these cost estimates.
    \1371\ $5,363,000 x .01502 = $80,552.26, rounded to $80,552; 
$1,072,720 x .01502 = $16,112.25, rounded to $16,112..
---------------------------------------------------------------------------

    As discussed above in Section V.L.2 of this release, the Commission 
preliminarily estimates that paragraph (b) of proposed new Rule 17g-8 
would result in one-time and annual costs to each NRSRO.\1372\ In 
particular, the Commission preliminarily estimates that the proposal 
would result in an average one-time cost to each NRSRO of approximately 
$54,600 and an average annual cost to each NRSRO of approximately 
$13,650.\1373\
---------------------------------------------------------------------------

    \1372\ See paragraph (b) of proposed new Rule 17g-8; see also 
Section II.J.1 of this release for a more detailed discussion of 
this proposal.
    \1373\ See Section V.L.2 of this release for a more detailed 
discussion of the basis for these cost estimates.
---------------------------------------------------------------------------

    As discussed above in Section V.N.2 of this release, the Commission 
preliminarily estimates that proposed requirement to file certain Form 
NRSROs (and Exhibits 1 through 9) and the Rule 17g-3 annual reports 
with the Commission through the EDGAR system would result in one-time 
costs to each NRSRO.\1374\ In particular, the Commission preliminarily 
estimates that the proposal would result in an average one-time cost to 
each NRSRO of approximately $1,365.\1375\
---------------------------------------------------------------------------

    \1374\ See proposed amendments to Regulation S-T, Rule 17g-1, 
and Rule 17g-3; see also Section II.L of this release for a more 
detailed discussion of this proposal.
    \1375\ See Section V.N.2 of this release for a more detailed 
discussion of the basis for this cost estimate.
---------------------------------------------------------------------------

    As discussed above in Sections V.A.2, V.C.2, V.G.2, V.K.2, and 
V.L.2 of this release, the Commission has proposed applying the 
recordkeeping requirements of Rule 17g-2 to five new types of 
records.\1376\ The Commission preliminarily estimates that these 
proposals would result in one-time and annual costs to each NRSRO. In 
particular, the Commission preliminarily estimates an average one-time 
cost to each NRSRO of approximately $5,460 and an average annual cost 
to each NRSRO of approximately $1,365.\1377\
---------------------------------------------------------------------------

    \1376\ See proposed new paragraphs (a)(9), (b)(12), (b)(13), 
(b)(14), and (b)(15) of Rule 17g-2; see also Sections II.A.2, 
II.C.2, II.F.2, II.I.2, and II.J.2 of this release, respectively, 
for a more detailed discussion of these proposals.
    \1377\ $1,092 x 5 = $5,460; $273 x 5 = $1,365. See Sections 
V.A.2, V.C.2, V.G.2, V.K.2, and V.L.2 of this release for a more 
detailed discussion of the basis for these cost estimates.
---------------------------------------------------------------------------

    Finally, as discussed in Section V.J.2 of this release, the 
Commission preliminarily estimates that proposed new Rule 17gx10 and 
proposed new Form ABS Due Diligence-15E would result in one-time and 
annual costs to providers of third-party due diligence services.\1378\ 
In particular, the Commission estimates an average one-time cost to 
each provider of third-party due diligence services of approximately 
$91,425.\1379\ In addition, the Commission preliminarily estimates that 
the annual cost resulting from these proposals would be based on the 
number of Exchange Act-ABS transactions issued per year. Consequently, 
the Commission preliminarily estimates that the industry-wide annual 
cost would be approximately $282,282.\1380\ For this reason, the 
Commission preliminarily estimates that the average annual cost to each 
provider of third-party due diligence services would be approximately 
$28,228.\1381\
---------------------------------------------------------------------------

    \1378\ See proposed new Rule 17g-10 and proposed new Form ABS 
Due Diligence-15E; see also Sections II.H.2 and II.H.3 of this 
release, respectively, for a more detailed discussion of these 
proposals.
    \1379\ See Section V.J.2 of this release for a more detailed 
discussion of the basis for this cost estimate.
    \1380\ Id.
    \1381\ $282,282/10 small providers of third-party due diligence 
services = $28,228.20 (rounded to $28,228).
---------------------------------------------------------------------------

    As noted above, the Commission preliminarily estimates that these 
costs largely are attributable to rulemaking mandates in the Dodd-Frank 
Act. The Commission also notes that the Dodd-Frank Act explicitly 
provides that the Commission's rulemaking make exceptions for small 
NRSROs in one instance.\1382\ The Commission preliminary believes that 
the exercise of the Commission's discretionary rulemaking would not 
disproportionately affect small entities. The Commission preliminarily 
believes that the exercise of discretionary rulemaking strikes an 
appropriate balance between minimizing the burden on small entities and 
meeting the rulemaking mandates in the Dodd-Frank Act.
---------------------------------------------------------------------------

    \1382\ See Public Law 111-203 Sec.  932(a)(4) and 15 U.S.C. 78o-
7(h)(3)(B)(i).

---------------------------------------------------------------------------

[[Page 33537]]

E. Duplicative, Overlapping, or Conflicting Federal Rules

    The Commission believes that there are no Federal rules that 
duplicate, overlap, or conflict with the proposed rules.

F. Significant Alternatives

    Pursuant to Section 3(a) of the RFA,\1383\ the Commission must 
consider certain types of alternatives, including: (1) The 
establishment of differing compliance or recording requirements or 
timetables that take into account the resources available to small 
entities; (2) the clarification, consolidation, or simplification of 
compliance and reporting requirements under the proposed rules for 
small entities; (3) the use of performance rather than design 
standards; and (4) an exemption from coverage of the proposed rules, or 
any part of the proposed rules, for small entities.
---------------------------------------------------------------------------

    \1383\ 5 U.S.C. 603(c).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the exercise of 
discretionary rulemaking with respect to the proposed amendments to 
existing rules and proposed new rules strike the appropriate balance 
between minimizing the burden on entities and allowing the Commission 
to meet its mandate under the Dodd-Frank Act. The Commission notes the 
Dodd-Frank Act explicitly mandated the Commission provide for 
exceptions for small NRSROs with respect to only one rulemaking and the 
Commission has proposed a rule amendment to implement this 
provision.\1384\ Consequently, the Commission does not believe it is 
necessary or appropriate to establish different compliance or reporting 
requirements or timetables; clarify, consolidate, or simplify 
compliance and reporting requirements under the proposed amendments to 
existing rules and proposed new rules for small entities; or summarily 
exempt small entities from coverage of the rule, or any part of the 
rule. The Commission believes that it is inconsistent with the goals of 
the Dodd-Frank Act to use performance standards rather than design 
standards. Further, the Commission believes that it would be 
inconsistent with the purposes of the Dodd-Frank Act to exempt small 
entities from compliance with the proposed rules.
---------------------------------------------------------------------------

    \1384\ See 15 U.S.C. 78o-7(h)(3)(B)(i) and proposed new 
paragraph (f) of Rule 17g-5; see also Section II.B.2 of this release 
for a more detailed discussion of this proposal.
---------------------------------------------------------------------------

G. Request for Comment

    The Commission generally requests comment on the certification and 
all aspects of its analysis in the IRFA. In addition, the Commission 
also seeks comment on the following:
    1. Would the number of small entities that would be subject to the 
proposed requirements have any effects that have not been discussed?
    2. Describe the nature of any effects on small entities subject to 
proposed requirements and provide empirical data to support the nature 
and extent of such effects.
    3. Describe the compliance burdens and how they would affect small 
entities.

VIII. Statutory Authority

    The Commission is proposing amendments to Sec. Sec.  232.101, 
232.201, 232.314, 240.17g-1, 240.17g-2, 240.17g-3, 240.17g-5, 240.17g-
6, 240.17g-7, Form NRSRO, and Form ABS-15G and is proposing to adopt 
Sec. Sec.  240.15Ga-2, 240.17g-8, 240.17g-9, 240.17g-10, and Form ABS 
Due Diligence-15E pursuant to the authority conferred by the Exchange 
Act, including Sections 15E, 17(a) and 36 (15 U.S.C. 78o-7, 78q, and 
78mm), and pursuant to authority in Sections 936, 938, and 943 of the 
Dodd-Frank Act (Pub. L. 111-203 Sec. Sec.  936, 938, and 943).

List of Subjects in 17 CFR Parts 232, 240, 249, and 249b

    Brokers, Reporting and recordkeeping requirements, Securities.

Text of Proposed Rules

    In accordance with the foregoing, the Commission proposes that 
Title 17, Chapter II of the Code of Federal Regulation be amended as 
follows.

PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR 
ELECTRONIC FILINGS

    1. The authority citation for part 232 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s(a), 77z-3, 
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c), 
80a-8, 80a-29, 80a-30, 80a-37, and 7201 et seq.; and 18 U.S.C. 1350.
* * * * *
    2. Section 232.101 is amended by adding paragraph (a)(1)(xiv) to 
read as follows:


Sec.  232.101  Mandated electronic submissions and exceptions.

    (a) * * *
    (1) * * *
    (xiv) Form NRSRO (Sec.  249b.300 of this chapter), and the 
information and documents in Exhibits 1 through 9 of Form NRSRO, filed 
with or furnished, as applicable, to the Commission pursuant to Sec.  
240.17g-1(e), (f), and (g) of this chapter and the annual reports filed 
with or furnished to, as applicable, the Commission pursuant to Sec.  
240.17g-3 of this chapter.
* * * * *
    3. Section 232.201 is amended by revising paragraph (a) 
introductory text to read as follows:


Sec.  232.201  Temporary hardship exemption.

    (a) If an electronic filer experiences unanticipated technical 
difficulties preventing the timely preparation and submission of an 
electronic filing other than a Form 3 (Sec.  249.103 of this chapter), 
a Form 4 (Sec.  249.104 of this chapter), a Form 5 (Sec.  249.105 of 
this chapter), a Form ID (Sec. Sec.  239.63, 249.446, 269.7, and 
274.402 of this chapter), a Form TA-1 (Sec.  249.100 of this chapter), 
a Form TA-2 (Sec.  249.102 of this chapter), a Form TA-W (Sec.  249.101 
of this chapter), a Form D (Sec.  239.500 of this chapter), an 
application for an order under any section of the Investment Company 
Act (15 U.S.C. 80a-1 et seq.), an Interactive Data File (Sec.  232.11 
of this chapter), or a Form NRSRO (Sec.  249b.300 of this chapter), and 
the information and documents in Exhibits 1 through 9 of Form NRSRO, 
filed with or furnished to, as applicable, the Commission pursuant to 
Sec.  240.17g-1(e), (f), or (g) of this chapter, or the annual reports 
filed with or furnished to, as applicable, the Commission pursuant to 
Sec.  240.17g-3 of this chapter, the electronic filer may file the 
subject filing, under cover of Form TH (Sec. Sec.  239.65, 249.447, 
269.10, and 274.404 of this chapter), in paper format no later than one 
business day after the date on which the filing was to be made.
* * * * *
    4. Section 232.314 is amended by:
    a. In the introductory text adding the phrase ``or in response to 
Rule 15Ga-2 (Sec.  240.15Ga-2 of this chapter)'' after the phrase ``The 
information required in response to Rule 15Ga-1 (Sec.  240.15Ga-1 of 
this chapter)'';
    b. In paragraph (a), removing the words ``Securities Exchange Act 
of 1934'' and in their place inserting the word ``Act''; and
    c. In paragraph (b):
    i. Adding the words ``or Rule 15Ga-2'' after the phrase ``The 
information required by Rule 15Ga-1''; and
    ii. Removing the words ``Web site'' and in their place inserting 
the word ``website''.

[[Page 33538]]

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    5. The authority citation for part 240 is amended by adding 
sectional authorities for Sec. Sec.  240.15Ga-2, 240.17g-8, and 
240.17g-9 to read as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 78p, 78q, 
78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 
80b-3, 80b-4, 80b-11, and 7201 et. seq.; 18 U.S.C. 1350; and 12 
U.S.C. 5221(e)(3) unless otherwise noted.
* * * * *
    Section 240.15Ga-2 is also issued under sec. 943, Public Law 111-
203, 124 Stat. 1376.
* * * * *
    Section 240.17g-8 is also issued under sec. 938, Public Law 111-
203, 124 Stat. 1376.
* * * * *
    Section 240.17g-9 is also issued under sec. 936, Public Law 111-
203, 124 Stat. 1376.
* * * * *
    6. Section 240.15Ga-2 is added to read as follows:


Sec.  240.15Ga-2  Findings and conclusions of third-party due diligence 
reports.

    (a) The issuer or underwriter of an offering of any asset-backed 
security (as that term is defined in Section 3(a)(77) of the Act (15 
U.S.C. 78c(a)(77)) shall furnish Form ABS-15G (Sec.  249.1400 of this 
chapter) if the security is to be rated by a nationally recognized 
statistical rating organization, containing the findings and 
conclusions of any third-party due diligence report obtained by the 
issuer or underwriter five business days prior to the first sale in the 
offering; however, if the issuer or underwriter receives a 
representation from a nationally recognized statistical rating 
organization that can be reasonably relied upon that the disclosure 
required by this paragraph will be publicly disclosed by the nationally 
recognized statistical rating organization five business days prior to 
the first sale in the offering in an information disclosure form 
generated pursuant to Rule 17g-7(a)(1) (Sec.  240.17g-7(a)(1) of this 
chapter) and included with the credit rating, the issuer or underwriter 
would not be required to furnish Form ABS-15G five days prior to the 
first sale in the offering.
    (b) If the issuer or underwriter receives a representation pursuant 
to paragraph (a) of this section, but the nationally recognized 
statistical rating organization has not fulfilled its representation to 
publicly disclose the disclosure five business days prior to the first 
sale in the offering, the issuer or underwriter shall furnish Form ABS-
15G two business days prior to the first sale in the offering.
    (c) For purposes of paragraph (a) of this section, ``third-party 
due diligence report'' means any report containing findings and 
conclusions of any ``due diligence services'' as defined in Rule 17g-
10(c)(1) (Sec.  240.17g-10(c)(1) of this chapter) performed by a third 
party.
    Instruction to paragraph (a) of this section: The issuer or 
underwriter shall provide to the Commission, upon request, information 
regarding the manner in which the representation by the nationally 
recognized statistical rating organization was obtained and relied upon 
for purposes of this paragraph.
    7. Section 240.17g-1 is amended by:
    a. In paragraphs (a), (b), and (c) removing the phase ``furnish the 
Commission with'' wherever it appears and adding in its place the 
phrase ``file with the Commission two paper copies of'';
    b. In paragraph (d), adding the phrase ``two paper copies of'' 
after the phrase ``the applicant must furnish the Commission with''; 
and
    c. Revising paragraphs (e), (f), (g), (h), and (i).
    The revisions read as follows:


Sec.  240.17g-1  Application for registration as a nationally 
recognized statistical rating organization.

* * * * *
    (e) Update of registration. A nationally recognized statistical 
rating organization amending materially inaccurate information in its 
application for registration pursuant to section 15E(b)(1) of the Act 
(15 U.S.C. 78o-7(b)(1)) must promptly file with the Commission an 
update of its registration on Form NRSRO that follows all applicable 
instructions for the Form. A Form NRSRO and the information and 
documents in Exhibits 1 through 9 of Form NRSRO filed under this 
paragraph must be filed electronically with the Commission in the 
format required by the EDGAR Filer Manual, as defined in Rule 11 of 
Regulation S-T.
    (f) Annual certification. A nationally recognized statistical 
rating organization amending its application for registration pursuant 
to section 15E(b)(2) of the Act (15 U.S.C. 78o-7(b)(2)) must file with 
the Commission an annual certification on Form NRSRO that follows all 
applicable instructions for the Form not later than 90 days after the 
end of each calendar year. A Form NRSRO and the information and 
documents in Exhibits 1 through 9 of Form NRSRO filed under this 
paragraph must be filed electronically with the Commission in the 
format required by the EDGAR Filer Manual, as defined in Rule 11 of 
Regulation S-T.
    (g) Withdrawal from registration. A nationally recognized 
statistical rating organization withdrawing from registration pursuant 
to section 15E(e)(1) of the Act (15 U.S.C. 78o-7(e)(1)) must furnish 
the Commission with a notice of withdrawal from registration on Form 
NRSRO that follows all applicable instructions for the Form. The 
withdrawal from registration will become effective 45 calendar days 
after the notice is furnished to the Commission upon such terms and 
conditions as the Commission may establish as necessary in the public 
interest or for the protection of investors. A Form NRSRO furnished 
under this paragraph must be furnished electronically with the 
Commission in the format required by the EDGAR Filer Manual, as defined 
in Rule 11 of Regulation S-T.
    (h) Filing or furnishing Form NRSRO. A Form NRSRO filed or 
furnished, as applicable, under any paragraph of this section will be 
considered filed with or furnished to, as applicable, the Commission on 
the date the Commission receives a complete and properly executed Form 
NRSRO that follows all applicable instructions for the Form. 
Information filed or furnished, as applicable, on a confidential basis 
and for which confidential treatment has been requested pursuant to 
applicable Commission rules will be accorded confidential treatment to 
the extent permitted by law.
    (i) Public availability of Form NRSRO. A nationally recognized 
statistical rating organization must make its current Form NRSRO and 
information and documents in Exhibits 1 through 9 to Form NRSRO 
publicly and freely available on an easily accessible portion of its 
corporate Internet Web site within 10 business days after the date of 
the Commission order granting an initial application for registration 
as a nationally recognized statistical rating organization or an 
application to register for an additional class of credit ratings and 
within 10 business days after filing with or furnishing to, as 
applicable, the Commission a Form NRSRO under paragraphs (e), (f), or 
(g) of this section. In addition, a nationally recognized statistical 
rating organization must make its up-to-date Exhibit 1 to Form NRSRO 
freely available in writing to any individual who requests a copy of 
the Exhibit.

[[Page 33539]]

    8. Section 240.17g-2 is amended by:
    a. In paragraphs (a)(2)(iii) and (a)(7) introductory text, removing 
the words ``or mortgage-backed'';
    b. Adding paragraph (a)(9);
    c. Revising paragraph (b)(1);
    d. In paragraph (b)(9), removing the words ``or mortgage-backed'';
    e. Revising paragraph (b)(11);
    f. Adding paragraphs (b)(12) through (15);
    g. Re-designating paragraph (d)(1) as paragraph (d); and
    h. Removing paragraphs (d)(2) and (d)(3);
    The additions and revisions read as follows:


Sec.  240.17g-2  Records to be made and retained by nationally 
recognized statistical rating organizations.

    (a) * * *
    (9) A record documenting the policies and procedures the nationally 
recognized statistical rating organization is required to establish, 
maintain, and enforce pursuant to Section 15E(h)(4)(A) of the Act (15 
U.S.C. 78o-7(h)(4)(A)) and Sec.  240.17g-8(c) of this chapter.
* * * * *
    (b) * * *
    (1) Significant records (for example, bank statements, invoices, 
and trial balances) underlying the information included in the annual 
financial reports the nationally recognized statistical rating 
organization files with or furnishes to, as applicable, the Commission 
pursuant to Sec.  240.17g-3 of this chapter.
* * * * *
    (11) Form NRSROs (including Exhibits and accompanying information 
and documents) the nationally recognized statistical rating 
organization files with or furnishes to, as applicable, the Commission.
    (12) The internal control structure the nationally recognized 
statistical rating organization is required to establish, maintain, 
enforce, and document pursuant to Section 15E(c)(3)(A) of the Act (15 
U.S.C. 78o-7(c)(3)(A)).
    (13) The policies and procedures the nationally recognized 
statistical rating organization is required to establish, maintain, 
enforce, and document pursuant to Sec.  240.17g-8(a) of this chapter.
    (14) The policies and procedures the nationally recognized 
statistical rating organization is required to establish, maintain, 
enforce, and document pursuant to Sec.  240.17g-8(b) of this chapter.
    (15) The standards of training, experience, and competence for 
credit analysts the nationally recognized statistical rating 
organization is required to establish, maintain, enforce, and document 
pursuant to Sec.  240.17g-9 of this chapter.
* * * * *
    9. Section 240.17g-3 is amended by:
    a. Revising the heading;
    b. Revising the introductory text of paragraph (a);
    c. In paragraph (a)(1) introductory text, removing the first word 
``Audited'' and adding in its place the phrase ``File with the 
Commission a financial report, as of the end of the fiscal year, 
containing audited'';
    d. In paragraph (a)(2) introductory text, removing the first word 
``If'' and adding in its place the phrase ``File with the Commission a 
financial report, as of the end of the fiscal year, containing, if'';
    e. In the Note to paragraph (a)(2), removing the word ``furnished'' 
and adding in its place the word ``filed'';
    f. In the introductory texts to paragraphs (a)(3), (4), and (5), 
removing the first word ``An'' and adding in its place the phrase 
``File with the Commission an unaudited financial report, as of the end 
of the fiscal year,'';
    g. In paragraph (a)(6) introductory text, removing the first word 
``An'' and adding in its place the phrase ``Furnish the Commission with 
an unaudited report, as of the end of the fiscal year,'';
    h. In the Note to paragraph (a)(6), removing the words ``or 
mortgage-backed'';
    i. Adding paragraphs (a)(7) and (8);
    j. Revising paragraph (b);
    k. Adding paragraphs (d) and (e).
    The additions and revisions read as follows:


Sec.  240.17g-3  Annual financial and other reports to be filed or 
furnished by nationally recognized statistical rating organizations.

    (a) A nationally recognized statistical rating organization must 
annually, not more than 90 calendar days after the end of its fiscal 
year (as indicated on its current Form NRSRO):
* * * * *
    (7) File with the Commission an unaudited report, as of the end of 
the fiscal year, concerning the internal control structure the 
nationally recognized statistical rating organization is required to 
establish, maintain, enforce, and document pursuant to Section 
15E(c)(3)(A) of the Act (15 U.S.C. 78o-7(c)(3)(A)) that contains:
    (i) A description of the responsibility of management in 
establishing and maintaining an effective internal control structure; 
and
    (ii) An assessment by management of the effectiveness of the 
internal control structure.
    (8) File with the Commission an unaudited annual report on the 
compliance of the nationally recognized statistical rating organization 
with the securities laws and the policies and procedures of the 
nationally recognized statistical rating organization pursuant to 
Section 15E(j)(5)(B) of the Act (15 U.S.C. 78o-7(j)(5)(B)).
    (b) The nationally recognized statistical rating organization must:
    (1) Attach to the reports filed or furnished, as applicable, 
pursuant to paragraphs (a)(1) through (6) of this section a signed 
statement by a duly authorized person associated with the nationally 
recognized statistical rating organization stating that the person has 
responsibility for the reports and, to the best knowledge of the 
person, the reports fairly present, in all material respects, the 
financial condition, results of operations, cash flows, revenues, 
analyst compensation, and credit rating actions of the nationally 
recognized statistical rating organization for the period presented; 
and
    (2) Attach to the report filed pursuant to paragraph (a)(7) of this 
section a signed statement by the chief executive officer of the 
nationally recognized statistical rating organization or, if the 
nationally recognized statistical rating organization does not have a 
chief executive officer, an individual performing similar functions, 
stating that the chief executive officer or individual has 
responsibility for the report and, to the best knowledge of the chief 
executive officer or other individual, the report fairly presents, in 
all material respects, a description of the responsibility of 
management in establishing and maintaining an effective internal 
control structure and an assessment of the effectiveness of the 
internal control structure.
* * * * *
    (d) Electronic Filing. The reports must be filed with or furnished 
to, as applicable, the Commission electronically in the format required 
by the EDGAR Filer Manual, as defined in Rule 11 of Regulation S-T.
    (e) Confidential Treatment. Information in a report filed or 
furnished, as applicable, on a confidential basis and for which 
confidential treatment has been requested pursuant to applicable 
Commission rules will be accorded confidential treatment to the extent 
permitted by law. Confidential treatment may be requested by marking 
each page ``Confidential Treatment Requested'' and by complying with 
Commission rules governing confidential treatment.
    10. Section 240.17g-5 is amended by:

[[Page 33540]]

    a. In paragraph (a)(3) introductory text, removing the words ``or 
mortgaged-backed'';
    b. In paragraphs (a)(3)(i), (a)(3)(ii) introductory text, 
(a)(3)(iii)(A), (a)(3)(iii)(B) introductory text, (a)(3)(iii)(C), and 
(a)(3)(iii)(D), removing the words ``Web site'' and adding in their 
place the word ``Web site'';
    c. In paragraph (b)(9), removing the words ``or mortgaged-backed'';
    d. In paragraph (c)(6), removing the word ``or'' at the end of the 
paragraph after the semicolon;
    e. In paragraph (c)(7), removing the period and adding ``; or'' at 
the end of the paragraph;
    f. Adding paragraph (c)(8);
    g. In paragraph (e), removing the words ``Web site'' and adding in 
their place the word ``website'' and removing the words ``Web sites'' 
and adding in their place the word ``websites'' wherever it occurs; and
    h. Adding paragraphs (f) and (g).
    The additions read as follows:


Sec.  240.17g-5  Conflicts of interest.

* * * * *
    (c) * * *
    (8) The nationally recognized statistical rating organization 
issues or maintains a credit rating where a person within the 
nationally recognized statistical rating organization who participates 
in sales or marketing of a product or service of the nationally 
recognized statistical rating organization or a product or service of a 
person associated with the nationally recognized statistical rating 
organization also participates in determining or monitoring the credit 
rating, or developing or approving procedures or methodologies used for 
determining the credit rating, including qualitative or quantitative 
models.
* * * * *
    (f) Upon written application by a nationally recognized statistical 
rating organization, the Commission may exempt, either conditionally or 
unconditionally or on specified terms and conditions, such nationally 
recognized statistical rating organization from the provisions of 
paragraph (c)(8) of this section if the Commission finds that due to 
the small size of the nationally recognized statistical rating 
organization it is not appropriate to require the separation within the 
nationally recognized statistical rating organization of the production 
of credit ratings from sales and marketing activities and such 
exemption is in the public interest.
    (g) In a proceeding pursuant to Section 15E(d) of the Act (15 
U.S.C. 78o-7(d)) or Section 21C of the Act (15 U.S.C. 78u-3), the 
Commission shall suspend or revoke the registration of a nationally 
recognized statistical rating organization if the Commission finds in 
such proceeding that the nationally recognized statistical rating 
organization has violated a rule issued under Section 15E(h) of the Act 
(15 U.S.C. 78o-7(h)), that the violation affected a rating, and that 
suspension or revocation is necessary for the protection of investors 
and in the public interest.


Sec.  240.17g-6  [Amended]

    11. Section 240.17g-6 is amended in paragraph (a)(4) by removing 
the words ``or mortgage-backed''.
    12. Section 240.17g-7 is revised to read as follows:


Sec.  240.17g-7  Disclosure requirements.

    (a) Disclosures to be made when taking a rating action. A 
nationally recognized statistical rating organization must publish the 
items described in paragraphs (a)(1) and (2) of this section, as 
applicable, when taking a rating action with respect to a credit rating 
assigned to an obligor, security, or money market instrument in a class 
of credit ratings for which the nationally recognized statistical 
rating organization is registered. For purposes of this section, the 
term ``rating action'' means any of the following: the publication of 
an expected or preliminary credit rating assigned to an obligor, 
security, or money market instrument before the publication of an 
initial credit rating; an initial credit rating; an upgrade or 
downgrade of an existing credit rating (including a downgrade to, or 
assignment of, default); a placement of an existing credit rating on 
credit watch or review; an affirmation of an existing credit rating; 
and a withdrawal of an existing credit rating. The items described in 
paragraphs (a)(1) and (a)(2) of this section must be published in the 
same medium and made available to the same persons who can receive or 
access the credit rating that is the result of the rating action or 
that is the subject of the rating action.
    (1) Information disclosure form. A form generated by the nationally 
recognized statistical rating organization that meets the requirements 
of paragraphs (a)(1)(i), (ii), and (iii) of this section.
    (i) Format. The form generated by the nationally recognized 
statistical rating organization must be in a format that:
    (A) Is easy to use and helpful for users of credit ratings to 
understand the information contained in the form; and
    (B) Provides the content described in paragraphs (a)(1)(ii)(K), 
(L), and (M) of this section in a manner that is directly comparable 
across types of obligors, securities, and money market instruments.
    (ii) Content. The form generated by the nationally recognized 
statistical rating organization must contain the following information 
about the credit rating:
    (A) The symbol, number, or score in the rating scale used by the 
nationally recognized statistical rating organization to denote credit 
rating categories and notches within categories assigned to the 
obligor, security, or money market instrument that is the subject of 
the credit rating and the identity of the obligor, security, or money 
market instrument;
    (B) The version of the procedure or methodology used to determine 
the credit rating;
    (C) The main assumptions and principles used in constructing the 
procedures and methodologies used to determine the credit rating, 
including qualitative methodologies and quantitative inputs and, if the 
credit rating is for a structured finance product, assumptions about 
the correlation of defaults across the underlying assets;
    (D) The potential limitations of the credit rating, including the 
types of risks excluded from the credit rating that the nationally 
recognized statistical rating organization does not comment on, 
including, as applicable, liquidity, market, and other risks;
    (E) Information on the uncertainty of the credit rating, including:
    (1) Information on the reliability, accuracy, and quality of the 
data relied on in determining the credit rating; and
    (2) A statement relating to the extent to which data essential to 
the determination of the credit rating were reliable or limited, 
including:
    (i) Any limits on the scope of historical data; and
    (ii) Any limits on accessibility to certain documents or other 
types of information that would have better informed the credit rating;
    (F) Whether and to what extent third-party due diligence services 
were used by the nationally recognized statistical rating organization, 
a description of the information that such third party reviewed in 
conducting due diligence services, and a description of the findings or 
conclusions of such third party;
    (G) If applicable, how servicer or remittance reports were used, 
and with what frequency, to conduct surveillance of the credit rating;
    (H) A description of the data about any obligor, issuer, security, 
or money market instrument that were relied upon

[[Page 33541]]

for the purpose of determining the credit rating;
    (I) A statement containing an overall assessment of the quality of 
information available and considered in determining the credit rating 
for the obligor, security, or money market instrument, in relation to 
the quality of information available to the nationally recognized 
statistical rating organization in rating similar obligors, securities, 
or money market instruments;
    (J) Information relating to conflicts of interest of the nationally 
recognized statistical rating organization, which must include:
    (1) A classification of the credit rating as either:
    (i) ``Solicited sell-side,'' meaning the credit rating was paid for 
by the obligor being rated or the issuer, underwriter, depositor, or 
sponsor of the security or money market instrument being rated;
    (ii) ``Solicited buy-side,'' meaning the credit rating was paid for 
by a person other than the obligor being rated or the issuer, 
underwriter, depositor, or sponsor of the security or money market 
instrument being rated; or
    (iii) ``Unsolicited,'' meaning the nationally recognized 
statistical rating organization was not paid to determine the credit 
rating;
    (2) If the credit rating is classified as either ``solicited sell-
side'' or ``solicited buy-side'' under paragraph (a)(1)(ii)(J)(1) of 
this section, disclosure of whether the nationally recognized 
statistical rating organization provided services other than 
determining credit ratings to the person that paid for the rating 
during the most recently ended fiscal year; and
    (3) If the rating action results from a review conducted pursuant 
to Section 15E(h)(4)(A) of the Act (15 U.S.C. 78o-7(h)(4)(A)) and Sec.  
240.17g-8(c) of this chapter, provide the following information (as 
applicable):
    (i) If the rating action is a placement of the credit rating on 
credit watch pursuant to Sec.  240.17g-8(c)(1) of this chapter, an 
explanation that the reason for the action is the discovery that a 
credit rating assigned to the obligor, security, or money market 
instrument in one or more prior rating actions was influenced by a 
conflict of interest and the date and associated credit rating of each 
prior rating action that the nationally recognized statistical rating 
organization currently has determined was influenced by the conflict;
    (ii) If the rating action is a revision of the credit rating 
pursuant to Sec.  240.17g-8(c)(3)(i) of this chapter, an explanation 
that the reason for the action is the discovery that a credit rating 
assigned to the obligor, security, or money market instrument in one or 
more prior rating actions was influenced by a conflict of interest, the 
date and associated credit rating of each prior rating action the 
nationally recognized statistical rating organization has determined 
was influenced by the conflict, and an estimate of the impact the 
conflict had on each such prior rating action;
    (iii) If the rating action is an affirmation of the credit rating 
pursuant to Sec.  240.17g-8(c)(3)(ii) of this chapter, an explanation 
of why no rating action was taken to revise the credit rating 
notwithstanding the conflict, the date and associated credit rating of 
each prior rating action the nationally recognized statistical rating 
organization has determined was influenced by the conflict, and an 
estimate of the impact the conflict had on each such prior rating 
action.
    (K) An explanation or measure of the potential volatility of the 
credit rating, including:
    (1) Any factors that might lead to a change in the credit rating; 
and
    (2) The magnitude of the change that could occur under different 
market conditions;
    (L) Information on the content of the credit rating, including:
    (1) If applicable, the historical performance of the credit rating; 
and
    (2) The expected probability of default and the expected loss in 
the event of default;
    (M) Information on the sensitivity of the credit rating to 
assumptions made by the nationally recognized statistical rating 
organization, including:
    (1) Five assumptions made in the ratings process that, without 
accounting for any other factor, would have the greatest impact on a 
rating if the assumptions were proven false or inaccurate; and
    (2) An analysis, using specific examples, of how each of the five 
assumptions identified in paragraph (a)(1)(ii)(M)(1) of this section 
impacts a rating;
    (N) If the credit rating is issued with respect to an asset-backed 
security, as defined in Section 3(a)(77) of the Act (15 U.S.C. 
78c(a)(77)), a description of:
    (1) The representations, warranties, and enforcement mechanisms 
available to investors; and
    (2) How they differ from the representations, warranties, and 
enforcement mechanisms in issuances of similar securities.
    (iii) Attestation. The nationally recognized statistical rating 
organization must attach to the form a signed statement by a person 
within the nationally recognized statistical rating organization 
stating that the person has responsibility for the rating action and, 
to the best knowledge of the person:
    (A) No part of the credit rating was influenced by any other 
business activities;
    (B) The credit rating was based solely upon the merits of the 
obligor, security, or money market instrument being rated; and
    (C) The credit rating was an independent evaluation of the risks 
and merits of the obligor, security, or money market instrument.
    (2) Third-party due diligence certification. Any written 
certification related to the credit rating received by the nationally 
recognized statistical rating organization from a provider of third-
party due diligence services pursuant to Section 15E(s)(4)(B) of the 
Act (15 U.S.C. 78o-7(s)(4)(B)).
    (b) Disclosure of credit rating histories. (1) Credit ratings 
subject to the disclosure requirement. A nationally recognized 
statistical rating organization must publicly disclose for free on an 
easily accessible portion of its corporate Internet Web site:
    (i) Each credit rating assigned to an obligor, security, and money 
market instrument in every class of credit ratings for which the 
nationally recognized statistical rating organization is registered 
that was outstanding as of June 26, 2007, and any subsequent upgrades 
or downgrades of a credit rating assigned to the obligor, security, or 
money market instrument (including a downgrade to, or assignment of, 
default), any placements of a credit rating assigned to the obligor, 
security, or money market instrument on credit watch or review, any 
affirmation of a credit rating assigned to the obligor, security, or 
money market instrument, and a withdrawal of a credit rating assigned 
to the obligor, security, or money market instrument; and
    (ii) Each credit rating assigned to an obligor, security, and money 
market instrument in every class of credit ratings for which the 
nationally recognized statistical rating organization is registered 
that was initially determined on or after June 26, 2007 and any 
subsequent upgrades or downgrades of a credit rating assigned to the 
obligor, security, or money market instrument (including a downgrade 
to, or assignment of, default), any placements of a credit rating 
assigned to the obligor, security, or money market instrument on credit 
watch or review, any affirmation of a credit rating assigned to the 
obligor, security, or money market instrument, and a withdrawal of a 
credit rating assigned to the obligor, security, or money market 
instrument.

[[Page 33542]]

    (2) Information. A nationally recognized statistical rating 
organization must include, at a minimum, the following information with 
each credit rating disclosed pursuant to paragraph (b)(1) of this 
section:
    (i) The identity of the nationally recognized statistical rating 
organization disclosing the rating action;
    (ii) The date of the rating action;
    (iii) If the rating action is taken with respect to a credit rating 
of an obligor as an entity, the following identifying information about 
the obligor, as applicable:
    (A) The Central Index Key (CIK) number of the rated obligor; and
    (B) The legal name of the obligor.
    (iv) If the rating action is taken with respect to a credit rating 
of a security or money market instrument, as applicable:
    (A) The Central Index Key (CIK) number of the issuer of the 
security or money market instrument;
    (B) The legal name of the issuer of the security or money market 
instrument; and
    (C) The CUSIP of the security or money market instrument;
    (v) A classification of the rating action as either:
    (A) A disclosure of a credit rating that was outstanding as of June 
26, 2007, for the purposes of paragraph (b)(1)(i) of this section;
    (B) An initial credit rating;
    (C) An upgrade of an existing credit rating;
    (D) A downgrade of an existing credit rating, which would include 
classifying the obligor, security, or money market instrument as in 
default, if applicable;
    (E) A placement of an existing credit rating on credit watch or 
review;
    (F) An affirmation of an existing credit rating; or
    (G) A withdrawal of an existing credit rating and, if the 
classification is withdrawal, the nationally recognized statistical 
rating organization also must classify the reason for the withdrawal as 
either:
    (1) The obligor defaulted, or the security or money market 
instrument went into default;
    (2) The obligation subject to the credit rating was extinguished by 
payment in full of all outstanding principal and interest due on the 
obligation according to the terms of the obligation; or
    (3) The credit rating was withdrawn for reasons other than those 
set forth in paragraph (b)(2)(v)(G)(1) or (2) of this section; and
    (vi) The classification of the class or subclass that applies to 
the credit rating as either:
    (A) Financial institutions, brokers, or dealers;
    (B) Insurance companies;
    (C) Corporate issuers; or
    (D) Issuers of structured finance products in one of the following 
subclasses:
    (1) Residential mortgage backed securities (``RMBS'') (for purposes 
of this subclass, RMBS means a securitization primarily of residential 
mortgages);
    (2) Commercial mortgage backed securities (``CMBS'') (for purposes 
of this subclass, CMBS means a securitization primarily of commercial 
mortgages);
    (3) Collateralized loan obligations (``CLOs'') (for purposes of 
this subclass, a CLO means a securitization primarily of commercial 
loans);
    (4) Collateralized debt obligations (``CDOs) (for purposes of this 
subclass, a CDO means a securitization primarily of other debt 
instruments such as RMBS, CMBS, CLOs, CDOs, other asset backed 
securities, and corporate bonds);
    (5) Asset-backed commercial paper conduits (``ABCP'') (for purposes 
of this subclass, ABCP means short term notes issued by a structure 
that securitizes a variety of financial assets, such as trade 
receivables or credit card receivables, which secure the notes);
    (6) Other asset-backed securities (``other ABS'') (for purposes of 
this subclass, other ABS means a securitization primarily of auto 
loans, auto leases, floor plans, credit card receivables, student 
loans, consumer loans, or equipment leases); or
    (7) Other structured finance products (``other SFPs'') (for 
purposes of this subclass, other SFPs means any structured finance 
product not identified in paragraphs (b)(2)(iv)(D)(1) through (6)) of 
this section; or
    (E) Issuers of government securities, municipal securities, or 
securities issued by a foreign government in one of the following 
subclasses:
    (1) Sovereign issuers;
    (2) United States public finance; or
    (3) International public finance; and
    (vii) The credit rating symbol, number, or score in the applicable 
rating scale of the nationally recognized statistical rating 
organization assigned to the obligor, security, or money market 
instrument as a result of the rating action or, if the credit rating 
remained unchanged as a result of the rating action, the credit rating 
symbol, number, or score in the applicable rating scale of the 
nationally recognized statistical rating organization assigned to the 
obligor, security, or money market instrument as of the date of the 
rating action (in either case, include a credit rating in a default 
category, if applicable).
    (3) Format. The information identified in paragraph (b)(2) of this 
section must be disclosed in an interactive data file that uses an XBRL 
(eXtensible Business Reporting Language) format and the List of XBRL 
Tags for NRSROs as published on the Internet Web site of the 
Commission.
    (4) Timing. The nationally recognized statistical rating 
organization must disclose the information required in paragraph (b)(2) 
of this section:
    (i) Within twelve months from the date the rating action is taken, 
if the credit rating subject to the action was paid for by the obligor 
being rated or by the issuer, underwriter, depositor, or sponsor of the 
security being rated; or
    (ii) Within twenty-four months from the date the rating action is 
taken, if the credit rating subject to the action is not a credit 
rating described in paragraph (b)(4)(i) of this section.
    (5) Removal of a credit rating history. The nationally recognized 
statistical rating organization may cease disclosing a rating history 
of an obligor, security, or money market instrument no earlier than 20 
years after the date a rating action with respect to the obligor, 
security, or money market instrument is classified as a withdrawal of 
the credit rating pursuant to paragraph (b)(2)(v)(G) of this section, 
provided that no subsequent credit ratings are assigned to the obligor, 
security, or money market instrument after the withdrawal 
classification.
    13. Section 240.17g-8 is added to read as follows:


Sec.  240.17g-8  Policies and procedures.

    (a) Policies and procedures with respect to the procedures and 
methodologies used to determine credit ratings. A nationally recognized 
statistical rating organization must establish, maintain, enforce, and 
document policies and procedures reasonably designed to ensure:
    (1) That the procedures and methodologies, including qualitative 
and quantitative data and models, the nationally recognized statistical 
rating organization uses to determine credit ratings are approved by 
its board of directors or a body performing a function similar to that 
of a board of directors.
    (2) That the procedures and methodologies, including qualitative 
and quantitative data and models, the nationally recognized statistical 
rating organization uses to determine credit ratings are developed and 
modified in accordance with the policies and procedures of the 
nationally recognized statistical rating organization.
    (3) That material changes to the procedures and methodologies, 
including changes to qualitative and

[[Page 33543]]

quantitative data and models, the nationally recognized statistical 
rating organization uses to determine credit ratings are:
    (i) Applied consistently to all credit ratings to which the changed 
procedures or methodologies apply; and
    (ii) To the extent that the changes are to surveillance or 
monitoring procedures and methodologies, applied to then-current credit 
ratings within a reasonable period of time, taking into consideration 
the number of ratings impacted, the complexity of the procedures and 
methodologies used to determine the credit ratings, and the type of 
obligor, security, or money market instrument being rated.
    (4) That the nationally recognized statistical rating organization 
promptly publishes on an easily accessible portion of its corporate 
Internet Web site:
    (i) Material changes to the procedures and methodologies, including 
to qualitative models or quantitative inputs, the nationally recognized 
statistical rating organization uses to determine credit ratings, the 
reason for the changes, and the likelihood the changes will result in 
changes to any current ratings; and
    (ii) Significant errors identified in a procedure or methodology, 
including a qualitative or quantitative model, the nationally 
recognized statistical rating organization uses to determine credit 
ratings that may result in a change in current credit ratings.
    (5) That the nationally recognized statistical rating organization 
discloses the version of a credit rating procedure or methodology, 
including the qualitative methodology or quantitative inputs, used with 
respect to a particular credit rating.
    (b) Policies and procedures with respect to credit rating symbols, 
numbers, or scores. A nationally recognized statistical rating 
organization must establish, maintain, enforce, and document policies 
and procedures that are reasonably designed to:
    (1) Assess the probability that an issuer of a security or money 
market instrument will default, fail to make timely payments, or 
otherwise not make payments to investors in accordance with the terms 
of the security or money market instrument.
    (2) Clearly define each symbol, number, or score in the rating 
scale used by the nationally recognized statistical rating organization 
to denote a credit rating category and notches within a category for 
each class and subclass of credit ratings for which the nationally 
recognized statistical rating organization is registered and to include 
such definitions in Exhibit 1 to Form NRSRO (Sec.  240b.300 of this 
chapter).
    (3) Apply any symbol, number, or score defined pursuant to 
paragraph (b)(2) of this section in a manner that is consistent for all 
types of obligors, securities, and money market instruments for which 
the symbol, number, or score is used.
    (c) Policies and procedures with respect to look-back reviews. The 
policies and procedures a nationally recognized statistical rating 
organization is required to establish, maintain, and enforce pursuant 
to Section 15E(h)(4)(A) of the Act (15 U.S.C. 78o-7(h)(4)(A)) must 
address instances in which a review conducted pursuant to those 
policies and procedures determines that a conflict of interest 
influenced a credit rating assigned to an obligor, security, or money 
market instrument by including, at a minimum, procedures that are 
reasonably designed to ensure that the nationally recognized 
statistical rating organization will:
    (1) Immediately publish a rating action placing the applicable 
credit ratings of the obligor, security, or money market instrument on 
credit watch or review based on the discovery of the conflict and 
include with the publication of the rating action the information 
required by Sec.  240.17g-7(a)(1)(ii)(J)(3)(i) of this chapter;
    (2) Promptly determine whether the current credit rating assigned 
to the obligor, security, or money market instrument must be revised so 
that it no longer is influenced by a conflict of interest and is solely 
a product of the documented procedures and methodologies the nationally 
recognized statistical rating organization uses to determine credit 
ratings; and
    (3) Promptly publish, based on the determination of whether the 
current credit rating assigned to the obligor, security, or money 
market instrument must be revised (as applicable):
    (i) A revised credit rating, if appropriate, and include with the 
publication of the revised credit rating the information required by 
Sec.  240.17g-7(a)(1)(ii)(J)(3)(ii) of this chapter; or
    (ii) An affirmation of the credit rating, if appropriate, and 
include with the publication of the affirmation the information 
required by Sec.  240.17g-7(a)(1)(ii)(J)(3)(iii) of this chapter.
    14. Section 240.17g-9 is added to read as follows:


Sec.  240.17g-9  Standards of training, experience, and competence for 
credit analysts.

    (a) A nationally recognized statistical rating organization must 
establish, maintain, enforce, and document standards of training, 
experience, and competence for the individuals it employs to determine 
credit ratings that are reasonably designed to achieve the objective 
that such individuals produce accurate credit ratings in the classes 
and subclasses of credit ratings for which the nationally recognized 
statistical rating organization is registered.
    (b) The nationally recognized statistical rating organization must 
consider the following when establishing the standards required under 
paragraph (a) of this section:
    (1) If the credit rating procedures and methodologies used by the 
individual involve qualitative analysis, the knowledge necessary to 
effectively evaluate and process the data relevant to the 
creditworthiness of the obligor being rated or the issuer of the 
securities or money market instruments being rated;
    (2) If the credit rating procedures and methodologies used by the 
individual involve quantitative analysis, the technical expertise 
necessary to understand any models and model inputs that are a part of 
the procedures and methodologies;
    (3) The classes and subclasses of credit ratings for which the 
individual participates in determining credit ratings and the factors 
relevant to such classes and subclasses, including the geographic 
location, sector, industry, regulatory and legal framework, and 
underlying assets, applicable to the obligors or issuers in the classes 
and subclasses; and
    (4) The complexity of the obligors, securities, or money market 
instruments being rated by the individual.
    (c) The nationally recognized statistical rating organization must 
include the following in the standards required under paragraph (a) of 
this section:
    (1) A requirement for periodic testing of the individuals employed 
by the nationally recognized statistical rating organization to 
determine credit ratings on their knowledge of the procedures and 
methodologies used by the nationally recognized statistical rating 
organization to determine credit ratings in the classes and subclasses 
of credit ratings for which the individual participates in determining 
credit ratings; and
    (2) A requirement that at least one individual with three years or 
more experience in performing credit analysis participates in the 
determination of a credit rating.
    15. Section 240.17g-10 is added to read as follows:

[[Page 33544]]

Sec.  240.17g-10  Certification of providers of third-party due 
diligence services in connection with asset-backed securities.

    (a) The written certification that a person employed to provide 
third-party due diligence services is required to provide to a 
nationally recognized statistical rating organization pursuant to 
Section 15E(s)(4)(B) of the Act (15 U.S.C. 78o-7(s)(4)(B)) must be on 
Form ABS Due Diligence-15E (Sec.  240b.400 of this chapter).
    (b) The written certification must be signed by an individual who 
is duly authorized by the person providing the third-party due 
diligence services to make such a certification.
    (c) For the purposes of Section 15E(s)(4)(B) of the Act (15 U.S.C. 
78o-7(s)(4)(B)) and this section:
    (1) The term due diligence services means a review of the assets 
underlying an asset-backed security, as defined in Section 3(a)(77) of 
the Act (15 U.S.C. 78c(a)(77)) for the purpose of making findings with 
respect to:
    (i) The quality or integrity of the information or data about the 
assets provided, directly or indirectly, by the securitizer or 
originator of the assets;
    (ii) Whether the origination of the assets conformed to, or 
deviated from, stated underwriting or credit extension guidelines, 
standards, criteria, or other requirements;
    (iii) The value of collateral securing such assets;
    (iv) Whether the originator of the assets complied with Federal, 
state, or local laws or regulations; or
    (v) Any other factor or characteristic of such assets that would be 
material to the likelihood that the issuer of the asset-backed security 
will pay interest and principal according to its terms and conditions.
    (2) The term issuer includes a sponsor, as defined in Sec.  
229.1011 of this chapter, or depositor, as defined in Sec.  229.1011 of 
this chapter, that participates in the issuance of an asset-backed 
security, as defined in Section 3(a)(77) of the Act (15 U.S.C. 
78c(a)(77)).
    (3) The term originator has the same meaning as in Section 15G of 
the Act (15 U.S.C. 78o-9).
    (4) The term securitizer has the same meaning as in Section 15G of 
the Act (15 U.S.C. 78o-9).

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

    16. The authority citation for Part 249 continues to read as 
follows:

    Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; and 18 U.S.C. 
1350, unless otherwise noted.

Subpart O--Forms for Securitizers of Asset-Backed Securities

    17. Section 249.1400 and Form ABS-15G (referenced in Sec.  
249.1400) to Part 249 are revised to read as follows:


Sec.  249.1400  Form ABS-15G, Asset-backed securitizer report pursuant 
to Section 15G of the Securities Exchange Act of 1934.

    This form shall be used for reports of information required by Rule 
15Ga-1 (Sec.  240.15Ga-1 of this chapter) and Rule 15Ga-2 (Sec.  
240.15Ga-2 of this chapter).

    Note: The text of Form ABS-15G does not, and this amendment will 
not, appear in the Code of Federal Regulations.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM ABS-15G

ASSET-BACKED SECURITIZER REPORT PURSUANT TO SECTION 15G OF THE 
SECURITIES EXCHANGE ACT OF 1934

    Check the appropriate box to indicate the filing obligation which 
this form is intended to satisfy:

-- Rule 15Ga-1 under the Exchange Act (17 CFR 240.15Ga-1) for the 
reporting period ------------ to ------------
-- Rule 15Ga-2 under the Exchange Act (17 CFR 240.15Ga-2)
    Date of Report (Date of earliest event reported)------------
    Commission File Number of securitizer: ------------
    Central Index Key Number of securitizer: ------------
-----------------------------------------------------------------------
Name and telephone number, including area code, of the person to 
contact in connection with this filing
Indicate by check mark whether the securitizer has no activity to 
report for the initial period pursuant to Rule 15Ga-1(c)(1) [ ]
Indicate by check mark whether the securitizer has no activity to 
report for the quarterly period pursuant to Rule 15Ga-1(c)(2)(i) [ ]
Indicate by check mark whether the securitizer has no activity to 
report for the annual period pursuant to Rule 15Ga-1(c)(2)(ii) [ ]
---- For forms furnished pursuant to Rule 15Ga-2 under the Exchange Act 
(17 CFR 240.15Ga-2), also provide the following information:
    Commission File Number of depositor: ------------
    Central Index Key Number of depositor: ------------
-----------------------------------------------------------------------
(Exact name of issuing entity as specified in its charter)
    Central Index Key Number of issuing entity (if applicable): ------
------
    Commission File Number of issuing entity (if applicable): --------
----
    Commission File Number of underwriter (if applicable): ------------
    Central Index Key Number of underwriter (if applicable): ----------
--

GENERAL INSTRUCTIONS

A. Rule as to Use of Form ABS-15G.

    This form shall be used to comply with the requirements of Rule 
15Ga-1 (17 CFR 240.15Ga-1) and Rule 15Ga-2 (17 CFR 240.15Ga-2) under 
the Exchange Act.

B. Events to be Reported and Time for Filing of Reports.

    Forms filed under Rule 15Ga-1. In accordance with Rule 15Ga-1, file 
the information required by Part I in accordance with Item 1.01, Item 
1.02, or Item 1.03, as applicable. If the filing deadline for the 
information occurs on a Saturday, Sunday, or holiday on which the 
Commission is not open for business, then the filing deadline shall be 
the first business day thereafter.
    Forms filed under Rule 15Ga-2. In accordance with Rule 15Ga-2, 
furnish the information required by Part II no later than five business 
days prior to the first sale of securities in the offering.

C. Preparation of Report

    This form is not to be used as a blank form to be filled in, but 
only as a guide in the preparation of the report on paper meeting the 
requirements of Rule 12b-12 (17 CFR 240.12b-12). The report shall 
contain the number and caption of the applicable item, but the text of 
such item may be omitted, provided the answers thereto are prepared in 
the manner specified in Rule 12b-13 (17 CFR 240.12b-13). All items that 
are not required to be answered in a particular report may be omitted 
and no reference thereto need be made in the report. All instructions 
should also be omitted.

D. Signature and Filing of Report

    1. Forms filed under Rule 15Ga-1. Any form filed for the purpose of 
meeting the requirements in Rule 15Ga-1 must be signed by the senior 
officer in charge of securitization of the securitizer.
    2. Forms filed under Rule 15Ga-2. Any form filed for the purpose of 
meeting the requirements in Rule 15Ga-2 must be signed by the senior 
officer in charge of securitization of the depositor if information 
required by Item 2.01 is required to be provided and must be signed by 
a duly authorized officer of

[[Page 33545]]

the underwriter if information required by Item 2.02 is required to be 
provided.
    3. Copies of report. If paper filing is permitted, three complete 
copies of the report shall be filed with the Commission.

INFORMATION TO BE INCLUDED IN THE REPORT

PART I: REPRESENTATION AND WARRANTY INFORMATION

Item 1.01 Initial Filing of Rule 15Ga-1 Representations and Warranties 
Disclosure

    Provide the disclosures required by Rule 15Ga-1 (17 CFR 240.15Ga-1) 
according to the filing requirements of Rule 15Ga-1(c)(1).

Item 1.02 Periodic Filing of Rule 15Ga-1 Representations and Warranties 
Disclosure

    Provide the disclosures required by Rule 15Ga-1 (17 CFR 240.15Ga-1) 
according to the filing requirements of Rule 15Ga-1(c)(2).

Item 1.03 Notice of Termination of Duty to File Reports under Rule 
15Ga-1

    If a securitizer terminates its reporting obligation pursuant to 
Rule 15Ga-1(c)(3), provide the date of the last payment on the last 
asset-backed security outstanding that was issued by or issued by an 
affiliate of the securitizer.

PART II: FINDINGS AND CONCLUSIONS OF THIRD-PARTY DUE DILIGENCE REPORTS

Item 2.01 Findings and Conclusions of a Third Party Due Diligence 
Report Obtained by the Issuer

    Provide the disclosures required by Rule 15Ga-2 (17 CFR 240.15Ga-2) 
for any third-party due diligence report obtained by the issuer.

Item 2.02 Findings and Conclusions of a Third-Party Due Diligence 
Report Obtained by the Underwriter

    Provide the disclosures required by Rule 15Ga-2 (17 CFR 240.15Ga-2) 
for any third party engaged by the underwriter.

SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 
1934, the reporting entity has duly caused this report to be signed on 
its behalf by the undersigned hereunto duly authorized.
------------ (Securitizer or Underwriter)
Date ------------
------------(Signature)*

    *Print name and title of the signing officer under his signature.

PART 249b--FURTHER FORMS, SECURITIES EXCHANGE ACT OF 1934

    18. The authority citation for part 249b continues to read in part 
as follows:

    Authority: 15 U.S.C. 78a et seq., unless otherwise noted;
* * * * *

    Note: The text of Form NRSRO does not, and this amendment will 
not, appear in the Code of Federal Regulations.

    19. Form NRSRO (referenced in Sec.  249b.300) is revised to read as 
follows:

Form NRSRO

APPLICATION FOR REGISTRATION AS A NATIONALLY RECOGNIZED STATISTICAL 
RATING ORGANIZATION (NRSRO)

    Persons who respond to the collection of information contained 
in this form are not required to respond unless the form displays a 
currently valid OMB control number.

SEC 1541 (4-09)
BILLING CODE 8011-01-P

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BILLING CODE 8011-01-C

FORM NRSRO INSTRUCTIONS

A. GENERAL INSTRUCTIONS.

    1. Form NRSRO is the Application for Registration as a Nationally 
Recognized Statistical Rating Organization (``NRSRO'') under Section 
15E of the Securities Exchange Act of 1934 (``Exchange Act'') and 
Exchange Act Rule 17g-1. Exchange Act Rule 17g-1 requires an Applicant/
NRSRO to use Form NRSRO to:
     File an initial application to be registered as an NRSRO 
with the U.S. Securities and Exchange Commission (``Commission'');
     File an application to register for an additional class of 
credit ratings with the Commission;
     File an application supplement with the Commission;
     File an update of registration pursuant to Section 
15E(b)(1) of the Exchange Act with the Commission;
     File an annual certification pursuant to Section 15E(b)(2) 
of the Exchange Act with the Commission; and
     Furnish a withdrawal of registration pursuant to Section 
15E(e) of the Exchange Act to the Commission.
    2. Exchange Act Rule 17g-1(c) requires that an Applicant/NRSRO

[[Page 33552]]

promptly file with the Commission a written notice if information filed 
with the Commission in an initial application for registration or in an 
application to register for an additional class of credit ratings is 
found to be or becomes materially inaccurate before the Commission has 
granted or denied the application. The notice must identify the 
information found to be materially inaccurate. The Applicant/NRSRO must 
also promptly file with the Commission accurate and complete 
information as an application supplement on Form NRSRO.
    3. Pursuant to Exchange Act Rule 17g-1(i), an NRSRO must make its 
current Form NRSRO and information and documents filed in Exhibits 1 
through 9 to Form NRSRO publicly and freely available on an easily 
accessible portion of its corporate Internet website within 10 business 
days after the date of the Commission Order granting an initial 
application for registration as an NRSRO or an application to register 
for an additional class of credit ratings and within 10 business days 
after filing with or furnishing to, as applicable, the Commission an 
update of registration, annual certification, or withdrawal from 
registration on Form NRSRO. The certifications from qualified 
institutional buyers, disclosure reporting pages, and Exhibits 10 
through 13 are not required to be made publicly available by the NRSRO 
pursuant to Rule 17g-1(i). An Applicant/NRSRO may request that the 
Commission keep confidential the certifications from qualified 
institutional buyers, the disclosure reporting pages, and the 
information and documents in Exhibits 10-13 filed with the Commission. 
An Applicant/NRSRO seeking confidential treatment for these submissions 
should mark each page ``Confidential Treatment'' and comply with 
Commission rules governing confidential treatment (See 17 CFR 200.80 
and 17 CFR 200.83). The Commission will keep this information 
confidential to the extent permitted by law.
    4. Section 15E(a)(2) of the Exchange Act prescribes time periods 
and requirements for the Commission to grant or deny an initial 
application for registration as an NRSRO. These time periods also apply 
to an application to register for an additional class of credit 
ratings.
    5. Type or clearly print all information. Use only the current 
version of Form NRSRO or a reproduction of it.
    6. Section 15E of the Exchange Act (15 U.S.C. 78o-7) authorizes the 
Commission to collect the Information on Form NRSRO from an Applicant/
NRSRO. The principal purposes of Form NRSRO are to determine whether an 
Applicant should be granted registration as an NRSRO, whether an NRSRO 
should be granted registration in an additional class of credit 
ratings, whether an NRSRO continues to meet the criteria for 
registration as an NRSRO, for an NRSRO to withdraw from registration, 
and to provide information about an NRSRO to users of credit ratings. 
Intentional misstatements or omissions may constitute federal criminal 
violations under 18 U.S.C. 1001.
    The information collection is in accordance with the clearance 
requirements of Section 3507 of the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507). The Commission may not conduct or sponsor, and you are 
not required to respond to, a collection of information unless it 
displays a valid Office of Management and Budget (OMB) control number. 
The time required to complete and file or furnish, as applicable, this 
form, will vary depending on individual circumstances. The estimated 
average time to complete an initial application is displayed on the 
facing page of this Form. Send comments regarding this burden estimate 
or suggestions for reducing the burden to Chief Information Officer, 
Securities and Exchange Commission, 100 F Street, NE, Washington, DC 
20549 or PRA Mailbox@sec.gov.
    7. Under Exchange Act Rule 17g-2(b)(10), an NRSRO must retain 
copies of all Form NRSROs (including Exhibits, accompanying 
information, and documents) filed with or furnished to, as applicable, 
the Commission. Exchange Act Rule 17g-2(c) requires that these records 
be retained for three years after the date the record is made.
    8. An Applicant must file with the Commission at the address 
indicated below two paper copies of an initial application for 
registration as an NRSRO under Exchange Act Rule 17g-1(a), an 
application to register for an additional class of credit ratings under 
Exchange Act Rule 17g-1(b), a supplement to an initial application or 
application to register for an additional class of credit ratings under 
Exchange Act Rule 17g-1(c), or a withdrawal of an initial application 
or an application to register for an additional class of credit ratings 
under Exchange Act Rule 17g-1(d).

ADDRESS--The mailing address for Form NRSRO is: U.S. Securities and 
Exchange Commission, 100 F Street, NE. Washington, DC 20549.
    After registration, an NRSRO must file with or furnish to, as 
applicable, the Commission electronically in the format required by the 
EDGAR Filer Manual, as defined in Rule 11 of Regulation S-T, an update 
of registration under Exchange Act Rule 17g-1(e), an annual 
certification under Exchange Act Rule 17g-1(f), or a withdrawal from 
registration under Exchange Act Rule 17g-1(g).
    9. A Form NRSRO will be considered filed with or furnished to, as 
applicable, the Commission on the date the Commission receives a 
complete and properly executed Form NRSRO that follows all applicable 
instructions for the Form, including the instructions in Item A.8 with 
respect to how a Form NRSRO must be filed with or furnished to the 
Commission.
    10. An NRSRO is subject to applicable fines, penalties, and other 
available sanctions set forth in Sections 15E, 21, 21A, 21B, 21C, and 
32 of the Exchange Act (15 U.S.C. 78o-7, 78u, 78u-1, 78u-2, 78u-3, and 
78ff, respectively) for violations of the securities laws.

B. INSTRUCTIONS FOR AN INITIAL APPLICATION

    An Applicant applying to be registered with the Commission as an 
NRSRO must file with the Commission an initial application on Form 
NRSRO. To complete an initial application:
     Check the ``INITIAL APPLICATION'' box at the top of Form 
NRSRO.
     Complete Items 1, 2, 3, 4, 5, 6, and 8. (See Instructions 
below for each Item). Enter ``None'' or ``N/A'' where appropriate.
     Unless exempt from the requirement, attach certifications 
from qualified institutional buyers, marked ``Certification from 
Qualified Institutional Buyer'' (See Instructions below for Item 6C).
     Attach Exhibits 1 through 13 (See Instructions below for 
each Exhibit).
     Execute the Form.
The Applicant must promptly file with the Commission a written notice 
if information submitted to the Commission in an initial application is 
found to be or becomes materially inaccurate prior to the date of a 
Commission order granting or denying the application. The notice must 
identify the information found to be materially inaccurate. The 
Applicant also must promptly file with the Commission an application 
supplement on Form NRSRO (See instructions below for an application 
supplement).

[[Page 33553]]

C. INSTRUCTIONS FOR AN APPLICATION TO ADD A CLASS OF CREDIT RATINGS

    An NRSRO applying to register for an additional class of credit 
ratings must file with the Commission an application on Form NRSRO. To 
complete an application to register for an additional class of credit 
ratings:
     Check the ``APPLICATION TO ADD CLASS OF CREDIT RATINGS'' 
box at the top of Form NRSRO.
     Complete Items 1, 2, 3, 4, 5, 6, 7, and 8 on the Form 
following all applicable instructions for each Item (See Instructions 
below for each Item). If any information in an Item on a previously 
submitted Form NRSRO is materially inaccurate, update that information. 
Enter ``None'' or ``N/A'' where appropriate. Complete each Item even if 
the Item is not being updated.
     Unless exempt from the requirement, attach certifications 
from qualified institutional buyers for the additional class of credit 
ratings marked ``Certification from Qualified Institutional Buyer'' 
(See Instructions below for Item 6C).
     If any information in an Exhibit previously submitted is 
materially inaccurate, update that information.
     Execute the Form.

The Applicant must promptly file with the Commission a written notice 
if information submitted to the Commission in an application to add a 
class of credit ratings is found to be or becomes materially inaccurate 
prior to the date of a Commission order granting or denying the 
application. The notice must identify the information found to be 
materially inaccurate. The Applicant also must promptly file with the 
Commission an application supplement on Form NRSRO (See instructions 
below for an application supplement).

D. INSTRUCTIONS FOR AN APPLICATION SUPPLEMENT

    An Applicant must file an application supplement with the 
Commission on Form NRSRO if information submitted to the Commission in 
a pending initial application for registration as an NRSRO or a pending 
application to register for an additional class of credit ratings is 
found to be or becomes materially inaccurate. To complete an 
application supplement:
     Check the ``APPLICATION SUPPLEMENT'' box at the top of 
Form NRSRO.
     Indicate on the line provided under the box the Item(s) or 
Exhibit(s) being supplemented.
     Complete Items 1, 2, 3, 4, 5 and 8 on the Form following 
all applicable instructions for each Item (See Instructions below for 
each Item). If supplementing an initial application, also complete Item 
6. If supplementing an application for registration in an additional 
class of credit ratings, also complete Items 6 and 7. If any 
information in an Item on a previously submitted Form NRSRO is 
materially inaccurate, update that information. Enter ``None'' or ``N/
A'' where appropriate. Complete each Item even if the Item is not being 
updated.
     If a certification from a qualified institutional buyer is 
being updated or a new certification is being added, attach the updated 
or new certification.
     If an Exhibit is being updated, attach the updated 
Exhibit.
     Execute the Form.

E. INSTRUCTIONS FOR AN UPDATE OF REGISTRATION

    After registration is granted, Section 15E(b)(1) of the Exchange 
Act requires that an NRSRO must promptly amend its application for 
registration if information or documents provided in a previously 
submitted Form NRSRO become materially inaccurate. This requirement 
does not apply to Item 7 and Exhibit 1, which only are required to be 
updated annually with the annual certification. It also does not apply 
to Exhibits 10-13 and the certifications from qualified institutional 
buyers, which are not required to be updated on Form NRSRO after 
registration. An NRSRO amending its application for registration must 
file with the Commission an update of its registration on Form NRSRO. 
To complete an update of registration:
     Check the ``UPDATE OF REGISTRATION'' box at the top of 
Form NRSRO.
     Indicate on the line provided under the box the Item(s) or 
Exhibit(s) being updated.
     Complete Items 1, 2, 3, 4, 5, 7, and 8 on the Form 
following all applicable instructions for each Item (See Instructions 
below for each Item). If any information in an Item on a previously 
submitted Form NRSRO is materially inaccurate, update that information. 
Enter ``None'' or ``N/A'' where appropriate. Complete each Item even if 
the Item is not being updated.
     If an Exhibit is being updated, attach the updated 
Exhibit.
     Execute the Form.

F. INSTRUCTIONS FOR ANNUAL CERTIFICATIONS

    After registration is granted, Section 15E(b)(2) of the Exchange 
Act requires that an NRSRO file with the Commission an annual 
certification not later than 90 days after the end of each calendar 
year. The annual certification must be filed with the Commission on 
Form NRSRO and must include an update of the information in Item 7 and 
the credit rating transition and default rates submitted in Exhibit 1, 
a certification that the information and documents on or with Form 
NRSRO continue to be accurate (use the certification on the Form), and 
a list of material changes to the application for registration that 
occurred during the previous calendar year. To complete an annual 
certification:
     Check the ``ANNUAL CERTIFICATION'' box at the top of Form 
NRSRO.
     Complete Items 1, 2, 3, 4, 5, 7, and 8 on the Form 
following all applicable instructions for each Item (See Instructions 
below for each Item). If any information in an Item on the previously 
submitted Form NRSRO is materially inaccurate, update that information. 
Enter ``None'' or ``N/A'' where appropriate. Complete each Item even if 
the Item is not being updated.
     If any information in a non-confidential Exhibit 
previously submitted is materially inaccurate, update that information. 
(Note: After registration, Exhibits 10 through 13 are not required to 
be made publicly available by the NRSRO pursuant to Exchange Act Rule 
17g-1(i) and they should not be updated with the filing of the annual 
certification. Instead, similar information must be filed with the 
Commission not more than 90 days after the end of each fiscal year 
under Exchange Act Rule 17g-3.).
     Attach a list of all material changes made to the 
information or documents in the application for registration of the 
NRSRO that occurred during the previous calendar year.
     Execute the Form.

G. INSTRUCTIONS FOR A WITHDRAWAL FROM REGISTRATION

    Section 15E(e)(1) of the Exchange Act provides that an NRSRO may 
voluntarily withdraw its registration with the Commission. Under 
Exchange Act Rule, 17g-1(g), to withdraw from registration, an NRSRO 
must furnish the Commission with a notice of withdrawal from 
registration on Form NRSRO. The withdrawal from registration will 
become effective 45 calendar days after the withdrawal from 
registration is furnished to the Commission upon such terms and 
conditions as the Commission may establish as necessary in the public 
interest or for the protection of

[[Page 33554]]

investors. To complete a withdrawal from registration:
     Check the ``WITHDRAWAL FROM REGISTRATION'' box at the top 
of Form NRSRO.
     Complete Items 1, 2, 3, 4, 5, 7, and 8 on the Form 
following all applicable instructions for each Item (See Instructions 
below for each Item). If any information on a previously submitted Form 
NRSRO is materially inaccurate, update that information. Enter ``None'' 
or ``N/A'' where appropriate. Complete each Item even if the Item is 
not being updated.
     Execute the Form.

H. INSTRUCTIONS FOR SPECIFIC LINE ITEMS

    Item 1A. Provide the name of the person (e.g., XYZ Corporation) 
that is filing or furnishing, as applicable, the Form NRSRO. This means 
the name of the person that is applying for registration as an NRSRO or 
is registered as an NRSRO and not the name of the individual that is 
executing the Form.
    Item 1E. The individual listed as the contact person must be 
authorized to receive all communications and papers from the Commission 
and must be responsible for their dissemination within the Applicant/
NRSRO.
    Certification. The certification must be executed by the Chief 
Executive Officer or the President of the person that is filing or 
furnishing, as applicable, the Form NRSRO or an individual with similar 
responsibilities.
    Item 3. Identify credit rating affiliates that issue credit ratings 
on behalf of the person filing or furnishing, as applicable, the Form 
NRSRO in one or more of the classes of credit ratings identified in 
Item 6 or Item 7. A ``credit rating affiliate'' is a separate legal 
entity or a separately identifiable department or division thereof that 
determines credit ratings that are credit ratings of the person filing 
or furnishing, as applicable, the Form NRSRO. The information in Items 
4-8 and all the Exhibits must incorporate information about the credit 
ratings, methodologies, procedures, policies, financial condition, 
results of operations, personnel, and organizational structure of each 
credit rating affiliate identified in Item 3, as applicable. Any credit 
rating determined by a credit rating affiliate identified in Item 3 
will be treated as a credit rating issued by the person filing or 
furnishing, as applicable, the Form NRSRO for purposes of Section 15E 
of the Exchange Act and the Commission's rules thereunder. The terms 
``Applicant'' and ``NRSRO'' as used on Form NRSRO and the Instructions 
for the Form mean the person filing or furnishing, as applicable, the 
Form NRSRO and any credit rating affiliate identified in Item 3.
    Item 4. Section 15E(j)(1) of the Exchange Act requires an NRSRO to 
designate a compliance officer responsible for administering the 
policies and procedures of the NRSRO established pursuant to Sections 
15E(g) and (h) of the Exchange Act (respectively, to prevent the misuse 
of material nonpublic information and address and manage conflicts of 
interest) and for ensuring compliance with applicable securities laws, 
rules, and regulations.
    Item 5. Section 15E(a)(3) of the Exchange Act and Exchange Act Rule 
17g-1(i) require an NRSRO to make Form NRSRO and Exhibits 1-9 to Form 
NRSRO filed with the Commission publicly and freely available on an 
easily accessible portion of the NRSRO's corporate Internet Web site 
within 10 business days after the date of the Commission order granting 
an initial application for registration as an NRSRO or an application 
to register for an additional class of credit ratings and within 10 
business days after filing with or furnishing to, as applicable, the 
Commission an amendment, annual certification, or withdrawal from 
registration on Form NRSRO. The certifications from qualified 
institutional investors, Disclosure Reporting Pages, and Exhibits 10 
through 13 are not required to be made publicly available on the 
NRSRO's corporate Internet Web site. Describe how the current Form 
NRSRO and Exhibits 1-9 will be made publicly and freely available on an 
easily accessible portion of the NRSRO's corporate Internet Web site by 
providing the Internet address and link to the Form and Exhibits.
    Item 6. Complete Item 6 only if filing an initial application for 
registration, an application to be registered in an additional class of 
credit ratings, or an application supplement.
    Item 6A. Pursuant to Section 15E(a)(1)(B)(vii) of the Exchange Act, 
an Applicant applying for registration as an NRSRO must disclose in the 
application the classes of credit ratings for which the Applicant/NRSRO 
is applying to be registered. Indicate these classes by checking the 
appropriate box or boxes. For each class of credit ratings, provide in 
the appropriate box the approximate number of obligors, securities, and 
money market instruments in that class for which the Applicant/NRSRO 
presently has a credit rating outstanding as of the date of the 
application. In determining this amount, the Applicant/NRSRO must treat 
as a separately rated security or money market instrument each 
individually rated security and money market instrument that, for 
example, is assigned a distinct CUSIP or other unique identifier, has 
distinct credit enhancement features as compared with other securities 
or money market instruments of the same issuer, or has a different 
maturity date as compared with other securities or money market 
instruments of the same issuer. The Applicant/NRSRO must not include an 
obligor, security, or money market instrument in more than one class of 
credit rating. An Applicant/NRSRO must include in the class of credit 
ratings described in Section 3(a)(62)(B)(iv) of the Exchange Act 
(issuers of asset-backed securities) to the extent not described in 
Section 3(a)(62)(B)(iv), any rated security or money market instrument 
issued by an asset pool or as part of any asset-backed securities 
transaction. For each class of credit ratings, also provide in the 
appropriate box the approximate date the Applicant/NRSRO began issuing 
and making readily accessible credit ratings in the class on a 
continuous basis through the present as a ``credit rating agency,'' as 
that term is defined in Section 3(a)(61) of the Exchange Act. If there 
was a period when the Applicant/NRSRO stopped issuing credit ratings in 
a particular class or stopped operating as a credit rating agency, 
provide the approximate date the Applicant/NRSRO resumed issuing and 
making readily accessible credit ratings in that class as a credit 
rating agency. Refer to the definition of ``credit rating agency'' in 
the instructions below (also at 15 U.S.C. 78c(a)(61)) to determine when 
the Applicant/NRSRO began operating as a ``credit rating agency.''
    Item 6B. To meet the definition of ``credit rating agency'' 
pursuant to Section 3(a)(61)(A) of the Exchange Act, the Applicant 
must, among other things, issue ``credit ratings on the Internet or 
through another readily accessible means, for free or for a reasonable 
fee.'' Briefly describe how the Applicant/NRSRO makes the credit 
ratings in the classes indicated in Item 6A readily accessible for free 
or for a reasonable fee. If a person must pay a fee to obtain a credit 
rating made readily accessible by the Applicant/NRSRO, provide a fee 
schedule or describe the price(s) charged.
    Item 6C. If the Applicant/NRSRO is required to file qualified 
institutional buyer certifications under Section 15E(a)(1)(C) of the 
Exchange Act file a minimum of 10 certifications from qualified 
institutional buyers, none of which is affiliated with the Applicant/

[[Page 33555]]

NRSRO. Each certification may address more than one class of credit 
ratings. To be registered as an NRSRO for a class of credit ratings 
identified in Item 6A under ``Applying for Registration,'' the 
Applicant/NRSRO must file at least two certifications that address the 
class of credit ratings. If this is an application of an NRSRO to be 
registered in one or more additional classes of credit ratings, file at 
least two certifications that address each additional class of credit 
ratings.
    The required certifications must be signed by a person duly 
authorized by the certifying entity, must be notarized, must be marked 
``Certification from Qualified Institutional Buyer,'' and must be in 
substantially the following form:
    ``I, [Executing official], am authorized by [Certifying entity] to 
execute this certification on behalf of [Certifying entity]. I certify 
that all actions by stockholders, directors, general partners, and 
other bodies necessary to authorize me to execute this certification 
have been taken and that [Certifying entity]:
    (i) Meets the definition of a `qualified institutional buyer' as 
set forth in section 3(a)(64) of the Securities Exchange Act of 1934 
(15 U.S.C. 78c(a)(64)) pursuant to the following subsection(s) of 17 
CFR 230.144A(a)(1) [insert applicable citations];
    (ii) Has seriously considered the credit ratings of [the Applicant/
NRSRO] in the course of making some of its investment decisions for at 
least the three years immediately preceding the date of this 
certification, in the following classes of credit ratings: [Insert 
applicable classes of credit ratings]; and
    (iii) Has not received compensation either directly or indirectly 
from [the Applicant/NRSRO] for executing this certification.
[Signature]
Print Name and Title
    You are not required to make a Certification from a Qualified 
Institutional Buyer filed with this Form NRSRO publicly available on 
your corporate Internet Web site pursuant to Exchange Act Rule 17g-
1(i). You may request that the Commission keep these certifications 
confidential by marking each page ``Confidential Treatment'' and 
complying with Commission rules governing confidential treatment (See 
17 CFR 200.80 and 17 CFR 200.83). The Commission will keep the 
certifications confidential upon request to the extent permitted by 
law.
    Item 7. An Applicant filing Form NRSRO to apply for registration as 
an NRSRO should not complete Item 7. An NRSRO filing or furnishing, as 
applicable, Form NRSRO for any other reason must complete Item 7. The 
information in Item 7 must be updated on an annual basis with the 
filing of the annual certification.
    Item 7A. Indicate the classes of credit ratings for which the NRSRO 
is currently registered by checking the appropriate box or boxes. For 
each class of credit ratings, provide in the appropriate box the 
approximate number of obligors, securities, and money market 
instruments in that class for which the NRSRO had a credit rating 
outstanding as of the end of the most recently ended calendar year. In 
determining this amount, NRSRO must treat as a separately rated 
security or money market instrument each individually rated security 
and money market instrument that, for example, is assigned a distinct 
CUSIP or other unique identifier, has distinct credit enhancement 
features as compared with other securities or money market instruments 
of the same issuer, or has a different maturity date as compared with 
other securities or money market instruments of the same issuer. The 
NRSRO must not include an obligor, security, or money market instrument 
in more than one class of credit rating. An NRSRO must include in the 
class of credit ratings described in Section 3(a)(62)(B)(iv) of the 
Exchange Act (issuers of asset-backed securities) to the extent not 
described in Section 3(a)(62)(B)(iv), any rated security or money 
market instrument issued by an asset pool or as part of any asset-
backed securities transaction. For each class of credit ratings, also 
provide in the appropriate box the approximate date the NRSRO began 
issuing and making readily accessible credit ratings in the class on a 
continuous basis through the present as a ``credit rating agency,'' as 
that term is defined in Section 3(a)(61) of the Exchange Act. If there 
was a period when the NRSRO stopped issuing credit ratings in a 
particular class or stopped operating as a credit rating agency, 
provide the approximate date the NRSRO resumed issuing and making 
readily accessible credit ratings in that class as a credit rating 
agency. Refer to the definition of ``credit rating agency'' in the 
instructions below (also at 15 U.S.C. 78c(a)(61)) to determine when the 
NRSRO began operating as a ``credit rating agency.''
    Item 7B. Briefly describe how the NRSRO makes the credit ratings in 
the classes indicated in Item 7A readily accessible for free or for a 
reasonable fee. If a person must pay a fee to obtain a credit rating 
made readily accessible by the NRSRO, provide a fee schedule or 
describe the price(s) charged.
    Item 8. Answer each question by checking the appropriate box. Refer 
to the definition of ``person within an Applicant/NRSRO'' set forth 
below to determine the persons to which the questions apply. 
Information that relates to an affirmative answer must be provided on a 
Disclosure Reporting Page (NRSRO) and filed with Form NRSRO. Submit a 
separate Disclosure Reporting Page (NRSRO) for each person that: (a) 
has committed or omitted any act, or has been subject to an order or 
finding, enumerated in subparagraphs (A), (D), (E), (G), or (H) of 
section 15(b)(4) of the Securities Exchange Act of 1934, has been 
convicted of any offense specified in section 15(b)(4)(B) of the 
Securities Exchange Act of 1934, or has been enjoined from any action, 
conduct, or practice specified in section 15(b)(4)(C) of the Securities 
Exchange Act of 1934; (b) has been convicted of any crime that is 
punishable by imprisonment for 1 or more years, and that is not 
described in section 15(b)(4) of the Securities Exchange Act of 1934, 
or has been convicted of a substantially equivalent crime by a foreign 
court of competent jurisdiction; or (c) is subject to any order of the 
Commission barring or suspending the right of the person to be 
associated with an NRSRO. The Disclosure Reporting Page (NRSRO) is 
attached to these instructions. Note: The definition of ``person within 
an Applicant/NRSRO'' is narrower than the definition of ``person 
associated with a nationally recognized statistical rating 
organization'' in Section 3(a)(63) of the Exchange Act. You are not 
required to make any disclosure reporting pages submitted with this 
Form NRSRO publicly available on your corporate Internet Web site 
pursuant to Exchange Act Rule 17g-1(i). You may request that the 
Commission keep any disclosure reporting pages confidential by marking 
each page ``Confidential Treatment'' and complying with Commission 
rules governing confidential treatment. The Commission will keep the 
disclosure reporting pages confidential upon request to the extent 
permitted by law.
    Item 9. Exhibits. Section 15E(a)(1)(B) of the Exchange Act requires 
a credit rating agency's application for registration as an NRSRO to 
contain certain specific information and documents and, pursuant to 
Section 15E(a)(1)(B)(x), any other information and documents concerning 
the applicant and any person associated with the applicant that the 
Commission requires as necessary or appropriate in the public interest 
or for the protection of investors. If any information or

[[Page 33556]]

document required to be included with any Exhibit is maintained in a 
language other than English, file a copy of the original document and a 
version of the document translated into English. Attach a certification 
by an authorized person that the translated version is a true, 
accurate, and complete English translation of the information or 
document. Attach the Exhibits to Form NRSRO in numerical order. Bind 
each Exhibit separately, and mark each Exhibit or bound volume of the 
Exhibit with the appropriate Exhibit number. The information in the 
Exhibits must be sufficiently detailed to allow for verification. The 
information and documents in Exhibits 1 through 9 must be made publicly 
and freely available on an easily accessible portion of the NRSRO's 
corporate Internet Web site pursuant to Exchange Act Rule 17g-1(i). The 
information and documents in Exhibits 10 through 13 are not required to 
be made publicly available on the NRSRO's corporate Internet Web site 
pursuant to Exchange Act Rule 17g-1(i). An NRSRO may request that the 
Commission keep these Exhibits confidential by marking each page of 
them ``Confidential Treatment'' and complying with Commission rules 
governing confidential treatment (See 17 CFR 200.80 and 17 CFR 200.83). 
The Commission will keep the information and documents in these 
Exhibits confidential upon request to the extent permitted by law. 
(Note: After registration, Exhibits 10 through 13 are not required to 
be made publicly available by the NRSRO pursuant to Exchange Act Rule 
17g-1(i) and they should not be updated with the filing of the annual 
certification. Instead, similar information must be filed with the 
Commission not more than 90 days after the end of each fiscal year 
pursuant to Exchange Act Rule 17g-3.).
    Exhibit 1. (1) An Applicant/NRSRO must provide in this Exhibit 
performance measurement statistics consisting of transition and default 
rates for each class and subclass of credit ratings (listed below) for 
which it is seeking registration as an NRSRO or for which it is 
registered as an NRSRO. For each applicable class and subclass of 
credit ratings, an Applicant/NRSRO must provide transition and default 
rates for 1-, 3-, and 10-year time periods through the most recent 
calendar year end. The transition and default rates for each time 
period must be presented together in tabular form (``Transition/Default 
Matrix''). The Transition/Default Matrices must be presented on a 
calendar year basis even if the Applicant/NRSRO has a fiscal year end 
other than December 31. Exhibit 1 must be updated annually with the 
filing of the NRSRO's Annual Certification pursuant to Exchange Act 
Rule 17g-1(f). Pursuant to Exchange Act Rule 17g-1(i), an NRSRO must 
make the Annual Certification publicly and freely available on an 
easily accessible portion of the NRSRO's corporate Internet Web site 
within 10 business days after the filing and must make its up-to-date 
Exhibit 1 freely available in writing to any individual who requests a 
copy of the Exhibit. The classes and subclasses of credit ratings for 
which an Applicant/NRSRO must provide Transition/Default Matrices are 
(as applicable):
    (A) The class of credit ratings described in Section 3(a)(62)(B)(i) 
of the Exchange Act (financial institutions, brokers, or dealers).
    (B) The class of credit ratings described in Section 
3(a)(62)(B)(ii) of the Exchange Act (insurance companies);
    (C) The class of credit ratings described in Section 
3(a)(62)(B)(iii) of the Exchange Act (corporate issuers);
    (D) The following subclasses of credit ratings described in Section 
3(a)(62)(B)(iv) of the Exchange Act (issuers of asset-backed 
securities) and, to the extent not described in Section 
3(a)(62)(B)(iv), any security or money market instrument issued by an 
asset pool or as part of any asset-backed securities transaction:
    (i) Residential mortgage backed securities (``RMBS'') (for the 
purposes of Exhibit 1, RMBS means a securitization primarily of 
residential mortgages);
    (ii) Commercial mortgage backed securities (``CMBS'') (for the 
purposes of Exhibit 1, CMBS means a securitization primarily of 
commercial mortgages);
    (iii) Collateralized loan obligations (``CLOs'') (for the purposes 
of Exhibit 1, a CLO means a securitization primarily of commercial 
loans);
    (iv) Collateralized debt obligations (``CDOs'') (for the purposes 
of Exhibit 1, a CDO means a securitization primarily of other debt 
instruments such as RMBS, CMBS, CLOs, CDOs, other asset backed 
securities, and corporate bonds);
    (v) Asset-backed commercial paper (``ABCP'') (for the purposes of 
Exhibit 1, ABCP means short term notes issued by a structure that 
securitizes a variety of financial assets (e.g., trade receivables or 
credit card receivables), which secure the notes);
    (vi) Other asset-backed securities (``other ABS'') (for the 
purposes of Exhibit 1, other ABS means a securitization primarily of 
auto loans, auto leases, floor plan financings, credit card 
receivables, student loans, consumer loans, or equipment leases); and
    (vii) Other structured finance products (``other SFPs'') (for the 
purposes of Exhibit 1, other SFPs means any structured finance product 
not identified in subparagraphs (i) through (vi) above--the Applicant/
NRSRO must provide a description of the products in this subclass); and
    (E) The following subclasses of credit ratings described in Section 
3(a)(62)(B)(v) of the Exchange Act (issuers of government securities, 
municipal securities, or securities issued by a foreign government):
    (i) Sovereign issuers;
    (ii) United States public finance; and
    (iii) International public finance.
    (2) The Transition/Default Matrices for applicable classes and 
subclasses of credit ratings must be presented in the same order that 
the classes and subclasses of credit ratings are identified in 
paragraphs (1)(A) through (E) above. For a given class or subclass, 
Transition/Default Matrices must be presented in the following order: 
1-year matrix, 3-year matrix and then 10-year matrix. If the Applicant/
NRSRO has not been determining credit ratings in the applicable class 
or subclass for the length of time necessary to produce a 1-, 3-, and/
or 10-year Transition/Default Matrix, it must explain that fact in the 
location where the Transition/Default Matrix would have been presented 
in the Exhibit. The Applicant/NRSRO must clearly define, after the 
presentation of all applicable Transition/Default Matrices, each 
symbol, number, or score in the rating scale used by the Applicant/
NRSRO to denote a credit rating category and notches within a category 
for each class and subclass of credit ratings in any Transition/Default 
Matrix presented in the Exhibit. In, addition the Applicant/NRSRO must 
clearly explain the conditions under which it classifies obligors, 
securities, or money market instruments as being in default. Next, the 
Applicant/NRSRO must provide the uniform resource locator (URL) of its 
corporate Internet Web site where the credit rating histories required 
to be disclosed pursuant to 17 CFR 17g-7(b) will be located (in the 
case of an Applicant) or are located (in the case of an NRSRO). Exhibit 
1 must contain no performance measurement statistics or information 
other than as described in, and required by, these Instructions for 
Exhibit 1; except that the Applicant/NRSRO may provide after the 
presentation of all required Transition/Default Matrices and other 
disclosures the Internet Web site URLs where other information relating 
to performance

[[Page 33557]]

measurement statistics of the Applicant/NRSRO is located.
    (3) The Transition/Default Matrices must be presented using the 
format of the sample matrix (``Sample Matrix'') below. The top row of a 
Transition/Default Matrix (the ``header row'') must contain column 
headings. The first and second cells in the header row must contain the 
headings, respectively: ``Credit Rating Scale'' and ``Number of Ratings 
Outstanding as of [insert applicable date].'' The applicable date is 
the date 1, 3, or 10 years prior to the most recent calendar year end 
depending on whether the Transition/Default Matrix is for a 1-, 3-, or 
10-year period. The next sequence of cells in the header row must 
contain, from left to right, each symbol, number, or score in the 
rating scale used by the Applicant/NRSRO to denote a credit rating 
category and notches within a category for the applicable class or 
subclass of credit ratings in descending order from the highest to the 
lowest notch. The Applicant/NRSRO must not include a ``default'' 
category if its rating scale has such a category. The next headings 
must be in the following order, from left to right, ``Default'' (see 
explanation below), ``Paid Off'' (see explanation below), and 
``Withdrawn (other)'' (see explanation below). The first column of a 
Transition/Default Matrix must have a separate cell containing each 
symbol, number, or score in the rating scale used by the Applicant/
NRSRO to denote a credit rating category and notches within a category 
for the applicable class or subclass of credit ratings in descending 
order from the highest to the lowest notch. The Applicant/NRSRO must 
not include a ``default'' category in the column if its rating scale 
has such a category. The last cell of the first column must contain the 
word ``Total.'' Finally, the Transition/Default Matrix must have a 
title identifying the applicable class or subclass of credit ratings, 
the period covered, and the start date and end date of the period.
    The Transition/Default Matrix must resemble the Sample Matrix below 
except that the number of credit rating symbols depicted in the cells 
of the first column and header row of a matrix will depend on the 
number of notches in the applicable rating scale of the Applicant/NRSRO 
(excluding a ``default'' category).

                                                                     Corporate Issuers--10-Year Transition and Default Rates
                                                                          [December 31, 2000 through December 31, 2010]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Number of
                                                                      ratings                                                                                                 Paid    Withdrawn
                       Credit rating scale                        outstanding as    AAA       AA       A       BBB       BB       B       CCC       CC       C     Default    off      (other)
                                                                   of 12/31/2000
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
AAA.............................................................              10      50%      10%  .......  .......        ;  .......  .......  .......  .......  .......      40%  ...........
AA..............................................................           2,000       1%      39%      12%      10%       8%       5%       4%  .......  .......       1%      19%           1%
A...............................................................           4,000  .......       6%      34%      15%      10%       6%       4%       3%  .......       2%      18%           2%
BBB.............................................................           3,600  .......       2%       9%      28%      15%      10%       6%       5%       1%       4%      17%           3%
BB..............................................................           1,000  .......  .......       2%       4%      20%      14%       5%  .......  .......       2%      16%          37%
B...............................................................             500  .......  .......       1%       3%       6%      20%      20%      15%  .......      15%      15%           5%
CCC.............................................................             300  .......  .......  .......  .......       4%       6%      15%      25%      20%      20%       4%           6%
CC..............................................................             200  .......  .......  .......  .......  .......       2%       8%      10%      38%      30%       2%          10%
C...............................................................             160  .......  .......  .......  .......  .......  .......       2%       8%      10%      67%       1%          12%
                                                                 -------------------------------------------------------------------------------------------------------------------------------
    Total.......................................................          11,770  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  ...........
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

     (4) An Applicant/NRSRO must populate the cells in the columns and 
rows of a Transition/Default Matrix in the following manner:
    (A) Second Column Showing Number of Ratings Outstanding as of the 
Period Start Date. To populate the cells of this column, the Applicant/
NRSRO must determine the number of obligors, securities, and money 
market instruments in the applicable class or subclass of credit 
ratings that were assigned an outstanding credit rating as of the 
period start date (cumulatively, the ``start-date cohort''). In 
determining the start-date cohort, the Applicant/NRSRO must exclude any 
obligors, securities, or money market instruments that the NRSRO 
classified as in default as of the start date. Next, the Applicant/
NRSRO must determine the number of obligors, securities, and money 
market instruments in the start-date cohort assigned a credit rating 
(other than an expected or preliminary credit rating) as of the start 
date in each notch represented in the ``Credit Rating Scale'' column. 
The Applicant/NRSRO must populate the cells of this column with the 
number of obligors, securities, and/or money market instruments 
assigned a credit rating in each notch and in the bottom cell the total 
number of credit ratings in the start-date cohort.
    (B) Rows Representing Credit Rating Notches. Each row representing 
a credit rating notch must contain percents indicating the credit 
rating outcomes of all the obligors, securities, and/or money market 
instruments assigned a credit rating at that notch as of the period 
start date. The percents in a row must add up to 100%. To compute the 
percents for each row representing a notch in the rating scale in the 
Transition/Default Matrix:
    (i) The Applicant/NRSRO must determine the number of obligors, 
securities, and money market instruments assigned a credit rating at 
that notch as of the period start-date that were assigned a credit 
rating at the same notch as of the period end date. This number must be 
expressed as a percent of the total number of obligors, securities, 
and/or money market instruments assigned a credit rating at that notch 
as of the period start date and the percent must be entered in the 
column representing the same notch. To determine this percent, the 
Applicant/NRSRO must use the credit rating at the notch assigned to the 
obligor, security, or money market instrument as of the period end date 
and not a credit rating at any other notch assigned to the obligor, 
security, or money market instrument between the period start date and 
the period end date.
    (ii) The Applicant/NRSRO must determine the number of obligors, 
securities, and money market instruments assigned a credit rating at 
that notch as of the period start date that were assigned a credit 
rating at each other notch as of the period end date. These numbers 
must be expressed as percents of the total number of obligors, 
securities, and/or money market instruments assigned a credit rating at 
that notch as of the period start date and the percents must be entered 
in the columns representing each different notch. To determine these 
percents, the Applicant/NRSRO must use the credit rating at the notch 
assigned to the obligor, security, or money market instrument as of the 
period end date and not a credit rating at any other notch assigned to 
the obligor, security, or money market instrument between the period 
start date and the period end date.
    (iii) The Applicant/NRSRO must determine the number of obligors, 
securities, and money market

[[Page 33558]]

instruments assigned a credit rating at that notch as of the period 
start date that went into Default (see explanation below) at any time 
during the applicable time period. This number must be expressed as a 
percent of the total number of obligors, securities, and/or money 
market instruments assigned a credit rating at that notch as of the 
period start date and the percent must be entered in the Default 
column. To determine this percent, the Applicant/NRSRO must classify an 
obligor, security, or money market instrument as having gone into 
Default if the conditions in either (a) or (b) (or in both (a) and (b)) 
are met:
    (a) The obligor failed to timely pay principal or interest due 
according to the terms of an obligation during the applicable period or 
the issuer of the security or money market instrument failed to timely 
pay principal or interest due according to the terms of the security or 
money market instrument during the applicable period; or
    (b) The Applicant/NRSRO classified the obligor, security, or money 
market instrument as having gone into default using its own definition 
of ``default'' during the applicable period.

An obligor, security, or money market instrument that goes into in 
Default as defined in this paragraph (4)(B)(iii) must be classified as 
in Default even if the Applicant/NRSRO assigned a credit rating to the 
obligor, security, or money market instrument at a notch above default 
in its rating scale on or after the event of Default or withdrew the 
credit rating on or after the event of Default.
    (iv) The Applicant/NRSRO must determine the number of obligors, 
securities, and money market instruments assigned a credit rating at 
that notch as of the period start date that Paid Off (see explanation 
below) at any time during the applicable time period. This number must 
be expressed as a percent of the total number of obligors, securities, 
and/or money market instruments assigned a credit rating at that notch 
as of the period start date and the percent must be entered in the Paid 
Off column. To determine this percent, the Applicant/NRSRO must 
classify an obligor, security, or money market instrument as Paid Off 
if the conditions in either (a) or (b) are met;
    (a) The obligor extinguished the obligation during the applicable 
time period by paying in full all outstanding principal and interest 
due on the obligation according to the terms of the obligation (e.g., 
because the obligation matured, was called, or was prepaid); and the 
Applicant/NRSRO withdrew the credit rating because the obligation was 
extinguished; or
    (b) The issuer of the security or money market instrument 
extinguished its obligation with respect to the security or money 
market instrument during the applicable time period by paying in full 
all outstanding principal and interest due according to the terms of 
the security or money market instrument (e.g., because the security or 
money market instrument matured, was called, or was prepaid); and the 
Applicant/NRSRO withdrew the credit rating for the security or money 
market instrument because the obligation was extinguished.
    (v) The Applicant/NRSRO must determine the number of obligors, 
securities, and money market instruments assigned a credit rating at 
that notch as of the period start date for which the Applicant/NRSRO 
withdrew a credit rating assigned to the obligor, security, or money 
market instrument at any time during the applicable time period for a 
reason other than Default (as described in paragraph (4)(B)(iii)) or 
Paid-Off (as described in paragraph (4)(B)(iv)). This number must be 
expressed as a percent of the total number of obligors, securities, 
and/or money market instruments assigned a credit rating at that notch 
as of the period start date and the percent must be entered in the 
Withdrawn (other) column. The Applicant/NRSRO must classify the 
obligor, security, or money market instrument as Withdrawn (other) even 
if the Applicant/NRSRO assigned a credit rating to the obligor, 
security, or money market instrument after withdrawing its credit 
rating.
    Exhibit 2. Provide in this Exhibit a general description of the 
procedures and methodologies used by the Applicant/NRSRO to determine 
credit ratings, including unsolicited credit ratings within the classes 
of credit ratings for which the Applicant/NRSRO is seeking registration 
or is registered. The description must be sufficiently detailed to 
provide users of credit ratings with an understanding of the processes 
employed by the Applicant/NRSRO in determining credit ratings, 
including, as applicable, descriptions of: Policies for determining 
whether to initiate a credit rating; a description of the public and 
non-public sources of information used in determining credit ratings, 
including information and analysis provided by third-party vendors; 
whether and, if so, how information about verification performed on 
assets underlying or referenced by a security or money market 
instrument issued by an asset pool or as part of any asset-backed or 
securities transaction is relied on in determining credit ratings; the 
quantitative and qualitative models and metrics used to determine 
credit ratings, including whether and, if so, how assessments of the 
quality of originators of assets underlying or referenced by a security 
or money market instrument issued by an asset pool or as part of any 
asset-backed or securities transaction factor into the determination of 
credit ratings; the methodologies by which credit ratings of other 
credit rating agencies are treated to determine credit ratings for 
securities or money market instruments issued by an asset pool or as 
part of any asset-backed or mortgaged-backed securities transaction; 
the procedures for interacting with the management of a rated obligor 
or issuer of rated securities or money market instruments; the 
structure and voting process of committees that review or approve 
credit ratings; procedures for informing rated obligors or issuers of 
rated securities or money market instruments about credit rating 
decisions and for appeals of final or pending credit rating decisions; 
procedures for monitoring, reviewing, and updating credit ratings, 
including how frequently credit ratings are reviewed, whether different 
models or criteria are used for ratings surveillance than for 
determining initial ratings, whether changes made to models and 
criteria for determining initial ratings are applied retroactively to 
existing ratings, and whether changes made to models and criteria for 
performing ratings surveillance are incorporated into the models and 
criteria for determining initial ratings; and procedures to withdraw, 
or suspend the maintenance of, a credit rating. An Applicant/NRSRO may 
provide in Exhibit 2 the location on its corporate Internet Web site 
where additional information about the procedures and methodologies is 
located.
    Exhibit 3. Provide in this Exhibit a copy of the written policies 
and procedures established, maintained, and enforced by the Applicant/
NRSRO to prevent the misuse of material, nonpublic information pursuant 
to Section 15E(g) of the Exchange Act and 17 CFR 240.17g-4. Do not 
include any information that is proprietary or that would diminish the 
effectiveness of a specific policy or procedure if made publicly 
available.
    Exhibit 4. Provide in this Exhibit information about the 
organizational structure of the Applicant/NRSRO, including, as 
applicable, an organizational chart that identifies, as applicable, the 
ultimate and sub-holding companies, subsidiaries, and material 
affiliates of the Applicant/NRSRO; an organizational chart showing the

[[Page 33559]]

divisions, departments, and business units of the Applicant/NRSRO; and 
an organizational chart showing the managerial structure of the 
Applicant/NRSRO, including the designated compliance officer identified 
in Item 4.
    Exhibit 5. Provide in this Exhibit a copy of the written code of 
ethics the Applicant/NRSRO has in effect or a statement of the reasons 
why the Applicant/NRSRO does not have a written code of ethics in 
effect.
    Exhibit 6. Identify in this Exhibit the types of conflicts of 
interest relating to the issuance of credit ratings by the Applicant/
NRSRO that are material to the Applicant/NRSRO. First, identify the 
conflicts described in the list below that apply to the Applicant/
NRSRO. The Applicant/NRSRO may use the descriptions below to identify 
an applicable conflict of interest and is not required to provide any 
further details. Second, briefly describe any other type of conflict of 
interest relating to the issuance of credit ratings by the Applicant/
NRSRO that is not covered in the descriptions below that is material to 
the Applicant/NRSRO (for example, one the Applicant/NRSRO has 
established specific policies and procedures to address):
    The Applicant/NRSRO is paid by issuers or underwriters to determine 
credit ratings with respect to securities or money market instruments 
they issue or underwrite.
     The Applicant/NRSRO is paid by obligors to determine 
credit ratings of the obligors.
     The Applicant/NRSRO is paid for services in addition to 
determining credit ratings by issuers, underwriters, or obligors that 
have paid the Applicant/NRSRO to determine a credit rating.
     The Applicant/NRSRO is paid by persons for subscriptions 
to receive or access the credit ratings of the Applicant/NRSRO and/or 
for other services offered by the Applicant/NRSRO where such persons 
may use the credit ratings of the Applicant/NRSRO to comply with, and 
obtain benefits or relief under, statutes and regulations using the 
term ``nationally recognized statistical rating organization.''
     The Applicant/NRSRO is paid by persons for subscriptions 
to receive or access the credit ratings of the Applicant/NRSRO and/or 
for other services offered by the Applicant/NRSRO where such persons 
also may own investments or have entered into transactions that could 
be favorably or adversely impacted by a credit rating issued by the 
Applicant/NRSRO.
     The Applicant/NRSRO allows persons within the Applicant/
NRSRO to:
    [cir] Directly own securities or money market instruments of, or 
have other direct ownership interests in, obligors or issuers subject 
to a credit rating determined by the Applicant/NRSRO.
    [cir] Have business relationships that are more than arms length 
ordinary course business relationships with obligors or issuers subject 
to a credit rating determined by the Applicant/NRSRO.
     A person associated with the Applicant/NRSRO is a broker 
or dealer engaged in the business of underwriting securities or money 
market instruments (identify the person).
     The Applicant/NRSRO has any other material conflict of 
interest that arises from the issuances of credit ratings (briefly 
describe).
    Exhibit 7. Provide in this Exhibit a copy of the written policies 
and procedures established, maintained, and enforced by the Applicant/
NRSRO to address and manage conflicts of interest pursuant to Section 
15E(h) of the Exchange Act. Do not include any information that is 
proprietary or that would diminish the effectiveness of a specific 
policy or procedure if made publicly available.
    Exhibit 8. Provide in this Exhibit the following information about 
the Applicant/NRSRO's credit analysts and the persons who supervise the 
credit analysts:
     The total number of credit analysts (including credit 
analyst supervisors).
     The total number of credit analyst supervisors.
     A general description of the minimum qualifications 
required of the credit analysts, including education level and work 
experience (if applicable, distinguish between junior, mid, and senior 
level credit analysts).
     A general description of the minimum qualifications 
required of the credit analyst supervisors, including education level 
and work experience.
    Exhibit 9. Provide in this Exhibit the following information about 
the designated compliance officer (identified in Item 4) of the 
Applicant/NRSRO:
     Name.
     Employment history.
     Post secondary education.
     Whether employed by the Applicant/NRSRO full-time or part-
time.
    Exhibit 10. Provide in this Exhibit a list of the largest users of 
credit rating services of the Applicant by the amount of net revenue 
earned by the Applicant attributable to the person during the fiscal 
year ending immediately before the date of the initial application. 
First, determine and list the 20 largest issuers and subscribers in 
terms of net revenue. Next, add to the list any obligor or underwriter 
that, in terms of net revenue during the fiscal year, equaled or 
exceeded the 20th largest issuer or subscriber. In making the list, 
rank the persons in terms of net revenue from largest to smallest and 
include the net revenue amount for each person. For purposes of this 
Exhibit:
    Net revenue means revenue earned by the Applicant for any type of 
service or product provided to the person, regardless of whether 
related to credit rating services, and net of any rebates and 
allowances the Applicant paid or owes to the person; and
    Credit rating services means any of the following: Rating an 
obligor (regardless of whether the obligor or any other person paid for 
the credit rating); rating an issuer's securities or money market 
instruments (regardless of whether the issuer, underwriter, or any 
other person paid for the credit rating); and providing credit ratings, 
credit ratings data, or credit ratings analysis to a subscriber. An 
NRSRO is not required to make this Exhibit publicly available on its 
corporate Internet Web site, pursuant to Exchange Act Rule 17g-1(i). An 
NRSRO may request that the Commission keep this Exhibit confidential by 
marking each page ``Confidential Treatment'' and complying with 
Commission rules governing confidential treatment (See 17 CFR 200.80 
and 17 CFR 200.83). The Commission will keep the information and 
documents in the Exhibit confidential upon request to the extent 
permitted by law. (Note: After registration, Exhibit 10 should not be 
updated with the filing of the annual certification. Instead, similar 
information must be filed with the Commission not more than 90 days 
after the end of each fiscal year pursuant to Exchange Act Rule 17g-3).
    Exhibit 11. Provide in this Exhibit the financial statements of the 
Applicant, which must include a balance sheet, an income statement and 
statement of cash flows, and a statement of changes in ownership 
equity, audited by an independent public accountant, for each of the 
three fiscal or calendar years ending immediately before the date of 
the Applicant's initial application to the Commission, subject to the 
following:
     If the Applicant is a division, unit, or subsidiary of a 
parent company, the Applicant may provide audited consolidated 
financial statements of its parent company.
     If the Applicant does not have audited financial 
statements for one or

[[Page 33560]]

more of the three fiscal or calendar years ending immediately before 
the date of the initial application, the Applicant may provide 
unaudited financial statements for the applicable year or years, but 
must provide audited financial statements for the fiscal or calendar 
year ending immediately before the date of the initial application.
    Attach to the unaudited financial statements a certification by a 
person duly authorized by the Applicant to make the certification that 
the person has responsibility for the financial statements and that to 
the best knowledge of the person making the certification the financial 
statements fairly present, in all material respects, the Applicant's 
financial condition, results of operations, and cash flows for the 
period presented.
    An NRSRO is not required to make this Exhibit publicly available on 
its corporate Internet Web site, pursuant to Exchange Act Rule 17g-
1(i). An NRSRO may request that the Commission keep this Exhibit 
confidential by marking each page ``Confidential Treatment'' and 
complying with Commission rules governing confidential treatment (See 
17 CFR 200.80 and 17 CFR 200.83). The Commission will keep the 
information and documents in the Exhibit confidential upon request to 
the extent permitted by law. (Note: After registration, Exhibit 11 
should not be updated with the filing of the annual certification. 
Instead, similar information must be filed with the Commission not more 
than 90 days after the end of each fiscal year pursuant to Exchange Act 
Rule 17g-3).
    Exhibit 12. Provide in this Exhibit the following information, as 
applicable, and which is not required to be audited, regarding the 
Applicant's aggregate revenues for the fiscal or calendar year ending 
immediately before the date of the initial application:
     Revenue from determining and maintaining credit ratings;
     Revenue from subscribers;
     Revenue from granting licenses or rights to publish credit 
ratings; and
     Revenue from all other services and products offered by 
your credit rating organization (include descriptions of any major 
sources of revenue).
    An NRSRO is not required to make this Exhibit publicly available on 
its corporate Internet Web site, pursuant to Exchange Act Rule 17g-
1(i). An NRSRO may request that the Commission keep this Exhibit 
confidential by marking each page ``Confidential Treatment'' and 
complying with Commission rules governing confidential treatment (See 
17 CFR 200.80 and 17 CFR 200.83). The Commission will keep the 
information and documents in the Exhibit confidential upon request to 
the extent permitted by law. (Note: After registration, Exhibit 12 
should not be updated with the filing of the annual certification. 
Instead, similar information must be filed with the Commission not more 
than 90 days after the end of each fiscal year pursuant to Exchange Act 
Rule 17g-3).
    Exhibit 13. Provide in this Exhibit the approximate total and 
median annual compensation of the Applicant's credit analysts for the 
fiscal or calendar year ending immediately before the date of this 
initial application. In calculating total and median annual 
compensation, the Applicant may exclude deferred compensation, provided 
such exclusion is noted in the Exhibit.
    An NRSRO is not required to make this Exhibit publicly available on 
its corporate Internet Web site pursuant to Exchange Act Rule 17g-1(i). 
An NRSRO may request that the Commission keep this Exhibit confidential 
by marking each page ``Confidential Treatment'' and complying with 
Commission rules governing confidential treatment (See 17 CFR 200.80 
and 17 CFR 200.83). The Commission will keep the information and 
documents in the Exhibit confidential upon request to the extent 
permitted by law. (Note: After registration, Exhibit 13 should not be 
updated with the filing of the annual certification. Instead, similar 
information must be filed with the Commission not more than 90 days 
after the end of each fiscal year pursuant to Exchange Act Rule 17g-3).
    I. EXPLANATION OF TERMS.
    1. COMMISSION--The U. S. Securities and Exchange Commission.
    2. CREDIT RATING [Section 3(a)(60) of the Exchange Act]--An 
assessment of the creditworthiness of an obligor as an entity or with 
respect to specific securities or money market instruments.
    3. CREDIT RATING AGENCY [Section 3(a)(61) of the Exchange Act]--Any 
person:
     Engaged in the business of issuing credit ratings on the 
Internet or through another readily accessible means, for free or for a 
reasonable fee, but does not include a commercial credit reporting 
company;
     Employing either a quantitative or qualitative model, or 
both to determine credit ratings; and
     Receiving fees from either issuers, investors, other 
market participants, or a combination thereof.
    4. NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION [Section 
3(a)(62) of the Exchange Act]--A credit rating agency that:
     Issues credit ratings certified by qualified institutional 
buyers in accordance with section 15(a)(1)(B)(ix) of the Exchange Act 
with respect to:
    [cir] Financial institutions, brokers, or dealers;
    [cir] Insurance companies;
    [cir] Corporate issuers;
    [cir] issuers of asset-backed securities;
    [cir] issuers of government securities, municipal securities, or 
securities issued by a foreign government; or
    [cir] a combination of one or more of the above; and
     is registered as an NRSRO.
    6. PERSON--An individual, partnership, corporation, trust, company, 
limited liability company, or other organization (including a 
separately identifiable department or division).
    7. PERSON WITHIN AN APPLICANT/NRSRO--The person filing or 
furnishing, as applicable, Form NRSRO identified in Item 1, any credit 
rating affiliates identified in Item 3, and any partner, officer, 
director, branch manager, or employee of the person or the credit 
rating affiliates (or any person occupying a similar status or 
performing similar functions).
    8. SEPARATELY IDENTIFIABLE DEPARTMENT OR DIVISION--A unit of a 
corporation or company:
     that is under the direct supervision of an officer or 
officers designated by the board of directors of the corporation as 
responsible for the day-to-day conduct of the corporation's credit 
rating activities for one or more affiliates, including the supervision 
of all employees engaged in the performance of such activities; and
     for which all of the records relating to its credit rating 
activities are separately created or maintained in or extractable from 
such unit's own facilities or the facilities of the corporation, and 
such records are so maintained or otherwise accessible as to permit 
independent examination and enforcement by the Commission of the 
Exchange Act and rules and regulations promulgated thereunder.
    8. QUALIFIED INSTITUTIONAL BUYER [Section 3(a)(64) of the Exchange 
Act]--An entity listed in 17 CFR 230.144A(a) that is not affiliated 
with the credit rating agency.
    19. Section 249b.400 and Form ABS Due Diligence-15E are added to 
read as follows:

[[Page 33561]]

Sec.  249b.400  Form ABS Due Diligence-15E, Certification of third-
party provider of due diligence services for asset-backed securities

    Note: The text of Form ABS Due Diligence-15E will not appear in 
the Code of Federal Regulations.

BILLING CODE 8011-01-P

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    By the Commission.
    Dated: May 18, 2011.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-12659 Filed 6-7-11; 8:45 am]
BILLING CODE 8011-01-C


