
[Federal Register Volume 79, Number 227 (Tuesday, November 25, 2014)]
[Notices]
[Pages 70261-70263]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-27846]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73649; File No. S7-04-09]


Order Extending Temporary Conditional Exemption for Nationally 
Recognized Statistical Rating Organizations From Requirements of Rule 
17g-5 Under the Securities Exchange Act of 1934 and Request for Comment

November 19, 2014.

I. Introduction

    On May 19, 2010, the Securities and Exchange Commission 
(``Commission'') conditionally exempted, with respect to certain credit 
ratings and until December 2, 2010, nationally recognized statistical 
rating organizations (``NRSROs'') from certain requirements in Rule 
17g-5(a)(3) \1\ under the Securities Exchange Act of 1934 (``Exchange 
Act''), which had a compliance date of June 2, 2010.\2\ Pursuant to the 
Order, an NRSRO is not required to comply with Rule 17g-5(a)(3) until 
December 2, 2010 with respect to credit ratings where: (1) The issuer 
of the structured finance product is a non-U.S. person; and (2) the 
NRSRO has a reasonable basis to conclude that the structured finance 
product will be offered and sold upon issuance, and that any arranger 
linked to the structured finance product will effect transactions of 
the structured finance product after issuance, only in transactions 
that occur outside the U.S. (``covered transactions'').\3\ On November 
23, 2010, the Commission extended the conditional temporary exemption 
until December 2, 2011.\4\ On November 16, 2011, the Commission 
extended the conditional temporary exemption until December 2, 2012.\5\ 
On November 26, 2012, the Commission extended the conditional temporary 
exemption until December 2, 2013.\6\ On November 22, 2013, the 
Commission extended the conditional temporary exemption until December 
2, 2014.\7\ The Commission is extending the temporary conditional 
exemption exempting NRSROs from complying with Rule 17g-5(a)(3) with 
respect to rating covered transactions until December 2, 2015.
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    \1\ See 17 CFR 240.17g-5(a)(3).
    \2\ See Exchange Act Release No. 62120 (May 19, 2010), 75 FR 
28825 (May 24, 2010) (``Order'').
    \3\ See id. at 28827-28 (setting forth conditions of relief).
    \4\ See Exchange Act Release No. 63363 (Nov. 23, 2010), 75 FR 
73137 (Nov. 29, 2010) (``First Extension Order'').
    \5\ See Exchange Act Release No. 65765 (Nov. 16, 2011), 76 FR 
72227 (Nov. 22, 2011) (``Second Extension Order'').
    \6\ See Exchange Act Release No. 34-68286 (Nov. 26, 2012), 77 FR 
71201 (Nov. 29, 2012) (``Third Extension Order'').
    \7\ See Exchange Act Release No. 34-70919 (Nov. 22, 2013), 78 FR 
70984 (Nov. 27, 2013) (``Fourth Extension Order'').
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II. Background

    Rule 17g-5 identifies, in paragraphs (b) and (c) of the rule, a 
series of conflicts of interest arising from the business of 
determining credit ratings.\8\ Paragraph (a) of Rule 17g-5 \9\ 
prohibits an NRSRO from issuing or maintaining a credit rating if it is 
subject to the conflicts of interest identified in paragraph (b) of 
Rule 17g-5 unless the NRSRO has taken the steps prescribed in paragraph 
(a)(1) (i.e., disclosed the type of conflict of interest in Exhibit 6 
to Form NRSRO in accordance with Section 15E(a)(1)(B)(vi) of the 
Exchange Act \10\ and Rule 17g-1) \11\ and paragraph (a)(2) (i.e., 
established and is maintaining and enforcing written policies and 
procedures to address and manage conflicts of interest in accordance 
with Section 15E(h) of the Exchange Act).\12\ Paragraph (c) of Rule 
17g-5 specifically prohibits seven types of conflicts of interest. 
Consequently, an NRSRO is prohibited from issuing or maintaining a 
credit rating when it is subject to these conflicts regardless of 
whether it had disclosed them and established procedures reasonably 
designed to address them.
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    \8\ 17 CFR 240.17g-5(b) and (c).
    \9\ 17 CFR 240.17g-5(a).
    \10\ 15 U.S.C. 78o-7(a)(1)(B)(vi).
    \11\ 17 CFR 240.17g-1.
    \12\ 15 U.S.C. 78o-7(h).
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    In December 2009, the Commission adopted subparagraph (a)(3) to 
Rule 17g-5. This provision requires an NRSRO that is hired by an 
arranger to determine an initial credit rating for a structured finance 
product to take certain steps designed to allow an NRSRO that is not 
hired by the arranger to nonetheless determine an initial credit 
rating--and subsequently monitor that credit rating--for the structured 
finance product.\13\ In particular, under Rule 17g-5(a)(3), an NRSRO is 
prohibited from issuing or maintaining a credit rating when it is 
subject to the conflict of interest identified in paragraph (b)(9) of 
Rule 17g-5 (i.e., being hired by an arranger to determine a credit 
rating for a structured finance product) \14\ unless it has taken the 
steps

[[Page 70262]]

prescribed in paragraphs (a)(1) and (2) of Rule 17g-5 (discussed above) 
and the steps prescribed in new paragraph (a)(3) of Rule 17g-5.\15\ 
Rule 17g-5(a)(3), among other things, requires that the NRSRO must:
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    \13\ See 17 CFR 240.17g-5(a)(3); see also Exchange Act Release 
No. 61050 (Nov. 23, 2009), 74 FR 63832 (Dec. 4, 2009) (``Adopting 
Release'') at 63844-45.
    \14\ Paragraph (b)(9) of Rule 17g-5 identifies the following 
conflict of interest: issuing or maintaining a credit rating for a 
security or money market instrument issued by an asset pool or as 
part of any asset-backed or mortgage-backed securities transaction 
that was paid for by the issuer, sponsor, or underwriter of the 
security or money market instrument. 17 CFR 240.17g-5(b)(9).
    \15\ 17 CFR 240.17g-5(a)(3).
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     Maintain on a password-protected Internet Web site a list 
of each structured finance product for which it currently is in the 
process of determining an initial credit rating in chronological order 
and identifying the type of structured finance product, the name of the 
issuer, the date the rating process was initiated, and the Internet Web 
site address where the arranger represents the information provided to 
the hired NRSRO can be accessed by other NRSROs;
     Provide free and unlimited access to such password-
protected Internet Web site during the applicable calendar year to any 
NRSRO that provides it with a copy of the certification described in 
paragraph (e) of Rule 17g-5 that covers that calendar year; \16\ and
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    \16\ Paragraph (e) of Rule 17g-5 requires that an NRSRO seeking 
to access the hired NRSRO's Internet Web site during the applicable 
calendar year must furnish the Commission with the following 
certification:
    The undersigned hereby certifies that it will access the 
Internet Web sites described in 17 CFR 240.17g-5(a)(3) solely for 
the purpose of determining or monitoring credit ratings. Further, 
the undersigned certifies that it will keep the information it 
accesses pursuant to 17 CFR 240.17g-5(a)(3) confidential and treat 
it as material nonpublic information subject to its written policies 
and procedures established, maintained, and enforced pursuant to 
section 15E(g)(1) of the Act (15 U.S.C. 78o-7(g)(1)) and 17 CFR 
240.17g-4. Further, the undersigned certifies that it will determine 
and maintain credit ratings for at least 10% of the issued 
securities and money market instruments for which it accesses 
information pursuant to 17 CFR 240.17g-5(a)(3)(iii), if it accesses 
such information for 10 or more issued securities or money market 
instruments in the calendar year covered by the certification. 
Further, the undersigned certifies one of the following as 
applicable: (1) In the most recent calendar year during which it 
accessed information pursuant to Sec.  17 CFR 240.17g-5(a)(3), the 
undersigned accessed information for [Insert Number] issued 
securities and money market instruments through Internet Web sites 
described in 17 CFR 240.17g-5(a)(3) and determined and maintained 
credit ratings for [Insert Number] of such securities and money 
market instruments; or (2) The undersigned previously has not 
accessed information pursuant to 17 CFR 240.17g-5(a)(3) 10 or more 
times during the most recently ended calendar year.
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     Obtain from the arranger a written representation that can 
reasonably be relied upon that the arranger will, among other things, 
disclose on a password-protected Internet Web site the information it 
provides to the hired NRSRO to determine the initial credit rating (and 
monitor that credit rating) and provide access to the Web site to an 
NRSRO that provides it with a copy of the certification described in 
paragraph (e) of Rule 17g-5.\17\
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    \17\ In particular, under paragraph (a)(3)(iii) of Rule 17g-5, 
the arranger must represent to the hired NRSRO that it will: (1) 
Maintain the information described in paragraphs (a)(3)(iii)(C) and 
(a)(3)(iii)(D) of Rule 17g-5 available at an identified password-
protected Internet Web site that presents the information in a 
manner indicating which information currently should be relied on to 
determine or monitor the credit rating; (2) Provide access to such 
password-protected Internet Web site during the applicable calendar 
year to any NRSRO that provides it with a copy of the certification 
described in paragraph (e) of Rule 17g-5 that covers that calendar 
year, provided that such certification indicates that the nationally 
recognized statistical rating organization providing the 
certification either: (i) determined and maintained credit ratings 
for at least 10% of the issued securities and money market 
instruments for which it accessed information pursuant to paragraph 
(a)(3)(iii) of Rule 17g-5 in the calendar year prior to the year 
covered by the certification, if it accessed such information for 10 
or more issued securities or money market instruments; or (ii) has 
not accessed information pursuant to paragraph (a)(3) of Rule 17g-5 
10 or more times during the most recently ended calendar year; (3) 
Post on such password-protected Internet Web site all information 
the arranger provides to the NRSRO, or contracts with a third party 
to provide to the NRSRO, for the purpose of determining the initial 
credit rating for the security or money market instrument, including 
information about the characteristics of the assets underlying or 
referenced by the security or money market instrument, and the legal 
structure of the security or money market instrument, at the same 
time such information is provided to the NRSRO; and (4) Post on such 
password-protected Internet Web site all information the arranger 
provides to the NRSRO, or contracts with a third party to provide to 
the NRSRO, for the purpose of undertaking credit rating surveillance 
on the security or money market instrument, including information 
about the characteristics and performance of the assets underlying 
or referenced by the security or money market instrument at the same 
time such information is provided to the NRSRO.
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    The Commission stated in the Adopting Release that subparagraph 
Rule 17g-5(a)(3) is designed to address conflicts of interest and 
improve the quality of credit ratings for structured finance products 
by making it possible for more NRSROs to rate structured finance 
products.\18\ For example, the Commission noted that when an NRSRO is 
hired to rate a structured finance product, some of the information it 
relies on to determine the rating is generally not made public.\19\ As 
a result, structured finance products frequently are issued with 
ratings from only the one or two NRSROs that have been hired by the 
arranger, with the attendant conflict of interest that creates.\20\ The 
Commission stated that subparagraph Rule 17g-5(a)(3) was designed to 
increase the number of credit ratings extant for a given structured 
finance product and, in particular, to promote the issuance of credit 
ratings by NRSROs that are not hired by arrangers.\21\ The Commission's 
goal in adopting the rule was to provide users of credit ratings with 
more views on the creditworthiness of structured finance products.\22\ 
In addition, the Commission stated that Rule 17g-5(a)(3) was designed 
to reduce the ability of arrangers to obtain better than warranted 
ratings by exerting influence over NRSROs hired to determine credit 
ratings for structured finance products.\23\ Specifically, by opening 
up the rating process to more NRSROs, the Commission intended to make 
it easier for the hired NRSRO to resist such pressure by increasing the 
likelihood that any steps taken to inappropriately favor the arranger 
could be exposed to the market through the credit ratings issued by 
other NRSROs.\24\
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    \18\ Adopting Release at 63844.
    \19\ Id.
    \20\ Id.
    \21\ Id.
    \22\ Id.
    \23\ Id.
    \24\ Id.
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    Rule 17g-5(a)(3) became effective on February 2, 2010, and the 
compliance date for Rule 17g-5(a)(3) was June 2, 2010.

III. Extension of Conditional Temporary Extension

    In the Order, the Commission requested comment generally, but also 
on a number of specific issues.\25\ The Commission received six comment 
letters in response to this solicitation of comment.\26\ The commenters 
expressed concern that the extraterritorial application of Rule 17g-
5(a)(3) could, in the commenter's view, among other things, disrupt 
local securitization markets,\27\ inhibit the ability of local firms to 
raise capital,\28\ and conflict with local laws.\29\ Several commenters 
also

[[Page 70263]]

requested that the conditional temporary exemption be extended or made 
permanent.\30\ The First Extension Order again solicited public comment 
on issues raised in connection with the extra-territorial application 
of Rule 17g-5(a)(3).\31\ One commenter requested that the Order be made 
permanent, citing many of the same reasons set forth in prior comment 
letters.\32\ The Second Extension Order again solicited public comment 
on issues raised in connection with the extra-territorial application 
of Rule 17g-5(a)(3).\33\ Commenters supported the exemption regarding 
the extra-territorial application of the Rule,\34\ with one of those 
commenters again requesting that the Order be made permanent.\35\ The 
Third Extension Order again solicited public comment on issues raised 
in connection with the extra-territorial application of Rule 17g-
5(a)(3). No comments were received. The Fourth Extension Order again 
solicited public comment on issues raised in connection with the extra-
territorial application of Rule 17g-5(a)(3). One comment was received 
and the commenter supported the exemption regarding the extra-
territorial application of the Rule.\36\
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    \25\ See Order at 28828.
    \26\ Letter from Masamichi Kono, Vice Commissioner for 
International Affairs, Financial Services Agency, Japan, dated Nov. 
12, 2010 (``Japan FSA Letter''); Letter from Masaru Ono, Executive 
Director, Securitization Forum of Japan, dated Nov. 12, 2010 (``SFJ 
Letter''); Letter from Rick Watson, Managing Director, Association 
for Financial Markets in Europe/European Securitisation Forum, dated 
Nov. 11, 2010 (``AFME Letter''); Letter from Jack Rando, Director, 
Capital Markets, Investment Industry Association of Canada, dated 
Sep. 22, 2010 (``IIAC Letter''); Letter from Christopher Dalton, 
Chief Executive Officer, Australian Securitisation Forum, dated Jun. 
27, 2010 (``AuSF Letter''); Letter from Takefumi Emori, Managing 
Director, Japan Credit Rating Agency, Ltd. (``JCR''), dated Jun. 25, 
2010 (``JCR Letter'').
    \27\ See Japan FSA Letter; SFJ Letter; AFME Letter; JCR Letter; 
AuSF Letter.
    \28\ See AFME Letter; JCR Letter; AuSF Letter.
    \29\ See Japan FSA Letter; AFME Letter; JCR Letter; AuSF Letter; 
IIAC Letter. With respect to local laws, we note that the European 
Commission in recent months has issued a relevant proposal for 
amendments to the European Union Regulation on Credit Ratings. See 
``Regulation of the European Parliament and of the Counsel on 
amending Regulation (EC) No 1060/2009 on credit rating agencies'' 
(available at http://ec.europa.eu/internal_market/securities/docs/agencies/100602_proposal_en.pdf).
    \30\ See Japan FSA Letter; SFJ Letter; AFME Letter; JCR Letter.
    \31\ See Letter from Tom Deutsch, Executive Director, American 
Securitization Forum, and Chris Dalton, Chief Executive Officer, 
Australian Securitization Forum, dated Aug. 9, 2011 (``ASF/AuSF 
Letter 1''); Letter from Jack Rando, Director, Capital Markets, 
Investment Industry Association of Canada, dated Nov. 2, 2011 
(``IIAC Letter 2'').
    \32\ See ASF/AuSF Letter 1.
    \33\ Letter from Chris Barnard to the Commission, dated Nov. 23, 
2011 (``Barnard Letter''); Letter from Tom Deutsch, Executive 
Director, American Securitization Forum and Chris Dalton, Chief 
Executive Officer, Australian Securitisation Forum, dated Aug. 28, 
2012 (``ASF/AuSF Letter 2'').
    \34\ See Barnard Letter; ASF/AuSF Letter 2.
    \35\ See ASF/AuSF Letter 2.
    \36\ See Letter from Chris Barnard to the Commission, dated Nov. 
26, 2013.
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    Given the continued concerns about potential disruptions of local 
securitization markets, and because the Commission's consideration of 
the issues raised will benefit from additional time to engage in 
further dialogue with interested parties and to monitor market and 
regulatory developments, the Commission believes extending the 
conditional temporary exemption until December 2, 2015 is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors.

IV. Request for Comment

    The Commission believes that it would be useful to continue to 
provide interested parties opportunity to comment. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/exorders.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number S7-04-09 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F St. NE., 
Washington, DC 20549-1090.

    All submissions should refer to File Number S7-04-09. This file 
number should be included on the subject line if email is used. To help 
us process and review your comments more efficiently, please use only 
one method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/exorders.shtml). Comments 
are also available for Web site viewing and printing in the 
Commission's Public Reference Room, 100 F St. NE., Washington, DC 20549 
on official business days between the hours of 10 a.m. and 3 p.m. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly.

V. Conclusion

    For the foregoing reasons, the Commission believes it would be 
necessary or appropriate in the public interest and consistent with the 
protection of investors to extend the conditional temporary exemption 
exempting NRSROs from complying with Rule 17g-5(a)(3) with respect to 
rating covered transactions until December 2, 2015.
    Accordingly,
    It is hereby ordered, pursuant to Section 36 of the Exchange Act, 
that a nationally recognized statistical rating organization is exempt 
until December 2, 2015 from the requirements in Rule 17g-5(a)(3) (17 
CFR 240.17g-5(a)(3)) for credit ratings where:
    (1) The issuer of the security or money market instrument is not a 
U.S. person (as defined under Securities Act Rule 902(k)); and
    (2) The nationally recognized statistical rating organization has a 
reasonable basis to conclude that the structured finance product will 
be offered and sold upon issuance, and that any arranger linked to the 
structured finance product will effect transactions of the structured 
finance product after issuance, only in transactions that occur outside 
the U.S.

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2014-27846 Filed 11-24-14; 8:45 am]
BILLING CODE 8011-01-P


