[Federal Register Volume 84, Number 157 (Wednesday, August 14, 2019)]
[Rules and Regulations]
[Pages 40247-40258]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-17218]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-86590; File No. S7-22-18]
RIN 3235-AM05


Amendments to Rules for Nationally Recognized Statistical Rating 
Organizations

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting amendments to rules for nationally recognized statistical 
rating organizations (``NRSROs'') under the Securities Exchange Act of 
1934 (``Exchange Act''). The amendments provide an exemption from a 
rule for NRSROs with respect to credit ratings if the issuer of the 
security or money market instrument referred to in the rule is not a 
U.S. person, and the NRSRO has a reasonable basis to conclude that all 
offers and sales of such security or money market instrument by any 
issuer, sponsor, or underwriter linked to such security or money market 
instrument will occur outside the United States. In addition, the 
amendments make conforming changes to similar exemptions in two other 
Exchange Act rules and technical corrections with respect to one of 
these rules.

DATES: Effective Date: September 13, 2019.

FOR FURTHER INFORMATION CONTACT: Harriet Orol, Kevin Vasel, or Patrick 
Boyle, at (212) 336-9080, Office of Credit Ratings, Securities and 
Exchange Commission, New York Regional Office, 200 Vesey Street, Suite 
400, New York, NY 10281.

SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to:

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                    Commission reference                                    CFR citation  (17 CFR)
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Securities Exchange Act of 1934 (Exchange Act): \1\
    Rule 17g-5(a)(3).......................................  Sec.   240.17g-5(a)(3)
    Rule 17g-7(a)..........................................  Sec.   240.17g-7(a)
    Rule 15Ga-2............................................  Sec.   240.15Ga-2
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\1\ 15 U.S.C. 78a et seq.

Table of Contents

I. Introduction
II. Background
    A. Rule 17g-5(a)(3)
    B. Rule 17g-7(a) and Rule 15Ga-2
III. Description of Rule Amendments
    A. Rule 17g-5(a)(3)
    B. Conforming Amendments to Rule 17g-7(a) and Rule 15Ga-2
    C. Technical Amendments
IV. Paperwork Reduction Act
    A. Summary of Collection of Information Under the Rule 
Amendments and Use of Information
    1. Amendment to Rule 17g-5(a)(3)
    2. Amendment to Rule 17g-7(a)
    B. Respondents
    C. Burden and Cost Estimates Related to the Amendments
    1. Amendment to Rule 17g-5(a)(3)
    2. Amendment to Rule 17g-7(a)
    D. Collection of Information Is Required To Obtain a Benefit
    E. Confidentiality
V. Other Matters
VI. Economic Analysis
    A. Introduction
    B. Baseline and Affected Parties
    C. Anticipated Costs and Benefits, Including Potential Effects 
on Efficiency, Competition, and Capital Formation
    1. Potential Benefits
    2. Potential Costs and Other Anticipated Effects
    3. Alternative Considered: Allow Exemptive Order To Expire
    a. Benefits
    b. Costs
VII. Regulatory Flexibility Act Certification
VIII. Statutory Authority

I. Introduction

    On September 26, 2018, the Commission published for comment 
proposed amendments to Rule 17g-5(a)(3) to provide an exemption from 
the

[[Page 40248]]

rule for NRSROs with respect to credit ratings if the issuer of the 
security or money market instrument referred to in the rule is not a 
U.S. person, and the NRSRO has a reasonable basis to conclude that all 
offers and sales of such security or money market instrument by any 
issuer, sponsor, or underwriter linked to such security or money market 
instrument will occur outside the United States.\2\ The Commission also 
proposed amendments to Rule 17g-7(a) and Rule 15Ga-2 that would conform 
the exemptions contained in such rules with the exemption proposed with 
respect to Rule 17g-5(a)(3).
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    \2\ See Amendments to Rules for Nationally Recognized 
Statistical Rating Organizations, Exchange Act Release No. 84289 
(Sept. 26, 2018), 83 FR 50297 (Oct. 5, 2018) (``Proposing 
Release''). The comment period for the proposed amendments expired 
on November 5, 2018.
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    As discussed in Section III of this release, the Commission has 
considered the comment letters received in response to the proposed 
amendments and is adopting the amendments as proposed.\3\ The 
Commission believes that codifying the exemption to Rule 17g-5(a)(3) is 
appropriate given notions of international comity and the generally 
limited interest of the Commission in regulating securities offered and 
sold exclusively outside of the United States. With respect to the 
conforming amendments to Rule 17g-7(a) and Rule 15Ga-2, the Commission 
continues to believe that it is important to maintain a consistent 
approach to determining how Rule 17g-5(a)(3), Rule 17g-7(a), and Rule 
15Ga-2 apply to offshore transactions. The Commission further believes 
that the changes made to the conditions to the exemptions will promote 
clarity and consistency regarding the intended application of the 
exemptions and their relationship to 17 CFR 230.901 through 230.905 
(``Regulation S'').
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    \3\ In the Proposing Release, the Commission also discussed 
comment letters received with respect to the existing temporary 
conditional exemption to Rule 17g-5(a)(3). See Proposing Release, 
supra note 2, 83 FR at 50299-300.
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II. Background

A. Rule 17g-5(a)(3)

    In 2009, the Commission adopted amendments to 17 CFR 240.17g-5 
(``Rule 17g-5'') designed to address conflicts of interest arising from 
the business of determining credit ratings, and to improve competition 
and the quality of credit ratings for structured finance products, by 
making it possible for more NRSROs to rate such securities.\4\ The 
amendments established a program (``Rule 17g-5 Program'') by which an 
NRSRO that is not hired by an issuer, sponsor, or underwriter 
(collectively, ``arranger'') is able to obtain the same information 
that the arranger provides to an NRSRO hired to determine a credit 
rating for the structured finance product at the same time the 
information is provided to the hired NRSRO.\5\
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    \4\ Amendments to Rules for Nationally Recognized Statistical 
Rating Organizations, Exchange Act Release No. 61050 (Nov. 23, 
2009), 74 FR 63832 (Dec. 4, 2009) (``Rule 17g-5 Adopting Release''). 
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 securities 
transaction. This broad category of financial instruments includes 
an asset-backed security as defined in Section 3(a)(79) of the 
Exchange Act (15 U.S.C. 78c(a)(79)) and other types of structured 
debt instruments, including synthetic and hybrid collateralized debt 
obligations. See, e.g., Nationally Recognized Statistical Rating 
Organizations, Exchange Act Release No. 72936 (Aug. 27, 2014), 79 FR 
55078, 55081 n.18 (Sept. 15, 2014) (``2014 NRSRO Amendments'').
    \5\ Rule 17g-5 Adopting Release, supra note 4, 74 FR at 63832. 
See also 17 CFR 240.17g-5. Throughout this release, an NRSRO that is 
not hired by an arranger is referred to as a ``non-hired NRSRO.'' An 
NRSRO that is hired by an arranger is referred to as a ``hired 
NRSRO.''
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    The Rule 17g-5 Program operates by requiring a hired NRSRO to 
maintain a password-protected website containing a list of each 
structured finance product for which it is currently in the process of 
determining an initial credit rating.\6\ The list must be in 
chronological order and identify the type of structured finance 
product, the name of the issuer, the date the credit rating process was 
initiated, and the website where the arranger of the structured finance 
product represents that the information provided to the hired NRSRO can 
be accessed by non-hired NRSROs.\7\ The hired NRSRO must provide free 
and unlimited access to the website it maintains pursuant to the Rule 
17g-5 Program to any non-hired NRSRO that provides a copy of a 
certification it has furnished to the Commission in accordance with 17 
CFR 240.17g-5(e).\8\
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    \6\ See 17 CFR 240.17g-5(a)(3)(i).
    \7\ Id.
    \8\ See 17 CFR 240.17g-5(a)(3)(ii); 17 CFR 240.17g-5(e).
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    The Rule 17g-5 Program also requires the hired NRSRO to obtain a 
written representation from the arranger of the structured finance 
product that can be reasonably relied on by the hired NRSRO.\9\ Such 
representation must include: That the arranger will maintain a 
password-protected website that other NRSROs can access; that the 
arranger will post on this website all information the arranger 
provides to the hired NRSRO (or contracts with a third party to provide 
to the hired NRSRO) for the purpose of determining the initial credit 
rating and undertaking credit rating surveillance; and that the 
arranger will post this information to the website at the same time 
such information is provided to the hired NRSRO.\10\
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    \9\ See 17 CFR 240.17g-5(a)(3)(iii).
    \10\ Id.
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    Prior to the June 2, 2010, compliance date for the Rule 17g-5 
Program, the Commission by order granted a temporary conditional 
exemption to NRSROs from Rule 17g-5(a)(3). This temporary conditional 
exemption (the ``existing Rule 17g-5(a)(3) exemption'') applies solely 
with respect to credit ratings if: (1) The issuer of the security or 
money market instrument is not a U.S. person (as defined under 17 CFR 
230.902(k)); 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 United States.\11\ These 
conditions were designed to confine the existing Rule 17g-5(a)(3) 
exemption's application to credit ratings of structured finance 
products issued in, and linked to, financial markets outside of the 
United States. The Commission granted this relief in light of concerns 
raised by various foreign securities regulators and market participants 
that local securitization markets may be disrupted if the rule applied 
to transactions outside the United States.\12\ The Commission has 
extended the existing Rule 17g-5(a)(3) exemption several times, most 
recently until the earlier of December 2, 2019, or the compliance date 
set forth in any final rule that may be adopted by the Commission that 
provides for a similar exemption.\13\
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    \11\ See Order Granting 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, Exchange Act Release No. 62120 (May 19, 
2010), 75 FR 28825 (May 24, 2010) (``Exemptive Order'').
    \12\ Id. at 28826-27. Such foreign securities regulators and 
market participants indicated that arrangers of structured finance 
products located outside the United States generally were not aware 
that they would be required to make the representations prescribed 
in Rule 17g-5 in order to obtain credit ratings from NRSROs and were 
not prepared to make and adhere to the new requirements set forth in 
Rule 17g-5(a)(3). These commenters also identified potential 
conflicts with local law in non-U.S. jurisdictions as a concern. Id.
    \13\ See Order Extending Conditional Temporary Exemption for 
Nationally Recognized Statistical Rating Organizations from 
Requirements of Rule 17g-5(a)(3) Under the Securities Exchange Act 
of 1934, Exchange Act Release No. 82144 (Nov. 22, 2017), 82 FR 56309 
(Nov. 28, 2017).

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[[Page 40249]]

B. Rule 17g-7(a) and Rule 15Ga-2

    In 2014, the Commission adopted Rule 17g-7(a) and Rule 15Ga-2. Rule 
17g-7(a) requires an NRSRO, when taking a rating action, to publish an 
information disclosure form containing specified information about the 
related credit rating.\14\ For example, the information disclosure form 
must specify, among other things, the version of the methodology used 
to determine the credit rating, a description of the types of data 
relied upon to determine the credit rating, and information on the 
sensitivity of the credit rating to assumptions made by the NRSRO.\15\ 
The NRSRO must also attach to the information disclosure form an 
attestation affirming that no part of the credit rating was influenced 
by any other business activities, that the credit rating was based 
solely upon the merits of the obligor, security, or money market 
instrument being rated, and that the rating was an independent 
evaluation of the credit risk of the obligor, security, or money market 
instrument.\16\
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    \14\ 17 CFR 240.17g-7(a)(1). Rule 17g-7(a) sets forth the 
required format and content of the information disclosure form and 
specifies that the form (and other items required by Rule 17g-7(a)) 
must be published in the same manner as the credit rating that is 
the result or subject of the rating action.
    \15\ See 17 CFR 240.17g-7(a)(1)(ii)(B), (H), and (M). For a 
comprehensive discussion of the required content of the form, see 
2014 NRSRO Amendments, supra note 4, 79 FR at 55167-77.
    \16\ 17 CFR 240.17g-7(a)(1)(iii).
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    Rule 17g-7(a) also requires an NRSRO, when taking a rating action, 
to publish any executed Form ABS Due Diligence-15E containing 
information about the security or money market instrument subject to 
the rating action received by the NRSRO or obtained by the NRSRO 
through the website maintained by an arranger under the Rule 17g-5 
Program.\17\ Form ABS Due Diligence-15E is the form on which a person 
employed by an NRSRO, issuer, or underwriter to provide third-party due 
diligence services in connection with an asset-backed security must, 
among other things, describe the scope and manner of the due diligence 
provided, summarize the findings and conclusions of its review, and 
certify that it conducted a thorough review in performing the due 
diligence.\18\
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    \17\ 17 CFR 240.17g-7(a)(2).
    \18\ Rule 17g-10 identifies Form ABS Due Diligence-15E as the 
form on which the certification required pursuant to Exchange Act 
Section 15E(s)(4)(B) must be set forth. See 17 CFR 240.17g-10; see 
also 15 U.S.C. 78o-7(s)(4)(B).
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    Rule 15Ga-2 also relates to third-party due diligence services and 
requires the issuer or underwriter of an asset-backed security that is 
to be rated by an NRSRO to furnish to the Commission Form ABS-15G 
containing the findings and conclusions of any third-party due 
diligence report obtained by the issuer or underwriter.\19\
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    \19\ See 17 CFR 240.15Ga-2; 17 CFR 249.1400. Forms ABS-15G are 
made publicly available through the Commission's EDGAR system. See 
17 CFR 232.101(a)(xvi).
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    In response to concerns raised by commenters when the rules were 
proposed,\20\ the Commission included paragraph (3) in Rule 17g-7(a) 
and paragraph (e) in Rule 15Ga-2 to provide an exemption from the 
disclosure requirements for certain offshore transactions.\21\ The 
Commission closely modeled the language of the Rule 17g-7(a) exemption 
on the existing Rule 17g-5(a)(3) exemption.\22\ The Commission noted 
that it was appropriate for the Rule 15Ga-2 exemption to be aligned 
with the Rule 17g-7(a) exemption so that there is a consistent approach 
to determining when the Commission's NRSRO rules apply to offshore 
transactions.\23\
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    \20\ With respect to Rule 17g-7(a), a commenter suggested that 
local laws could impede the ability of an NRSRO to obtain or 
disclose information about the issuer as required by the proposed 
rule. See 2014 NRSRO Amendments, supra note 4, 79 FR at 55165. 
Similarly, with respect to Rule 15Ga-2, a commenter indicated that 
application of the rule to offshore transactions may conflict with 
foreign securities laws and other laws, rules, and regulations. See 
2014 NRSRO Amendments, supra note 4, 79 FR at 55184, n. 1420. As 
discussed in the Proposing Release, similar concerns regarding 
potentially overlapping or conflicting foreign regulations have been 
raised by commenters with respect to Rule 17g-5(a)(3).
    \21\ See 2014 NRSRO Amendments, supra note 4, 79 FR at 55165, 
55184-85. See also 17 CFR 240.17g-7(a)(3) (providing for an 
exemption if: (1) The rated obligor or issuer of the rated security 
or money market instrument is not a U.S. person; and (2) the NRSRO 
has a reasonable basis to conclude that a security or money market 
instrument issued by the rated obligor or the issuer will be offered 
and sold upon issuance, and that any underwriter or arranger linked 
to the security or money market instrument will effect transactions 
in the security or money market instrument, only in transactions 
that occur outside the United States); 17 CFR 240.15Ga-2(e) 
(providing for an exemption with respect to offerings of asset-
backed securities if: (1) The offering is not required to be, and is 
not, registered under the Securities Act; (2) the issuer of the 
rated security is not a U.S. person; and (3) the security will be 
offered and sold upon issuance, and any underwriter or arranger 
linked to the security will effect transactions of the security 
after issuance, only in transactions that occur outside the United 
States).
    \22\ 2014 NRSRO Amendments, supra note 4, 79 FR at 55165.
    \23\ Id. at 55185 n.1422.
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III. Description of Rule Amendments

A. Rule 17g-5(a)(3)

    In the Proposing Release, the Commission proposed to codify, with 
certain clarifying changes, the existing Rule 17g-5(a)(3) exemption. 
Specifically, the Commission proposed to add new paragraph (iv) to Rule 
17g-5(a)(3) to provide that the provisions of paragraphs (i) through 
(iii) of Rule 17g-5(a)(3) will not apply to an NRSRO when issuing or 
maintaining a credit rating for a security or money market instrument 
issued by an asset pool or as part of any asset-backed securities 
transaction, if: (1) The issuer of the security or money market 
instrument is not a U.S. person (as defined in 17 CFR 230.902(k)); and 
(2) the NRSRO has a reasonable basis to conclude that all offers and 
sales of the security or money market instrument by any issuer, 
sponsor, or underwriter linked to the security or money market 
instrument will occur outside the United States (as that phrase is used 
in Regulation S).
    Three commenters, including an NRSRO and two industry groups, 
submitted comment letters in response to the proposed amendments.\24\ 
The commenters all supported the Commission's proposal to codify the 
existing Rule 17g-5(a)(3) exemption.\25\ One commenter stated that 
concerns that have been raised over time about extraterritorial 
application of Rule 17g-5(a)(3) remain relevant and that adoption of 
the proposed amendment would be an effective means by which to provide 
permanent relief.\26\ This commenter also expressed the belief that 
adopting the proposed amendment would be consistent with notions of 
international comity and the generally limited interest of the 
Commission in regulating securities offered and sold exclusively 
outside the United States.\27\ Another commenter stated that Rule 17g-
5(a)(3) should not apply with respect to non-U.S. offerings absent a 
substantial effect in the United States or on U.S. persons, arguing 
that applying the rule to all credit ratings of an NRSRO or a 
registered affiliate,

[[Page 40250]]

regardless of whether the relevant transaction involves a U.S. investor 
connection, would be inconsistent from a policy perspective with the 
wider U.S. legislative and regulatory framework as well as principles 
of international comity.\28\ Commenters also indicated that 
codification of the existing Rule 17g-5(a)(3) exemption would benefit 
NRSROs and other securitization market participants worldwide by 
providing certainty and predictability regarding continued application 
of the exemption.\29\
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    \24\ See letter from Thomas L. Guest, dated October 5, 2018 
(``Guest letter''); letter from Ryan Mensing, Vice President, Senior 
Regulatory Officer, Government and Public Affairs, Moody's Investors 
Service, dated November 5, 2018 (``Moody's letter''); letter from 
Sairah Burki, Senior Director and Head of ABS Policy, Structured 
Finance Industry Group, and Chris Dalton, Chief Executive Officer, 
Australian Securitisation Forum, dated November 5, 2018 (``SFIG/ASF 
letter''). The comments are available at https://www.sec.gov/comments/s7-22-18/s72218.htm.
    \25\ Id.
    \26\ See Moody's letter. According to the commenter, ``[t]hese 
concerns have included: possible disruption to local securitization 
markets; overlapping and potentially conflicting regulatory 
requirements in other jurisdictions; conflicts with local 
confidentiality and data protection laws; misalignment with varying 
international market practices; and possible inconsistency with 
principles of international comity.'' Id. In the Proposing Release, 
the Commission discussed comments received with respect to the 
Exemptive Order that raised similar concerns. See Proposing Release, 
supra note 2, 83 FR at 50299-300.
    \27\ See Moody's letter.
    \28\ See SFIG/ASF letter. This commenter also stated its view 
that imposition of Rule 17g-5(a)(3) on transactions offered by 
foreign issuers solely to foreign investors would have an undue 
negative impact on global issuance of asset-backed securities and 
exact extensive costs on securitization issuers and NRSROs around 
the globe without tangible benefits to, or protection of, U.S. 
investors.
    \29\ See Moody's letter; SFIG/ASF letter.
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    One of the commenters, though supportive of the proposal, expressed 
the view that Rule 17g-5(a)(3) has been ineffective, citing 
longstanding discussions among its issuer member firms as evidence that 
very few non-hired NRSROs have requested access to the websites that 
arrangers are required to maintain under the rule.\30\ This commenter 
noted that concerns with respect to the effectiveness of the rule are 
compounded by lingering international uncertainty regarding the 
potential future applicability of Rule 17g-5(a)(3) to extraterritorial 
transactions.\31\
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    \30\ See SFIG/ASF letter.
    \31\ Id.
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    The Commission has considered the views and policy considerations 
expressed by commenters and continues to believe it is appropriate to 
provide relief regarding the application of Rule 17g-5(a)(3) to 
transactions offered and sold exclusively outside the United States. As 
stated in the Proposing Release, the Commission believes that such an 
approach is consistent with the approach it has taken in other contexts 
and with notions of international comity and the generally limited 
interest of the Commission in regulating securities offered and sold 
exclusively outside of the United States. Thus, the Commission is 
adopting new paragraph (iv) to Rule 17g-5(a)(3) as proposed. The 
Commission has also directed staff to further evaluate the 
effectiveness of Rule 17g-5(a)(3) with respect to credit ratings of 
structured finance products that are not eligible for relief under the 
adopted exemption.
    The conditional exemption that the Commission is adopting in new 
paragraph (iv) to Rule 17g-5(a)(3) is narrowly tailored to provide 
relief only with respect to structured finance products issued by non-
U.S. issuers and offered and sold exclusively outside of the United 
States. Further, the exemption only applies to the provisions of 
paragraphs (i) through (iii) of Rule 17g-5(a)(3). It does not limit in 
any way the scope or applicability of the other requirements in Rule 
17g-5 or other provisions of the federal securities laws, including the 
antifraud provisions.
    The first condition of the exemption to Rule 17g-5(a)(3)--that the 
issuer of the structured finance product must not be a U.S. person--
limits the relief to credit ratings of structured finance products 
issued by non-U.S. issuers. To this end, and for purposes of the 
exemption, ``U.S. person'' has the same definition as under Regulation 
S.\32\ Consequently, to qualify for the exemption, the NRSRO has to be 
determining a credit rating for a structured finance product issued by 
a person that is not a U.S. person.
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    \32\ See 17 CFR 230.902(k).
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    The second condition of the exemption to Rule 17g-5(a)(3)--that the 
NRSRO has a reasonable basis to conclude that all offers and sales of 
the structured finance product by any arranger linked to the structured 
finance product will occur outside the United States--is intended to 
limit the relief to credit ratings of structured finance products 
offered and sold exclusively outside the United States. This condition 
closely tracks the language of Regulation S \33\ and specifies that the 
phrase ``occur outside the United States'' has the same meaning as in 
Regulation S.
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    \33\ See 17 CFR 230.901.
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    The determination of whether an NRSRO has a reasonable basis to 
conclude that all offers and sales of the structured finance product by 
any arranger linked to the structured finance product will occur 
outside the United States depends on the facts and circumstances of a 
given situation. To have a reasonable basis to reach such a conclusion, 
the NRSRO generally should ascertain how any arranger linked to the 
structured finance product intends to market and sell the structured 
finance product and to engage in any secondary market activities (i.e., 
re-sales) of the structured finance product, and whether any such 
efforts and activities will occur in the United States (including any 
``directed selling efforts,'' as defined in Regulation S).\34\
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    \34\ 17 CFR 230.902(c).
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    For instance, an NRSRO could obtain from the applicable arranger a 
representation upon which the NRSRO can reasonably rely that all offers 
and sales by the arranger of the structured finance product to be rated 
by the NRSRO will occur outside the United States. For example, the 
arranger's representation could provide assurances that all such offers 
and sales will be conducted in accordance with the applicable safe 
harbor under Regulation S.\35\ In determining whether it is reasonable 
to rely on any such representation, an NRSRO should evaluate the 
representation in light of other information known to the NRSRO, such 
as information in the relevant transaction documents, any ongoing or 
prior failures by the arranger to adhere to its representations, and 
any pattern of conduct by the arranger of it failing to promptly 
correct breaches of its representations.
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    \35\ See 17 CFR 230.903 and 904.
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    An NRSRO generally should reevaluate the reasonableness of its 
basis for concluding that the structured finance product will be 
offered and sold outside the United States if the NRSRO obtains 
information during the course of its engagement that could cause it to 
reasonably believe there are offering or sales activities occurring 
inside the United States. In this regard, one option would be for the 
NRSRO to include in any representation obtained from an arranger a 
mechanism for the arranger to promptly notify the NRSRO of any change 
that would render the representation untrue or inaccurate.

B. Conforming Amendments to Rule 17g-7(a) and Rule 15Ga-2

    In the Proposing Release, the Commission proposed amendments to 
Rule 17g-7(a) and Rule 15Ga-2 to align the exemptions in such rules 
with the exemption proposed with respect to Rule 17g-5(a)(3). 
Specifically, the Commission proposed amending paragraph (3)(ii) of 
Rule 17g-7(a) to clarify that the exemption to Rule 17g-7(a) is 
available only if an NRSRO has a reasonable basis to conclude that: (1) 
With respect to any security or money market instrument issued by a 
rated obligor, all offers and sales by any issuer, sponsor, or 
underwriter linked to the security or money market instrument will 
occur outside the United States (as that phrase is used in Regulation 
S); or (2) with respect to a rated security or money market instrument, 
all offers and sales by any issuer, sponsor, or underwriter linked to 
the security or money market instrument will occur outside the United 
States (as that phrase is used in Regulation S). Likewise, the 
Commission proposed amending

[[Page 40251]]

paragraph (e)(3) of Rule 15Ga-2 to clarify that the exemption to Rule 
15Ga-2 is available only if all offers and sales of an asset-backed 
security by any issuer, sponsor, or underwriter linked to the security 
will occur outside the United States (as that phrase is used in 
Regulation S).
    One commenter addressed the proposed amendments to Rule 17g-7(a) 
and Rule 15Ga-2. The commenter supported the Commission's efforts to 
align the exemptions to these rules with the exemption proposed for 
Rule 17g-5(a)(3).\36\ The Commission continues to believe that it is 
appropriate for there to be a consistent approach to determining how 
Rule 17g-5(a)(3), Rule 17g-7(a), and Rule 15Ga-2 apply to offshore 
transactions. The Commission is therefore adopting the amendments to 
Rule 17g-7(a) and Rule 15Ga-2 as proposed.
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    \36\ See Moody's letter.
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    As is the case with the exemption to Rule 17g-5(a)(3), the 
determination of whether an NRSRO has a reasonable basis to conclude 
that all offers and sales of the applicable securities or money market 
instruments by any arranger linked to such securities or money market 
instruments will occur outside the United States depends on the facts 
and circumstances of a given situation. The discussion in Section 
III.A. of this release regarding how an NRSRO may obtain such a 
reasonable basis for purposes of the exemption to Rule 17g-5(a)(3) also 
applies for purposes of the amendment to Rule 17g-7(a).
    As described in the Proposing Release, the amendment to Rule 17g-
7(a) also clarifies that the second condition of the Rule 17g-7(a) 
exemption applies differently in the case of rated obligors than it 
does in the case of rated securities or money market instruments. In 
the case of rated securities or money market instruments, the condition 
to the Rule 17g-7(a) exemption applies in the same way as the condition 
to the Rule 17g-5(a)(3) exemption--i.e., an NRSRO must have a 
reasonable basis to conclude that all offers and sales of the rated 
security or money market instrument by any arranger linked to that 
security or money market instrument will occur outside the United 
States. For the Rule 17g-7(a) exemption to apply with respect to a 
rating of an obligor, however, an NRSRO must have a reasonable basis to 
conclude that the condition is satisfied with respect to all securities 
or money market instruments issued by that obligor. Accordingly, if any 
of a rated obligor's securities or money market instruments are offered 
and sold by an arranger linked to those securities or money market 
instruments within the United States, the exemption would not apply to 
rating actions involving the credit rating assigned to the obligor as 
an entity. The Commission previously discussed the distinction between 
the application of the exemption with respect to rated obligors and 
rated securities or money market instruments in the adopting release 
for Rule 17g-7(a).\37\ As amended, Rule 17g-7(a) more clearly states 
this distinction in the rule text itself.
---------------------------------------------------------------------------

    \37\ See 2014 NRSRO Amendments, supra note 4, 79 FR at 55165 
n.1107.
---------------------------------------------------------------------------

C. Technical Amendments

    The proposed amendment to Rule 15Ga-2 also included technical 
amendments to the rule text, which the Commission is adopting as 
proposed. Specifically, the subparagraph designations of paragraph (e) 
of Rule 15Ga-2 are revised to use numerals ((1), (2), and (3)) instead 
of romanettes ((i), (ii), and (iii)). Additionally, the reference to 17 
CFR 230.902 in paragraph (e)(2) of Rule 15Ga-2 is revised to read 
``Sec.  230.902(k)'' in place of ``Securities Act Rule 902(k).'' In 
addition, the Commission is adopting a technical amendment to correct 
the subparagraph designations of paragraph (f) of Rule 15Ga-2 to use 
numerals ((1) and (2)) instead of romanettes ((i) and (ii)).

IV. Paperwork Reduction Act

    The amendments to Rule 17g-5(a)(3) and Rule 17g-7(a) contain new 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act of 1995 (``PRA'').\38\ The Commission submitted 
revisions to the currently approved collections of information to the 
Office of Management and Budget (``OMB'') for review in accordance with 
the PRA.\39\ An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid control number. The titles for the collections of 
information are:
---------------------------------------------------------------------------

    \38\ 44 U.S.C. 3501 et seq.
    \39\ See 44 U.S.C. 3507(d); 5 CFR 1320.11.

------------------------------------------------------------------------
             Rule                     Rule title        OMB control No.
------------------------------------------------------------------------
Rule 17g-5....................  Conflicts of Interest          3235-0649
Rule 17g-7....................  Reports to be made             3235-0656
                                 public by nationally
                                 recognized
                                 statistical rating
                                 organizations
                                 (NRSROs).
------------------------------------------------------------------------

    The amendment to Rule 15Ga-2 does not contain a collection of 
information requirement within the meaning of the PRA.
    In the Proposing Release, the Commission provided estimates of the 
burden of complying with the proposed amendments to Rule 17g-5(a)(3) 
and Rule 17g-7(a) and requested comment on the proposed collections of 
information. The Commission did not receive any comment letters 
addressing the collection of information aspects of the proposal.

A. Summary of Collection of Information Under the Rule Amendments and 
Use of Information

1. Amendment to Rule 17g-5(a)(3)
    The Commission is adopting, as proposed, an amendment to Rule 17g-
5(a)(3) that provides an exemption to the rule with respect to credit 
ratings of structured finance products if the issuer of the structured 
finance product is not a U.S. person and the NRSRO has a reasonable 
basis to conclude that all offers and sales of the structured finance 
product by any arranger linked to the structured finance product will 
occur outside the United States.\40\ In order to have a reasonable 
basis for such a conclusion, an NRSRO may collect information from an 
arranger. For instance, an NRSRO may elect to obtain a representation 
from an arranger regarding the manner in which the structured finance 
product will be offered and sold. Such information regarding the manner 
in which the structured finance product will be offered and sold may be 
necessary for an NRSRO to determine whether the exemption applies with 
respect to the rating of the structured finance product.
---------------------------------------------------------------------------

    \40\ See paragraph (a)(3)(iv) of Rule 17g-5; see also supra 
Section III.A. (discussing the adopted exemption in more detail).

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

[[Page 40252]]

2. Amendment to Rule 17g-7(a)
    The Commission is adopting, as proposed, an amendment to the 
existing exemption in Rule 17g-7(a). The amendment clarifies that, in 
order for the exemption to apply, an NRSRO must have a reasonable basis 
to conclude that: (1) With respect to any security or money market 
instrument issued by a rated obligor, all offers and sales by any 
issuer, sponsor, or underwriter linked to the security or money market 
instrument will occur outside the United States; or (2) with respect to 
a rated security or money market instrument, all offers and sales by 
any issuer, sponsor, or underwriter linked to the security or money 
market instrument will occur outside the United States.\41\ In order to 
have a reasonable basis for such a conclusion, an NRSRO may collect 
information from an arranger or obligor. For instance, an NRSRO may 
elect to obtain a representation from an arranger regarding the manner 
in which a rated security or money market instrument will be offered 
and sold or from an obligor regarding the manner in which all its 
securities and money market instruments have been offered and sold. 
Such information may be necessary for an NRSRO to determine whether the 
exemption applies with respect to a rating action.
---------------------------------------------------------------------------

    \41\ See paragraph (3)(ii) of Rule 17g-7(a); see also supra 
Section III.B. (discussing the amended exemption in more detail).
---------------------------------------------------------------------------

B. Respondents

    Rule 17g-5(a)(3) applies to NRSROs that rate structured finance 
products. Currently, there are seven NRSROs that are registered in the 
issuers of asset-backed securities ratings class that could rely on the 
exemption to Rule 17g-5(a)(3).\42\
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    \42\ The seven NRSROs registered to rate asset-backed securities 
are: A.M. Best Rating Services, Inc. (``A.M. Best''); DBRS, Inc. 
(``DBRS''); Fitch Ratings, Inc. (``Fitch''); Kroll Bond Rating 
Agency, Inc. (``KBRA''); Moody's Investors Service, Inc. 
(``Moody's''); Morningstar Credit Ratings, LLC (``Morningstar''); 
and S&P Global Ratings (``S&P'').
---------------------------------------------------------------------------

    Rule 17g-7(a) applies to all rating actions taken by an NRSRO. 
There are currently 10 credit rating agencies registered with the 
Commission as NRSROs that could rely on the exemption to Rule 17g-
7(a).\43\
---------------------------------------------------------------------------

    \43\ In addition to the seven NRSROs listed in note 42 supra, 
three additional credit rating agencies are currently registered as 
NRSROs: Egan-Jones Ratings Company; HR Ratings de M[eacute]xico, 
S.A. de C.V.; and Japan Credit Rating Agency, Ltd.
---------------------------------------------------------------------------

C. Burden and Cost Estimates Related to the Amendments

1. Amendment to Rule 17g-5(a)(3)
    The amendment to Rule 17g-5(a)(3) codifies the existing exemption, 
with certain clarifying changes.
    The Commission believes that NRSROs will modify their processes to 
account for the changes to the conditions of the exemption as adopted. 
For instance, an NRSRO that has sought written representations from an 
arranger to support the reasonable belief required under the existing 
Rule 17g-5(a)(3) exemption may modify the form of the representation to 
conform to the language of the condition as adopted. In the Proposing 
Release, the Commission estimated that it would take an NRSRO 
approximately five hours to update its process for obtaining a 
reasonable basis to reflect the clarifying language in the exemption, 
for an industry-wide one-time burden of approximately 35 hours.\44\ The 
Commission received no comments on this estimate and continues to 
estimate an industry-wide one-time burden of approximately 35 hours.
---------------------------------------------------------------------------

    \44\ 5 hours x 7 NRSROs registered to rate asset-backed 
securities = 35 hours.
---------------------------------------------------------------------------

    In order to have a reasonable basis to conclude that all offers and 
sales of the structured finance product by any arranger linked to the 
structured finance product will occur outside the United States, the 
Commission believes that NRSROs will likely seek information from 
arrangers, thereby resulting in associated costs. In the Proposing 
Release, the Commission estimated that an NRSRO would spend 
approximately two hours per transaction gathering and reviewing 
information received from arrangers to determine if the exemption 
applies. The Commission also estimated in the Proposing Release that 
approximately 267 rated transactions would be eligible for the 
exemption in a given year and that each transaction would be rated by 
approximately two NRSROs, resulting in a total aggregate annual hour 
burden of 1,068 hours.\45\ The Commission received no comments on these 
estimates.
---------------------------------------------------------------------------

    \45\ 2 hours x 267 transactions x 2 NRSROs per transaction = 
1,068 hours. The estimates of the number of annual transactions and 
the number of NRSROs per transaction in the Proposing Release were 
calculated using information from the databases maintained by Asset-
Backed Alert and Commercial Mortgage Alert and represented the 
average number of transactions and NRSROs per transaction for the 
years ended December 31, 2015, 2016, and 2017. See Proposing 
Release, supra note 2, 83 FR at 50303 n. 63.
---------------------------------------------------------------------------

    The Commission continues to estimate that an NRSRO would spend 
approximately two hours per transaction gathering and reviewing 
information received from arrangers to determine if the exemption 
applies and that each transaction would be rated by approximately two 
NRSROs. The Commission is updating its estimate of the number of rated 
transactions that would be eligible for the exemption in a given year 
to reflect more current data. The Commission currently estimates that 
approximately 284 rated transactions would be eligible for the 
exemption annually,\46\ resulting in a total aggregate annual hour 
burden of 1,136 hours.\47\
---------------------------------------------------------------------------

    \46\ This estimate was calculated using information, as of March 
25, 2019, from the databases maintained by Asset-Backed Alert and 
Commercial Mortgage Alert. Isolating the transactions coded in the 
databases as ``Non-U.S.'' offerings provided an estimate of the 
number of transactions that would have been eligible for the 
exemption. The databases also specify the number of NRSROs rating 
each transaction, which was used to calculate the average number of 
NRSROs per transaction (1.88). For purposes of the Commission's 
estimates, the number of NRSROs per transaction was rounded to the 
nearest whole number, resulting in no change from the estimate used 
in the Proposing Release. The estimates represent the average number 
of transactions and NRSROs per transaction for the years ended 
December 31, 2016, 2017, and 2018.
    \47\ 2 hours x 284 transactions x 2NRSROs per transaction = 
1,136 hours.
---------------------------------------------------------------------------

2. Amendment to Rule 17g-7(a)
    The Commission is adopting, as proposed, amendments to the existing 
exemption in Rule 17g-7(a). The amendments clarify that, in order for 
the exemption to apply, an NRSRO must have a reasonable basis to 
conclude that: (1) With respect to any security or money market 
instrument issued by a rated obligor, all offers and sales by any 
issuer, sponsor, or underwriter linked to the security or money market 
instrument will occur outside the United States; or (2) with respect to 
a rated security or money market instrument, all offers and sales by 
any issuer, sponsor, or underwriter linked to the security or money 
market instrument will occur outside the United States.\48\
---------------------------------------------------------------------------

    \48\ See paragraph (3)(ii) of Rule 17g-7(a); see also supra 
Section III.B. (discussing the amended exemption in more detail).
---------------------------------------------------------------------------

    The Commission believes that NRSROs will modify their processes to 
reflect the amendment to the Rule 17g-7(a) exemption. For instance, an 
NRSRO that has sought written representations from an obligor or 
arranger to support the reasonable belief required under the existing 
Rule 17g-7(a) exemption may modify the form of the representation to 
conform to the language of the condition as amended. In the Proposing 
Release, the Commission estimated that it would take an NRSRO 
approximately five hours to update its process for obtaining

[[Page 40253]]

a reasonable basis to reflect the amendment to the Rule 17g-7(a) 
exemption, for an industry-wide one-time burden of approximately 50 
hours.\49\ The Commission received no comments on this estimate and 
continues to estimate an industry-wide one-time burden of approximately 
50 hours.
---------------------------------------------------------------------------

    \49\ 5 hours x 10 NRSROs = 50 hours.
---------------------------------------------------------------------------

D. Collection of Information Is Required To Obtain a Benefit

    The collection of information is required to obtain or maintain a 
benefit--i.e., to qualify for the relevant exemption and eliminate the 
need to incur the costs associated with complying with the 
corresponding rule. In order to form a reasonable basis to conclude 
that all offers and sales of a security or money market instrument will 
occur outside the United States, an NRSRO likely will gather certain 
information from the obligor or an arranger including, for example, 
obtaining a representation to that effect. The determination of a 
reasonable basis would be necessary for the exemption to Rule 17g-
5(a)(3) and the amended exemption to Rule 17g-7(a) to apply.

E. Confidentiality

    Any information obtained by an NRSRO from an obligor or arranger to 
establish a reasonable basis will not be made public, unless the NRSRO, 
obligor, or arranger chooses to make it public. Information provided to 
the Commission in connection with staff examinations or investigations 
would be kept confidential, subject to the provisions of applicable 
law.

V. Other Matters

    Pursuant to the Congressional Review Act, the Office of Information 
and Regulatory Affairs has designated these rules as not a major rule 
as defined by 5 U.S.C. 804(2).

VI. Economic Analysis

A. Introduction

    As discussed above, the Commission is adopting, as proposed, an 
amendment to Rule 17g-5(a)(3) to provide an exemption from the rule 
with respect to credit ratings where the issuer of the structured 
finance product is not a U.S. person, and the NRSRO has a reasonable 
basis to conclude that all offers and sales of the structured finance 
product by any arranger linked to the structured finance product will 
occur outside the United States. The Commission is also adopting 
conforming amendments to similar exemptions set forth in Rule 17g-7(a) 
and Rule 15Ga-2. The Commission is sensitive to the costs and benefits 
of its rules. When engaging in rulemaking that requires the Commission 
to consider or determine whether an action is necessary or appropriate 
in the public interest, Section 3(f) of the Exchange Act requires that 
the Commission consider, in addition to the protection of investors, 
whether the action will promote efficiency, competition, and capital 
formation.\50\ In addition, Section 23(a)(2) of the Exchange Act 
requires the Commission to consider the effects on competition of any 
rules the Commission adopts under the Exchange Act, and 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.\51\
---------------------------------------------------------------------------

    \50\ See 15 U.S.C. 78c(f).
    \51\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The Commission has considered the effects of the amendments on 
competition, efficiency, and capital formation. Many of the benefits 
discussed below are difficult to quantify, in particular when 
considering the potential impact on conflicts of interest or 
competition. Consequently, while the Commission has, wherever possible, 
attempted to quantify the economic effects expected to result from the 
amendments, much of the discussion below is qualitative in nature. 
Moreover, because the existing Rule 17g-5(a)(3) exemption is currently 
in effect (and has been in effect since May 19, 2010--i.e., prior to 
the compliance date for Rule 17g-5(a)(3)), there has been no effect on 
transactions outside the United States because changes in the market 
related to the application of Rule 17g-5(a)(3) have not occurred with 
respect to these transactions as a consequence of the Exemptive Order.
    The Commission continues to believe that the codification of 
current practices with respect to Rule 17g-5(a)(3) is appropriate when 
compared to the alternative of allowing the existing Rule 17g-5(a)(3) 
exemption to expire. As discussed above, the commenters supported the 
proposal to codify the exemption to Rule 17g-5(a)(3).\52\ The 
Commission received no comments addressing the alternative considered 
in the Proposing Release.
---------------------------------------------------------------------------

    \52\ See supra notes 25-29 and accompanying text.
---------------------------------------------------------------------------

    The Commission continues to believe that the amendments to Rule 
17g-7(a) and Rule 15Ga-2 will not have a material impact on efficiency, 
competition, and capital formation or impose new costs of any 
significance. As discussed in the Proposing Release, the amendments to 
Rule 17g-7(a) and Rule 15Ga-2 are conforming and clarifying in nature. 
Further, unlike the existing Rule 17g-5(a)(3) exemption, the Rule 17g-
7(a) and Rule 15Ga-2 exemptions are already included as part of the 
rule text, and thus not subject to expiration.

B. Baseline and Affected Parties

    The Exemptive Order serves as the economic baseline against which 
the costs and benefits, as well as the impact on efficiency, 
competition, and capital formation, of the codification of the existing 
Rule 17g-5(a)(3) exemption is considered.
    As discussed in the Proposing Release, pursuant to the Exemptive 
Order, NRSROs have been exempt from the requirements of paragraphs (i) 
through (iii) of Rule 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 17 CFR 230.902(k)); 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 United States. As a result, with respect to such structured finance 
products, NRSROs have not been required to comply with the requirements 
of Rule 17g-5(a)(3), including the requirement to obtain from the 
arranger a representation that the arranger will maintain a website 
containing all information the arranger provides to the hired NRSRO in 
connection with the rating.
    Similarly, the existing exemptive language of paragraph (3) of Rule 
17g-7(a) and paragraph (e) of Rule 15Ga-2, before giving effect to the 
amendments adopted today, serves as the economic baseline against which 
the costs and benefits, as well as the impact on efficiency, 
competition, and capital formation, of the amendments to such rules are 
considered. As previously noted, the Commission believes the amendments 
to Rule 17g-7(a) and Rule 15Ga-2 are clarifying and conforming in 
nature and do not substantively deviate from the baseline.
    The economic and regulatory analysis in this section reflects 
structured finance product markets and the credit rating industry as 
they exist today. We begin with a summary of the approximate number of 
NRSROs that would be directly affected by the codification and features 
of the regulatory and economic environment

[[Page 40254]]

in which the affected entities operate. A discussion of the current 
economic environment will provide a framework for assessing how the 
regulation may impact efficiency, competition, and capital formation in 
this market.
    Currently, 10 credit rating agencies are registered with the 
Commission as NRSROs. Of the 10 NRSROs, seven are currently registered 
in the class of credit ratings for issuers of asset-backed 
securities.\53\ Three of the larger NRSROs accounted for approximately 
95 percent of credit ratings outstanding as of December 31, 2018; \54\ 
these three firms have operations outside of the United States.
---------------------------------------------------------------------------

    \53\ See supra notes 42-43.
    \54\ The three NRSROs are Fitch, Moody's, and S&P. The 
percentage of credit ratings outstanding attributable to Fitch, 
Moody's, and S&P was calculated using information reported by each 
NRSRO on Item 7A of Form NRSRO with respect to its annual 
certification for calendar year 2018. Annual certifications on Form 
NRSRO must be filed with the Commission on EDGAR pursuant to Rule 
17g-1(f) and made publicly and freely available on each NRSRO's 
website pursuant to Rule 17g-1(i). The number of outstanding credit 
ratings for each class of credit ratings for which an NRSRO is 
registered is reported on Item 7A of Form NRSRO.
---------------------------------------------------------------------------

    The credit rating industry is highly concentrated and this market 
structure persists, in part, as a result of the costs associated with 
building the necessary reputational capital. In addition, large and 
incumbent NRSROs benefit from economies of scale, as well as from 
switching costs that issuers are likely to bear if they were to 
consider using different NRSROs. These costs provide incentives for 
issuers to use the services of NRSROs with which they have preexisting 
relationships and represent a barrier that newcomers entering the 
market for credit ratings would need to overcome to compete with 
incumbent credit rating agencies.
    In addition to the above economic barriers to entry, there exist 
some commercial and other barriers to entry.\55\ For instance, the 
investment guidelines of fixed income mutual fund managers and pension 
plan sponsors often specify use of the ratings of particular credit 
rating agencies, and many of these guidelines refer to the larger 
NRSROs by name. Some fixed income indices also require ratings by 
specific NRSROs, thus increasing the demand for ratings from those 
NRSROs. However, it has been reported that some investors are changing 
their guidelines to include ratings from additional NRSROs, and several 
of the smaller NRSROs have reported success in gaining market share 
with respect to the issuers of asset-backed securities.\56\ Market 
participants and academics have also identified regulatory barriers to 
entry in the credit rating industry.\57\
---------------------------------------------------------------------------

    \55\ See 2018 Annual Report on Nationally Recognized Statistical 
Rating Organizations, available at https://www.sec.gov/files/2018-annual-report-on-nrsros.pdf, 25-26 (``Annual Report'').
    \56\ See id. at 22-25.
    \57\ See id. at 26. The Annual Report notes that regulatory 
barriers to entry include the costs associated with complying with 
statutory provisions and related rules. See id.
---------------------------------------------------------------------------

    Gathering comprehensive data on foreign issuances of asset-backed 
securities is difficult given the breadth of markets and products one 
needs to consider and that data may not be available for several 
lesser-developed markets. Further, it is often not clear whether these 
issuances are made by non-U.S. persons. However, there has been an 
increase in the issuances of asset-backed securities worldwide since 
2011, with the issuances amounting to approximately $754.7 billion in 
2018.\58\ For example, when considering all underwriters for deals in 
Europe, while the trend has varied over the past five years, the three 
highest annual issuance totals over such period were achieved in 2016 
through 2018, the highest of which occurred in 2018.\59\ Asset-backed 
securities constitute a growing market in Europe and other major 
financial markets, and, as discussed below, any application of Rule 
17g-5(a)(3) to transactions outside the United States could affect the 
functioning of these foreign markets.\60\
---------------------------------------------------------------------------

    \58\ See Asset-Backed Alert (Rankings for Issuers of Worldwide 
Asset- and Mortgage-Backed Securities), available at https://www.abalert.com/rankings.pl?Q=100. See also Commercial Mortgage 
Alert (CMBS Summary--Global CMBS Issuance in 2017), available at 
https://www.cmalert.com/rankings.pl?Q=67. The information on these 
websites, reported as of March 8, 2019, indicates that, 
notwithstanding a slight decline in issuances in 2016, there has 
been an upward trend in the total annual issuances of asset-backed 
securities from 2011 through 2018.
    \59\ See Asset-Backed Alert (Rankings for Bookrunners of 
European Structured Finance Deals), available at https://www.abalert.com/rankings.pl?Q=98, information reported as of March 
8, 2019. Total issuances in Europe amounted to approximately $101.1 
billion in 2016, approximately $95.5 billion in 2017, and 
approximately $118.0 billion in 2018. Id.
    \60\ See, e.g., the SIFMA databases that cover historical 
issuances and outstanding values in Europe, the United States, and 
Australia for the following: Asset-backed securities, collateralized 
debt obligations/collateralized loan obligations, commercial 
mortgage-backed securities, and residential mortgage-backed 
securities, available at http://www.sifma.org.
---------------------------------------------------------------------------

C. Anticipated Costs and Benefits, Including Potential Effects on 
Efficiency, Competition, and Capital Formation

1. Potential Benefits
    As discussed above, the Commission issued the Exemptive Order in 
2010, and an extension of the Exemptive Order is currently in effect. 
Because the amendments to Rule 17g-5(a)(3), Rule 17g-7(a), and Rule 
15Ga-2 would generally maintain the status quo,\61\ we do not expect 
the amendments would result in any major economic effects. For the same 
reason, we also do not expect this rulemaking to affect efficiency, 
competition, or capital formation in any major way.
---------------------------------------------------------------------------

    \61\ As discussed in the Proposing Release, although the 
language of the second condition of the exemption to Rule 17g-
5(a)(3), as adopted, differs from the comparable condition set forth 
in the Exemptive Order, and conforming changes are being made to the 
corresponding conditions in Rule 17g-7(a) and Rule 15Ga-2, the 
changes are clarifying in nature and the Commission does not believe 
they will alter the status quo. The conforming changes to Rule 17g-
7(a) and Rule 15Ga-2, however, could result in changes from the 
current state. Specifically, those changes could avoid potential 
confusion by arrangers and NRSROs that could result from differences 
in the language of the conditions set forth in the rules.
---------------------------------------------------------------------------

    To the extent that the amendment of Rule 17g-5(a)(3) would enhance 
the certainty of the future status of an exemption to this rule, it 
could result in marginal economic benefits to arrangers, NRSROs, and 
regulators. Specifically, if NRSROs and arrangers expect to be required 
to comply with Rule 17g-5(a)(3) in the future, they may allocate 
personnel and financial resources to correspond with foreign and U.S. 
regulators and to set up applicable websites in anticipation of future 
compliance. The Commission believes the amendment would eliminate the 
need to incur such costs since the exemption being adopted does not 
have a termination date. Furthermore, by reducing the need to incur 
such costs, the amendment could allow issuers and smaller NRSROs to 
expand in the global structured finance market, and could improve 
competition. Commenters on the Proposing Release generally agreed that 
the proposed amendment would provide certainty that would benefit 
market participants.\62\
---------------------------------------------------------------------------

    \62\ See Moody's letter; SFIG/ASF letter.
---------------------------------------------------------------------------

    The exemption to Rule 17g-5(a)(3), as adopted, would not 
necessarily result in more intense competition between issuers and 
other intermediaries because issuers would continue to offer structured 
finance products as they do under the current regulatory regime. 
Further, all existing NRSROs rating structured finance products could 
continue to rely on the exemption as they do currently under the 
extended Exemptive Order; therefore, competition among these existing 
credit rating agencies would most likely not be affected by adoption of 
the exemption.

[[Page 40255]]

2. Potential Costs and Other Anticipated Effects
    Similarly, because the existing Rule 17g-5(a)(3) exemption is 
currently in effect, the amendment to Rule 17g-5(a)(3) should not 
impose any significant additional costs on NRSROs or arrangers of 
structured finance products relative to the baseline.
    However, as is the case with the existing Rule 17g-5(a)(3) 
exemption, issuers and NRSROs may incur some expenses in relying on the 
exemption to Rule 17g-5(a)(3), which is conditioned on an NRSRO having 
a reasonable basis to conclude that all offers and sales of the 
structured finance product by any arranger linked to the structured 
finance product will occur outside the United States. In order to have 
a reasonable basis for such a conclusion, the Commission believes that 
NRSROs will likely seek representations from arrangers, thereby 
resulting in associated costs. The Commission currently estimates that 
approximately 284 rated transactions would be eligible for the 
exemption in a given year.\63\ To the extent that NRSROs seek 
representations to support their reasonable belief, the Commission 
estimates that it would cost an arranger approximately $730 per 
transaction to provide such representations,\64\ for total aggregate 
annual costs for all arrangers of approximately $207,320.\65\
---------------------------------------------------------------------------

    \63\ See supra note 46.
    \64\ 2 hours per transaction x legal fee for a compliance 
attorney at $365 per hour = $730. The Commission estimates the wage 
rate associated with these burden hours based on salary information 
for the securities industry compiled by the Securities Industry and 
Financial Markets Association (SIFMA). For example, the estimated 
wage figure for compliance attorneys is based on published rates for 
compliance attorneys, modified to account for a 1,800-hour work-year 
and multiplied by 5.35 to account for bonuses, firm size, employee 
benefits, and overhead, yielding an effective hourly rate for 2013 
of $334 for compliance attorneys. See Securities Industry and 
Financial Markets Association, Report on Management & Professional 
Earnings in the Securities Industry 2013. These estimates are 
adjusted for inflation based on Bureau of Labor Statistics data on 
CPI-U between January 2013 (230.280) and January 2019 (251.792). 
Therefore, the 2019 inflation-adjusted effective hourly wage rates 
for compliance attorneys are estimated at $365 ($334 x 251.792/
230.280). All effective hourly wage rates discussed throughout the 
release rely on the same SIFMA data inflation adjusted to January 
2019.
    \65\ $730 per transaction x 284 annual transactions = $207,320.
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    Similarly, for an NRSRO that chooses to seek representations to 
support its reasonable belief, the Commission estimates that it would 
cost the NRSRO approximately $730 per transaction.\66\ The Commission 
further estimates that each transaction is rated by approximately two 
NRSROs,\67\ for total aggregate annual costs for all NRSROs of 
$414,640.\68\ Thus, to the extent that all NRSROs seek representations 
for all transactions eligible to rely on the exemption to Rule 17g-
5(a)(3) each year, the Commission estimates the amendment would result 
in total annual costs of $621,960.\69\
---------------------------------------------------------------------------

    \66\ 2 hours per transaction x legal fee for a compliance 
attorney at $365 per hour = $730.
    \67\ See supra note 46.
    \68\ $730 per transaction x 284 annual transactions x 2 NRSROs 
per transaction = $414,640.
    \69\ $730 per transaction x 284 annual transactions (for 
arrangers) + $730 per transaction x 284 annual transactions x 2 
NRSROs per transaction (for NRSROs) = $621,960.
---------------------------------------------------------------------------

    In addition, although the conditions with respect to the exemption 
to Rule 17g-5(a)(3) are substantially the same under the Exemptive 
Order, NRSROs may incur a modest one-time cost to conform their 
processes to reflect the clarifying change adopted with respect to one 
of the conditions to the exemption. For instance, an NRSRO that has 
sought written representations from an arranger to support the 
reasonable belief required under the Exemptive Order may modify the 
form of the representation to conform to the language of the condition 
as adopted. The Commission expects an NRSRO's in-house attorney would 
oversee revisions to the form representation and that there would be a 
one-time burden of five hours for the language to be revised, approved, 
and documented. Accordingly, the Commission estimates a one-time 
aggregate cost of $12,775 for NRSROs to adjust their procedures to 
reflect the clarifying language of the adopted exemption.\70\
---------------------------------------------------------------------------

    \70\ 5 hours per NRSRO x legal fee for a compliance attorney at 
$365 per hour x the 7 NRSROs registered to rate asset-backed 
securities = $12,775.
---------------------------------------------------------------------------

    Similarly, additional one-time costs may be incurred by NRSROs to 
modify their processes to reflect the conforming amendment to the 
conditions with respect to the Rule 17g-7(a) exemption. The Commission 
expects the one-time costs incurred by such NRSROs to approximate the 
costs set forth with respect to Rule 17g-5(a)(3) above. As with Rule 
17g-5(a)(3), the Commission expects an NRSRO's in-house attorney would 
oversee revisions to the form representation with respect to the Rule 
17g-7(a) exemption and that there would be a one-time burden of five 
hours for the language to be revised, approved, and documented. 
Accordingly, the Commission estimates a one-time aggregate cost of 
$18,250 for NRSROs to adjust their procedures to reflect the adopted 
conforming changes to the Rule 17g-7(a) exemption.\71\
---------------------------------------------------------------------------

    \71\ 5 hours per NRSRO x legal fee for a compliance attorney at 
$365 per hour x all 10 NRSROs = $18,250.
---------------------------------------------------------------------------

    The Commission believes that no similar costs will be incurred by 
issuers and underwriters as a result of the amendment to Rule 15Ga-2, 
given that such rule relates to an obligation of the issuer or 
underwriter of a structured finance product and there is no equivalent 
need to obtain information from a third party to determine if the Rule 
15Ga-2 exemption applies.
3. Alternative Considered: Allow Exemptive Order To Expire
    As discussed in the Proposing Release, the Commission considered 
the alternative of allowing the current extension of the Exemptive 
Order to expire without codifying an exemption to Rule 17g-5(a)(3). The 
Commission continues to believe that this alternative is not consistent 
with notions of international comity or the Commission's limited 
interest in regulating securities offered and sold exclusively outside 
the United States. As discussed in the Proposing Release, the 
Commission believes principles of international comity and reasonable 
expectations of participants would be better served by not allowing the 
expiration of the current extension of the Exemptive Order. The 
Commission has nevertheless considered the economic effects of this 
alternative.
a. Benefits
    This alternative offers several potential economic benefits to the 
extent they could come to fruition. The last three decades have 
witnessed an increase in the globalization of financial markets and in 
cross-border trading. Greater international capital flows can 
contribute to the development of new product markets and industries by 
enabling issuers to raise capital in markets around the world. The 
Commission considered the potential implications of the expiration of 
the existing Rule 17g-5(a)(3) exemption on cross-listing activity for 
U.S. and non-U.S. issuers.\72\ One possible factor that hypothetically 
could affect the flow of capital from U.S. markets to foreign 
alternative trading venues is the costs associated with complying with 
U.S. securities laws. If complying with Rule 17g-5(a)(3) implies higher 
costs for issuers of structured finance products, and the costs affect 
the choice of an issuer's venue, non-U.S. issuers may benefit from the 
current exemptive relief

[[Page 40256]]

by obtaining funding at a lower all-in cost than similarly situated 
U.S. issuers. If the Exemptive Order were to expire, however, such non-
U.S. issuers would be unable to pursue such a strategy because they 
would have the same regulatory treatment as U.S. issuers. As a result, 
if the existing Rule 17g-5(a)(3) exemption were to expire, U.S. and 
non-U.S. issuers would compete for funding on more even terms.
---------------------------------------------------------------------------

    \72\ Although the Commission regulations are designed to promote 
competition, efficiency, and capital formation in U.S. markets and 
to protect U.S. investors, the Commission recognizes that some of 
its regulations impact market participants globally. When 
applicable, the economic effects to those market participants are 
discussed.
---------------------------------------------------------------------------

    Investors and issuers globally could obtain potential economic 
benefits, such as reduced conflicts of interest and informational 
efficiency in credit ratings, if arrangers were required to comply with 
the Rule 17g-5 Program. With respect to certain debt and structured 
finance products, credit ratings provided by non-hired NRSROs using 
information provided pursuant to the Rule 17g-5 Program could serve a 
verification function in capital markets by offering market 
participants a broader set of opinions on the creditworthiness of those 
products.\73\ This information could help investors in their decisions 
to augment the risk profiles of their portfolios through economic 
exposure to investment opportunities.\74\
---------------------------------------------------------------------------

    \73\ See Rule 17g-5 Adopting Release, supra note 4, 74 FR at 
63857.
    \74\ See e.g., Arthur R. Pinto, Control and Responsibility of 
Credit Rating Agencies in the United States, American Journal of 
Comparative Law, Vol. 54 at 341-56 (2006). See also John R.M. Hand 
et al., The Effect of Bond Rating Agency Announcements on Bond and 
Stock Prices, Journal of Finance, Vol. 47, No. 2 at 733-52 (1992). 
However, these potential economic benefits to investors would only 
occur to the extent non-hired NRSROs use information obtained 
pursuant to the Rule 17g-5 Program to issue credit ratings. As 
discussed in Section III of this release, one commenter has 
expressed the view that Rule 17g-5(a)(3) has been ineffective, 
citing longstanding discussions among its issuer member firms as 
evidence that very few non-hired NRSROs have requested access to the 
websites that arrangers are required to maintain under the rule. See 
supra note 30 and accompanying text. The Commission has directed 
staff to further evaluate the effectiveness of Rule 17g-5(a)(3).
---------------------------------------------------------------------------

    Globalization, however, can be a conduit of risk and could lead to 
problems in one market or jurisdiction spilling over to other markets 
or jurisdictions.\75\ If the existing Rule 17g-5(a)(3) exemption were 
to expire, then it is possible that any benefits of this rule with 
respect to the credit rating industry in the United States would apply 
to foreign markets as well, potentially reducing the risk of spillovers 
that may result from conflicts of interest that Rule 17g-5(a)(3) was 
designed to address.\76\ Specifically, arrangers that engage in 
structured finance transactions in foreign markets would also need to 
maintain websites containing all information provided to hired NRSROs 
with respect to the rating of such structured finance products and 
provide access to any non-hired NRSRO that makes the required 
certifications. This would permit non-hired NRSROs to provide ratings 
of these products. The availability of additional ratings from an 
independent source could provide incentives to hired NRSROs to provide 
more accurate and unbiased ratings due to reputational concerns. Any 
additional ratings by non-hired NRSROs could, in turn, provide 
investors with independent views on the risk profiles of the structured 
finance products and improve the reliability of the credit ratings of 
these products.\77\ The potential improvement in the quality of ratings 
in foreign markets could attenuate the risk of spillovers, which could 
benefit financial markets globally.
---------------------------------------------------------------------------

    \75\ For instance, the European sovereign debt crisis renewed 
the debate on the role credit rating agencies play during crises and 
the interdependence between different financial markets. This debt 
crisis has included sovereign credit rating downgrades, widening of 
sovereign bond and credit default swap spreads, and pressures on 
stock markets. See, e.g., Manfred G[auml]rtner et al., PIGS or 
Lambs? The European Sovereign Debt Crisis and the Role of Rating 
Agencies, International Advances in Economic Research, Vol. 17, No. 
3 at 288 (2011). See also Valerie De Bruyckere et al., Bank/
Sovereign Risk Spillovers in the European Debt Crisis, Journal of 
Banking & Finance, Vol. 37, Issue 12 at 4793-809 (2013).
    \76\ See Rule 17g-5 Adopting Release, supra note 4, 74 FR at 
63857.
    \77\ See, e.g., Daniel Covitz and Paul Harrison, Testing 
Conflicts of Interest at Bond Rating Agencies with Market 
Anticipation: Evidence that Reputation Incentives Dominate, Federal 
Reserve Board Working Paper No. 2003-68 (2003), for evidence on the 
role of reputation among credit rating agencies. However, there is 
also some evidence to the contrary, wherein the argument is that if 
reputation losses are lower in an industry due to increased 
competition, then there are lesser incentives to provide accurate 
ratings. See Bo Becker and Todd Milbourn, How Did Increased 
Competition Affect Credit Ratings?, Journal of Financial Economics, 
Vol. 101, No. 3 at 493-514 (2011).
---------------------------------------------------------------------------

    The Commission notes, however, that the possible benefits 
attributable to the expiration of the Exemptive Order for Rule 17g-
5(a)(3) should be viewed in light of the concerns expressed by 
commenters about barriers preventing those benefits from being 
realized. For instance, one commenter identified potentially 
conflicting regulatory requirements and conflicts with local 
confidentiality and data protection laws in other jurisdictions among 
concerns regarding the application of Rule 17g-5(a)(3) to credit 
ratings of structured finance products offered and sold exclusively 
outside the United States.\78\ If any foreign laws limit the 
information an arranger is able to post on the website maintained 
pursuant to the Rule 17g-5 Program, a hired NRSRO may not have 
sufficient information on which to base a credit rating or, if the 
arranger provides information to a hired NRSRO that it cannot also post 
to the website, the hired NRSRO will not be able to reasonably rely on 
the representation it received from the arranger. In either case, 
NRSROs effectively would be precluded from rating structured finance 
products in such jurisdictions, attenuating the benefits described 
above.
---------------------------------------------------------------------------

    \78\ See Moody's letter. As discussed in the Proposing Release, 
comments received with respect to the Exemptive Order discussed 
these concerns in more detail. See Proposing Release, supra note 2, 
83 FR at 50299-300.
---------------------------------------------------------------------------

b. Costs
    Several costs of expiration of the existing Rule 17g-5(a)(3) 
exemption are relevant to consider. As mentioned earlier, the 
Commission currently estimates that approximately 284 rated 
transactions would be eligible for the exemption to Rule 17g-5(a)(3) in 
a given year.\79\ If the existing Rule 17g-5(a)(3) exemption were 
allowed to expire, the requirements of Rule 17g-5(a)(3) would apply 
with respect to these transactions. The Commission estimates the 
following costs as a result of expiration of the existing Rule 17g-
5(a)(3) exemption.
---------------------------------------------------------------------------

    \79\ See supra note 46.
---------------------------------------------------------------------------

    The Commission estimates that expiration of the existing Rule 17g-
5(a)(3) exemption would result in an annual increase in costs of 
$166,820 for NRSROs for additional website maintenance and associated 
compliance costs.\80\ The Commission also estimates an annual increase 
in costs of $49,700 for arrangers to post information about new 
structured finance product transactions to the related websites.\81\

[[Page 40257]]

Additionally, if certain sponsors do not also currently issue rated 
structured finance products in transactions that occur within the 
United States (which are currently subject to the requirements of Rule 
17g-5(a)(3)), then they may incur one-time costs to set up websites. 
The Commission estimates that it would take a sponsor 300 hours to 
develop a system, as well as the policies and procedures governing the 
disclosures, resulting in a total of up to 43,800 hours across 146 
sponsors.\82\ The Commission estimates that the average one-time cost 
to each sponsor would be $82,350, and the total aggregate one-time cost 
across all sponsors would be up to $12,023,100.\83\ Finally, on an 
ongoing basis, the Commission estimates an annual increase in costs of 
$2,412,225 for arrangers to make additional information about these 
transactions available on the related websites each month and to 
monitor compliance with its obligations over the life of the structured 
finance products. \84\
---------------------------------------------------------------------------

    \80\ The Commission estimates that it will take approximately 
one hour per transaction for website maintenance and that an NRSRO 
would have a webmaster perform these responsibilities, at a cost of 
$248 per hour. The Commission further estimates that each 
transaction will be rated by approximately two NRSROs (see supra 
note 46). Therefore, the estimated annual cost for website 
maintenance by NRSROs involved with 284 structured finance ratings 
would be $140,864 (284 transactions x 1 hour per transaction x $248 
per hour x 2 NRSROs per transaction). In addition, the Commission 
estimates that compliance personnel at an NRSRO will spend, on 
average, one hour per month to monitor compliance with the 
requirements of the Rule 17g-5 Program. Staff estimates a $309 per 
hour figure for a compliance manager. Therefore, the estimated 
annual compliance cost would be $25,956 (12 months per year x 1 hour 
per month x $309 per hour x 7 NRSROs registered to rate asset-backed 
securities). As a result, the total estimated annual cost for NRSROs 
would be $166,820 ($140,864 website maintenance cost + $25,956 
compliance cost).
    \81\ The Commission estimates that it will take an arranger 
approximately one hour per transaction to post the information it 
provides to a hired NRSRO to the related website. The Commission 
believes that an arranger would have a junior business analyst 
perform these responsibilities, at a cost of $175 per hour. 
Therefore, based on the estimate of 284 rated transactions per year, 
the estimated annual cost for arrangers to make such information 
available on the related website would be $49,700 (284 transactions 
x 1 hour per transaction x $175 per hour).
    \82\ Total hours to develop systems would be 43,800 (146 
sponsors x 300 hours per sponsor). The number of sponsors was 
estimated using information as of March 25, 2019 from the Asset-
Backed Alert and Commercial Mortgage Alert databases. Isolating the 
transactions coded in the database as ``Non-U.S.'' offerings and 
sorting the data by sponsor (in the case of the Asset-Backed Alert 
database) or seller (in the case of the Commercial Mortgage Alert 
database) enables an estimate of the number of separate sponsors 
that would be eligible for the exemption. The estimate represents 
the average number of such sponsors for the years ended December 31, 
2016, 2017, and 2018. We note that the estimate of the aggregate 
hours across all sponsors represents upper bounds, as it is 
plausible that some sponsors also issue structured finance products 
in U.S.-based transactions and would have already incurred any such 
one-time costs.
    \83\ As discussed in the Rule 17g-5 Adopting Release, the 
Commission believes that a sponsor would use a compliance manager 
and a programmer analyst to perform these functions, and each would 
spend half of the estimated hours conducting these tasks. The 
average hourly cost for a compliance manager is $309 and the average 
hourly cost for a programmer analyst is $240. Therefore, the average 
one-time cost to a sponsor would be $82,350 ([150 hours x $309 per 
hour] + [150 hours x $240 per hour]). The aggregate cost across all 
sponsors would be up to $12,023,100 (146 sponsors x $82,350 per 
sponsor). We note that these estimates represent upper bounds. As 
noted in note 82, some sponsors may have already incurred any one-
time set up costs in connection with U.S.-based issuances. In 
addition, it is plausible that sponsors will obtain these services 
for a much lower cost from web service providers.
    \84\ The Commission estimates that it will take an arranger 
approximately half an hour per month for each transaction to make 
such information available on the related website. The hourly burden 
per transaction for a year is 6 hours (0.5 hours per month x 12 
months). The Commission believes that an arranger would have a 
junior business analyst perform these responsibilities at a rate of 
$175. Further, we relied on the Rule 17g-5 Adopting Release to infer 
the total number of outstanding deals under surveillance. In that 
release, the Commission indicated that, on average, an arranger will 
issue 20 new deals a year and will have 125 outstanding deals, or 
6.25 outstanding deals for every new deal. Combining this with our 
estimate of 284 new transactions per year yields an estimate of 6.25 
x 284 = 1,775 outstanding deals. Combining these estimates, the 
annual cost for arrangers to provide information on ongoing deals is 
$1,863,750 (1,775 outstanding transactions x $175 per hour x 6 hours 
per year). In addition, the Commission estimates that compliance 
personnel at an arranger will spend, for each outstanding 
transaction, one hour per year to monitor compliance with its 
requirements in connection with the Rule 17g-5 Program. The 
Commission estimates a $309 per hour figure for a compliance 
manager. Therefore, the estimated annual compliance cost would be 
$548,475 (1 hour per transaction, per year x $309 per hour x 1,775 
outstanding transactions). As a result, the total estimated annual 
ongoing cost for arrangers would be $2,412,225 ($1,863,750 website 
maintenance cost + $548,475 compliance cost).
---------------------------------------------------------------------------

    In addition to these direct compliance costs, expiration of the 
existing Rule 17g-5(a)(3) exemption could result in costs that are 
difficult to quantify. For instance, an incremental increase in costs 
resulting from the applicability of the Rule 17g-5 Program may vary 
significantly from transaction to transaction, contributing to the 
difficulty in quantifying such costs. A bespoke transaction may require 
significantly more communications between the arranger and the hired 
NRSRO than a transaction by a frequent issuer of similar securities, 
resulting in the incurrence of higher costs to arrangers. Moreover, the 
Rule 17g-5 Program requires that information must be posted to the 
arranger's website at the same time such information is provided to a 
hired NRSRO. If the exemption were to expire, information that may have 
previously been communicated verbally to a hired NRSRO may need to be 
memorialized in writing. In certain cases, an arranger could enlist 
outside counsel to draft or review materials to be provided to a hired 
NRSRO, resulting in additional costs.
    Further, there are potential negative economic consequences. Since 
the global financial crisis there have been other efforts, in addition 
to the Dodd-Frank Wall Street Reform and Consumer Protection Act,\85\ 
to assess and regulate the credit rating industry as well as to 
encourage market participants to establish stronger internal credit 
risk assessment practices. As discussed in the Proposing Release, 
commenters on the Exemptive Order have expressed concerns that the 
requirements of Rule 17g-5(a)(3) could potentially be duplicative of or 
conflict with regulations applicable to NRSROs and arrangers in foreign 
markets, and thus harm the competitive position of NRSROs in those 
markets.\86\ Failure to provide relief regarding the application of 
Rule 17g-5(a)(3) to transactions offered and sold exclusively outside 
the United States may be viewed as inconsistent with notions of 
international comity.
---------------------------------------------------------------------------

    \85\ Public Law 111-203, 124 Stat. 1376, H.R. 4173 (July 21, 
2010).
    \86\ See Proposing Release, supra note 2, 83 FR at 50299-300.
---------------------------------------------------------------------------

    The expiration of the existing Rule 17g-5(a)(3) exemption may lead 
to losses for NRSROs if, as commenters on the Exemptive Order have 
suggested, conflicts exist between the requirements of the Rule 17g-5 
Program and foreign laws that limit the information available to 
NRSROs. Some NRSROs could be precluded from rating structured finance 
products in such jurisdictions, which could lead to loss of revenue 
associated with credit ratings that NRSROs currently provide under the 
existing Exemptive Order. NRSROs could also experience losses as a 
result of the expiration of the existing Rule 17g-5(a)(3) exemption due 
to competitive pressures in the foreign markets from credit rating 
agencies that are not registered as NRSROs (``non-NRSRO rating 
agencies'') and therefore not subject to Rule 17g-5(a)(3). Expiration 
of the existing Rule 17g-5(a)(3) exemption may also lead to new 
compliance costs for NRSROs and arrangers relating to posting 
information on the websites with respect to credit ratings maintained 
by NRSROs that had previously been subject to the exemption. From the 
point of view of arrangers, additional costs of compliance could result 
in a decline in their issuances of structured finance products if 
alternative non-NRSRO rating agencies are unavailable or unacceptable 
to arrangers or investors.
    Finally, if the existing Rule 17g-5(a)(3) exemption were allowed to 
expire, this could also raise legal barriers to entry for smaller 
NRSROs that may be planning to expand their foreign ratings 
business.\87\ The increased set-up costs may lower such NRSROs' 
incentives to rate structured finance products in those foreign 
markets.
---------------------------------------------------------------------------

    \87\ Three of the four smaller NRSROs registered in the class of 
credit ratings for issuers of asset-backed securities list foreign 
affiliates as credit rating affiliates on their most recently filed 
Form NRSRO. Form NRSRO filings can be accessed through the 
Commission's EDGAR system.

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[[Page 40258]]

VII. Regulatory Flexibility Act Certification

    The Commission certified, under section 605(b) of the Regulatory 
Flexibility Act of 1980 (``RFA'') \88\ that the proposed amendments to 
Rule 17g-5(a)(3), Rule 17g-7(a), and Rule 15Ga-2 would not have a 
significant economic impact on a substantial number of small entities. 
In Section VII of the Proposing Release, the Commission explained that 
the proposed amendment to Rule 17g-5(a)(3) applies exclusively to rated 
structured finance products and the NRSROs that are considered small 
for purposes of the RFA are not currently registered for the class of 
credit ratings for issuers of asset-backed securities.\89\ The 
Commission further stated in the Proposing Release that it did not 
believe the economic impact of the proposed amendments to Rule 17g-7(a) 
and Rule 15Ga-2 would be significant, explaining that an exemption is 
already included in the text of such rules and that the amendments are 
clarifying in nature.\90\ The Commission solicited comments regarding 
this certification and received none. The Commission continues to 
believe this certification is appropriate.
---------------------------------------------------------------------------

    \88\ 5 U.S.C. 601 et seq.
    \89\ See Proposing Release, supra note 2, 83 FR at 50309.
    \90\ See id. at 50309-10.
---------------------------------------------------------------------------

VIII. Statutory Authority

    The Commission is adopting amendments to 17 CFR 240.17g-5(a)(3), 17 
CFR 240.17g-7(a), and 17 CRF 240.15Ga-2 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).

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

Text of Amendment

    In accordance with the foregoing, title 17, chapter II of the Code 
of Federal Regulations is amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
1. The authority citation for part 240 continues to read as follows:

    Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq.; and 
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; and 
Pub. L. 111-203, 939A, 124 Stat. 1887 (2010); and secs. 503 and 602, 
Pub. L. 112-106, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
    Section 240.15Ga-2 is also issued under sec. 943, Pub. L. 111-
203, 124 Stat. 1376.
* * * * *
    Section 240.17g-7 is also issued under sec. 943, Pub. L. 111-
203, 124 Stat. 1376.
* * * * *


0
2. Amend Sec.  240.15Ga-2 by revising paragraph (e) to read as follows:


Sec.  240.15Ga-2  Findings and conclusions of third-party due diligence 
reports.

* * * * *
    (e) The requirements of this rule would not apply to an offering of 
an asset-backed security if certain conditions are met, including:
    (1) The offering is not required to be, and is not, registered 
under the Securities Act of 1933;
    (2) The issuer of the rated security is not a U.S. person (as 
defined in Sec.  230.902(k)); and
    (3) All offers and sales of the security by any issuer, sponsor, or 
underwriter linked to the security will occur outside the United States 
(as that phrase is used in Sec. Sec.  230.901 through 230.905 
(Regulation S)).
* * * * *

0
3. Amend Sec.  240.15Ga-2 by:
0
a. Redesignating paragraph (f)(i) as (f)(1); and
0
b. Redesignating paragraph (f)(ii) as (f)(2).

0
4. Amend Sec.  240.17g-5 by adding paragraph (a)(3)(iv) to read as 
follows:


Sec.  240.17g-5  Conflicts of interest.

    (a) * * *
    (3) * * *
    (iv) The provisions of paragraphs (a)(3)(i) through (iii) of this 
section will not apply to a nationally recognized statistical rating 
organization when issuing or maintaining a credit rating for a security 
or money market instrument issued by an asset pool or as part of any 
asset-backed securities transaction, if:
    (A) The issuer of the security or money market instrument is not a 
U.S. person (as defined in Sec.  230.902(k) of this chapter); and
    (B) The nationally recognized statistical rating organization has a 
reasonable basis to conclude that all offers and sales of the security 
or money market instrument by any issuer, sponsor, or underwriter 
linked to the security or money market instrument will occur outside 
the United States (as that phrase is used in Sec. Sec.  230.901 through 
230.905 (Regulation S) of this chapter).
* * * * *

0
5. Amend Sec.  240.17g-7 by revising paragraph (a)(3) to read as 
follows:


Sec.  240.17g-7  Disclosure requirements.

    (a) * * *
    (3) Exemption. The provisions of paragraphs (a)(1) and (2) of this 
section do not apply to a rating action if:
    (i) The rated obligor or issuer of the rated security or money 
market instrument is not a U.S. person (as defined in Sec.  230.902(k) 
of this chapter); and
    (ii) The nationally recognized statistical rating organization has 
a reasonable basis to conclude that:
    (A) With respect to any security or money market instrument issued 
by a rated obligor, all offers and sales by any issuer, sponsor, or 
underwriter linked to the security or money market instrument will 
occur outside the United States (as that phrase is used in Sec. Sec.  
230.901 through 230.905 (Regulation S) of this chapter); or
    (B) With respect to a rated security or money market instrument, 
all offers and sales by any issuer, sponsor, or underwriter linked to 
the security or money market instrument will occur outside the United 
States (as that phrase is used in Sec. Sec.  230.901 through 230.905 
(Regulation S) of this chapter).
* * * * *

    By the Commission.

    Dated: August 7, 2019.
Vanessa Countryman,
Secretary.
[FR Doc. 2019-17218 Filed 8-13-19; 8:45 am]
 BILLING CODE 8011-01-P


