79–006 

115TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 1st Session 115–384 

RISK-BASED CREDIT EXAMINATION ACT 

NOVEMBER 3, 2017.—Committed to the Committee of the Whole House on the State 

of the Union and ordered to be printed 

Mr. HENSARLING, from the Committee on Financial Services, 

submitted the following 

R E P O R T 

[To accompany H.R. 3911] 

[Including cost estimate of the Congressional Budget Office] 

The Committee on Financial Services, to whom was referred the 

bill (H.R. 3911) to amend the Securities Exchange Act of 1934 with 

respect to risk-based examinations of Nationally Recognized Statistical Rating Organizations, having considered the same, report favorably thereon without amendment and recommend that the bill 

do pass. 

PURPOSE AND SUMMARY

On October 2, 2017, Representatives Ann Wagner and Bill Foster 

introduced H.R. 3911, the ‘‘Risk-Based Credit Examinations Act of 

2017’’, which amends the Securities Exchange Act of 1934 (Exchange Act) to make risk-based the annual reporting requirements 

of the Nationally Recognized Statistical Rating Organizations 

(NRSROs). 

BACKGROUND AND NEED FOR LEGISLATION

The credit rating agencies—NRSROs—have received a healthy 

and deserved dose of criticism for their failures in both precipitating and accelerating the financial crisis. In the years leading up 

to the crisis, the government adopted a series of policies that had 

the effect of conferring a ‘‘Good Housekeeping’’ seal of approval on 

the credit rating agencies and their products, including designating 

certain agencies as ‘‘nationally recognized’’ and hard-wiring references to their ratings into numerous Federal statutes and regulations. These regulatory privileges and the perception that the government had placed its imprimatur on the rating agencies’ assessVerDate Sep 11 2014 02:22 Nov 04, 2017 Jkt 079006 PO 00000 Frm 00001 Fmt 6659 Sfmt 6602 E:\HR\OC\HR384.XXX HR384
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ments bred a sense of complacency among investors and a failure 

of private-sector due diligence that contributed to mispriced risk 

and a collapse of market confidence when ratings of certain assetbacked securities were called into question during the subprime 

melt-down of 2007 and 2008. As economist Lawrence J. White observed: 

There is little question that the three major credit rating 

agencies were central parties in the subprime mortgage 

lending boom. Subprime lending was fueled importantly by 

the ability of the mortgage originators to sell their loans 

to ‘‘packagers’’ (or securitizers), who pooled the loans into 

securities and sold the securities to institutional investors, 

or who combined the securities with other debt instruments into yet-more-complicated securities, . . . that were 

sold to institutional investors. And crucial to the ability of 

these packagers to sell the securities was the process of obtaining favorable ratings on the securities. 

To address the failures exposed by the financial crisis, Subtitle 

C of Title IX of the Dodd-Frank Act includes many credit rating 

agency reforms. While some of these provisions may be constructive, several create new barriers to entry and further entrench the 

type of rating agency oligopoly that has not served investors or the 

economy well and was the reason that Congress first passed credit 

agency legislation in 2006. 

The new SEC Authorities in Subtitle C of Title IX of the DoddFrank Act enhances the SEC’s regulatory regime for NRSROs. The 

NRSRO framework established by the Credit Rating Agency Reform Act of 2006 was based on registration—not regulation. Under 

this model, the SEC does not dictate the methodologies used by the 

rating agencies or evaluate the accuracy of those methodologies. 

The Dodd-Frank Act follows the 2006 Act’s ‘‘registration not regulation’’ approach: while it does not require the SEC to regulate or 

evaluate the rating agencies’ methodologies or models, it does seek 

to ensure that ratings are based on an objective application of 

those methodologies and that commercial considerations do not influence rating decisions. 

Section 932 creates an Office of Credit Ratings in the SEC, imposes more stringent conflict-of-interest regulation on credit rating 

agencies, and gives the compliance officers at rating agencies additional responsibilities, including filing annual reports with the 

SEC. The annual reports are comprehensive and require that the 

OCR travels to the credit rating agency and conduct on-sight interviews with management and staff. Specifically, the Commission is 

required to examine each NRSRO annually on eight review areas 

designated in the Exchange Act, which are resource intensive and 

often redundant when no material issues have been identified. 

Those eight review areas are: (i) whether the NRSRO conducts 

business in accordance with its policies, procedures, and rating 

methodologies; (ii) the management of conflicts of interest by the 

NRSRO; (iii) the implementation of ethics policies by the NRSRO; 

(iv) the internal supervisory controls of the NRSRO; (v) the governance of the NRSRO; (vi) the activities of the NRSRO’s Designated 

Compliance Officer; (vii) the processing of complaints of the 

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NRSRO; and (viii) the policies of the NRSRO governing the postemployment activities of its former personnel. 

While credit rating agencies must be held accountable, the DoddFrank Act’s increased reporting requirements are a burden for 

small credit rating agencies and have ultimately hurt investors 

who bear the cost of the new rules. Small credit rating agencies 

were not the cause of the financial crisis but now are bearing the 

cost of rigid and in some cases blunt legislative provisions that did 

not consider that not all NRSROs are the same. Competition 

breeds innovation and efficiency but Dodd-Frank’s credit rating 

agencies’ provisions further cements the domination of large, wellestablished NRSROs that can afford the costs of regulation. 

The NRSRO legal and regulatory regime is complex and the 

Dodd-Frank Act requirements prevent new credit rating agencies 

from entering the market, and thereby chill innovation and competition among credit rating agencies, and further consolidate 

power in the very largest credit rating agencies. 

On May 15, 2013, former SEC Chair Mary Jo White, on behalf 

of a unanimous Commission, wrote a letter to Chairman Hensarling to request that Congress amend the Exchange Act and provide the SEC with the authority contained in H.R. 3911. 

HEARINGS

The Committee on Financial Services held a hearing examining 

matters relating to H.R. 3911 on April 26, 2017. 

COMMITTEE CONSIDERATION

The Committee on Financial Services met in open session on October 11, 2017, and October 12, 2017, and ordered H.R. 3911 to be 

reported favorably to the House without amendment by a recorded 

vote of 60 yeas to 0 nays (Record vote no. FC–85), a quorum being 

present. 

COMMITTEE VOTES

Clause 3(b) of rule XIII of the Rules of the House of Representatives requires the Committee to list the record votes on the motion 

to report legislation and amendments thereto. The sole recorded 

vote was on a motion by Chairman Hensarling to report the bill favorably to the House without amendment. The motion was agreed 

to by a recorded vote of 60 yeas to 0 nays (Record vote no. FC–85), 

a quorum being present. 

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Insert graphic folio 5 HR384.001
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COMMITTEE OVERSIGHT FINDINGS

Pursuant to clause 3(c)(1) of rule XIII of the Rules of the House 

of Representatives, the findings and recommendations of the Committee based on oversight activities under clause 2(b)(1) of rule X 

of the Rules of the House of Representatives, are incorporated in 

the descriptive portions of this report. 

PERFORMANCE GOALS AND OBJECTIVES

Pursuant to clause 3(c)(4) of rule XIII of the Rules of the House 

of Representatives, the Committee states that H.R. 3911 will eliminate the one-size fits all annual reporting requirements currently 

placed on NRSROs and alleviate the unnecessary burdens and disproportionate costs on small credit rating agencies by amending the 

Securities Exchange Act of 1934 to make the criteria required in 

annual reporting by NRSROs risk-based. 

NEW BUDGET AUTHORITY, ENTITLEMENT AUTHORITY, AND TAX

EXPENDITURES

In compliance with clause 3(c)(2) of rule XIII of the Rules of the 

House of Representatives, the Committee adopts as its own the estimate of new budget authority, entitlement authority, or tax expenditures or revenues contained in the cost estimate prepared by 

the Director of the Congressional Budget Office pursuant to section 

402 of the Congressional Budget Act of 1974. 

CONGRESSIONAL BUDGET OFFICE ESTIMATES

Pursuant to clause 3(c)(3) of rule XIII of the Rules of the House 

of Representatives, the following is the cost estimate provided by 

the Congressional Budget Office pursuant to section 402 of the 

Congressional Budget Act of 1974: 

U.S. CONGRESS, 

CONGRESSIONAL BUDGET OFFICE, 

Washington, DC, November 1, 2017. 

Hon. JEB HENSARLING, 

Chairman, Committee on Financial Services, 

House of Representatives, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 3911, the Risk-Based 

Credit Examination Act. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contact is Stephen Rabent. 

Sincerely, 

KEITH HALL, Director. 

Enclosure. 

H.R. 3911—Risk-Based Credit Examination Act 

Under current law, the Office of Credit Ratings (OCR) within the 

Securities and Exchange Commission (SEC) conducts an annual examination of nationally recognized statistical rating organizations 

(NRSROs) in eight specified review areas and produces an annual 

report on its findings. H.R. 3911 would authorize the OCR to inVerDate Sep 11 2014 02:22 Nov 04, 2017 Jkt 079006 PO 00000 Frm 00005 Fmt 6659 Sfmt 6602 E:\HR\OC\HR384.XXX HR384
6 

clude the results from any or all of those examinations in its annual reviews. 

Based on an analysis of information from the SEC, CBO estimates that implementing H.R. 3911 would not significantly affect 

the costs for the SEC to produce its annual reviews of NRSROs. 

Moreover, the SEC is authorized to collect fees sufficient to offset 

its annual appropriation; therefore, assuming appropriation actions 

consistent with that authority, CBO estimates that the net effect 

of the bill on discretionary spending would be negligible. 

Enacting H.R. 3911 would not affect direct spending or revenues; 

therefore, pay-as-you-go procedures do not apply. 

CBO estimates that enacting H.R. 3911 would not increase net 

direct spending or on-budget deficits in any of the four consecutive 

10-year periods beginning in 2028. 

H.R. 3911 contains no intergovernmental or private-sector mandates as defined in the Unfunded Mandates Reform Act. 

The CBO staff contact for this estimate is Stephen Rabent. The 

estimate was approved by H. Samuel Papenfuss, Deputy Assistant 

Director for Budget Analysis. 

FEDERAL MANDATES STATEMENT

This information is provided in accordance with section 423 of 

the Unfunded Mandates Reform Act of 1995. 

The Committee has determined that the bill does not contain 

Federal mandates on the private sector. The Committee has determined that the bill does not impose a Federal intergovernmental 

mandate on State, local, or tribal governments. 

ADVISORY COMMITTEE STATEMENT

No advisory committees within the meaning of section 5(b) of the 

Federal Advisory Committee Act were created by this legislation. 

APPLICABILITY TO LEGISLATIVE BRANCH

The Committee finds that the legislation does not relate to the 

terms and conditions of employment or access to public services or 

accommodations within the meaning of the section 102(b)(3) of the 

Congressional Accountability Act. 

EARMARK IDENTIFICATION

With respect to clause 9 of rule XXI of the Rules of the House 

of Representatives, the Committee has carefully reviewed the provisions of the bill and states that the provisions of the bill do not 

contain any congressional earmarks, limited tax benefits, or limited 

tariff benefits within the meaning of the rule. 

DUPLICATION OF FEDERAL PROGRAMS

In compliance with clause 3(c)(5) of rule XIII of the Rules of the 

House of Representatives, the Committee states that no provision 

of the bill establishes or reauthorizes: (1) a program of the Federal 

Government known to be duplicative of another Federal program; 

(2) a program included in any report from the Government Accountability Office to Congress pursuant to section 21 of Public 

Law 111–139; or (3) a program related to a program identified in 

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the most recent Catalog of Federal Domestic Assistance, published 

pursuant to the Federal Program Information Act (Pub. L. No. 95– 

220, as amended by Pub. L. No. 98–169). 

DISCLOSURE OF DIRECTED RULEMAKING

Pursuant to section 3(i) of H. Res. 5, (115th Congress), the following statement is made concerning directed rulemakings: The 

Committee estimates that the bill requires no directed rulemakings 

within the meaning of such section. 

SECTION-BY-SECTION ANALYSIS OF THE LEGISLATION

Section 1. Short title 

This Section cites H.R. 3911 as the ‘‘Risk-Based Credit Examination Act’’ 

Section 2. Risk-based examination of Nationally Recognized Statistical Rating Organizations 

This section amends the Securities Exchange Act of 1934 to allow 

for the SEC to perform risk-based examinations of the NRSROs by 

focusing on those areas designated in Section 15E(p)(3)(B) of the 

Exchange Act that the SEC in its discretion identifies as appropriate for review for each NRSRO. 

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of the 

House of Representatives, changes in existing law made by the bill, 

as reported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italics, 

and existing law in which no change is proposed is shown in 

roman): 

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of the 

House of Representatives, changes in existing law made by the bill, 

as reported, are shown as follows (new matter is printed in italics 

and existing law in which no change is proposed is shown in 

roman): 

SECURITIES EXCHANGE ACT OF 1934 

TITLE I—REGULATION OF SECURITIES EXCHANGES 

* * * * * * * 

SEC. 15E. REGISTRATION OF NATIONALLY RECOGNIZED STATISTICAL 

RATING ORGANIZATIONS. 

(a) REGISTRATION PROCEDURES.— 

(1) APPLICATION FOR REGISTRATION.— (A) IN GENERAL.—A credit rating agency that elects to be 

treated as a nationally recognized statistical rating organization for purposes of this title (in this section referred to 

as the ‘‘applicant’’), shall furnish to the Commission an application for registration, in such form as the Commission 

shall require, by rule or regulation issued in accordance 

8 

with subsection (n), and containing the information described in subparagraph (B). 

(B) REQUIRED INFORMATION.—An application for registration under this section shall contain information regarding— 

(i) credit ratings performance measurement statistics over short-term, mid-term, and long-term periods 

(as applicable) of the applicant; 

(ii) the procedures and methodologies that the applicant uses in determining credit ratings; 

(iii) policies or procedures adopted and implemented 

by the applicant to prevent the misuse, in violation of 

this title (or the rules and regulations hereunder), of 

material, nonpublic information; 

(iv) the organizational structure of the applicant; 

(v) whether or not the applicant has in effect a code 

of ethics, and if not, the reasons therefor; 

(vi) any conflict of interest relating to the issuance 

of credit ratings by the applicant; 

(vii) the categories described in any of clauses (i) 

through (v) of section 3(a)(62)(B) with respect to which 

the applicant intends to apply for registration under 

this section; 

(viii) on a confidential basis, a list of the 20 largest 

issuers and subscribers that use the credit rating services of the applicant, by amount of net revenues received therefrom in the fiscal year immediately preceding the date of submission of the application; 

(ix) on a confidential basis, as to each applicable category of obligor described in any of clauses (i) through 

(v) of section 3(a)(62)(B), written certifications described in subparagraph (C), except as provided in 

subparagraph (D); and 

(x) any other information and documents concerning 

the applicant and any person associated with such applicant as the Commission, by rule, may prescribe as 

necessary or appropriate in the public interest or for 

the protection of investors. 

(C) WRITTEN CERTIFICATIONS.—Written certifications required by subparagraph (B)(ix)— 

(i) shall be provided from not fewer than 10 qualified institutional buyers, none of which is affiliated 

with the applicant; 

(ii) may address more than one category of obligors 

described in any of clauses (i) through (v) of section 

3(a)(62)(B); 

(iii) shall include not fewer than 2 certifications for 

each such category of obligor; and 

(iv) shall state that the qualified institutional 

buyer— 

(I) meets the definition of a qualified institutional buyer under section 3(a)(64); and 

(II) has used the credit ratings of the applicant 

for at least the 3 years immediately preceding the 

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date of the certification in the subject category or 

categories of obligors. 

(D) EXEMPTION FROM CERTIFICATION REQUIREMENT.—A 

written certification under subparagraph (B)(ix) is not required with respect to any credit rating agency which has 

received, or been the subject of, a no-action letter from the 

staff of the Commission prior to August 2, 2006, stating 

that such staff would not recommend enforcement action 

against any broker or dealer that considers credit ratings 

issued by such credit rating agency to be ratings from a 

nationally recognized statistical rating organization. 

(E) LIMITATION ON LIABILITY OF QUALIFIED INSTITUTIONAL BUYERS.—No qualified institutional buyer shall be 

liable in any private right of action for any opinion or 

statement expressed in a certification made pursuant to 

subparagraph (B)(ix). 

(2) REVIEW OF APPLICATION.— 

(A) INITIAL DETERMINATION.—Not later than 90 days 

after the date on which the application for registration is 

furnished to the Commission under paragraph (1) (or within such longer period as to which the applicant consents) 

the Commission shall— 

(i) by order, grant such registration for ratings in 

the subject category or categories of obligors, as described in clauses (i) through (v) of section 3(a)(62)(B); 

or 

(ii) institute proceedings to determine whether registration should be denied. 

(B) CONDUCT OF PROCEEDINGS.— 

(i) CONTENT.—Proceedings referred to in subparagraph (A)(ii) shall— 

(I) include notice of the grounds for denial under 

consideration and an opportunity for hearing; and 

(II) be concluded not later than 120 days after 

the date on which the application for registration 

is furnished to the Commission under paragraph 

(1). 

(ii) DETERMINATION.—At the conclusion of such proceedings, the Commission, by order, shall grant or 

deny such application for registration. 

(iii) EXTENSION AUTHORIZED.—The Commission may 

extend the time for conclusion of such proceedings for 

not longer than 90 days, if it finds good cause for such 

extension and publishes its reasons for so finding, or 

for such longer period as to which the applicant consents. 

(C) GROUNDS FOR DECISION.—The Commission shall 

grant registration under this subsection— 

(i) if the Commission finds that the requirements of 

this section are satisfied; and 

(ii) unless the Commission finds (in which case the 

Commission shall deny such registration) that— 

(I) the applicant does not have adequate financial and managerial resources to consistently 

produce credit ratings with integrity and to mateVerDate Sep 11 2014 02:22 Nov 04, 2017 Jkt 079006 PO 00000 Frm 00009 Fmt 6659 Sfmt 6601 E:\HR\OC\HR384.XXX HR384
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rially comply with the procedures and methodologies disclosed under paragraph (1)(B) and with 

subsections (g), (h), (i), and (j); or 

(II) if the applicant were so registered, its registration would be subject to suspension or revocation under subsection (d). 

(3) PUBLIC AVAILABILITY OF INFORMATION.—Subject to section 

24, the Commission shall, by rule, require a nationally recognized statistical rating organization, upon the granting of registration under this section, to make the information and documents submitted to the Commission in its completed application for registration, or in any amendment submitted under 

paragraph (1) or (2) of subsection (b), publicly available on its 

website, or through another comparable, readily accessible 

means, except as provided in clauses (viii) and (ix) of paragraph (1)(B). 

(b) UPDATE OF REGISTRATION.— 

(1) UPDATE.—Each nationally recognized statistical rating 

organization shall promptly amend its application for registration under this section if any information or document provided therein becomes materially inaccurate, except that a nationally recognized statistical rating organization is not required to amend— 

(A) the information required to be filed under subsection 

(a)(1)(B)(i) by filing information under this paragraph, but 

shall amend such information in the annual submission of 

the organization under paragraph (2) of this subsection; or 

(B) the certifications required to be provided under subsection (a)(1)(B)(ix) by filing information under this paragraph. 

(2) CERTIFICATION.—Not later than 90 days after the end of 

each calendar year, each nationally recognized statistical rating organization shall file with the Commission an amendment 

to its registration, in such form as the Commission, by rule, 

may prescribe as necessary or appropriate in the public interest or for the protection of investors— 

(A) certifying that the information and documents in the 

application for registration of such nationally recognized 

statistical rating organization (other than the certifications 

required under subsection (a)(1)(B)(ix)) continue to be accurate; and 

(B) listing any material change that occurred to such information or documents during the previous calendar year. 

(c) ACCOUNTABILITY FOR RATINGS PROCEDURES.— 

(1) AUTHORITY.—The Commission shall have exclusive authority to enforce the provisions of this section in accordance 

with this title with respect to any nationally recognized statistical rating organization, if such nationally recognized statistical rating organization issues credit ratings in material contravention of those procedures relating to such nationally recognized statistical rating organization, including procedures relating to the prevention of misuse of nonpublic information and 

conflicts of interest, that such nationally recognized statistical 

rating organization— 

11 

(A) includes in its application for registration under subsection (a)(1)(B)(ii); or 

(B) makes and disseminates in reports pursuant to section 17(a) or the rules and regulations thereunder. 

(2) LIMITATION.—The rules and regulations that the Commission may prescribe pursuant to this title, as they apply to nationally recognized statistical rating organizations, shall be 

narrowly tailored to meet the requirements of this title applicable to nationally recognized statistical rating organizations. 

Notwithstanding any other provision of this section, or any 

other provision of law, neither the Commission nor any State 

(or political subdivision thereof) may regulate the substance of 

credit ratings or the procedures and methodologies by which 

any nationally recognized statistical rating organization determines credit ratings. Nothing in this paragraph may be construed to afford a defense against any action or proceeding 

brought by the Commission to enforce the antifraud provisions 

of the securities laws. 

(3) INTERNAL CONTROLS OVER PROCESSES FOR DETERMINING

CREDIT RATINGS.— 

(A) IN GENERAL.—Each nationally recognized statistical 

rating organization shall establish, maintain, enforce, and 

document an effective internal control structure governing 

the implementation of and adherence to policies, procedures, and methodologies for determining credit ratings, 

taking into consideration such factors as the Commission 

may prescribe, by rule. 

(B) ATTESTATION REQUIREMENT.—The Commission shall 

prescribe rules requiring each nationally recognized statistical rating organization to submit to the Commission an 

annual internal controls report, which shall contain— 

(i) a description of the responsibility of the management of the nationally recognized statistical rating organization in establishing and maintaining an effective internal control structure under subparagraph 

(A); 

(ii) an assessment of the effectiveness of the internal 

control structure of the nationally recognized statistical rating organization; and 

(iii) the attestation of the chief executive officer, or 

equivalent individual, of the nationally recognized statistical rating organization. 

(d) CENSURE, DENIAL, OR SUSPENSION OF REGISTRATION; NOTICE

AND HEARING.— 

(1) IN GENERAL.—The Commission, by order, shall censure, 

place limitations on the activities, functions, or operations of, 

suspend for a period not exceeding 12 months, or revoke the 

registration of any nationally recognized statistical rating organization, or with respect to any person who is associated with, 

who is seeking to become associated with, or, at the time of the 

alleged misconduct, who was associated or was seeking to become associated with a nationally recognized statistical rating 

organization, the Commission, by order, shall censure, place 

limitations on the activities or functions of such person, suspend for a period not exceeding 1 year, or bar such person from 

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being associated with a nationally recognized statistical rating 

organization, if the Commission finds, on the record after notice and opportunity for hearing, that such censure, placing of 

limitations, suspension, bar or revocation is necessary for the 

protection of investors and in the public interest and that such 

nationally recognized statistical rating organization, or any 

person associated with such an organization, whether prior to 

or subsequent to becoming so associated— 

(A) has committed or omitted any act, or is subject to an 

order or finding, enumerated in subparagraph (A), (D), (E), 

(H), or (G) of section 15(b)(4), has been convicted of any offense specified in section 15(b)(4)(B), or is enjoined from 

any action, conduct, or practice specified in subparagraph 

(C) of section 15(b)(4), during the 10-year period preceding 

the date of commencement of the proceedings under this 

subsection, or at any time thereafter; 

(B) has been convicted during the 10-year period preceding the date on which an application for registration is 

filed with the Commission under this section, or at any 

time thereafter, of— 

(i) any crime that is punishable by imprisonment for 

1 or more years, and that is not described in section 

15(b)(4)(B); or 

(ii) a substantially equivalent crime by a foreign 

court of competent jurisdiction; 

(C) is subject to any order of the Commission barring or 

suspending the right of the person to be associated with a 

nationally recognized statistical rating organization; 

(D) fails to file the certifications required under subsection (b)(2); 

(E) fails to maintain adequate financial and managerial 

resources to consistently produce credit ratings with integrity; 

(F) has failed reasonably to supervise, with a view to 

preventing a violation of the securities laws, an individual 

who commits such a violation, if the individual is subject 

to the supervision of that person. 

(2) SUSPENSION OR REVOCATION FOR PARTICULAR CLASS OF

SECURITIES.— (A) IN GENERAL.—The Commission may temporarily suspend or permanently revoke the registration of a nationally recognized statistical rating organization with respect 

to a particular class or subclass of securities, if the Commission finds, on the record after notice and opportunity 

for hearing, that the nationally recognized statistical rating organization does not have adequate financial and 

managerial resources to consistently produce credit ratings 

with integrity. 

(B) CONSIDERATIONS.—In making any determination 

under subparagraph (A), the Commission shall consider— 

(i) whether the nationally recognized statistical rating organization has failed over a sustained period of 

time, as determined by the Commission, to produce 

ratings that are accurate for that class or subclass of 

securities; and 

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(ii) such other factors as the Commission may determine. 

(e) TERMINATION OF REGISTRATION.— (1) VOLUNTARY WITHDRAWAL.—A nationally recognized statistical rating organization may, upon such terms and conditions as the Commission may establish as necessary in the 

public interest or for the protection of investors, withdraw from 

registration by furnishing a written notice of withdrawal to the 

Commission. 

(2) COMMISSION AUTHORITY.—In addition to any other authority of the Commission under this title, if the Commission 

finds that a nationally recognized statistical rating organization is no longer in existence or has ceased to do business as 

a credit rating agency, the Commission, by order, shall cancel 

the registration under this section of such nationally recognized statistical rating organization. 

(f) REPRESENTATIONS.— 

(1) BAN ON REPRESENTATIONS OF SPONSORSHIP BY UNITED

STATES OR AGENCY THEREOF.—It shall be unlawful for any nationally recognized statistical rating organization to represent 

or imply in any manner whatsoever that such nationally recognized statistical rating organization has been designated, sponsored, recommended, or approved, or that the abilities or qualifications thereof have in any respect been passed upon, by the 

United States or any agency, officer, or employee thereof. 

(2) BAN ON REPRESENTATION AS NRSRO OF UNREGISTERED

CREDIT RATING AGENCIES.—It shall be unlawful for any credit 

rating agency that is not registered under this section as a nationally recognized statistical rating organization to state that 

such credit rating agency is a nationally recognized statistical 

rating organization registered under this title. 

(3) STATEMENT OF REGISTRATION UNDER SECURITIES EXCHANGE ACT OF 1934 PROVISIONS.—No provision of paragraph 

(1) shall be construed to prohibit a statement that a nationally 

recognized statistical rating organization is a nationally recognized statistical rating organization under this title, if such 

statement is true in fact and if the effect of such registration 

is not misrepresented. 

(g) PREVENTION OF MISUSE OF NONPUBLIC INFORMATION.— (1) ORGANIZATION POLICIES AND PROCEDURES.—Each nationally recognized statistical rating organization shall establish, 

maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of the business of such nationally recognized statistical rating organization, to prevent the misuse in violation of this title, or the rules 

or regulations hereunder, of material, nonpublic information by 

such nationally recognized statistical rating organization or 

any person associated with such nationally recognized statistical rating organization. 

(2) COMMISSION AUTHORITY.—The Commission shall issue 

final rules in accordance with subsection (n) to require specific 

policies or procedures that are reasonably designed to prevent 

misuse in violation of this title (or the rules or regulations 

hereunder) of material, nonpublic information. 

(h) MANAGEMENT OF CONFLICTS OF INTEREST.— 

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(1) ORGANIZATION POLICIES AND PROCEDURES.—Each nationally recognized statistical rating organization shall establish, 

maintain, and enforce written policies and procedures reasonably designed, taking into consideration the nature of the business of such nationally recognized statistical rating organization and affiliated persons and affiliated companies thereof, to 

address and manage any conflicts of interest that can arise 

from such business. 

(2) COMMISSION AUTHORITY.—The Commission shall issue 

final rules in accordance with subsection (n) to prohibit, or require the management and disclosure of, any conflicts of interest relating to the issuance of credit ratings by a nationally 

recognized statistical rating organization, including, without 

limitation, conflicts of interest relating to— 

(A) the manner in which a nationally recognized statistical rating organization is compensated by the obligor, or 

any affiliate of the obligor, for issuing credit ratings or providing related services; 

(B) the provision of consulting, advisory, or other services by a nationally recognized statistical rating organization, or any person associated with such nationally recognized statistical rating organization, to the obligor, or any 

affiliate of the obligor; 

(C) business relationships, ownership interests, or any 

other financial or personal interests between a nationally 

recognized statistical rating organization, or any person 

associated with such nationally recognized statistical rating organization, and the obligor, or any affiliate of the obligor; 

(D) any affiliation of a nationally recognized statistical 

rating organization, or any person associated with such 

nationally recognized statistical rating organization, with 

any person that underwrites the securities or money market instruments that are the subject of a credit rating; and 

(E) any other potential conflict of interest, as the Commission deems necessary or appropriate in the public interest or for the protection of investors. 

(3) SEPARATION OF RATINGS FROM SALES AND MARKETING.— 

(A) RULES REQUIRED.—The Commission shall issue rules 

to prevent the sales and marketing considerations of a nationally recognized statistical rating organization from influencing the production of ratings by the nationally recognized statistical rating organization. 

(B) CONTENTS OF RULES.—The rules issued under subparagraph (A) shall provide for— 

(i) exceptions for small nationally recognized statistical rating organizations with respect to which the 

Commission determines that the separation of the production of ratings and sales and marketing activities 

is not appropriate; and 

(ii) suspension or revocation of the registration of a 

nationally recognized statistical rating organization, if 

the Commission finds, on the record, after notice and 

opportunity for a hearing, that— 

15 

(I) the nationally recognized statistical rating 

organization has committed a violation of a rule 

issued under this subsection; and 

(II) the violation of a rule issued under this subsection affected a rating. 

(4) LOOK-BACK REQUIREMENT.— (A) REVIEW BY THE NATIONALLY RECOGNIZED STATISTICAL

RATING ORGANIZATION.—Each nationally recognized statistical rating organization shall establish, maintain, and enforce policies and procedures reasonably designed to ensure that, in any case in which an employee of a person 

subject to a credit rating of the nationally recognized statistical rating organization or the issuer, underwriter, or 

sponsor of a security or money market instrument subject 

to a credit rating of the nationally recognized statistical 

rating organization was employed by the nationally recognized statistical rating organization and participated in 

any capacity in determining credit ratings for the person 

or the securities or money market instruments during the 

1-year period preceding the date an action was taken with 

respect to the credit rating, the nationally recognized statistical rating organization shall— 

(i) conduct a review to determine whether any conflicts of interest of the employee influenced the credit 

rating; and 

(ii) take action to revise the rating if appropriate, in 

accordance with such rules as the Commission shall 

prescribe. 

(B) REVIEW BY COMMISSION.— 

(i) IN GENERAL.—The Commission shall conduct 

periodic reviews of the policies described in subparagraph (A) and the implementation of the policies at 

each nationally recognized statistical rating organization to ensure they are reasonably designed and implemented to most effectively eliminate conflicts of interest. 

(ii) TIMING OF REVIEWS.—The Commission shall review the code of ethics and conflict of interest policy 

of each nationally recognized statistical rating organization— 

(I) not less frequently than annually; and 

(II) whenever such policies are materially modified or amended. 

(5) REPORT TO COMMISSION ON CERTAIN EMPLOYMENT TRANSITIONS.— 

(A) REPORT REQUIRED.—Each nationally recognized statistical rating organization shall report to the Commission 

any case such organization knows or can reasonably be expected to know where a person associated with such organization within the previous 5 years obtains employment 

with any obligor, issuer, underwriter, or sponsor of a security or money market instrument for which the organization issued a credit rating during the 12-month period 

prior to such employment, if such employee— 

(i) was a senior officer of such organization; 

16 

(ii) participated in any capacity in determining credit ratings for such obligor, issuer, underwriter, or 

sponsor; or 

(iii) supervised an employee described in clause (ii). 

(B) PUBLIC DISCLOSURE.—Upon receiving such a report, 

the Commission shall make such information publicly 

available. 

(i) PROHIBITED CONDUCT.— (1) PROHIBITED ACTS AND PRACTICES.—The Commission shall 

issue final rules in accordance with subsection (n) to prohibit 

any act or practice relating to the issuance of credit ratings by 

a nationally recognized statistical rating organization that the 

Commission determines to be unfair, coercive, or abusive, including any act or practice relating to— 

(A) conditioning or threatening to condition the issuance 

of a credit rating on the purchase by the obligor or an affiliate thereof of other services or products, including precredit rating assessment products, of the nationally recognized statistical rating organization or any person associated with such nationally recognized statistical rating organization; 

(B) lowering or threatening to lower a credit rating on, 

or refusing to rate, securities or money market instruments issued by an asset pool or as part of any assetbacked or mortgage-backed securities transaction, unless a 

portion of the assets within such pool or part of such 

transaction, as applicable, also is rated by the nationally 

recognized statistical rating organization; or 

(C) modifying or threatening to modify a credit rating or 

otherwise departing from its adopted systematic procedures and methodologies in determining credit ratings, 

based on whether the obligor, or an affiliate of the obligor, 

purchases or will purchase the credit rating or any other 

service or product of the nationally recognized statistical 

rating organization or any person associated with such organization. 

(2) RULE OF CONSTRUCTION.—Nothing in paragraph (1), or in 

any rules or regulations adopted thereunder, may be construed 

to modify, impair, or supersede the operation of any of the 

antitrust laws (as defined in the first section of the Clayton 

Act, except that such term includes section 5 of the Federal 

Trade Commission Act, to the extent that such section 5 applies to unfair methods of competition). 

(j) DESIGNATION OF COMPLIANCE OFFICER.— 

(1) IN GENERAL.—Each nationally recognized statistical rating organization shall designate an individual responsible for 

administering the policies and procedures that are required to 

be established pursuant to subsections (g) and (h), and for ensuring compliance with the securities laws and the rules and 

regulations thereunder, including those promulgated by the 

Commission pursuant to this section. 

(2) LIMITATIONS.— (A) IN GENERAL.—Except as provided in subparagraph 

(B), an individual designated under paragraph (1) may not, 

while serving in the designated capacity— 

17 

(i) perform credit ratings; 

(ii) participate in the development of ratings methodologies or models; 

(iii) perform marketing or sales functions; or 

(iv) participate in establishing compensation levels, 

other than for employees working for that individual. 

(B) EXCEPTION.—The Commission may exempt a small 

nationally recognized statistical rating organization from 

the limitations under this paragraph, if the Commission 

finds that compliance with such limitations would impose 

an unreasonable burden on the nationally recognized statistical rating organization. 

(3) OTHER DUTIES.—Each individual designated under paragraph (1) shall establish procedures for the receipt, retention, 

and treatment of— 

(A) complaints regarding credit ratings, models, methodologies, and compliance with the securities laws and the 

policies and procedures developed under this section; and 

(B) confidential, anonymous complaints by employees or 

users of credit ratings. 

(4) COMPENSATION.—The compensation of each compliance 

officer appointed under paragraph (1) shall not be linked to the 

financial performance of the nationally recognized statistical 

rating organization and shall be arranged so as to ensure the 

independence of the officer’s judgment. 

(5) ANNUAL REPORTS REQUIRED.— 

(A) ANNUAL REPORTS REQUIRED.—Each individual designated under paragraph (1) shall submit to the nationally 

recognized statistical rating organization an annual report 

on the compliance of the nationally recognized statistical 

rating organization with the securities laws and the policies and procedures of the nationally recognized statistical 

rating organization that includes— 

(i) a description of any material changes to the code 

of ethics and conflict of interest policies of the nationally recognized statistical rating organization; and 

(ii) a certification that the report is accurate and 

complete. 

(B) SUBMISSION OF REPORTS TO THE COMMISSION.—Each 

nationally recognized statistical rating organization shall 

file the reports required under subparagraph (A) together 

with the financial report that is required to be submitted 

to the Commission under this section. 

(k) STATEMENTS OF FINANCIAL CONDITION.—Each nationally recognized statistical rating organization shall, on a confidential basis, 

file with the Commission, at intervals determined by the Commission, such financial statements, certified (if required by the rules 

or regulations of the Commission) by an independent public accountant, and information concerning its financial condition, as the 

Commission, by rule, may prescribe as necessary or appropriate in 

the public interest or for the protection of investors. 

(l) SOLE METHOD OF REGISTRATION.— 

(1) IN GENERAL.—On and after the effective date of this section, a credit rating agency may only be registered as a nationVerDate Sep 11 2014 02:22 Nov 04, 2017 Jkt 079006 PO 00000 Frm 00017 Fmt 6659 Sfmt 6601 E:\HR\OC\HR384.XXX HR384
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ally recognized statistical rating organization for any purpose 

in accordance with this section. 

(2) PROHIBITION ON RELIANCE ON NO-ACTION RELIEF.—On 

and after the effective date of this section— 

(A) an entity that, before that date, received advice, approval, or a no-action letter from the Commission or staff 

thereof to be treated as a nationally recognized statistical 

rating organization pursuant to the Commission rule at 

section 240.15c3–1 of title 17, Code of Federal Regulations, 

may represent itself or act as a nationally recognized statistical rating organization only— 

(i) during Commission consideration of the application, if such entity has filed an application for registration under this section; and 

(ii) on and after the date of approval of its application for registration under this section; and 

(B) the advice, approval, or no-action letter described in 

subparagraph (A) shall be void. 

(3) NOTICE TO OTHER AGENCIES.—Not later than 30 days 

after the date of enactment of this section, the Commission 

shall give notice of the actions undertaken pursuant to this 

section to each Federal agency which employs in its rules and 

regulations the term ‘‘nationally recognized statistical rating 

organization’’ (as that term is used under Commission rule 

15c3–1 (17 C.F.R. 240.15c3–1), as in effect on the date of enactment of this section). 

(m) ACCOUNTABILITY.— 

(1) IN GENERAL.—The enforcement and penalty provisions of 

this title shall apply to statements made by a credit rating 

agency in the same manner and to the same extent as such 

provisions apply to statements made by a registered public accounting firm or a securities analyst under the securities laws, 

and such statements shall not be deemed forward-looking 

statements for the purposes of section 21E. 

(2) RULEMAKING.—The Commission shall issue such rules as 

may be necessary to carry out this subsection. 

(n) REGULATIONS.— 

(1) NEW PROVISIONS.—Such rules and regulations as are required by this section or are otherwise necessary to carry out 

this section, including the application form required under subsection (a)— 

(A) shall be issued by the Commission in final form, not 

later than 270 days after the date of enactment of this section; and 

(B) shall become effective not later than 270 days after 

the date of enactment of this section. 

(2) REVIEW OF EXISTING REGULATIONS.—Not later than 270 

days after the date of enactment of this section, the Commission shall— 

(A) review its existing rules and regulations which employ the term ‘‘nationally recognized statistical rating organization’’ or ‘‘NRSRO’’; and 

(B) amend or revise such rules and regulations in accordance with the purposes of this section, as the CommisVerDate Sep 11 2014 02:22 Nov 04, 2017 Jkt 079006 PO 00000 Frm 00018 Fmt 6659 Sfmt 6601 E:\HR\OC\HR384.XXX HR384
19 

sion may prescribe as necessary or appropriate in the public interest or for the protection of investors. 

(o) NRSROS SUBJECT TO COMMISSION AUTHORITY.— 

(1) IN GENERAL.—No provision of the laws of any State or political subdivision thereof requiring the registration, licensing, 

or qualification as a credit rating agency or a nationally recognized statistical rating organization shall apply to any nationally recognized statistical rating organization or person employed by or working under the control of a nationally recognized statistical rating organization. 

(2) LIMITATION.—Nothing in this subsection prohibits the securities commission (or any agency or office performing like 

functions) of any State from investigating and bringing an enforcement action with respect to fraud or deceit against any 

nationally recognized statistical rating organization or person 

associated with a nationally recognized statistical rating organization. 

(p) REGULATION OF NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATIONS.— 

(1) ESTABLISHMENT OF OFFICE OF CREDIT RATINGS.— 

(A) OFFICE ESTABLISHED.—The Commission shall establish within the Commission an Office of Credit Ratings (referred to in this subsection as the ‘‘Office’’) to administer 

the rules of the Commission— 

(i) with respect to the practices of nationally recognized statistical rating organizations in determining 

ratings, for the protection of users of credit ratings 

and in the public interest; 

(ii) to promote accuracy in credit ratings issued by 

nationally recognized statistical rating organizations; 

and 

(iii) to ensure that such ratings are not unduly influenced by conflicts of interest. 

(B) DIRECTOR OF THE OFFICE.—The head of the Office 

shall be the Director, who shall report to the Chairman. 

(2) STAFFING.—The Office established under this subsection 

shall be staffed sufficiently to carry out fully the requirements 

of this section. The staff shall include persons with knowledge 

of and expertise in corporate, municipal, and structured debt 

finance. 

(3) COMMISSION EXAMINATIONS.— 

(A) ANNUAL EXAMINATIONS REQUIRED.—The Office shall 

conduct an examination of each nationally recognized statistical rating organization at least annually. 

(B) CONDUCT OF EXAMINATIONS.—Each examination 

under subparagraph (A) shall include, as appropriate, a review of— 

(i) whether the nationally recognized statistical rating organization conducts business in accordance with 

the policies, procedures, and rating methodologies of 

the nationally recognized statistical rating organization; 

(ii) the management of conflicts of interest by the 

nationally recognized statistical rating organization; 

20 

(iii) implementation of ethics policies by the nationally recognized statistical rating organization; 

(iv) the internal supervisory controls of the nationally recognized statistical rating organization; 

(v) the governance of the nationally recognized statistical rating organization; 

(vi) the activities of the individual designated by the 

nationally recognized statistical rating organization 

under subsection (j)(1); 

(vii) the processing of complaints by the nationally 

recognized statistical rating organization; and 

(viii) the policies of the nationally recognized statistical rating organization governing the post-employment activities of former staff of the nationally recognized statistical rating organization. 

(C) INSPECTION REPORTS.—The Commission shall make 

available to the public, in an easily understandable format, 

an annual report summarizing— 

(i) the essential findings of all examinations conducted under subparagraph (A), as deemed appropriate by the Commission; 

(ii) the responses by the nationally recognized statistical rating organizations to any material regulatory 

deficiencies identified by the Commission under clause 

(i); and 

(iii) whether the nationally recognized statistical 

rating organizations have appropriately addressed the 

recommendations of the Commission contained in previous reports under this subparagraph. 

(4) RULEMAKING AUTHORITY.—The Commission shall— 

(A) establish, by rule, fines, and other penalties applicable to any nationally recognized statistical rating organization that violates the requirements of this section and the 

rules thereunder; and 

(B) issue such rules as may be necessary to carry out 

this section. 

(q) TRANSPARENCY OF RATINGS PERFORMANCE.— 

(1) RULEMAKING REQUIRED.—The Commission shall, by rule, 

require that each nationally recognized statistical rating organization publicly disclose information on the initial credit ratings determined by the nationally recognized statistical rating 

organization for each type of obligor, security, and money market instrument, and any subsequent changes to such credit ratings, for the purpose of allowing users of credit ratings to 

evaluate the accuracy of ratings and compare the performance 

of ratings by different nationally recognized statistical rating 

organizations. 

(2) CONTENT.—The rules of the Commission under this subsection shall require, at a minimum, disclosures that— 

(A) are comparable among nationally recognized statistical rating organizations, to allow users of credit ratings 

to compare the performance of credit ratings across nationally recognized statistical rating organizations; 

21 

(B) are clear and informative for investors having a wide 

range of sophistication who use or might use credit ratings; 

(C) include performance information over a range of 

years and for a variety of types of credit ratings, including 

for credit ratings withdrawn by the nationally recognized 

statistical rating organization; 

(D) are published and made freely available by the nationally recognized statistical rating organization, on an 

easily accessible portion of its website, and in writing, 

when requested; 

(E) are appropriate to the business model of a nationally 

recognized statistical rating organization; and 

(F) each nationally recognized statistical rating organization include an attestation with any credit rating it 

issues affirming that no part of the rating was influenced 

by any other business activities, that the rating was based 

solely on the merits of the instruments being rated, and 

that such rating was an independent evaluation of the 

risks and merits of the instrument. 

(r) CREDIT RATINGS METHODOLOGIES.—The Commission shall 

prescribe rules, for the protection of investors and in the public interest, with respect to the procedures and methodologies, including 

qualitative and quantitative data and models, used by nationally 

recognized statistical rating organizations that require each nationally recognized statistical rating organization— 

(1) to ensure that credit ratings are determined using procedures and methodologies, including qualitative and quantitative data and models, that are— 

(A) approved by the board of the nationally recognized 

statistical rating organization, a body performing a function similar to that of a board; and 

(B) in accordance with the policies and procedures of the 

nationally recognized statistical rating organization for the 

development and modification of credit rating procedures 

and methodologies; 

(2) to ensure that when material changes to credit rating 

procedures and methodologies (including changes to qualitative 

and quantitative data and models) are made, that— 

(A) the changes are applied consistently to all credit ratings to which the changed procedures and methodologies 

apply; 

(B) to the extent that changes are made to credit rating 

surveillance procedures and methodologies, the changes 

are applied to then-current credit ratings by the nationally 

recognized statistical rating organization within a reasonable time period determined by the Commission, by rule; 

and 

(C) the nationally recognized statistical rating organization publicly discloses the reason for the change; and 

(3) to notify users of credit ratings— 

(A) of the version of a procedure or methodology, including the qualitative methodology or quantitative inputs, 

used with respect to a particular credit rating; 

22 

(B) when a material change is made to a procedure or 

methodology, including to a qualitative model or quantitative inputs; 

(C) when a significant error is identified in a procedure 

or methodology, including a qualitative or quantitative 

model, that may result in credit rating actions; and 

(D) of the likelihood of a material change described in 

subparagraph (B) resulting in a change in current credit 

ratings. 

(s) TRANSPARENCY OF CREDIT RATING METHODOLOGIES AND IN- FORMATION REVIEWED.— (1) FORM FOR DISCLOSURES.—The Commission shall require, 

by rule, each nationally recognized statistical rating organization to prescribe a form to accompany the publication of each 

credit rating that discloses— 

(A) information relating to— 

(i) the assumptions underlying the credit rating procedures and methodologies; 

(ii) the data that was relied on to determine the 

credit rating; and 

(iii) if applicable, how the nationally recognized statistical rating organization used servicer or remittance 

reports, and with what frequency, to conduct surveillance of the credit rating; and 

(B) information that can be used by investors and other 

users of credit ratings to better understand credit ratings 

in each class of credit rating issued by the nationally recognized statistical rating organization. 

(2) FORMAT.—The form developed under paragraph (1) 

shall— 

(A) be easy to use and helpful for users of credit ratings 

to understand the information contained in the report; 

(B) require the nationally recognized statistical rating 

organization to provide the content described in paragraph 

(3)(B) in a manner that is directly comparable across types 

of securities; and 

(C) be made readily available to users of credit ratings, 

in electronic or paper form, as the Commission may, by 

rule, determine. 

(3) CONTENT OF FORM.— 

(A) QUALITATIVE CONTENT.—Each nationally recognized 

statistical rating organization shall disclose on the form 

developed under paragraph (1)— 

(i) the credit ratings produced by the nationally recognized statistical rating organization; 

(ii) the main assumptions and principles used in 

constructing procedures and methodologies, including 

qualitative methodologies and quantitative inputs and 

assumptions about the correlation of defaults across 

underlying assets used in rating structured products; 

(iii) the potential limitations of the credit ratings, 

and the types of risks excluded from the credit ratings 

that the nationally recognized statistical rating organization does not comment on, including liquidity, market, and other risks; 

23 

(iv) information on the uncertainty of the credit rating, including— 

(I) information on the reliability, accuracy, and 

quality of the data relied on in determining the 

credit rating; and 

(II) a statement relating to the extent to which 

data essential to the determination of the credit 

rating were reliable or limited, including— 

(aa) any limits on the scope of historical 

data; and 

(bb) any limits in accessibility to certain 

documents or other types of information that 

would have better informed the credit rating; 

(v) whether and to what extent third party due diligence services have been used by the nationally recognized statistical rating organization, a description of 

the information that such third party reviewed in conducting due diligence services, and a description of the 

findings or conclusions of such third party; 

(vi) a description of the data about any obligor, 

issuer, security, or money market instrument that 

were relied upon for the purpose of determining the 

credit rating; 

(vii) a statement containing an overall assessment of 

the quality of information available and considered in 

producing a rating for an obligor, security, or money 

market instrument, in relation to the quality of information available to the nationally recognized statistical rating organization in rating similar issuances; 

(viii) information relating to conflicts of interest of 

the nationally recognized statistical rating organization; and 

(ix) such additional information as the Commission 

may require. 

(B) QUANTITATIVE CONTENT.—Each nationally recognized 

statistical rating organization shall disclose on the form 

developed under this subsection— 

(i) an explanation or measure of the potential volatility of the credit rating, including— 

(I) any factors that might lead to a change in 

the credit ratings; and 

(II) the magnitude of the change that a user can 

expect under different market conditions; 

(ii) information on the content of the rating, including— 

(I) the historical performance of the rating; and 

(II) the expected probability of default and the 

expected loss in the event of default; 

(iii) information on the sensitivity of the rating to 

assumptions made by the nationally recognized statistical rating organization, including— 

(I) 5 assumptions made in the ratings process 

that, without accounting for any other factor, 

would have the greatest impact on a rating if the 

assumptions were proven false or inaccurate; and 

24 

(II) an analysis, using specific examples, of how 

each of the 5 assumptions identified under subclause (I) impacts a rating; 

(iv) such additional information as may be required 

by the Commission. 

(4) DUE DILIGENCE SERVICES FOR ASSET-BACKED SECURITIES.— 

(A) FINDINGS.—The issuer or underwriter of any assetbacked security shall make publicly available the findings 

and conclusions of any third-party due diligence report obtained by the issuer or underwriter. 

(B) CERTIFICATION REQUIRED.—In any case in which 

third-party due diligence services are employed by a nationally recognized statistical rating organization, an 

issuer, or an underwriter, the person providing the due 

diligence services shall provide to any nationally recognized statistical rating organization that produces a rating 

to which such services relate, written certification, as provided in subparagraph (C). 

(C) FORMAT AND CONTENT.—The Commission shall establish the appropriate format and content for the written 

certifications required under subparagraph (B), to ensure 

that providers of due diligence services have conducted a 

thorough review of data, documentation, and other relevant information necessary for a nationally recognized 

statistical rating organization to provide an accurate rating. 

(D) DISCLOSURE OF CERTIFICATION.—The Commission 

shall adopt rules requiring a nationally recognized statistical rating organization, at the time at which the nationally recognized statistical rating organization produces a 

rating, to disclose the certification described in subparagraph (B) to the public in a manner that allows the public 

to determine the adequacy and level of due diligence services provided by a third party. 

(t) CORPORATE GOVERNANCE, ORGANIZATION, AND MANAGEMENT

OF CONFLICTS OF INTEREST.— 

(1) BOARD OF DIRECTORS.—Each nationally recognized statistical rating organization shall have a board of directors. 

(2) INDEPENDENT DIRECTORS.— 

(A) IN GENERAL.—At least 1⁄2 of the board of directors, 

but not fewer than 2 of the members thereof, shall be independent of the nationally recognized statistical rating 

agency. A portion of the independent directors shall include users of ratings from a nationally recognized statistical rating organization. 

(B) INDEPENDENCE DETERMINATION.—In order to be considered independent for purposes of this subsection, a 

member of the board of directors of a nationally recognized 

statistical rating organization— 

(i) may not, other than in his or her capacity as a 

member of the board of directors or any committee 

thereof— 

25 

(I) accept any consulting, advisory, or other 

compensatory fee from the nationally recognized 

statistical rating organization; or 

(II) be a person associated with the nationally 

recognized statistical rating organization or with 

any affiliated company thereof; and 

(ii) shall be disqualified from any deliberation involving a specific rating in which the independent 

board member has a financial interest in the outcome 

of the rating. 

(C) COMPENSATION AND TERM.—The compensation of the 

independent members of the board of directors of a nationally recognized statistical rating organization shall not be 

linked to the business performance of the nationally recognized statistical rating organization, and shall be arranged 

so as to ensure the independence of their judgment. The 

term of office of the independent directors shall be for a 

pre-agreed fixed period, not to exceed 5 years, and shall 

not be renewable. 

(3) DUTIES OF BOARD OF DIRECTORS.—In addition to the overall responsibilities of the board of directors, the board shall 

oversee— 

(A) the establishment, maintenance, and enforcement of 

policies and procedures for determining credit ratings; 

(B) the establishment, maintenance, and enforcement of 

policies and procedures to address, manage, and disclose 

any conflicts of interest; 

(C) the effectiveness of the internal control system with 

respect to policies and procedures for determining credit 

ratings; and 

(D) the compensation and promotion policies and practices of the nationally recognized statistical rating organization. 

(4) TREATMENT OF NRSRO SUBSIDIARIES.—If a nationally recognized statistical rating organization is a subsidiary of a parent entity, the board of the directors of the parent entity may 

satisfy the requirements of this subsection by assigning to a 

committee of such board of directors the duties under paragraph (3), if— 

(A) at least 1⁄2 of the members of the committee (including the chairperson of the committee) are independent, as 

defined in this section; and 

(B) at least 1 member of the committee is a user of ratings from a nationally recognized statistical rating organization. 

(5) EXCEPTION AUTHORITY.—If the Commission finds that 

compliance with the provisions of this subsection present an 

unreasonable burden on a small nationally recognized statistical rating organization, the Commission may permit the nationally recognized statistical rating organization to delegate 

such responsibilities to a committee that includes at least one 

individual who is a user of ratings of a nationally recognized 

statistical rating organization. 

(u) DUTY TO REPORT TIPS ALLEGING MATERIAL VIOLATIONS OF

LAW.— 

26 

(1) DUTY TO REPORT.—Each nationally recognized statistical 

rating organization shall refer to the appropriate law enforcement or regulatory authorities any information that the nationally recognized statistical rating organization receives from 

a third party and finds credible that alleges that an issuer of 

securities rated by the nationally recognized statistical rating 

organization has committed or is committing a material violation of law that has not been adjudicated by a Federal or State 

court. 

(2) RULE OF CONSTRUCTION.—Nothing in paragraph (1) may 

be construed to require a nationally recognized statistical rating organization to verify the accuracy of the information described in paragraph (1). 

(v) INFORMATION FROM SOURCES OTHER THAN THE ISSUER.—In 

producing a credit rating, a nationally recognized statistical rating 

organization shall consider information about an issuer that the 

nationally recognized statistical rating organization has, or receives 

from a source other than the issuer or underwriter, that the nationally recognized statistical rating organization finds credible and 

potentially significant to a rating decision. 

* * * * * * * 

Æ