________________________________________________________________________ 

2011 SUMMARY REPORT OF COMMISSION 

STAFF’S EXAMINATIONS OF EACH 

NATIONALLY RECOGNIZED STATISTICAL 

RATING ORGANIZATION ________________________________________________________________________ 

As Required by Section 15E(p)(3)(C) 

of the Securities Exchange Act of 1934

 

This is a report of the Staff of the U.S. Securities and Exchange Commission.

The Commission has expressed no view regarding the analysis, findings, or 

conclusions contained herein.

__________________________________ 

September 2011
I. SUMMARY

This Report summarizes the examinations conducted by staff from the U.S. Securities and 

Exchange Commission (the “Staff”) under Section 15E(p)(3) of the Securities Exchange Act of 

1934 (“Exchange Act”).1

II. BACKGROUND

 This is a report of the Staff and, as such, reflects solely the Staff’s 

views. The U.S. Securities and Exchange Commission (“Commission”) is making this Staff 

report public as required by Section 15E(p)(3)(C) of the Exchange Act. 

A. Statutory Framework and Rules

In 2006, Congress passed the Credit Rating Agency Reform Act (the “Rating Agency Reform 

Act”) that provided the Commission with the authority to establish a registration and oversight 

program for credit rating agencies.2

 The Rating Agency Reform Act added Section 15E to the 

Exchange Act, which established Commission oversight over those credit rating agencies that 

register with the Commission as Nationally Recognized Statistical Rating Organizations 

(“NRSROs”). The Rating Agency Reform Act also amended Section 17 of the Exchange Act to 

provide the Commission with recordkeeping, reporting, and examination authority over 

registered NRSROs.3

Importantly, Section 15E(c)(2) expressly prohibits the Commission from regulating the 

substance of credit ratings or the procedures and methodologies by which an NRSRO determines 

credit ratings.

In 2007, the Commission adopted Exchange Act Rules 17g-1 through 17g-6 and Form NRSRO 

to implement the registration and oversight program required by the Rating Agency Reform Act. 

Pursuant to these rules, registered NRSROs must, among other things, make certain public 

disclosures, make and retain certain records, furnish financial reports to the Commission, 

establish and enforce procedures to manage the handling of material non-public information, and 

disclose and manage conflicts of interest. The Commission’s rules also prohibit an NRSRO from 

having certain conflicts of interest and engaging in certain unfair, abusive, or otherwise coercive 

practices. The Commission amended several of these rules in February 2009 and December 

2009 with the goal of further increasing the transparency of NRSRO rating methodologies, 

strengthening the disclosures of rating performance, prohibiting NRSROs from engaging in 

certain practices, and enhancing NRSRO record keeping.

 

1

 15 U.S.C. § 78o-7(p)(3)(C). Unless otherwise noted, all Section and Rule references in this Report are to 

the Securities Exchange Act of 1934 and related rules. See 15 U.S.C § 78o-7; 15 U.S.C. § 78q (a) & (b); 

17 C.F.R. § 240.17g.

2

 Credit Rating Agency Reform Act of 2006, Pub. L. No. 109-291, 120 Stat. 1327 (2006)

3

 See Section 17(a).
2011 Section 15E Examinations Summary Report – Page 2 of 22

In July 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act 

(the “Dodd-Frank Act”), which, among other things, amended Section 15E to enhance the 

regulation and oversight of NRSROs by imposing new reporting, disclosure, and examination 

requirements.

4

• Filing annual reports on internal controls;

 The Dodd-Frank Act directs the Commission to adopt rules to implement a 

number of provisions related to NRSROs. To this end, the Commission adopted new Rule 17g-7 

and has proposed new rules to implement certain provisions of the Dodd-Frank Act concerning 

the following areas:

5

• Addressing conflicts of interest with respect to sales and marketing concerns;

 6

• Conducting “look back” reviews of ratings in which former NRSRO employees 

participated to determine whether employment opportunities with a rated entity, 

issuer, underwriter, or sponsor influenced the rating;7

• Disclosing information relating to initial credit ratings and subsequent changes to 

credit ratings to track the performance of an NRSRO’s credit ratings;

 

8

• Requiring an NRSRO to have certain policies and procedures governing the way 

an NRSRO determines credit ratings;9

• Publishing a standard form with each credit rating disclosing the assumptions 

underlying the methodology used to determine the credit rating;

 

10

• Disclosing information concerning third-party due diligence reports for assetbacked securities;

 

11

• Establishing professional standards for training credit rating analysts;12

• Requiring the consistent application of rating symbols and definitions.

and

13

As of the date of this Report, the Commission has adopted the following rules applicable to 

NRSROs:

 

4

 The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203 (“Dodd-Frank”), 

§ 932, 124 Stat. 1376, 1872-83 (2010).

5

 Section 15E(c)(3)(B).

6

 Section 15E(h)(3)(A).

7

 Section 15E(h)(4)(A).

8

 Section 15E(q)(1).

9

 Section 15E(r).

10 Section 15E(s)(1).

11 Section 15E(s)(4)(C).

12 Dodd-Frank, § 936, 124 Stat. 1884-85.

13 Dodd-Frank, § 938(a), 124 Stat. 1376, 1885.
2011 Section 15E Examinations Summary Report – Page 3 of 22

Exchange Act Rules Applicable to NRSROs

Rule 17g-1 Requires an NRSRO to apply for NRSRO status and issue credit ratings for 

various classes of securities by filing a Form NRSRO with the Commission, and 

prescribes how an NRSRO must keep its registration up-to-date and file an 

annual certification. Additionally, an NRSRO must make its current Form 

NRSRO and information and documents submitted in Exhibits 1 through 9 to 

Form NRSRO publicly available.

Rule 17g-2 Requires an NRSRO to make and retain certain types of business records and 

publicly disclose certain ratings history data. 

Rule 17g-3 Requires an NRSRO to file annual financial reports and reports of the number of 

credit rating actions with the Commission, some of which are audited. 

Rule 17g-4 Requires an NRSRO to establish and enforce written policies and procedures

designed to address specific areas in which material, nonpublic information 

could be inappropriately disclosed or used. 

Rule 17g-5 Identifies a series of conflicts of interest arising from the business of determining 

credit ratings. Some of these conflicts must be disclosed and managed, while 

others are expressly prohibited.

Rule 17g-6 Prohibits NRSROs from engaging in certain unfair, abusive, or coercive

practices. 

Rule 17g-7 Requires NRSROs to include information regarding the representations, 

warranties, and enforcement mechanisms available to investors in an assetbacked securities offering in any report accompanying a credit rating issued in 

connection with such offering, including a preliminary credit rating, as well as 

how those representations, warranties, and enforcement mechanisms differ from 

those in similar offerings.

B. Annual Examinations

Generally, the purpose of NRSRO examinations is to facilitate compliance with applicable laws 

and rules, identify potential violations of such laws and rules, and monitor for remedial action. 

Examinations also serve to inform the Commission and Commission staff of NRSROs’ 

compliance with their regulatory obligations and noteworthy industry developments. If the 

examination staff identifies potential violations of federal securities laws or rules during an 

NRSRO examination, the staff may refer the matter to the Commission’s Division of 

Enforcement, which is responsible for further investigating these potential violations and taking 

further action when appropriate, either in a Federal court or in an administrative action.
2011 Section 15E Examinations Summary Report – Page 4 of 22

Section 15E(p)(3)(A), added by the Dodd-Frank Act, requires the Staff to conduct an 

examination of each NRSRO at least annually. Under Section 15E(p)(3)(B), each examination 

must include a review of the following: 

1. Whether the NRSRO conducts business in accordance with its policies, procedures, and 

rating methodologies;

2. The management of conflicts of interest by the NRSRO;

3. Implementation of ethics policies by the NRSRO;

4. The internal supervisory controls of the NRSRO;

5. The governance of the NRSRO;

6. The activities of the designated compliance officer of the NRSRO;

7. The processing of complaints by the NRSRO; and

8. The NRSRO’s policies governing the post-employment activities of former staff of the 

NRSRO.14

C. Requirement for a Summary Staff Report

Section 15E(p)(3)(C) requires that the Commission make available to the public, in an easily 

understandable format, an annual report summarizing (i) the essential findings of the Section 15E 

examinations as deemed appropriate by the Commission; (ii) the responses by the NRSROs to 

any material regulatory deficiencies identified by the Commission in those findings; and (iii) 

whether the NRSROs have appropriately addressed the recommendations of the Commission 

contained in previous Section 15E summary reports.15

D. Registered NRSROs

In 2007, following the adoption of the Commission’s first set of NRSRO rules, the Commission 

began granting registrations to credit rating agencies that applied to be registered as an NRSRO. 

A credit rating agency may apply to be registered with respect to one or more of the following 

five classes of credit ratings: (1) financial institutions, brokers, or dealers (“financial 

institutions”); (2) insurance companies; (3) corporate issuers; (4) issuers of asset-backed 

securities (“asset-backed securities”); and (5) issuers of government securities, municipal 

securities, or securities issued by a foreign government (“government securities”). To date, the 

Commission has granted NRSRO registration to ten credit rating agencies. Those credit rating 

agencies and dates of registration are listed below: 

 

14 Section 15E(p)(3)(B)(i)–(viii).

15 Section 15E(p)(3)(C)(i)–(iii).
2011 Section 15E Examinations Summary Report – Page 5 of 22

NRSRO16

A.M. Best Company, Inc. (“A.M. Best”) September 24, 2007

 Date of Registration 

DBRS Inc. (“DBRS”) September 24, 2007

Egan-Jones Rating Company (“Egan-Jones”) December 21, 2007 

Fitch, Inc. (“Fitch”) September 24, 2007

Japan Credit Rating Agency, Ltd. (“JCR”) September 24, 2007

Kroll Bond Rating Agency (“Kroll”)17

Moody’s Investors Service, Inc. (“Moody’s”) September 24, 2007 

 February 11, 2008

Morningstar Credit Ratings, LLC (“Morningstar”)18

Rating and Investment Information, Inc. (“R&I”) September 24, 2007

 June 23, 2008 

Standard & Poor's Ratings Services (“S&P”) September 24, 2007 

The table and charts below list the number of outstanding ratings reported by each NRSRO in its 

Form NRSRO annual certification for 2010. For each NRSRO, the table sets forth the number of 

outstanding ratings for the five asset classes.

 

16 Orders granting registration can be found at: http://www.sec.gov/divisions/marketreg/ratingagency.htm. In 

addition, each NRSRO is required to post its Form NRSRO on its own website.

17 Kroll was formerly LACE Financial Corp. 

18 Morningstar was formerly Realpoint LLC.
2011 Section 15E Examinations Summary Report – Page 6 of 22

NRSRO Ratings Outstanding by Asset Class*

Financial 

Institutions

Insurance 

Companies 

Corporate 

Issuers

AssetBacked

Securities

Government 

Securities Total 

A.M. Best N/R 5,062 2,043 54 N/R 7,159

DBRS 14,941 156 3,863 10,091 13,533 42,584

Egan-Jones 89 47 877 13 19 1,045

Fitch 61,550 1,657 13,385 64,535 363,897 505,024

JCR 159 30 495 N/R** 52 736

Kroll 16,515 48 1,002 0*** 59 17,624

Moody's 61,581 4,540 30,285 101,546 841,235 1,039,187

Morningstar N/R N/R N/R 8,322 N/R 8,322

R&I 503 48 2,836 N/R 1,031 4,418

S&P 54,000 8,200 44,500 117,900 965,900 1,190,500

Total 209,338 19,788 99,286 302,461 2,185,726 2,816,599

* As reported by the NRSROs on Form NRSRO, dated as of year-end 2010.

** N/R” indicates the NRSRO is not registered for that class of securities. R&I and JCR withdrew from their 

NRSRO registrations in asset-backed securities on June 28, 2010 and December 2, 2010, respectively.

***Kroll is registered in asset-backed securities, although it reported no ratings in this class as of year-end 2010.

Moody’s and S&P are the two largest registered NRSROs based on number of ratings reported

outstanding, with approximately 1 million and 1.2 million ratings reported outstanding, 

respectively. Fitch is the third largest with approximately 500,000 ratings reported outstanding. 

Generally, the agencies vary in their focus on credit ratings for particular asset classes. Some 

agencies specialize in a particular class. Moody’s and S&P report issuing the greatest number of 

credit ratings for corporate issuers, asset-backed securities, and government securities. For credit 

ratings related to financial institutions, Fitch and Moody’s report issuing more ratings than S&P. 

S&P reports issuing the most ratings for insurance companies, with A.M. Best, Moody’s, and 

Fitch reporting issuance of most of the remaining ratings in that asset class. Some of the smaller 

NRSROs concentrate more on particular sectors or regions. For example, A.M. Best primarily 

assigns insurance financial strength ratings while Morningstar specializes in asset-backed 

securities. Prior to its acquisition by Kroll, LACE Financial Corp. primarily focused on ratings 

of financial institutions. Two NRSROs, JCR and R&I, are based in Japan and primarily issue 

ratings on Japanese companies.

The charts below illustrate the differences in reported coverage between the ten agencies in each 

of the five ratings sectors.19

 

19 The charts represent the percentage of total outstanding ratings of all NRSROs combined, as reported on 

Form NRSRO, and not a percentage of the total number of rated obligors, issuers, and issues/obligations. 
2011 Section 15E Examinations Summary Report – Page 7 of 22

AM Best

0.25%

DBRS

1.51% Egan Jones

0.04%

Fitch

17.93%

Kroll

0.63%

JCR

0.03%

Moody's

Morningstar 36.90% 0.30%

R&I

0.16%

S&P

42.27%

Total

AM Best

0.00%

DBRS

7.14%

Egan Jones

0.04%

Fitch

29.40%

Kroll

7.89%

JCR

0.08%

Moody's

29.42%

Morningstar

0.00%

R&I

0.24%

S&P

25.80%

Financial Institutions 

AM Best

25.58%

DBRS

0.79%

Egan Jones

0.24%

Fitch

8.37%

Kroll

0.24%

JCR

0.15%

Moody's

22.94%

Morningstar

0.00%

R&I

0.24%

S&P

41.44%

Insurance Companies

AM Best

2.06%

DBRS

3.89% Egan Jones

0.88%

Fitch

13.48%Kroll

1.01%

JCR

0.50%

Moody's

30.50% Morningstar

0.00%

R&I

2.86%

S&P

44.82%

Corporate Issuers

AM Best

0.02%

DBRS

3.34% Egan Jones

0.00%

Fitch

21.34%

Kroll

0.00%

JCR

0.00%

Moody's

33.57%

Morningstar

2.75%

R&I

0.00%

S&P

38.98%

Asset-Backed Securities

Credit Ratings Outstanding

AM Best

0.00%

DBRS

0.62% Egan Jones

0.00% Fitch

16.65%

Kroll

0.00%

JCR

0.00%

Moody's

38.49%

Morningstar

0.00%

R&I

0.05%

S&P

44.19%

Government Securities
2011 Section 15E Examinations Summary Report – Page 8 of 22

The table below illustrates the relative size of each NRSRO in terms of staffing: 

Number of Credit Analysts and Credit Analyst 

Supervisors*

Credit 

Analysts

Credit Analyst 

Supervisors Total

A.M. Best 77 43 120

DBRS 75 20 95

Egan-Jones 2 3 5

Fitch 712 337 1,049

JCR 27 30 57

Kroll 9 4 13

Moody's 1,088 116 1,204

Morningstar 17 7 24

R&I 74 4 78

S&P 1,109 236 1,345

 * As reported by each NRSRO on Exhibit 8 of Form NRSRO, for year-end 2010.

E. The Staff’s Examinations

Section 15E(p)(1) requires that the Commission establish an Office of Credit Ratings to 

administer the rules of the Commission adopted under Section 15E, and requires that this office 

conduct the annual Section 15E examinations. Section 15E(p)(2) provides that the office will be 

sufficiently staffed to carry out its duties.

 

To establish this office, the Commission requires the reprogramming approval of both the House 

and Senate Appropriations Subcommittees on Financial Services and General Government. The 

Commission has not received the Congressional approval necessary to establish the office. 

Nevertheless, recognizing the importance of the Section 15E examination requirement, the 

NRSRO examination staff from the Commission’s Office of Compliance Inspections and 

Examinations (“OCIE”) conducted these examinations along with examiners from other OCIE 

program areas and NRSRO specialists from the Commission’s Division of Trading and Markets. 

Because of the limited resources available for these examinations, the Staff focused on covering 

the review areas mandated by Section 15E(p)(3)(B) for this year’s examinations and enhancing 

its expertise in these areas as they relate to each NRSRO’s operations for further risk assessment 

and scoping of future examinations. 

The Staff began its first set of Section 15E examinations in August 2010, shortly after passage of 

the Dodd-Frank Act. The examinations generally focused on NRSRO activities for the period 

covering December 1, 2009 through August 1, 2010 (the “Review Period”).20

 

20 This Review Period allowed the Staff to review each NRSRO’s activities during the several months before 

the examinations began.
2011 Section 15E Examinations Summary Report – Page 9 of 22

III. SUMMARY OF ESSENTIAL FINDINGS

The following summarizes the essential findings of the Staff’s Section 15E examinations. For 

purposes of this Report, “essential findings” includes the Staff’s notable observations and 

concerns arising from the examinations. These “essential findings” are not findings of the 

Commission, and the Staff’s expression of concern about an issue does not necessarily mean that 

the Commission or the Staff has reached a definitive conclusion about that issue.

As of the date of this Report, the Commission has not determined that any finding discussed in 

this Report constitutes a “material regulatory deficiency,” but may do so in the future. If the 

Commission determines that any finding of a Section 15E examination does constitute a 

“material regulatory deficiency,” the Staff will include the relevant NRSRO’s response to such 

deficiency in a future summary report.

Beginning with next year’s summary report, the Staff will include a summary of whether the 

NRSROs have appropriately addressed recommendations contained in previous reports. The 

Staff notes that, in some cases, the NSRSROs have already taken steps to address concerns that 

the Staff raised during the examination process.

For purposes of this Report, the Staff has divided the NRSROs into two groups: the three 

“larger” NRSROs—Fitch, Moody’s and S&P—and the remaining seven “smaller” NRSROs—

A.M. Best, DBRS, EJR, JCR, Kroll, Morningstar, and R&I.

A. General Observations

The Staff makes the following general observations:

1. The NRSROs appear to be trending even more toward employing the 

issuer-pay business model.

Of the ten registered NRSROs, seven—including the three larger NRSROs—operate 

predominantly under the issuer-pay model.21 The remaining three have historically operated 

predominantly under the subscriber-pay model. However, two of the subscriber-pay NRSROs 

have recently taken steps to focus more on issuer-pay business. This new focus on the issuer-pay 

model appears to be occurring with respect to ratings of asset-backed securities. 

 

21 There are two business models used by the NRSROs. Under the issuer-pay model, the NRSRO receives 

compensation from obligors for rating the obligor or securities issued by the obligor. Under the subscriberpay model, subscribers pay the NRSRO for access to the NRSRO’s ratings.
2011 Section 15E Examinations Summary Report – Page 10 of 22

2. The NRSROs have been subject to substantial, relatively new legal and 

regulatory requirements.

As discussed above, the current regulatory structure of NRSROs began with the Rating Agency 

Reform Act in 2006, followed by Commission rulemaking pursuant to the Rating Agency 

Reform Act in 2007 and 2009, and the passage of the Dodd-Frank Act in 2010. Since the end of 

the Review Period, the Commission has adopted one new rule implementing the NRSRO 

provisions of the Dodd-Frank Act and proposed a series of new rules and rule amendments to 

implement the balance of those provisions. In addition, during that time, regulators in other 

jurisdictions, such as the European Union and Japan, have also instituted new legal and 

regulatory requirements that apply to NRSROs with operations in those jurisdictions.

22 The 

NRSROs have been required to implement policies and procedures to keep pace with the 

changing regulatory landscape. In particular, NRSROs with international operations have been 

challenged to implement changes that satisfy each jurisdiction’s requirements.

3. Each of the three larger NRSROs has made changes to improve its

operations since the 2007-08 examinations. 

In July 2008, the Commission made public a staff report summarizing issues identified during 

staff examinations of Fitch, Moody’s, and S&P that occurred during 2007-08 (the “2008 Public 

Report”).

23 These examinations focused on the NRSROs’ rating of subprime residential 

mortgage-backed securities (“RMBS”) and collateralized debt obligations (“CDOs”) and focused 

on activities that occurred before each agency became registered as an NRSRO and subject to the 

NRSRO rules. The 2008 Public Report noted several concerns about the examined NRSROs’ 

operations related to RMBS and CDO ratings, including concerns about the sufficiency of 

resources devoted to ratings and surveillance, adequacy of disclosures, documentation of the 

ratings process, and management of conflicts of interest. Each of the three larger NRSROs 

appears to have devoted notable resources and effort to responding to the concerns and 

recommendations outlined in the 2008 Public Report.

4. Two of the smaller NRSROs have recently changed ownership. 

One of the smaller NRSROs was recently acquired by a much larger company currently involved 

in credit rating services. It appears that this acquisition may result in the new parent company 

devoting additional resources to expand the NRSRO’s business and market share.

Another of the smaller NRSROs was recently acquired by an outside party that appears to have 

already devoted significant resources to expanding the NRSRO’s business and market share. In 

 

22 See Regulation (EC) No. 1060/2009 of the European Parliament and of the Council of 16 September 2009 

on credit rating agencies, as amended (2011 O.J. (L145) 54, at 30); Act for Partial Amendment to the 

Financial Instruments and Exchange Act, enacted on June 17, 2009 and promulgated on June 24, 2009 (Act 

No. 58 of 2009), amending the Financial Instruments and Exchange Act (Act No. 25 of 1948).

23 See Summary Report of Issues Identified in the Commission Staff’s Examinations of Select Credit Rating 

Agencies (July 2008), available at http://www.sec.gov/news/studies/2008/craexamination070808.pdf. 
2011 Section 15E Examinations Summary Report – Page 11 of 22

this case, the new ownership has committed to addressing Staff examination findings relating to 

the prior ownership and management team.

B. Statutory Review Areas

In the following sections, the Staff has organized the summary of its findings in terms of the 

Section 15E(p)(3)(B) mandated review areas. The Staff notes that some of the findings are 

applicable to multiple review areas.

1. Conducting Business in Accordance with Policies, Procedures, and 

Methodologies

Section 15E and Commission rules require that NRSROs maintain and enforce various written 

policies and procedures, including policies and procedures relating to preventing the misuse of 

material, nonpublic information, managing conflicts of interest, and dealing with complaints. In 

particular, Rule 17g-2(a)(6) requires NRSROs to make and retain a record documenting the 

procedures and methodologies used by the NRSRO to determine credit ratings. Those 

procedures and methodologies must be disclosed in Exhibit 2 to Form NRSRO. 

The Staff’s review of whether each NRSRO conducted business in accordance with its policies, 

procedures, and methodologies focused on reviewing the documentation of ratings activity for a 

selected number of issuers to determine whether the NRSRO had followed its procedures in each 

case. In addition, the Staff performed testing of whether each NRSRO was following its 

procedures to protect material nonpublic information. Finally, the Staff’s reviews of the 

remaining seven mandated review areas also involved testing of whether each NRSRO 

conducted business in accordance with its policies, procedures, and methodologies. The Staff’s 

essential findings in those other areas are discussed in later sections of this Report.

The Staff’s essential findings in this area are as follows:

a) One of the larger NRSROs reported that it had failed to follow its

methodology for rating certain asset-backed securities. 

During the Staff’s examinations, one of the larger NRSROs reported that it had erroneously 

applied its ratings methodology to ratings of certain asset-backed securities and placed a 

considerable number of these ratings under review.24

 

24 The NRSRO reported this analysis error as the Staff was conducting its examination. Thus, report of the 

error occurred outside the Review Period, but application of the erroneous analysis did fall within the 

Review Period.

 The Staff’s initial review of the 

circumstances surrounding this error raised several concerns. First, the error resulted in the 

issuance of ratings that were inconsistent with the NRSRO’s methodologies. Second, the Staff is 

concerned about the timeliness with which the error was discovered, disclosed, and remediated. 

Third, the Staff’s inquiry into this issue raised concerns about the sufficiency of resources the 

NRSRO devoted to the surveillance of asset-backed securities ratings and whether the NRSRO is 

following its published criteria for placing asset-backed securities ratings under review. 
2011 Section 15E Examinations Summary Report – Page 12 of 22

Importantly, the Staff is concerned about the extent to which market share and business 

considerations may have contributed to (1) the rating error and to the delay in discovering, 

disclosing, and remediating the error; (2) the delay in placing certain asset-backed securities

ratings under review; and (3) the resources the NRSRO devotes to surveillance of asset-backed 

securities ratings. 

The Staff recommended that the NRSRO conduct a comprehensive internal review of the 

circumstances surrounding this error. In addition, the Staff recommended that the NRSRO 

review the adequacy of the resources the NRSRO devotes to surveillance of its asset-backed 

securities ratings and whether it follows its disclosed procedures for placing ratings under 

review. The Staff plans to further review these issues and the NRSRO’s responses.

b) One of the smaller NRSROs appears to have been slow to disclose 

changes to its rating methodology for certain asset-backed 

securities and how those changes would apply to its ratings, and 

slow to apply those changes to outstanding ratings of affected 

asset-backed securities. 

One of the smaller NRSROs appears to have made changes to its methodology for assigning 

ratings to certain asset-backed securities, but failed for several months to publicly disclose those 

changes and how they applied to its ratings. In addition, this NRSRO appears to have delayed 

applying those changes to potentially affected outstanding ratings, in some cases, for more than a 

year. The Staff’s initial review of the circumstances surrounding this methodology change 

raised several concerns. First, the delay in publicly disclosing the change appears to have 

resulted in the issuance of ratings that were inconsistent with the NRSRO’s disclosed 

methodologies. Second, the Staff is concerned that applying the changed methodology to new 

issue asset-backed securities ratings, without a public disclosure of the change, may have 

resulted in selective disclosure of the methodology change to those market participants involved 

in the new issuance of asset-backed securities. Third, the NRSRO appears to have failed to 

follow its disclosed policies and procedures for surveillance of asset-backed securities ratings. 

Fourth, the delay in applying the changes to the outstanding ratings may have resulted in a 

prolonged period where older ratings were determined in a manner inconsistent with more 

recently issued ratings to which the changed methodology had been applied. Finally, the Staff is 

concerned about the extent to which the lack of resources devoted to the rating and surveillance 

process and market share and business considerations may have contributed to the delays in 

disclosure and application of the methodology change, and the failure to follow the surveillance 

policies and procedures for asset-backed securities. 

The Staff recommended that the NRSRO conduct a comprehensive internal review of the 

circumstances surrounding implementation of the methodology change. In addition, the Staff 

recommended that the NRSRO evaluate its internal controls to ensure that methodology changes 

are promptly disclosed and applied to new and existing ratings in a consistent manner and that it 

follow its disclosed surveillance policies and procedures. Finally, the Staff recommended that 

the NRSRO review the adequacy of the resources the NRSRO devotes to applying changes to 

methodologies to existing asset-backed securities ratings. The Staff plans to further review these 

issues and the NRSRO’s responses.
2011 Section 15E Examinations Summary Report – Page 13 of 22

c) Two of the smaller NRSROs had notable instances of apparent 

failures to follow the policies and procedures for committee 

review of rating actions.

Two of the smaller NRSROs appear to have failed to follow their policies and procedures with 

regard to the frequency with which rating committees reviewed asset-backed securities ratings. 

In the case of one of these NRSROs, the failure to follow the procedure may have resulted from 

the policy being unclear.

The Staff recommended that each NRSRO follow its policies and procedures for committee 

reviews, and, in the case where the policy appeared unclear, that the NRSRO clarify the policy.

d) All of the NRSROs failed to follow their ratings procedures in 

some instances.

The Staff’s ratings file review generally found instances where each of the NRSROs failed to 

follow all its ratings procedures, in addition to other instances more specifically discussed in this 

Report. These instances generally involved failing to follow procedures regarding 

documentation to be maintained with respect to each ratings action. None of these instances 

appears to have been material. In addition, in some cases, the NRSRO’s own internal audit or 

compliance function identified the problem, and the NRSRO took remedial measures on its own.

The Staff made various recommendations to the NRSROs regarding improvements to following 

ratings documentation procedures. The recommendations generally involved enhancing internal 

controls to ensure that ratings procedures are followed, including recommendations for enhanced 

training regarding new procedures. 

2. Management of Conflicts of Interest

Section 15E(h)(1) requires NRSROs to have and enforce written policies and procedures to 

address and manage conflicts of interest. Those policies and procedures must be disclosed in 

Exhibit 7 to Form NRSRO. Rule 17g-5(b) lists certain conflicts of interest that an NRSRO 

cannot have unless the conflict is disclosed and the NRSRO has and enforces policies and 

procedures to address and manage the conflict, and Rule 17g-5(c) lists certain other conflicts of 

interest that are absolutely prohibited. In Exhibit 6 to Form NRSRO, an NRSRO must disclose

material conflicts of interest.

The Staff’s essential findings in this area are as follows:
2011 Section 15E Examinations Summary Report – Page 14 of 22

a) Two of the smaller NRSROs appeared to have troubling 

weaknesses with respect to their employee securities ownership 

policies and procedures. Each of the three larger NRSROs and 

four of the smaller NRSROs appeared to have some weaknesses 

with respect to their employee securities ownership policies and 

procedures.

The Staff identified what appeared to be troubling weaknesses in two of the smaller NRSROs’ 

securities ownership policies and procedures and implementation of those policies and 

procedures. In the case of one of these NRSROs, the securities ownership policies appeared 

poorly documented, and it was difficult to determine whether the NRSRO’s employees had 

complied with the policies. In this case, it appears that employees—one a key employee—

violated the policy by failing to adhere to the requirements of the securities trading pre-approval 

process. It also appears that the same key employee held securities related to a business sector 

for which he participated in criteria development, in violation of the policy.25 In another of the 

smaller NRSROs, the securities ownership policies and procedures also appeared to be poorly 

documented, and implementation of the policies, including monitoring and enforcement, 

appeared haphazard and inconsistent. In fact, the Staff identified one instance where a key 

analyst of this NRSRO may have directly owned a security of a company that was subject to a 

rating action in which the analyst participated.26

In the case of these two NRSROs, the Staff made recommendations that each enhance its 

securities ownership policies and procedures, including enhancements to documentation and 

enforcement.

The Staff also identified what appeared to be some weaknesses in each of the three larger 

NRSROs’ and four of the smaller NRSROs’ employee securities ownership policies and 

procedures. These weaknesses generally involved some instances where the policies may have 

been unclear or not as comprehensive as may be prudent. In addition, the Staff identified 

apparent weaknesses in the implementation of these policies, such as apparent inconsistent 

application of the policies or slow administration of the ownership and trading review process. 

The Staff made recommendations to each NRSRO regarding strengthening its employee 

securities ownership policies and procedures, including implementation and enforcement of 

those policies.

The Staff considers employee securities ownership policies and procedures to be an important 

control in the management of conflicts of interest, and plans to continue focusing on this area in 

future reviews.27

 

25 The key employee who appears to have violated the policies in this case is no longer with that NRSRO.

26 Rule 17g-5(c)(2) prohibits an NRSRO from issuing a credit rating where an analyst participating in the 

rating has a direct ownership interest in the company that is the subject of the rating.

27 The Staff believes that the employee securities ownership policies and procedures also play a critical role in 

preventing the misuse of material non-public information. See Rule 17g-4 (requiring NRSROs to 

implement policies and procedures reasonably designed to prevent the misuse of material nonpublic 

information).
2011 Section 15E Examinations Summary Report – Page 15 of 22

b) Two of the larger NRSROs did not have specific policies and 

procedures for managing the potential conflict of rating issuers

that may be significant shareholders of the NRSRO.

Two of the larger NRSROs issue ratings for companies that may be significant shareholders of 

the NRSRO or the NRSRO’s parent company. The Staff believes that, in cases where the 

issuer’s ownership in the NRSRO is material, this could present a conflict of interest. The Staff 

recommended that these two NRSROs establish specific policies and procedures to disclose and 

manage potential conflicts of interest arising from rating an issuer that is a material shareholder.

c) The three smaller NRSROs that relied primarily on the 

subscriber-pay business model appeared to have some 

weaknesses with respect to their policies and procedures to 

manage the potential conflict of interest associated with being 

paid by subscribers for ratings.

As mentioned above, three of the smaller NRSROs historically have relied on the subscriber-pay 

business model. The Staff believes that this business model presents certain conflicts of interest 

inherent in the fact that subscribers, on whom the NRSRO relies, have an interest in ratings 

actions and could exert pressure on the NRSRO for certain outcomes.28 As such, an NRSRO 

operating under this business model should have policies and procedures to manage this potential 

conflict. The Staff found, however, that the three historically subscriber-based NRSROs 

appeared to have some weaknesses in their written policies and procedures in this regard. The 

Staff recommended that these NRSROs enhance their written policies and procedures to manage 

the conflicts associated with the subscriber-pay business model.

d) Two of the smaller NRSROs appeared to have weak policies and 

procedures to disclose and manage conflicts of interest

associated with certain ancillary businesses.

NRSROs must disclose the conflicts of interest arising from providing ancillary services on 

Exhibit 6 of Form NRSRO.29 Like other conflicts, NRSROs must maintain and enforce written 

policies and procedures to manage any such conflicts. Ancillary services consist of any services 

that an NRSRO may provide which are not core credit rating services.

One smaller NRSRO failed to disclose and implement policies and procedures to manage 

conflicts of interest associated with an ancillary service. Another of the smaller NRSROs

appeared to have weak policies and procedures to manage conflicts of interest associated with an 

ancillary service. The Staff recommended that each NRSRO fully disclose and implement 

policies and procedures to manage the conflicts associated with these ancillary services.

 

28 Rule 17g-5(b)(4) and (5) specifically identify conflicts associated with the subscriber-pay model that an 

NRSRO must disclose and must have and enforce written policies and procedures to manage. 

29 See Rule 17g-5(a)(1); see also Rule 17g-5(b)(3). 
2011 Section 15E Examinations Summary Report – Page 16 of 22

e) One of the smaller NRSROs appeared to have weak barriers 

between its rating analysts and employees of an ancillary service 

that poses a potential conflict of interest. 

At one of the smaller NRSROs, rating analysts shared office space with employees of an 

ancillary business unit that provides investment advice. The Staff considers the potential 

conflicts between the interests of investment advice clients and ratings analytics to be significant. 

In addition, the potential for the inappropriate dissemination of material nonpublic information 

among the analysts and investment advice employees is significantly increased where they share 

office space. The Staff recommended that the NRSRO implement stronger barriers between 

these lines of business, including physical separation of the employees.

f) The Staff identified other areas where the NRSROs’ conflicts of 

interest policies and procedures could be strengthened.

In addition to the issues otherwise specifically discussed in this Report, the Staff generally noted 

some other areas where each of the NRSROs could strengthen its conflicts of interest policies 

and procedures. The Staff made various recommendations to the NRSROs regarding 

improvements. 

3. Implementation of Ethics Policies

Each NRSRO has implemented written ethics policies and procedures, and the Staff reviewed 

those procedures and their implementation as part of these examinations. Much of the content of 

these policies and procedures addresses topics that are the subject of other Section 15E 

examination areas. As such, to the extent that the Staff made notable findings with respect to the 

NRSROs’ ethics policies, those findings are addressed in other sections of this Report.

4. Internal Supervisory Controls

Section 15E(c)(3) requires that each NRSRO establish an effective internal control structure 

governing the policies, procedures, and methodologies for determining credit ratings. The Staff 

reviewed each NRSRO’s internal control structure related to determining credit ratings and the

NRSRO’s overall compliance control structure. The Staff also performed testing of selected 

procedures.

The Staff’s essential findings in this area are as follows:

a) Three of the smaller NRSROs appeared to have weak internal 

supervisory controls. 

Three of the smaller NRSROs appeared to have weak internal supervisory controls. The 

weaknesses identified at one of these NRSROs included the lack of any internal audit function 
2011 Section 15E Examinations Summary Report – Page 17 of 22

and limited compliance personnel relative to the NRSRO’s size and recent growth. The 

weaknesses identified at the second of these NRSROs included weak documentation of policies 

and procedures, including weak documentation of ratings methodologies and processes, and lack 

of an internal audit function. The weaknesses identified at the third of these NRSROs included 

weak documentation of the ratings process, weak internal controls over the ratings process, and 

lack of an internal audit function.

The Staff made recommendations to these NRSROs regarding enhancements to their internal 

supervisory control structures.

b) One of the other smaller NRSROs appeared to have a particularly 

weak internal supervisory control structure.

One of the other smaller NRSROs appeared to have a particularly weak internal supervisory 

control structure. The Staff found significant weaknesses in the NRSRO’s internal policies and 

procedures, including weak and sometimes non-existent documentation of some ratings 

methodologies and processes, very weak oversight by the designated compliance officer, and a 

very weak internal control structure. The bulk of the ratings at this NRSRO appear to be 

assigned by a single person with no effective committee structure or other control structures.

The Staff made several recommendations to this NRSRO regarding enhancements to its internal 

supervisory controls.

c) The Staff identified apparent weaknesses in the procedures for

publishing pending rating actions at one of the larger NRSROs 

and three of the smaller NRSROs.

Rule 17g-4(a)(3) requires an NRSRO to establish and enforce policies and procedures reasonably 

designed to prevent its pending credit rating actions from being selectively disclosed before 

being made public. At one of the larger NRSROs, the procedures for disseminating a pending 

rating action appeared to allow for limited dissemination of a pending rating action in some 

instances prior to public dissemination. At three of the smaller NRSROs, the Staff identified 

instances where there appeared to be an unnecessary delay between assignment of a credit rating 

and publication of the rating action. The Staff is concerned that the apparently unnecessary 

delay in release and publication of some credit rating actions increases the possibility that 

pending credit rating actions will be inappropriately disseminated. The Staff recommended that

each of these NRSROs consider enhancing its policies and procedures for dissemination of 

pending credit rating actions. 

d) The Staff identified other areas where the NRSROs’ internal 

supervisory controls could be strengthened.

In addition to the issues otherwise specifically discussed in this Report, the Staff generally noted 

some other areas where each of the NRSROs could strengthen its internal supervisory controls. 

The Staff made recommendations to the NRSROs regarding improvements.
2011 Section 15E Examinations Summary Report – Page 18 of 22

5. Governance

Section 15E(t), added by the Dodd-Frank Act, requires that NRSROs have a board of directors 

and mandates the structure and responsibilities of the board. 

The Staff reviewed whether each NRSRO has taken steps to meet the requirements under this 

new provision. However, the testing of whether the NRSROs have effectively implemented new 

governing provisions was limited because this provision is new and implementation generally 

fell outside of the Review Period.

The Staff found that each of the NRSROs has made efforts to comply with the new governance 

provisions.30 The Staff noted some instances where the governance structures may not comply 

with all of the requirements of Section 15E(t) or where implementation appears to be weak. The 

Staff made recommendations to the NRSROs regarding these concerns. The Staff should be able 

more comprehensively to test implementation of the new governance provisions in future Section 

15E examinations. 

6. Designated Compliance Officer Activities

Section 15E(j)(1) requires each NRSRO to designate a compliance officer (“DCO”) responsible 

for administering the policies and procedures established to prevent the misuse of material nonpublic information and manage conflicts of interest and ensuring compliance with the securities 

laws. In addition, the DCO is prohibited from engaging in certain activities (Section 15E(j)(2)), 

is responsible for establishing procedures for the receipt, retention, and treatment of complaints 

(Section 15E(j)(3)), must be compensated in a manner not linked to financial performance of the 

NRSRO and that ensures independence (Section 15E(j)(4)), and must submit an annual report to 

the NRSRO on the compliance of the NRSRO with the securities laws and the NRSRO’s policies 

and procedures (Section 15E(j)(5)(A)). The NRSRO must file this report with the Commission 

(Section 15E(j)(5)(B)).

The Staff considers the DCO role to be a critical element helping to ensure an NRSRO’s

compliance with securities laws. The Staff expects the DCO at each NRSRO to have sufficient 

resources, institutional support, and independence to effectively carry out the DCO’s statutory 

obligations.

The Staff reviewed the role and activities of each NRSRO’s DCO. This review included 

interviews with each DCO. 

The Staff’s essential findings in this area are as follows:

 

30 Three of the smaller NRSROs have requested that the Commission grant them exemptive relief from some 

of the provisions of Section 15E(t). 
2011 Section 15E Examinations Summary Report – Page 19 of 22

a) At one of the larger NRSROs, the stability and clarity of the DCO’s 

role can be improved.

At one larger NRSRO, there have been significant changes in the compliance function, including 

changes in structure and leadership roles since 2008. During that time, four different people 

have served as the DCO, and the current DCO is serving on an interim basis.

31 The Staff is 

concerned that the changes, which continue to the present, have created an environment in which 

a clearly defined set of roles and responsibilities for the DCO has not yet been fully established.

In addition, the Staff is concerned that this NRSRO’s DCO function may not have a prominent 

enough role within the NRSRO’s compliance program to effectively accomplish the statutory 

mandate. The Staff found some indication that this NRSRO’s prior DCOs historically may not 

have had full access to senior management or full involvement in all compliance functions. In 

addition, the Staff found some indication that tension between the prior DCOs and other business 

lines of the NRSRO may have hindered an effective working relationship. 

The Staff has expressed concerns that this developing structure of the compliance function at this 

NRSRO may compromise the DCO’s role in the compliance function. The Staff has 

recommended that this NRSRO make establishing stability in the DCO role a key priority and 

ensure that the structure of the compliance function will enable the DCO to effectively and 

independently carry out the DCO’s statutory duties.

b) At four of the smaller NRSROs, the DCO and compliance function 

may not have sufficient resources and support to effectively 

ensure compliance with the securities laws.

At four of the smaller NRSROs, the Staff identified concerns about the sufficiency of resources 

devoted to the DCO and compliance functions. These concerns included concerns about the 

DCO’s time being spread across multiple functions, the DCO having limited staff to support 

carrying out compliance duties, or the DCO potentially not having a prominent enough role 

within the NRSRO’s compliance program to effectively accomplish the DCO’s statutory duties. 

The Staff made recommendations regarding strengthening the role of and resources available to 

both the DCO individually and the compliance function as a whole. 

c) At one of the smaller NRSROs, the DCO does not appear able to 

effectively carry out the necessary DCO duties.

At one of the smaller NRSROs, the Staff is concerned that the DCO is unable to carry out the 

DCO duties. The DCO at this NRSRO has very little relevant experience or training to fill the 

role and demonstrates very little knowledge or understanding of the credit rating business, 

processes, or applicable laws or rules. The Staff identified several troubling compliance 

deficiencies and weaknesses at this NRSRO, and many of these concerns appear related to the 

 

31 This NRSRO represented that it recently identified a new DCO to serve on a permanent basis, and that the 

new DCO will assume the role shortly. 
2011 Section 15E Examinations Summary Report – Page 20 of 22

lack of an effective DCO. The Staff recommended that this NRSRO evaluate the experience, 

knowledge, and skills necessary for its DCO to effectively carry out the DCO duties.

d) The Staff identified some other concerns about the remaining 

two smaller NRSRO’s DCO activities. 

In addition to the issues otherwise specifically discussed in this Report, the Staff generally noted

some other concerns about the remaining two smaller NRSRO’s DCO activities. The Staff made 

recommendations to these NRSROs regarding improvements.

7. Complaints

Section 15E(j)(3), added by the Dodd-Frank Act, states that an NRSRO’s DCO must establish 

procedures for the receipt, retention, and treatment of (i) complaints regarding credit ratings, 

models, methodologies, and compliance with the securities laws and the NRSRO’s policies and 

procedures; and (ii) confidential, anonymous complaints by employees or users of credit ratings. 

Rule 17g-2(b)(8) requires an NRSRO to retain any written complaints received from persons not 

associated with the NRSRO about the performance of a credit analyst in initiating, determining, 

maintaining, monitoring, changing, or withdrawing a credit rating. The Staff reviewed each 

NRSRO’s policies and procedures for complaints and performed some testing of those 

procedures. However, the testing was limited because the statutory requirement for complaints 

is relatively new and implementation of the policies generally fell outside of the Review Period.

The Staff found that all of the NRSROs have established written policies and procedures to 

address this new requirement. The Staff noted some cases where an NRSRO could provide 

greater clarity in its written procedures, particularly as regards what constitutes a complaint. The 

Staff also noted some instances where the written policies and procedures may not cover all of 

the requirements outlined in the statute. The Staff made recommendations to the NRSROs 

regarding the identified weaknesses. The Staff should be able to conduct a more comprehensive 

review and testing of the complaints procedures in next year’s Section 15E examinations. 

8. Post-Employment Policies

Section 15E(h)(4)(A)(i), added by the Dodd-Frank Act, requires an NRSRO to establish, 

maintain, and enforce policies and procedures reasonably designed to ensure that the firm will 

review a former employee’s involvement in the determination of credit ratings for a person or an 

issuer, underwriter, or sponsor of a security or money market instrument if the former employee 

is now employed by such person or entity. The Staff reviewed each NRSRO’s “look-back” 

policies and procedures and performed some testing of those procedures. However, the testing 

was limited because the statutory requirement for look-backs is relatively new and 

implementation of the policies generally fell outside of the Review Period.

The Staff found that all of the NRSROs have established written policies and procedures to 

address this new look-back requirement. The Staff noted some weaknesses in some of the 

NRSROs’ plans and ability to implement the new policies. The Staff also noted some instances 

where the written policies and procedures may not cover all of the requirements outlined in the 
2011 Section 15E Examinations Summary Report – Page 21 of 22

statute or could otherwise be strengthened. The Staff made recommendations to the NRSROs 

regarding the identified weaknesses. The Staff should be able to conduct a more comprehensive 

review and testing of the look-back procedures in next year’s Section 15E examinations. 

C. Other Findings and Observations

The Staff had findings and observations other than those falling under the statutory review areas.

The Staff’s essential findings in those other areas are as follows:

1. The public disclosures made by one of the smaller NRSROs appear to be 

incomplete and misleading in many respects.

Each NRSRO must make various public disclosures about its operations on Form NRSRO. An 

NRSRO must publicly disclose in Exhibit 2 to Form NRSRO a general description of its credit

rating procedures and methodologies. This description must be “sufficiently detailed to provide 

users of credit ratings with an understanding of the processes employed by the NRSRO in 

determining credit ratings” and specific areas must be addressed. The instructions for Exhibit 2 

to Form NRSRO also require the NRSRO to provide a description of “the structure and voting 

process of committees that review or approve credit ratings.”32 Exhibit 8 to Form NRSRO 

requires an NRSRO to provide certain information concerning the NRSRO’s credit analysts, 

including the total number of credit analysts and credit analyst supervisors. 

The disclosures of one of the smaller NRSROs on its Form NRSRO appear to be incomplete and 

misleading in many respects. This NRSRO has failed to disclose certain rating methodologies, 

and its disclosures of other rating methodologies appear weak. In addition, this NRSRO’s public 

descriptions of its committee process appear misleading. Finally, this NRSRO’s disclosures 

about the number of analysts working on credit ratings appear misleading. The Staff made 

recommendations to this NRSRO to reevaluate and improve its disclosures.

2. One of the smaller NRSROs may not characterize certain designations it 

assigns to securities as credit ratings.

One of the smaller NRSROs may not characterize certain designations it assigns to securities as 

credit ratings. The characterization of these designations has important implications; for 

example, if the designations are credit ratings, they are subject to the NRSRO’s policies and 

procedures for assigning credit ratings, including the committee process and documentation, and 

to public disclosure as rating actions. The Staff recommended that the NRSRO conduct a 

comprehensive review of these designations to determine whether they should be considered 

credit ratings.

 

32 Form NRSRO Instructions, Exhibit 2. 
2011 Section 15E Examinations Summary Report – Page 22 of 22

3. The public disclosures of each of the seven smaller NRSROs could be 

improved. 

As mentioned, NRSROs make official public disclosures on Form NRSRO, but also make public 

statements and representations in a number of different ways, including via websites and press 

releases. The Staff believes all NRSRO public statements and representations should be 

accurate, complete, clear, and timely. In addition to disclosure issues otherwise specifically 

discussed in this Report, the Staff identified areas in which the seven smaller NRSROs could 

improve their public statements. These areas generally included Form NRSRO disclosures, such 

as internal procedures and accurate reporting of the number of ratings, additional information 

and analysis posted on websites, differentiation between NRSRO ratings and ratings of nonNRSRO registered affiliates, and clarifying whether translated documents were full translations

of documents originally written in another language. The Staff made several recommendations 

for improvements.

IV. CONCLUSION

The Staff conducted the first of its annual Section 15E examinations of each of the ten credit 

rating agencies registered with the Commission as NRSROs. The Staff had many findings and 

observations and made corresponding recommendations to each NRSRO for improvements.