__________________________________________________________________________

2013 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.

__________________________________

December 2013
TABLE OF CONTENTS

I. REGULATORY AND NRSRO OVERVIEW.................................................................... 2

A. Statutory Framework and Rules....................................................................................... 2

B. Registered NRSROs......................................................................................................... 5

II. OFFICE OF CREDIT RATINGS AND EXAMINATION OVERVIEW....................... 6

A. Examinations under Section 15E(p)(3)............................................................................ 6

B. Examination Overview .................................................................................................... 6

III. SETTLEMENT OF PUBLIC ADMINISTRATIVE PROCEEDING ............................. 7

IV. SUMMARY OF RESPONSES TO RECOMMENDATIONS FROM PREVIOUS 

REPORTS AND NOTED INSTANCES OF REMEDIAL ACTION ...................................... 7

V. SUMMARY OF ESSENTIAL FINDINGS......................................................................... 9

A. Review Area: Adherence to Policies, Procedures, and Methodologies.......................... 9

B. Review Area: Management of Conflicts of Interest ..................................................... 11

C. Review Area: Implementation of Ethics Policies......................................................... 13

D. Review Area: Internal Supervisory Controls................................................................ 14

E. Review Area: Governance ............................................................................................ 19

F. Review Area: DCO Activities ...................................................................................... 20

G. Review Area: Complaints............................................................................................. 21

H. Review Area: Post-Employment................................................................................... 22

VI. CONCLUSION ................................................................................................................... 23
2013 Section 15E Examinations Summary Report Page 2

I. REGULATORY AND NRSRO OVERVIEW

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 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

On September 29, 2006, President George W. Bush signed into law the Credit Rating Agency 

Reform Act of 2006 (the “Rating Agency Act”).

2 Section 4 of the Rating Agency Act added 

Section 15E to the Exchange Act (“Section 15E”), which provided authority for the Commission 

to implement registration, recordkeeping, financial reporting, and oversight rules with respect to

those credit rating agencies that register with the Commission as nationally recognized statistical 

rating organizations (“NRSROs”). The Rating Agency Act also amended Section 17 of the 

Exchange Act to provide the Commission with recordkeeping, reporting, and examination 

authority over registered NRSROs.3

 Significantly, Section 15E(c)(2) expressly prohibits the 

Commission from regulating “the substance of credit ratings or the procedures and 

methodologies by which any [NRSRO] determines credit ratings.”4

In 2007, the Commission implemented the NRSRO registration and oversight program created 

by the Rating Agency Act by adopting Rules 17g-1 through 17g-6 and Form NRSRO.5

 Pursuant 

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

make and retain certain records, furnish certain 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. These rules also prohibit an NRSRO from having certain 

conflicts of interest and engaging in certain unfair, coercive, or abusive practices. The 

Commission amended several of these rules in February 2009 and December 2009 with the goals

of further increasing the transparency of NRSRO rating methodologies; strengthening the 

disclosures of rating performance; prohibiting NRSROs from engaging in certain unfair, 

coercive, or abusive practices; and enhancing NRSRO record keeping.

6

 1 15 U.S.C. § 78o-7(p)(3)(C). Unless otherwise noted, all Section and Rule references in this report are to 

the Exchange Act and rules under the Exchange Act. See 15 U.S.C § 78o-7; 15 U.S.C. § 78q (a) & (b); 17 

CFR 240.17g-1 through 17g-7.

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

3 See Sections 17(a) and 17(b) of the Exchange Act.

4 15 U.S.C. § 78o-7(c)(2). 

5 See Oversight of Credit Rating Agencies Registered as Nationally Recognized Statistical Rating 

Organizations, Exchange Act Release No. 55857 (Jun. 5, 2007), 72 FR 33564 (Jun. 18, 2007).

6 See Amendments to Rules for Nationally Recognized Statistical Rating Organizations, Exchange Act 

Release No. 59342 (Feb. 2, 2009), 74 FR 6456 (Feb. 9, 2009) and Amendments to Rules for Nationally 
2013 Section 15E Examinations Summary Report Page 3

On July 21, 2010, President Barack Obama signed into law 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.7 The Dodd-Frank Act mandated the creation of the 

Office of Credit Ratings (“OCR”), which was established in June 2012 with the appointment of 

its Director, Thomas J. Butler. OCR is responsible for oversight of credit rating agencies 

registered with the Commission as NRSROs.

The Dodd-Frank Act directed the Commission to adopt rules to implement a number of 

provisions related to NRSROs. In January 2011, the Commission adopted new Rule 17g-7.

8

 

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

NRSROs:9

Exchange Act Rules Applicable to NRSROs

Rule 17g-1 Requires a credit rating agency 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-todate 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 certain audited and unaudited annual financial 

reports and reports of the number of credit rating actions with the Commission. 

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

designed to address specific areas in which material, non-public 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.

 Recognized Statistical Rating Organizations, Exchange Act Release No. 61050 (Nov. 23, 2009), 74 FR 

63832 (Dec. 4, 2009). 

7 The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 932, 124 Stat. 

1376, 1872-83 (2010).

8 See Disclosure for Asset-Backed Securities Required by Section 943 of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act, Securities Act of 1933 Release No. 9175; Exchange Act Release 

No. 63741 (Jan. 20, 2011), 76 FR 4515 (Jan. 26, 2011). 

9 The table includes summaries of certain provisions of the rules. For the specific and complete requirements 

of the rules, see 17 CFR 240.17g-1 through 17g-7.
2013 Section 15E Examinations Summary Report Page 4

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.

In addition, the Commission has proposed new rules to implement certain provisions of 

the Dodd-Frank Act concerning the following areas:

• filing annual reports on internal controls;10

• addressing conflicts of interest with respect to sales and marketing concerns;11

• 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;12 

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

credit ratings to track the performance of an NRSRO’s credit ratings;13

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

an NRSRO determines credit ratings;14

• publishing a standard form with each credit rating disclosing, among other things, 

the assumptions underlying the methodology used to determine the credit rating;15

• disclosing information concerning third-party due diligence reports for assetbacked securities;16

• establishing professional standards for training credit rating analysts;17 and

• requiring the consistent application of rating symbols and definitions.18

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

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

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

13 Section 15E(q)(1).

14 Section 15E(r).

15 Section 15E(s)(1).

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

17 Dodd-Frank Act, § 936, 124 Stat. 1884-85.

18 Dodd-Frank Act, § 938(a), 124 Stat. 1376, 1885.
2013 Section 15E Examinations Summary Report Page 5

B. Registered NRSROs

In 2007, following the adoption of its 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”).19 

The ten credit rating agencies registered as NRSROs, as of [the date of this report] and dates of 

their initial registrations are listed below:

NRSRO20 Date of Registration

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

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

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

Fitch Ratings, Inc. (“Fitch”)21 September 24, 2007

HR Ratings de México, S.A. de C.V. (“HR”) November 5, 2012

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

Kroll Bond Rating Agency, Inc. (“KBRA”)22 February 11, 2008

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

Morningstar Credit Ratings, LLC (“Morningstar”)23 June 23, 2008

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

More information on NRSRO registration applications and the state of competition, 

transparency, and conflicts of interest among NRSROs is included in the Annual Report to 

Congress under Section 6 of the Rating Agency Act (December 2013), available on the 

Commission’s website: http://www.sec.gov/about/offices/ocr.shtml. 

 19 See Section 3(a)(62)(A) of the Exchange Act.

20 Orders granting registration can be found at: http://www.sec.gov/about/offices/ocr.shtml. Paragraph (i) of 

Rule 17g-1 requires an NRSRO to make its current Form NRSRO and Exhibits 1 through 9 to Form 

NRSRO publicly available on its website, or through another comparable, readily accessible means within 

10 business days after the date the Commission grants an initial application for registration as an NRSRO 

or registration for an additional class of credit ratings, and within 10 business days after updating its 

registration, furnishing its annual certification, or withdrawing from registration.

21 Effective January 10, 2013, Fitch, Inc. changed its name to Fitch Ratings, Inc. Exhibit 4 to the 2013 Form 

NRSRO for Fitch Ratings, Inc., p. 4. http://www.fitchratings.com/web_content/nrsro/nav/NRSRO_Exhibit4.pdf.

22 Formerly known as LACE Financial Corp.

23 Formerly known as Realpoint LLC.
2013 Section 15E Examinations Summary Report Page 6

II. OFFICE OF CREDIT RATINGS AND EXAMINATION OVERVIEW

A. Examinations under Section 15E(p)(3)

Generally, the purpose of NRSRO examinations is to monitor compliance with federal securities 

laws and rules, identify potential violations of such laws and rules, and encourage remedial 

action. Examinations also serve to inform the Commission and the 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 investigation of these potential violations.

Section 15E(p)(3)(A) requires OCR to conduct an examination of each NRSRO at least annually. 

Section 15E(p)(3)(B) provides that the examination shall include a review of the following eight 

topic areas (“Section 15E Review Areas”): (i) whether the NRSRO conducts business in 

accordance with the policies, procedures, and rating methodologies of the NRSRO; (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 designated compliance officer (“DCO”) of the NRSRO; (vii) 

the processing of complaints by the NRSRO; and (viii) the policies of the NRSRO governing the

post-employment activities of former staff of the NRSRO.

Section 15E(p)(3)(C) requires the Commission to make publicly available an annual report 

summarizing: (i) the essential findings of all Section 15E examinations, as deemed appropriate 

by the Commission; (ii) the NRSROs’ responses to any material regulatory deficiencies 

identified by the Commission; and (iii) whether the NRSROs have appropriately addressed the 

recommendations of the Commission contained in previous annual reports on examinations.24

B. Examination Overview

The subject of the instant report began in October 2012 (the “2013 examinations”). The 2013

examinations generally focused on NRSRO activities for the period covering October 1, 2011

through December 31, 2012 (the “Review Period”).

The 2013 examinations included a review of the Section 15E Review Areas and examined how 

each NRSRO adhered to Section 15E and Rules 17g-1 through 17g-7. For the 2013 

examinations, each NRSRO was subjected to an individualized risk assessment, an enhancement 

from prior examination cycles. The individualized risk assessments took into account a number

of factors, including, the types of ratings and services offered by the NRSRO, findings and 

observations from prior examinations, the impact of an internal control or compliance failure by 

the NRSRO, recent developments affecting NRSROs generally and the rating classes in which 

 24 This report does not cover examinations or reviews that may be conducted outside the scope of Section 

15E. 
2013 Section 15E Examinations Summary Report Page 7

they are registered, and relevant tips, complaints, and referrals received by the Commission. As 

a result of these individualized risk assessments, each 2013 examination included a review of 

each of the Section 15E Review Areas, while also being tailored to the specific risk profile of 

each NRSRO.

For purposes of this report only, we will refer to Fitch, Moody’s, and S&P as larger NRSROs 

and the seven other NRSROs (AMB, DBRS, EJR, JCR, KBRA, HR, and Morningstar) as smaller 

NRSROs. 

III. SETTLEMENT OF PUBLIC ADMINISTRATIVE PROCEEDING

In April 2012, the Commission instituted administrative proceedings against EJR and Sean Egan, 

EJR’s founder, President, owner, and primary analyst.25 In the Order Instituting Proceedings, the 

Commission alleged that EJR and Mr. Egan committed numerous violations of Sections 15E and 

17(a) and the rules thereunder. 

In January of 2013, EJR and Egan consented to an SEC order, without admitting or denying the 

findings therein, finding, among other things, that EJR made willful and material misstatements 

and omissions when registering with the SEC to become an NRSRO for asset-backed securities 

and government securities. Under the settlement, EJR agreed to be barred from rating assetbacked and government securities issuers as an NRSRO, with the right to re-apply for 

registration in these classes after 18 months. Egan was barred from association with any 

NRSRO registered in these two classes for the same period. The settlement further required EJR 

and Egan to complete a comprehensive review of EJR’s policies and to correct the issues 

identified in that review as well as the issues identified in the Order and the 2012 summary 

letter. The settlement also required that EJR submit a report detailing the steps it took to address 

these issues. EJR has submitted the report, which describes several amendments to EJR’s 

policies, procedures, and internal controls for issuing ratings, to correct the issues identified in 

the settlement order and 2012 examination summary letter. The order is available on the 

Commission’s website: http://www.sec.gov/litigation/admin/2013/34-68703.pdf.

IV. SUMMARY OF RESPONSES TO RECOMMENDATIONS FROM PREVIOUS 

REPORTS AND NOTED INSTANCES OF REMEDIAL ACTION

The Staff’s determination that an NRSRO appropriately addressed a recommendation does not 

constitute the Staff’s endorsement of that NRSRO or its policies, procedures, or operations. In a 

future examination, the Staff may continue to review and make additional recommendations 

concerning the NRSRO or its policies, procedures, and operations related to a recommendation 

that was previously deemed by the Staff to be appropriately addressed, or to the general subject 

matter of that recommendation. The Staff’s assessment of whether an NRSRO has appropriately 

 25 In the Matter of Egan-Jones Ratings Company and Sean Egan, Release No. 66854 (April 24, 2012). 
2013 Section 15E Examinations Summary Report Page 8

addressed a recommendation reflects solely the Staff’s view and does not necessarily reflect the 

views of the Commission. 

The Staff’s assessment of whether an NRSRO has appropriately addressed a recommendation 

depends on the specific facts and circumstances of each recommendation including the 

promptness of the NRSRO’s response, the severity of the conduct at issue, and whether the 

remedial action undertaken by the NRSRO is likely to fully resolve the Staff’s concerns. 

Based on the Staff’s 2013 examinations, the Staff has determined that no 2012 recommendations 

have not been appropriately addressed. NRSROs responded to the 2012 recommendations with 

remedial measures such as adopting new or revising existing procedures, enhancing or 

implementing new internal controls, implementing new software systems, and conducting 

compliance and analytical training. Further, NRSROs have added, or have begun to add,

compliance resources, both in the form of experienced compliance personnel and in software 

systems and information technology infrastructure. NRSROs have also improved oversight by 

boards of directors or governing committees to which oversight duties have been assigned under 

Section 15E(t)(4) (hereinafter, a “Board” or “Boards”). 

In particular, the Staff notes five general areas of improvement among NRSROs: 

(i) Enhanced documentation, disclosure, and Board oversight of criteria and methodologies.

The Staff has observed that many NRSROs have developed and publicly disclosed 

ratings criteria and methodologies that better describe ratings inputs and processes. Some 

NRSROs have also increased Board oversight of rating processes and methodologies. 

(ii) Investment in software or computer systems. The Staff found that some NRSROs have 

made investments in software and information technology infrastructure by, for example,

implementing systems for electronic recordkeeping and for monitoring employee 

securities trading. One NRSRO has implemented systems that enable it to operate in a 

nearly paperless environment, so as to minimize the inadvertent dissemination of 

confidential information and to ensure preservation of all records required by Rule 17g-2. 

(iii) Increased prominence of the role of the DCO within NRSROs. The Staff has found that 

the role of the DCO has taken on more prominence within many NRSROs. The Staff has 

noticed that certain DCOs have increased reporting obligations to, and more interaction 

with, the NRSRO’s Board. At these NRSROs, the DCO meets with the Board to discuss 

compliance matters, quarterly or more frequently. 

(iv) Implementation or enhancement of internal controls. The Staff has recognized that all 

NRSROs have added or improved internal controls over the rating process. More 

NRSROs are using audits and other testing to verify compliance with federal securities 

law, and NRSROs have generally improved employee training on compliance matters. 

(v) Adherence to internal policies and procedures. The Staff has noticed a general 

improvement in NRSROs’ adherence to internal rating policies and procedures, which 

improvement appears to be attributable, in part, to improvements in the internal control 

structure at NRSROs. 
2013 Section 15E Examinations Summary Report Page 9

The end result of these improvements has been a noticeable positive shift in the compliance 

culture of NRSROs. Since the Section 15E examinations first began in 2010, NRSROs have 

devoted more resources and attention to compliance with federal securities laws. The 2013 

Examinations revealed continuing improvement in compliance with federal securities laws, as 

NRSROs begin to import compliance personnel and practices from other regulated industries. 

V. SUMMARY OF ESSENTIAL FINDINGS

Section 15E(p)(3)(C)(i) requires this report to contain a summary of the essential findings of the 

annual examinations, as deemed appropriate by the Commission.

For purposes of this report, “essential findings” include the Staff’s most notable observations and 

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

Commission, and the Staff’s inclusion of an issue does not necessarily mean that the Staff has 

reached a definitive conclusion about that issue. Essential findings are organized by the Section 

15E Review Areas.

The Commission has not determined whether 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.

A. Review Area: Adherence to Policies, Procedures, and Methodologies 

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

policies and procedures. 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. 

A general description of these procedures and methodologies must be included in Exhibit 2 to 

Form NRSRO. Section 15E(c)(3)(A) requires NRSROs to establish, maintain, enforce, and 

document an effective internal control structure governing the implementation of and adherence 

to policies, procedures, and methodologies for determining credit ratings. 

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 selecting rating files for review, the Staff employed a risk-based sampling process

taking into account issues such as the significance of the rated asset class to the financial 

markets, the NRSRO’s activity in the rated asset class, and the likelihood of market harm if the 

rating were not produced in accordance with the NRSRO’s procedures and methodologies. The 

Staff’s reviews of the eight mandated review areas also involved testing 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. Instances 

where policies, procedures, and methodologies needed to be established or improved are also 

discussed in later sections of this report.
2013 Section 15E Examinations Summary Report Page 10

The Staff’s essential findings regarding whether each NRSRO has conducted its business in 

accordance with its policies, procedures and methodologies are as follows:

1. At one larger and five smaller NRSROs, the Staff found some instances where rating 

procedures and methodologies were not followed. 

The Staff reviewed, for each NRSRO, the internal controls governing the rating process, 

including policies and procedures. The Staff found that some NRSROs, at times, did not follow 

certain aspects of their rating procedures.

The Staff found that one larger NRSRO did not adhere to its procedures requiring analysts to 

seek managerial approval of certain changes to a draft press release. In this instance, the 

NRSRO incorporated changes suggested by an issuer without obtaining the requisite managerial 

approval. This same NRSRO, when asked by the Staff to produce the rating file related to this 

press release pursuant to Rule 17g-2(f), which requires an NRSRO to promptly furnish the 

Commission with the copies of the records required to be retained under Rule 17g-2, initially 

declined on the grounds that the NRSRO had a practice of asking for consent of certain issuers 

before producing their documents to the Commission and that this particular issuer did not

provide such consent. The NRSRO ultimately furnished the file to the Staff. 

The Staff recommended that the larger NRSRO ensure that it complies with Rule 17g-2.

The Staff also found that four smaller NRSROs did not consistently conduct surveillance within 

the timeframes set forth in their procedures, and one smaller NRSRO did not follow its 

procedures for disclosing whether an issuer participated in an unsolicited rating.

The Staff recommended that each of the smaller NRSROs conduct surveillance reviews within

the timeframe required by their procedures or improve public disclosures on Form NRSRO.

2. One larger NRSRO did not follow its rating criteria development policies and procedures

in some instances. 

Procedures for which a record must be made pursuant to Rule 17g-2(a)(6) include procedures 

related to the development of substantive ratings criteria and methodologies. The Staff reviewed 

NRSROs’ criteria development policies and procedures and tested those procedures to ensure 

that rating criteria and methodologies were being developed in a manner consistent with their 

procedures. This review revealed weaknesses with regard to adhering to established procedures 

regarding development of criteria.

The Staff found that one larger NRSRO did not consistently follow certain policies and 

procedures when it revised significant structured finance criteria. Some of the required 

documentation was not maintained in a manner specified in the procedures, and some meetings 

of the criteria committee were not held with the frequency required by the procedures.

The Staff recommended that the NRSRO enhance its internal controls to ensure compliance with 

its criteria development policies and procedures. 
2013 Section 15E Examinations Summary Report Page 11

3. All of the larger NRSROs and six of the smaller NRSROs had certain weaknesses in 

following their procedures for maintaining records related to rating actions.

The Staff requested rating files from each NRSRO to evaluate compliance with its recordkeeping 

procedures and with Rule 17g-2. The Staff observed weaknesses in NRSROs’ record retention 

and recordation of rating actions and committee procedures. 

The Staff’s review revealed instances at all larger NRSROs where documents required by Rule 

17g-2 or by the NRSRO’s recordkeeping procedures to be kept were not being consistently 

retained. Though mostly clerical in nature, the recordkeeping issues identified included 

inconsistent recording of voting and non-voting attendees of rating committees, inconsistent 

retention of communications that relate to the issuance of a credit rating letter, and one instance 

where a voting record was not retained in the rating file.

At six of the smaller NRSROs, the Staff observed similar instances of not adhering to 

recordkeeping procedures. For example, the Staff observed an instance where a smaller NRSRO 

rated certain bonds, yet a review of the relevant rating records revealed that there had been no 

mention of two tranches of these bonds in the rating committee records. Among the other 

recordkeeping issues identified with the smaller NRSROs were not maintaining complete records 

of rating committee files, not maintaining vote counts or participants in the rating committees, 

and not retaining records of all communications that related to the determination of credit 

ratings. 

The Staff recommended that these NRSROs retain all records required by Rule 17g-2 and their 

record retention policies and procedures. Further, the Staff recommended that the smaller 

NRSROs enhance oversight of the rating process and document retention.

B. Review Area: Management of Conflicts of Interest 

Section 15E(h)(1) requires an NRSRO to establish, maintain, and enforce written policies and 

procedures reasonably designed to address and manage conflicts of interest. The types of 

conflicts of interest relating to the issuance of credit ratings and material to the NRSRO must be 

disclosed in Exhibit 6 to Form NRSRO, and the written policies and procedures to address and 

manage these conflicts must be disclosed in Exhibit 7 to Form NRSRO. Rule 17g-5(b) lists 

certain conflicts of interest that are prohibited for an NRSRO unless, under Rule 17g-5(a), the 

type of conflict is disclosed in Exhibit 6 to Form NRSRO and the NRSRO establishes, maintains,

and enforces written policies and procedures to address and manage the conflict, and Rule 17g5(c) lists certain other conflicts of interest that are strictly prohibited. 

The Staff’s essential findings regarding the management of conflicts of interest are as follows:

1. Four smaller NRSROs did not have sufficient procedures and controls for separating 

business and analytical functions or for preventing rating analysts from being involved in fee 

discussions and from having access to rating fee information.

Rule 17g-5(c)(6) prohibits an NRSRO from issuing a rating where the fee paid for the rating was

“negotiated, discussed, or arranged” by a person within the NRSRO who had “responsibility for 
2013 Section 15E Examinations Summary Report Page 12

participating in determining credit ratings....” To ensure compliance with this Rule, many 

NRSROs establish controls to separate business development and analytical functions.

The Staff found that at one smaller NRSRO, the separation of business and analytical functions 

needed improvement. A review of rating files and related communications revealed that rating 

analysts, at the instance of management, had a significant role in the business development and 

marketing efforts of the NRSRO. Moreover, it was discovered that at this NRSRO, two analysts

had preliminary fee discussions with underwriters. It was also found that an analyst at this 

NRSRO discussed rating expenses with an underwriter in contravention of the NRSRO’s 

procedures.

Similarly, at another smaller NRSRO, the Staff noted instances where third parties inadvertently 

emailed rating analysts fee information regarding ratings to which the analysts were assigned. 

The NRSRO identified the conduct at issue and took corrective action, including initiating 

development of new communication protocols to prevent further inadvertent fee disclosures to 

analysts.

The Staff also found weaknesses in the separation of business and analytical functions at two 

other smaller NRSROs.

The Staff recommended a number of corrective actions, including revising procedures, 

modifying the office floor plan, improving controls, and hiring additional staff.

2. One larger NRSRO did not disclose the largest users of its credit rating services in 

accordance with the instructions for Exhibit 10 of Form NRSRO.

Rule 17g-5(c)(1) prohibits an NRSRO from issuing or maintaining a credit rating for an entity 

that contributed 10% or more of an NRSRO’s net revenue in the most recently ended fiscal year. 

The Staff monitors compliance with this provision, in part, by reviewing the NRSRO’s annual 

financial report under Rule 17g-3, which, under Rule 17g-3(a)(5), must include the 20 largest 

issuers and subscribers that used credit rating services provided by the NRSRO and any obligor 

or underwriter if the net revenue attributable to the obligor or underwriter equaled or exceeded 

the net revenue attributable to the 20th largest issuer or subscriber. The net revenue amount must 

be included for each person on the list.

The Staff found that one of the larger NRSROs did not provide fully accurate disclosure under 

Rule 17g-3(a)(5). The NRSRO attributed this disclosure issue to a shortcoming in its accounting 

system. While the Staff does not have reason to believe that any issuer or subscriber accounts 

for more than 10% of the net revenue of this NRSRO, the Staff has reiterated its 

recommendation that prompt action be taken to ensure that the NRSRO provides the requisite 

disclosures.

3. One larger NRSRO and five smaller NRSROs had weaknesses in procedures and controls 

governing certain prohibited acts and conflicts of interest, including employee securities 

ownership.
2013 Section 15E Examinations Summary Report Page 13

One conflict of interest that an NRSRO may not have is set forth in Rule 17g-5(c)(2), which

prohibits an NRSRO from issuing or maintaining a rating with respect to a person where the

NRSRO, a credit analyst that participated in determining a rating, or a person responsible for 

approving a rating, directly owns securities of, or has any other direct ownership in, the person 

that is subject to the credit rating. 

NRSROs are also prohibited from engaging in certain unfair, coercive, or abusive practices set 

forth in Rule 17g-6. The Staff reviewed and tested NRSROs’ procedures and controls governing 

conflicts of interest and prohibited practices and found certain weaknesses.

The Staff found that one larger NRSRO and five smaller NRSROs needed to improve 

management of the conflict of interest associated with employee securities ownership. At the 

larger NRSRO, the Staff found that there were no formal written procedures requiring preclearance of certain securities trading. At this NRSRO, the Staff also found that three analysts 

were not in compliance with the NRSRO’s securities trading policy and that two employees 

submitted inaccurate certifications of securities holdings. One of these smaller NRSROs had no 

pre-clearance process for securities ownership, no periodic securities disclosure requirement, and 

had insufficient procedures and controls for preventing employees and their family members 

from owning interests in issuers or obligors subject to a rating. Another smaller NRSRO 

exempts independent directors from its securities ownership policies. At a third smaller 

NRSRO, new employees were not required to report securities holdings when they begin 

employment, and at a fourth smaller NRSRO employees are required to submit brokerage 

statements to compliance each quarter only if they have traded during that quarter. Another 

smaller NRSRO was found to have a weakness in its controls for adding securities to the list of 

securities employees are prohibited from owning. 

The Staff also found that three smaller NRSROs did not have procedures to manage other 

conflicts of interest of the NRSRO and its employees and that two smaller NRSROs did not 

disclose certain conflicts of interest on their Forms NRSRO. The Staff further found that a 

smaller NRSRO’s procedures did not address all prohibited acts and practices set forth in Rule 

17g-6. 

The Staff has recommended corrective action for these NRSROs, including recommendations to 

strengthen policies, procedures, and controls for monitoring employee securities trading and 

ownership; to enhance disclosure of conflicts on Form NRSRO; and to review the NRSRO’s 

conflicts of interest to determine whether any additional conflicts of interest should be disclosed 

on Form NRSRO.

C. Review Area: Implementation of Ethics Policies

Section 15E(a)(1)(B)(v) requires that an application for registration as an NRSRO include 

information regarding whether or not the NRSRO has in effect a code of ethics, and if not, the 

reasons it does not. An NRSRO must provide a copy of the written code of ethics it has in effect 

or a statement of the reasons it does not have such a code in Exhibit 5 to Form NRSRO. Each 

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

policies and procedures and their implementation as part of the 2013 examinations. Much of the 

content of these policies and procedures addresses other related mandatory review areas under 
2013 Section 15E Examinations Summary Report Page 14

Section 15E(p)(3)(B). As such, to the extent that the Staff made essential findings related to 

ethics policies, those findings are addressed in other sections of this report.

With regard to ethics policies, the Staff identified an essential finding at one smaller NRSRO. At 

this NRSRO, Board members are required to certify the Code of Conduct every six months, but a 

Staff review determined that the certifications had not been made as required.

The Staff recommended that the NRSRO ensure that Board members certify the Code of 

Conduct.

D. Review Area: Internal Supervisory Controls

Section 15E(c)(3)(A) requires that each NRSRO 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. The Staff reviewed each 

NRSRO’s overall control structure, including the internal control structure related to determining 

credit ratings. Rule 17g-2(a)(6) further provides that NRSROs must make and retain a record 

documenting the procedures and methodologies used to determine credit ratings. 

Section 15E(g)(1) requires an NRSRO to establish, maintain, and enforce written policies and 

procedures reasonably designed to prevent the misuse of material, non-public information by the 

NRSRO or any person associated with the NRSRO. Rule 17g-4(a)(3) provides that these written 

policies and procedures must include policies and procedures reasonably designed to prevent the 

inappropriate dissemination of pending credit rating actions within and outside the NRSRO

before issuing the rating on the Internet or through another readily accessible means. 

The Staff’s essential findings regarding internal supervisory controls are as follows:

1. The Staff identified weaknesses in some of the procedures and supervisory controls 

governing the rating process at two larger NRSROs.

The Staff found that a larger NRSRO did not maintain written procedures for certain key aspects 

of the rating process as required by Rule 17g-2(a)(6). The NRSRO did not maintain written

procedures governing ratings placed under review and did not have adequate controls for timely 

updating certain ratings after an initial surveillance review. With regard to ratings placed under 

review, the NRSRO informally tracked ratings, but the Staff found that the NRSRO did not have 

documented policies and procedures governing timely review of these ratings. Consequently, in 

one instance, a rating was under review for approximately ten months and market participants

did not receive guidance as to the timing of an expected resolution. Similarly, this larger 

NRSRO lacked procedures governing timely updating of ratings following an initial surveillance 

review. The Staff found that in one instance, this larger NRSRO identified a rating as requiring 

revision, but no rating action was taken for three months. When this rating was ultimately 

revised, a rating committee downgraded the rating five notches, from investment grade to below 

investment grade. The Staff also found that at this NRSRO, numerous dependent transactions

were not immediately downgraded upon the downgrade of the entity providing credit support. 

This NRSRO did not have documented procedures as to the timing of rating changes for 

dependent ratings. 
2013 Section 15E Examinations Summary Report Page 15

At another larger NRSRO, the Staff noted that incorrect ratings for eight bond offerings by a 

major financial institution were posted on the NRSRO’s website until the error was detected by 

an investor. According to the NRSRO, the bonds were entered into their system under an 

incorrect payment priority level and resulted in the ratings being incorrectly published as one 

notch higher than the NRSRO’s methodology would have dictated.

The Staff recommended that these NRSROs improve controls to ensure that the rating process is 

conducted consistent with NRSRO procedures and federal securities law.

2. The Staff identified weaknesses in criteria development and disclosure at two larger and 

four smaller NRSROs.

At one smaller NRSRO, a senior executive was found to have tried to influence the analytical 

staff to violate policies for ratings and criteria development. The Staff did not uncover evidence 

that the senior executive was successful in the attempts to influence the criteria, although certain 

public communications were influenced. In particular, this executive caused the NRSRO to 

announce that certain ratings services were being provided when in fact they were not. The Staff 

notes that this NRSRO took corrective action, and the senior executive’s employment at the 

NRSRO has ended.

At another smaller NRSRO, the Staff found that there was no prohibition on allowing business 

interests to influence criteria development. The Staff determined that without policies limiting 

the influence of commercial interests on criteria development, the registrant may not be 

adequately managing the issuer-pay conflict. 

The Staff also identified some instances where the public disclosures of established criteria at 

two larger NRSROs could have been more fulsome. At one larger NRSRO, a rating was 

assigned to an international development bank without reference to a published methodology. 

This NRSRO’s policies require that credit ratings are assigned with reference to published 

methodologies unless the issuer is sufficiently unique that no outstanding methodology would 

apply. The Staff learned, however, that this NRSRO routinely rates a number of similar entities 

and, therefore, this type of entity could not be deemed to be new or unique. The Staff also noted

inconsistencies between this NRSRO’s internal documentation and its published commentary 

regarding how methodologies were used for this rating. Similarly, the Staff noted that another 

larger NRSRO issued ratings of a certain type of asset-backed security for which it had no 

specific, publicly-disclosed criteria. When rating these securities, this larger NRSRO applied 

criteria for similar asset-backed securities but nearly none of the press releases of these assetbacked security ratings made reference to the criteria being used. 

Two smaller NRSROs also had weaknesses in public disclosures of established criteria. The 

Staff found that for two of the smaller NRSROs, the general description of rating methodology 

found in their Forms NRSRO was not sufficiently detailed to provide users of credit ratings with 

an understanding of the rating process. At one of these NRSROs, it was also determined that 

there was no internal rating methodology to provide analysts with adequate instructions on how 
2013 Section 15E Examinations Summary Report Page 16

to rate a security. Furthermore, the Staff found that at this NRSRO, changes to the rating model 

were not consistently documented. 

The Staff found other instances where NRSROs could have improved criteria disclosures,

criteria development procedures and adherence thereto, model development, and documentation.

The Staff made a number of recommendations to these NRSROs, including a recommendation to 

improve public disclosures about the rating process and to improve supervisory controls 

governing the development and use of rating methodology and criteria.

3. One larger NRSRO and four smaller NRSROs had weaknesses in certain rating 

procedures or in certain public disclosures of those policies and procedures.

NRSROs are required to maintain records documenting internal procedures they use to determine 

credit ratings, pursuant to Rule 17g-2(a)(6), and are also required to publicly disclose a general 

description of the ratings process, pursuant to the instructions to Exhibit 2 of Form NRSRO.26

The Staff made observations with respect to the internal rating policies and procedures of one 

larger NRSRO and three smaller NRSROs and with the public disclosure of the ratings process 

for four smaller NRSROs. 

The Staff found that certain aspects of the rating procedures for one larger NRSRO and three

smaller NRSROs needed to be strengthened. A larger NRSRO lacked policies and procedures 

for the committees it uses to pre-screen certain structured finance transactions. One smaller 

NRSRO’s internal policies and procedures governing the rating process and the monitoring of 

ratings and model use were not sufficiently detailed. A second smaller NRSRO did not

document the guidelines for composing an industry group for rating purposes, and the policies 

and procedures of this smaller NRSRO did not include a requirement to document the point at 

which rating decisions are considered to be finalized for dissemination. A third smaller NRSRO 

was found to have insufficient policies and procedures regarding certain ratings definitions, 

processes, and procedures. 

The Staff also found weaknesses in public disclosures of the rating process at another smaller 

NRSRO, and at three smaller NRSROs, the Staff found there was a lack of sufficient detail as to 

certain aspects of the procedures governing the rating process or as to certain terms to describe 

rating actions.

Among the additional weaknesses observed at one larger and two smaller NRSROs were the 

need for better documentation of changes to rating processes, the need for better communication 

of those changes to employees, and the need for a review of the effectiveness of the rating 

committee process. 

 26 Rule 17g-2(a)(6) provides that an NRSRO must document the “established procedures and methodologies 

used by the [NRSRO] to determine credit ratings.” The instructions to Exhibit 2 of Form NRSRO provide 

that an NRSRO must publicly disclose a general description of its 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.” 
2013 Section 15E Examinations Summary Report Page 17

 

The Staff made a number of recommendations to these NRSROs, including recommendations to 

improve public disclosures about the rating process and to improve controls governing the 

development of rating methodology and criteria.

4. One larger and one smaller NRSRO did not have adequate disclosures distinguishing

NRSRO from non-NRSRO ratings.

The Staff found that a larger NRSRO routinely displayed NRSRO ratings and non-NRSRO 

ratings side-by-side on its website and did not provide sufficient disclosure that certain ratings 

were non-NRSRO ratings.

The Staff also observed that a smaller NRSRO issued non-NRSRO ratings in an asset class for 

which it was not registered to issue NRSRO ratings. Certain advertising materials for this 

NRSRO, however, did not disclose that it is not registered to issue NRSRO ratings for this asset 

class. 

The Staff recommended that these NRSROs improve disclosures to better distinguish NRSRO 

ratings from non-NRSRO ratings.

5. The Staff observed weaknesses in one larger and four smaller NRSROs’ internal controls 

over the handling of material non-public information, including pending rating actions.

Rule 17g-4 provides that NRSROs must establish, maintain, and enforce policies and procedures 

to prevent the misuse of material non-public information. This rule further provides that these 

procedures must be reasonably designed to prevent inappropriate dissemination of material nonpublic information, including pending rating actions, both within and outside the NRSRO and to 

prevent a person within the NRSRO from trading on material non-public information. The Staff 

observed weaknesses in these procedures and controls at one larger and four smaller NRSROs.

At a larger NRSRO, the Staff observed weaknesses in the information technology systems 

designed for the dissemination of ratings, causing instances of ratings being released to 

subscribers before the public. The Staff also found that procedures and controls at this NRSRO 

did not prevent analysts from accessing material non-public information on issuers whose 

securities analysts were permitted to trade.

At one smaller NRSRO, the Staff found a need for better documentation of its practices and 

improvement of its policies and procedures for communicating ratings to issuers and for the

release of ratings. The Staff further found that at this same NRSRO, many practices concerning 

publication of ratings were not accurately codified in procedures; for example, the procedures 

did not accurately describe the NRSRO’s process for posting ratings to its website and 

distributing ratings to media organizations.

The Staff found that a second smaller NRSRO maintained policies and procedures for handling 

confidential information that were not reasonably designed to limit independent directors’ access 
2013 Section 15E Examinations Summary Report Page 18

to material non-public information and that procedures prohibiting the use of personal email for 

the transmission of material non-public information were not consistently followed. 

The Staff recommended that these NRSROs improve their procedures and controls for handling 

confidential information.

6. The Staff found that certain improvements were needed in the internal audit or testing 

programs at one larger and five smaller NRSROs.

Section 15E(c)(3)(A) provides that each NRSRO must “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....” The Staff noted

that many NRSROs relied on a testing or internal audit program as an internal supervisory 

control. 

At two smaller and one larger NRSRO, the Staff found weaknesses with respect to the testing 

program for rating criteria and models. The audit department and compliance department were 

not adequately monitoring the larger NRSRO’s criteria function to ensure its independence from 

business and market share considerations. The Staff also noted weaknesses with this larger 

NRSRO’s model quality review process, including lack of communication between criteria and 

model quality review functions and inadequate follow-up on model quality review 

recommendations. Similarly, at two smaller NRSROs, the Staff found insufficient procedures for 

rating model validation and testing.

The Staff identified a number of weaknesses in the compliance testing or internal audit regimes

at four smaller NRSROs. At one smaller NRSRO, there was a lack of coordination between the 

compliance function and the internal audit function such that the compliance department was not 

always provided with copies of internal audit reports with direct impact on the compliance 

program. At this same NRSRO it was found that there was insufficient testing of employee

access to confidential information available on the NRSRO’s network. At three other smaller 

NRSROs, the Staff found that processes for internal compliance reviews should be better 

documented, including the development of a plan and a review schedule.

The Staff recommended that these NRSROs improve and better document their testing and audit 

programs.

7. Four smaller NRSROs require improvements to their programs for training employees on

compliance policies and procedures.

Section 15E(c)(3)(A) provides that each NRSRO must “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....” The Staff noted 

that many NRSROs relied on a compliance or analytical training program as an internal 

supervisory control. 
2013 Section 15E Examinations Summary Report Page 19

The Staff found that four smaller NRSROs had training programs that needed improvement. 

Among the issues observed by the Staff were a lack of mandatory compliance training, little 

analytical staff training, no formal employee training on securities trading policies, and low 

effectiveness of past training sessions. 

The Staff made a number of recommendations, including recommendations to host regular 

mandatory compliance or analytical training.

E. Review Area: Governance

The Staff’s 2013 examinations involved an analysis of the NRSROs’ compliance with Section 

15E(t), with particular focus on the oversight function performed by NRSRO Boards.

The Staff’s essential findings relating to the NRSROs’ compliance with the governance 

provisions of Section 15E(t) are as follows: 

1. Documentation of Board meetings at three smaller NRSROs does not sufficiently 

evidence that the Board is discharging its obligations under Section 15E(t).

Section 15E(t)(3) provides that in addition to the overall responsibilities of the Board, the Board 

must oversee: the establishment, maintenance, and enforcement of policies and procedures for 

determining credit ratings and to address, manage, and disclose any conflicts of interest; the 

effectiveness of internal controls for determining ratings; and compensation and promotion 

policies and practices. As part of the assessment of compliance with this Section, the Staff 

reviewed the minutes of meetings of the Board of each NRSRO and interviewed members of the 

Board. 

Based on this review, the Staff concluded that at three of the smaller NRSROs, Board execution 

of its Section 15E(t)(3) duties was not sufficiently evidenced.

The Staff advised each of these NRSROs to improve documentation of Board meetings to 

evidence sufficient Board oversight.

2. The Staff found that Board composition or oversight was in need of improvement at one 

larger NRSRO and four smaller NRSROs.

The Staff interviewed members of the Boards of each NRSRO and reviewed the charter or 

governing documents for each Board. The Staff found that many Boards did not meet certain 

requirements with respect to composition or needed improvement in the execution of their 

Section 15E(t) duties.

At one larger NRSRO, Board meetings may need additional safeguards to ensure Board 

independence. Consistent with Section 15E(t)(2)(A), at least half of this larger NRSRO’s Board

was composed of independent directors, and a portion of the independent directors must include 

users of ratings from the NRSRO. However, this NRSRO allowed the attendance of nonindependent, non-voting shareholder representatives at Board meetings. The Staff found issues 
2013 Section 15E Examinations Summary Report Page 20

with Board composition at a smaller NRSRO, where the Board did not record having a “user” of 

credit ratings as required by Section 15E(t)(2)(A).

The Staff made further findings with respect to the conduct of Board meetings, noting that the 

Boards of three smaller NRSROs demonstrated insufficient engagement in executing their 

Section 15E(t) duties. These findings included a lack of preparedness to discharge duties at 

Board meetings and a lack of command of the details of key compliance issues facing the 

NRSRO. Additionally, the Staff noted that the Board of another smaller NRSRO was not 

required by its governing charter to oversee compensation and promotion practices as required 

by Section 15E(t)(3)(D).

The Staff made a variety of recommendations to these NRSROs, including recommendations to 

amend Board governing documents and to ensure that the structure of their Boards are consistent 

with Section 15E(t).

F. Review Area: DCO Activities

Section 15E(j)(1) requires each NRSRO to designate an individual responsible for administering 

the policies and procedures established to prevent the misuse of material non-public information 

and address and manage conflicts of interest and for ensuring compliance with the securities 

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

including performing credit ratings or participating in the development of ratings methodologies 

or models, performing marketing or sales functions, or participate in establishing compensation 

levels, other than for individuals working for the DCO. Under Section 15E(j)(3), the DCO is

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

Section 15E(j)(4) requires that the DCO be compensated in a manner not linked to the financial 

performance of the NRSRO and must be arranged to ensure the DCO’s independence. Under 

Section 15E(j)(5), the DCO 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, and the NRSRO 

must file the report with the Commission.

The Staff considers the DCO role to be a critical element in 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 regarding DCOs are as follows:

1. The Staff found that at one larger NRSRO and two smaller NRSROs, the duties of the 

compliance staff could be more clearly defined and the role of compliance within the 

organization could be strengthened. 

The Staff found that at one larger NRSRO, compliance in regional offices needs to be 

strengthened with additional compliance personnel in certain regions and additional resources to 

ensure visibility, credibility, and effectiveness of the compliance function globally. 
2013 Section 15E Examinations Summary Report Page 21

At a smaller NRSRO, the Staff observed that a complaint regarding analytical integrity and 

model development was not timely handled due to a lack of communication between the 

compliance staff of the NRSRO and the NRSRO’s parent company. Also at this NRSRO, the 

DCO does not have the ability to conduct email searches relating to complaints or otherwise

without involvement of the DCO’s supervisor. At a second smaller NRSRO, the procedures 

governing the role of the DCO did not reflect the duties under Section 15E(j).

The Staff recommended a number of remedial measures including revising procedures and 

adding compliance resources.

G. Review Area: Complaints

Section 15E(j)(3) 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 developed under 

Section 15E; 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. Rule 17g-2(c) 

requires that such communications be retained for a period of three years after the date the record 

is made or received. Rule 17g-2(d) concerns the manner of retention and Rule 17g-2(e) governs 

the use of third party custodians for retention. The Staff reviewed each NRSRO’s policies and 

procedures for complaints and tested the policies and procedures. 

The Staff found that all the NRSROs have written policies and procedures generally to address 

these requirements, but some specific requirements were not covered. The Staff made 

recommendations to the NRSROs regarding the identified weaknesses. 

The Staff’s essential findings regarding complaints are as follows:

1. One larger and three smaller NRSROs were found to have weaknesses in either their

complaints procedures or in the handling of complaints.

The Staff found that the procedures of one larger and one smaller NRSRO did not fully address 

the handling of complaints as required by Section 15E(j)(3). The larger NRSRO was determined 

to have insufficient written policies and procedures for handling both complaints by employees 

and confidential and anonymous complaints. This larger NRSRO also did not adhere to its 

procedures in the handling of third-party complaints. The Staff found that a smaller NRSRO had 

procedures that were confusing, difficult to apply, and that compliance personnel conceded were 

in need of improvement.

At two smaller NRSROs, the Staff noted weaknesses in the policies and procedures governing 

complaints. For instance, the procedures did not address all categories of complaints enumerated 

in Section 15E(j)(3) and in particular did not address complaints by employees or users of credit 

ratings. Another smaller NRSRO did not have an established process for the submission of 
2013 Section 15E Examinations Summary Report Page 22

complaints, anonymous or otherwise, and the complaint log did not contain adequate information 

regarding the nature of the complaints. In addition, this NRSRO lacked procedures governing 

the investigation and resolution of complaints.

The Staff reviewed a sample of complaint files from each NRSRO and found that one larger and 

one smaller NRSRO did not consistently follow their procedures for handling complaints.

The Staff recommended that these NRSROs improve procedures and controls governing 

complaints.

H. Review Area: Post-Employment 

Section 15E(h)(4)(A) 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 to determine whether any conflicts of interest of the employee influenced 

the rating. The Staff reviewed each NRSRO’s “look-back” policies and procedures and tested 

those procedures.

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

address the look-back requirement. 

The Staff’s essential findings regarding NRSRO look-back policies and procedures are as 

follows:

1. Two larger and six smaller NRSROs did not consistently conduct adequate look-back 

searches or did not have adequate procedures governing the searches.

At one larger and one smaller NRSRO, look-back reviews were not being conducted in a manner 

reasonably designed to determine the employer of departed employees. The larger NRSROs’

practice of ascertaining the current employment of former employees was determined to consist

only of rating committee chairs asking the committee if analysts are aware of any former 

employees of the NRSRO being employed by the issuer. The Staff also found that a smaller 

NRSRO did not have a record of the senior officers and supervisors who worked on particular 

ratings, thus, look-back reviews conducted for these employees would not show which ratings 

they had worked on. At this smaller NRSRO, it was also noted that there were no specific 

requirements for documenting look-back reviews and no person who was made responsible for 

reporting departed employees to the Commission. 

The Staff also found that one larger and five smaller NRSROs required improvement in their 

look-back procedures. Two smaller NRSROs required only minimal information gathering 

measures and do not require the NRSRO to take any action to independently verify the current or 

former employer of the employee. The look-back procedures of another NRSRO did not include 

some of the actions routinely taken by the DCO to research the employment of former analysts. 

The procedures for a smaller NRSRO did not specify the timeframe within which look-back 
2013 Section 15E Examinations Summary Report Page 23

reviews must be conducted. The look-back procedures of another smaller NRSRO lacked 

sufficient detail about the look-back review process.

At a larger NRSRO, look-back procedures (i) did not address employees who voluntarily 

terminate employment and who do not notify the NRSRO of their next employer or do not have 

a new employer upon leaving and (ii) were not followed in certain instances. 

The Staff made recommendations to the NRSROs regarding these weaknesses.

VI. CONCLUSION

The Staff has identified findings and recommendations for the NRSROs. The Staff 

acknowledges that NRSROs have implemented compliance improvements and have taken steps 

toward improving compliance since Section 15E exams began in 2010. For future examinations, 

the Staff will continue to refine its risk assessment to ensure a balance between verifying 

compliance with key laws and regulations and identifying and examining emerging risk areas.