________________________________________________________________________________________________________________________________________________________________________________________________________________________

Annual Report on Nationally 

Recognized Statistical Rating 

Organizations

________________________________________________________________________________________________________________________________________________________________________________________________________________________

As Required by Section 6 of the 

Credit Rating Agency Reform

Act of 2006

U.S. Securities and Exchange Commission ______________________________________________________________________________________________________

March 2012
1 

ANNUAL REPORT ON NATIONALLY RECOGNIZED

STATISTICAL RATING ORGANIZATIONS

As Required by Section 6 of the Credit Rating Agency

Reform Act of 2006 

I. INTRODUCTION

 The U.S. Securities and Exchange Commission (“Commission”) is providing this 

report under Section 6 of the Credit Rating Agency Reform Act of 2006 (“Rating Agency 

Act”).1

 Section 6 of the Rating Agency Act requires the Commission to submit an 

annual report to the Committee on Banking, Housing, and Urban Affairs of the Senate 

and the Committee on Financial Services of the House of Representatives that, with 

respect to the year to which the report relates:

• Identifies applicants for registration as nationally recognized statistical rating 

organizations (“NRSROs”) under Section 15E of the Securities Exchange Act of 

1934 (“Exchange Act”); 

• Specifies the number of and actions taken on such applications; and 

• Specifies the views of the Commission on the state of competition, transparency, 

and conflicts of interest among NRSROs. 

 This report relates to the period from June 26, 2010 to June 25, 2011.2

 

1

 Pub. L. 109-291, 120 Stat. 1327, S. 3850 (Sept. 29, 2006). The Rating Agency Act, among other 

things, added Section 15E to the Exchange Act (15 U.S.C. 78o-7) to establish self-executing 

requirements on NRSROs and provide the Commission with the authority to implement a 

registration and oversight program for NRSROs. On June 5, 2007, the Commission approved 

rules implementing such a program. See Oversight of Credit Rating Agencies Registered as 

Nationally Recognized Statistical Rating Organizations, Exchange Act Release No. 55857, 72 FR 

33564 (Jun. 18, 2007) (“June 2007 Adopting Release”). The implementing rules were Form 

NRSRO (17 CFR 249b.300) and Rules 17g-1through 17g-6 (17 CFR 240.17g-1 through 17g-6). 

The Commission has twice adopted amendments to some of these rules. See Amendments to 

Rules for Nationally Recognized Statistical Rating Organizations, Exchange Act Release No. 

59342 (Feb. 2, 2009), 74 FR 6456 (Feb. 9, 2009) (“February 2009 Adopting Release”) and 

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

Release No. 61050 (Nov. 23, 2009), 74 FR 63832 (Dec. 4, 2009) (“November 2009 Adopting 

Release”). The Commission has also adopted new Rule 17g-7 (17 CFR 240.17g-7). 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). 

 The report 

provides an overview of Commission rulemaking and other actions relating to NRSROs 

2

 The first annual report, which was published in June 2008, related to the period from June 26, 

2007, the effective date of the Rating Agency Act, to June 25, 2008. See

http://www.sec.gov/divisions/marketreg/ratingagency/nrsroannrep0608.pdf. Subsequent annual 

reports are on the NRSRO page of the Commission’s website: 

http://www.sec.gov/divisions/marketreg/ratingagency.htm#nrsroannreps.
2 

and addresses the items specified in Section 6 of the Rating Agency Act for the current 

period. 

 On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection 

Act (the “Dodd-Frank Act”)3

 was enacted. The NRSRO provisions in the Dodd-Frank 

Act substantially augment the Rating Agency Act. In particular, Title IX, Subtitle C, 

consisting of Sections 931 through 939H of the Dodd-Frank Act, “Improvements to the 

Regulation of Credit Rating Agencies,” amended the Exchange Act to impose new selfexecuting requirements with respect to NRSROs, requires that the Commission adopt 

rules applicable to NRSROs in a number of areas, and requires the Commission to 

conduct certain studies.4

 

 Further, Section 939A of the Dodd-Frank Act requires each Federal agency to: 

review its regulations that require the use of an assessment of the credit-worthiness of a 

security or money market instrument and any references to or requirements regarding 

credit ratings; modify its regulations to remove references to or requirements of reliance 

on credit ratings and substitute the standard of creditworthiness the agency determines is 

appropriate; and transmit a report to Congress describing any modifications to the 

regulations.5

 As described below in Section II of this report, the Commission has 

proposed and adopted rules and rule amendments in response to the “reference removal” 

mandate of the Dodd-Frank Act.6

 

 

3

 Pub. L. 111-203, 124 Stat. 1376, H.R. 4173. 4

 The Commission has taken certain actions in accordance with these provisions. See Section II of 

this report. 5

 The Commission issued this report on July 21, 2011, subsequent to this reporting period. See

Report on Review of Reliance on Credit Ratings As Required by Section 939A(c) of the DoddFrank Wall Street Reform and Consumer Protection Act, July 2011. In Section III of the report, 

the Commission described certain rules and forms that Commission staff is continuing to consider 

how best to address in light of Section 939A of the Dodd-Frank Act. 6

 The Commission took action prior to the enactment of the Dodd-Frank Act regarding the removal 

of references to credit ratings in Commission rules. In 1994, the Commission issued a concept 

release addressing this issue. See Concept Release: Nationally Recognized Statistical Rating 

Organizations, Exchange Act Release No. 34616 (Aug. 31, 1994), 59 FR 46314 (Sep. 7, 1994). In 

2003, the Commission again sought comment on whether it should eliminate the NRSRO 

designation from Commission rules, and, if so, what alternatives could be adopted to meet the 

Commission’s regulatory objectives. See Concept Release: Rating Agencies and the Use of Credit 

Ratings under the Federal Securities Laws, Exchange Act Release No. 47972 (Jun. 4, 2003), 68 

FR 35258 (Jun. 12, 2003). In July 2008, the Commission proposed removing references in certain 

of its rules to ratings by NRSROs. See Proposed Rule: References to Ratings of Nationally 

Recognized Statistical Rating Organizations, Exchange Act Release No. 58070 (Jul. 1, 2008), 73 

FR 40088 (Jul. 11, 2008). In response, the Commission received many comments that raised 

serious concerns about the proposals. See www.sec.gov/comments/s7-17-08/s71708.shtml. In 

October 2009, the Commission adopted several of the proposed amendments and re-opened for 

comment the remaining proposals. See References to Ratings of Nationally Recognized Statistical 

Rating Organizations, Exchange Act Release No. 60789 (Oct. 5, 2009), 74 FR 52358 (Oct. 9, 

2009) (amending Exchange Act Rule 3a1-1 (17 CFR 240.3a1-1), Exchange Act Rules 300, 

301(b)(5) and 301(b)(6) of Regulation ATS (17 CFR 242.300, 242.301(b)(5) and 242.301(b)(6)), 

Form ATS-R (17 CFR 249.638) and Form PILOT (17 CFR 249.821); and Rules 5b-3 and 10f-3 

under the Investment Company Act of 1940 (17 CFR 270.5b-3 and 17 CFR 270.10f-3). The 
3 

Sections 932(a)(8) and (a)(4) of the Dodd-Frank Act, respectively, also amended 

Section 15E of the Exchange Act to add paragraphs 15E(p)(3)7

 and 15E(h)(4)(B),8 which 

relate to Commission examinations and reviews of NRSROs. Section 15E(p)(3)(A) 

requires the Commission to conduct an examination of each NRSRO at least annually. 

Under Section 15E(p)(3)(B), the examination must include a review of: (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) 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 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 (“look-back policies”).

 In addition, Section 

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

summarizing (i) the essential findings of all examinations conducted under Section 

15E(p)(3)(A) as deemed appropriate by the Commission; (ii) the responses by the 

NRSROs 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. Section 15E(h)(4)(B)(i) requires that 

the Commission conduct periodic reviews of NRSROs’ look-back policies and the 

implementation of the policies at each NRSRO “to ensure they are reasonably designed 

and implemented to most effectively eliminate conflicts of interest.” Section 

15E(h)(4)(B)(ii) requires that the Commission review the code of ethics and conflict of 

interest policies of each NRSRO at least annually and whenever the policies are 

materially modified. The Commission has completed the first cycle of such examinations 

and reviews with respect to each of the NRSROs.

9

II. COMMISSION RULEMAKING AND OTHER ACTIONS RELATING TO 

NRSROs

 The Commission issued the following releases relating to NRSROs during the 

reporting period: 

• Nationally Recognized Statistical Rating Organizations, Exchange Act Release 

No. 64514 (May 18, 2011), 76 FR 33420 (Jun. 8, 2011) (“May 2011 Proposing 

 Commission stated that the amendments were designed, among other things, to address concerns 

that the inclusion of requirements relating to credit ratings in Commission rules could create the 

appearance that the Commission had, in effect, given its “official seal of approval” to the ratings, 

which could adversely affect the quality of due diligence and investment analysis and lead to 

undue reliance on NRSRO ratings. See 74 FR 52358. 7

 15 U.S.C. 78o-7(p)(3). 8

 15 U.S.C. 78o-7(h)(4)(B). 9

 The Commission issued its examination report on September 30, 2011, subsequent to this 

reporting period. See 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, 

www.sec.gov/news/studies/2011/2011_nrsro_section15e_examinations_summary_report.pdf. 
Release”). The Commission proposed for comment rule amendments and new 

rules in accordance with the Dodd-Frank Act and to enhance oversight that would 

require NRSROs to, among other things: report on internal controls; protect 

against conflicts of interest; establish professional standards for credit analysts; 

publicly provide—along with the publication of a credit rating—disclosure about 

the credit rating and the methodology used to determine it; enhance their public 

disclosures about the performance of their credit ratings; and make certain 

submissions to the Commission electronically. The proposal also would require 

disclosures concerning third-party due diligence reports for asset-backed 

securities. 

• Solicitation of Comment to Assist in Study on Assigned Credit Ratings, Exchange 

Act Release No. 64456 (May 10, 2011). The Commission requested comment to 

assist it in carrying out a study on, among other matters, the feasibility of 

establishing a system in which a public or private utility or a self-regulatory 

organization assigns NRSROs to determine credit ratings for structured finance 

products. The study, as well as a resulting report to Congress, is required by 

Section 939F of the Dodd-Frank Act.

• Removal of Certain References to Credit Ratings Under the Securities Exchange 

Act of 1934, Exchange Act Release No. 64352 (Apr. 27, 2011), 76 FR 26550 

(May 6, 2011). The Commission proposed for comment amendments to 

Exchange Act Rules 15c3-1, 15c3-3, 17a-4, 101 and 102 of Regulation M, and 

10b-10, and one Exchange Act form (Form X-17A-5, Part IIB) to remove 

references to credit ratings and, in certain cases, substitute alternative standards of 

creditworthiness as required by Section 939A of the Dodd-Frank Act. The 

Commission also requested public comment on potential standards of 

creditworthiness for purposes of Exchange Act Sections 3(a)(41) and 3(a)(53), 

which define the terms “mortgage related security” and “small business related 

security,” respectively.

• References to Credit Ratings in Certain Investment Company Act Rules and 

Forms, Securities Act of 1933 (“Securities Act”) Release No. 9193, Investment 

Company Act of 1940 (“Investment Company Act”) Release No. 29592 (Mar. 3, 

2011), 76 FR 12896 (Mar. 8, 2011). The Commission proposed for comment a 

new rule and amendments to two rules and four forms under the Securities Act 

and the Investment Company Act that contain references to credit ratings. The 

Commission proposed amendments to Rule 2a-7, Rule 5b-3, and Form N-MFP 

under the Investment Company Act and Forms N-1A, N-2, and N-3 under the 

Securities Act and the Investment Company Act. The Commission also proposed 

a new rule under the Investment Company Act to establish a credit-worthiness 

standard to replace a statutory reference to credit ratings in the Investment 

Company Act removed by Section 939(c) of the Dodd-Frank Act. 

• Security Ratings, Securities Act Release No. 9186, Exchange Act Release No. 

63874 (Feb. 9, 2011), 76 FR 8946 (Feb. 16, 2011). The Commission proposed for 

4 
comment rule amendments to remove credit ratings as eligibility criteria for 

companies seeking to use “short form” registration when registering securities for 

public sale. Under the Securities Act, the Commission proposed amending Rules 

134, 138, 139, 168, Form S-3, Form S-4, Form F-3, and Form F-4. The 

Commission further proposed rescinding Form F-9 and amending the Exchange 

Act forms and rules that refer to Form F-9 to eliminate those references. The 

Commission also proposed amending Schedule 14A under the Exchange Act.10

• Disclosure for Asset-Backed Securities Required by Section 943 of the DoddFrank Wall Street Reform and Consumer Protection Act, Securities Act Release 

No. 9175; Exchange Act Release No. 63741 (Jan. 20, 2011), 76 FR 4515 (Jan. 26, 

2011). The Commission adopted new rules pursuant to Section 943 of the DoddFrank Act related to representations and warranties in asset-backed securities 

offerings, including new Rule 17g-7, which requires NRSROs to include 

information regarding the representations, warranties, and enforcement 

mechanisms available to investors in any report accompanying a credit rating for 

an offering of asset-backed securities.

• Credit Rating Standardization Study, Exchange Act Release No. 63573 (Dec. 17, 

2010). The Commission requested comment to help inform its study pursuant to 

Section 939(h) of the Dodd-Frank Act on the feasibility and desirability of: 

standardizing credit ratings terminology, so that all credit rating agencies issue 

credit ratings using identical terms; standardizing the market stress conditions 

under which ratings are evaluated; requiring a quantitative correspondence 

between credit ratings and a range of default probabilities and loss expectations 

under standardized conditions of economic stress; and standardizing credit rating 

terminology across asset classes, so that named ratings correspond to a standard 

range of default probabilities and expected losses independent of asset class and 

issuing entity. 

• Disclosure for Asset-Backed Securities Required by Section 943 of the DoddFrank Wall Street Reform and Consumer Protection Act, Securities Act Release

No. 9148; Exchange Act Release No. 63029 (Oct. 4, 2010), 75 FR 62718 (Oct. 

13, 2010). The Commission proposed new rules pursuant to Section 943 of the 

Dodd-Frank Act related to representations and warranties in asset-backed 

securities offerings, including new Rule 17g-7. (The Commission issued the 

related adopting release on January 20, 2011. See the description of Securities 

Act Release No. 9175, Exchange Act Release No. 63741 above.) 

• Removal From Regulation FD of the Exemption for Credit Rating Agencies, 

Securities Act Release No. 9146; Exchange Act Release No. 63003; Investment 

Company Act of 1940 Release No. 29448 (Sep. 29, 2010), 75 FR 61050 (Oct. 4, 

2010). The Commission implemented Section 939B of the Dodd-Frank Act, 

5 

 

10 The Commission adopted final rules on July 27, 2011, subsequent to this reporting period. See

Security Ratings, Securities Act Release No. 9245, Exchange Act Release No. 6497, 76 FR 46603 

(Aug. 3, 2011).
which requires that the Commission “revise Regulation FD (17 CFR 243.100) to 

remove from such regulation the exemption for entities whose primary business 

is the issuance of credit ratings (17 CFR 243.100(b)(2)(iii))” within 90 days 

after the date of enactment.

6 

III. STATUS OF REGISTRANTS AND APPLICANTS

 Section 3(a)(62) of the Exchange Act11 defines a “nationally recognized statistical 

rating organization” as a credit rating agency that issues credit ratings certified by 

qualified institutional buyers, in accordance with Section 15E(a)(1)(B)(ix) of the 

Exchange Act, with respect to: (i) financial institutions, brokers, or dealers; (ii) insurance 

companies; (iii) corporate issuers; (iv) issuers of asset-backed securities (as that term is 

defined in 17 CFR 229.1101(c)); (v) issuers of government securities, municipal 

securities, or securities issued by a foreign government; or (vi) a combination of one or 

more categories of obligors described in any of clauses (i) through (v); and that is 

registered under Exchange Act Section 15E. 

 

The Commission has granted registration as an NRSRO under Section 15E to ten 

credit rating agencies. One of these credit rating agencies has recently withdrawn from 

registration as an NRSRO.12 The registered credit rating agencies, dates of initial 

registration, categories of credit ratings described in clauses (i) through (v) of Exchange 

Act Section 3(a)(62) in which they are registered, and locations of their principal offices

are, as of the date of this report:13

NRSRO/ Registration Principal 

Categories of Credit Ratings Date Office

 

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

Categories (ii), (iii), and (iv)14

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

Categories (i) through (v)

Egan-Jones Ratings Co. (“EJR”) December 21, 2007 U.S.

Categories (i) through (v)

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

Categories (i) through (v)

 

11 15 U.S.C. 78c(a)(62).

12 On October 13, 2011, Rating and Investment Information, Inc., which had been registered with the 

Commission as an NRSRO since September 24, 2007, furnished the Commission with a notice of 

withdrawal from registration as an NRSRO. The withdrawal became effective on November 27, 

2011. See http://www.sec.gov/news/digest/2011/dig112811.htm. 13 See the current Form NRSRO for each firm for any updates of this information. 14 A.M. Best withdrew from registration in category (i) (financial institutions, brokers, or dealers)

during the reporting period. The withdrawal became effective on May 13, 2011, 45 calendar days 

after the notice of withdrawal was furnished to the Commission.
7 

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

Categories (i), (ii), (iii), and (v)15

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

Categories (i) through (v)

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

Categories (i) through (v)

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

 Category (iv) 

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

Categories (i) through (v)

 During the reporting period, there were changes in the names of several of the 

NRSROs. KBRA changed its name from LACE Financial Corp. on November 12, 

2010.16 LACE Financial Corp. was purchased on August 23, 2010 and is currently 

owned by KBRA Holdings, Inc.; K-2 Global Partners, LLC has a controlling ownership 

interest in KBRA Holdings, Inc.17 Morningstar changed its name from Realpoint LLC.18 

Realpoint LLC was purchased on May 3, 2010 by Morningstar, Inc., and the NRSRO is 

now a wholly-owned subsidiary of Morningstar, Inc.19 In addition, DBRS, Inc., the 

entity previously identified in Item 3 of Form NRSRO as a credit rating affiliate is now 

identified in Item 1 of Form NRSRO as the NRSRO; DBRS Limited, the entity 

previously identified in Item 1 of Form NRSRO as the NRSRO is now identified in Item 

3 of Form NRSRO as a credit rating affiliate.20

As reported in last year’s annual report, Dagong Global Credit Rating Co., Ltd. 

(“Dagong”), a credit rating agency based in Beijing, China, submitted its application for 

registration as an NRSRO to the Commission on December 24, 2009. Dagong 

subsequently consented to two extensions of time for the Commission to act on the 

application. On April 14, 2010, the Commission instituted proceedings to determine 

whether Dagong’s application for registration as an NRSRO should be denied.21

 

15 JCR withdrew from registration in category (iv) (issuers of asset-backed securities) during the 

reporting period. The withdrawal became effective on December 2, 2010, 45 days after the notice 

of withdrawal was furnished to the Commission.

 

16 See Item 1 of KBRA’s Form NRSRO, as of KBRA’s update of registration dated November 16, 

2010. 17 See Exhibit 4 to KBRA’s Form NRSRO, as of KBRA’s annual certification dated March 30, 2011 

for the year ended December 31, 2010. 18 See Item 1 of Morningstar’s Form NRSRO in an update of registration dated June 10, 2011.

19 See Exhibit 4 to Morningstar’s Form NRSRO, in an update of registration dated June 10, 2011. 20 See Items 1 and 3of DBRS’s annual certification dated March 31, 2011 for the calendar year 

ended December 31, 2010. 21 Order Instituting Administrative Proceedings Pursuant to Section 15E(2)(A)(ii) of the Securities 

Exchange Act of 1934 and Notice for Hearing, Exchange Act Release No. 61906 (Apr. 14, 2010), 

75 FR 20645 (Apr. 20, 2010).
8 

Potential grounds for denial included whether Dagong: (1) had a sufficient connection 

with U.S. interstate commerce to register as an NRSRO and thereby invoke the 

regulatory and oversight authority of the Commission; and (2) would be subject to having 

its registration suspended or revoked because of requirements in its home jurisdiction 

preventing it from complying with U.S. securities laws and rules. On September 22, 

2010 the Commission issued an order denying Dagong’s application for registration as an 

NRSRO.22 The Commission found that Dagong was “currently unable” to comply with 

the Exchange Act’s recordkeeping, document production, and examination requirements. 

Because of this finding, the Commission did not determine whether Dagong had a 

sufficient connection with U.S. interstate commerce. 

The Commission received no complete initial applications for registration as an 

NRSRO during the reporting period. 

IV. COMMISSION’S VIEW ON COMPETITION

A. Select NRSRO Statistics

 The following sections summarize certain information reported by NRSROs 

registered with the Commission on Form NRSRO and Commission analyses of that 

information. 

1. NRSRO Credit Ratings Outstanding 

 The table below provides the number of credit ratings outstanding reported by 

each NRSRO in its annual certification for the calendar year ending December 31, 2010 

in each of the five categories identified in Section 3(a)(62) of the Exchange Act for which 

the NRSRO is registered. 

 

22 Order Denying Application for Registration as a Nationally Recognized Statistical Rating 

Organization, Exchange Act Release No. 62968 (Sep. 22, 2010).

 
9 

Number of Credit Ratings Outstanding by Category of Credit Rating

Source: NRSRO Annual Certifications for the Year Ended December 31, 2010 

Financial 

Institutions

Insurance 

Companies

Corporate 

Issuers

Issuers of 

AssetBacked 

Securities

Issuers of 

Government 

Securities

Total Ratings

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

EJR 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

KBRA 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/A 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

*N/R indicates the NRSRO is not registered for that category of securities. 

**KBRA is registered in the asset-backed securities category, although it reported no outstanding 

ratings in this category as of December 31, 2010.

 The pie charts below depict the percent of the total credit ratings outstanding in 

total and in each category reported by all NRSROs as of December 31, 2010 that were 

attributable to each NRSRO. For example, per the above table, A.M. Best reported that it 

had 5,062 insurance company credit ratings outstanding, and the total of the credit ratings 

outstanding in that category reported by all NRSROs was 19,788. Dividing 5,062 by 

19,788 = (approximately) 0.2558 (the proportion of NRSRO insurance company ratings 

attributable to A.M. Best), and 0.2558 = 25.58%. 
10 

AM Best

0.02%

DBRS

3.34% Egan Jones

0.00%

Fitch

21.34%

KBRA

0.00%

JCR

0.00%

Moody's

33.57%

Morningstar

2.75%

R&I

0.00%

S&P

38.98%

Issuers of Asset-Backed Securities

AM Best

0.00%

DBRS

0.62% Egan Jones

0.00%

Fitch

16.65%

KBRA

0.00%

JCR

0.00%

Moody's

38.49%

Morningstar

0.00%

R&I

0.05%

S&P

44.19%

Issuers of Government Securities
11 

Moody’s and S&P were the two largest NRSROs based on the number of credit 

ratings outstanding as of December 31, 2010, with approximately 1 million and 1.2 

million ratings outstanding, respectively, and Fitch was the third largest with 

approximately 500,000 ratings outstanding. However, concentration was not consistent 

across rating classes. Moody’s and S&P had the largest number of outstanding credit 

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

credit ratings of financial institutions, Fitch and Moody’s had substantially more ratings 

outstanding than S&P, although the difference has decreased in recent years. S&P had 

the largest number of outstanding credit ratings of insurance companies, with A.M. Best 

and Moody’s providing most of the remaining ratings in that class. 

Three NRSROs (Fitch, Moody’s, and S&P) accounted for approximately 97% of 

all outstanding credit ratings (no change from last year’s report). The concentration of 

outstanding ratings for these three NRSROs is high across all five categories but does 

vary across those categories. For instance, Fitch, Moody’s, and S&P account for over 

99% of all outstanding NRSRO ratings for government, municipal and sovereign 

securities23, but less than 73% of all outstanding NRSRO ratings for insurance 

companies.24 For various reasons, including those discussed below, market concentration 

must be considered together with other factors to identify the level of competition in a 

given market. 

Some of the smaller NRSROs concentrate more on particular sectors or regions. 

For example, A.M Best primarily rates insurance companies. Morningstar rates only 

asset-backed securities (“ABS”). KBRA primarily rates financial institutions. JCR and 

R&I are based in Japan and issue ratings primarily on Japanese issuers and securities.

 Among the smaller NRSROs, KBRA and DBRS reported having the largest 

number of outstanding ratings of financial institutions (16,515 and 14,941, respectively, 

or approximately 8% and 7%, respectively, of all outstanding ratings in this category). 

A.M. Best reported the largest number of ratings of insurance companies among the 

smaller NRSROs (5,062, or about 26%, of all outstanding ratings in this category) and 

DBRS reported the largest number of outstanding ratings of corporate issuers among the 

smaller NRSROs (3,863, or about 4% of all outstanding ratings in this category). 

 Of the 302,461 outstanding credit ratings of ABS, all but 18,480 (approximately 

6%) were attributable to Fitch, Moody’s, and S&P. Among the smaller NRSROs, DBRS 

reported having the largest number of outstanding ratings of ABS (10,091, or 

approximately 3.34%, of all ratings in this category). 

Of the ten NRSROs, seven operate primarily under the “issuer-pay” model.25 

Two NRSROs, KBRA and Morningstar, operate primarily under the “subscriber-pay” 

 

23 Fitch, Moody’s, and S&P together accounted for 2,171,032 of the 2,185,726 outstanding NRSRO 

credit ratings in this category as of December 31, 2010. 24 Fitch, Moody’s, and S&P together accounted for 14,397 of the 19,788 outstanding NRSRO credit 

ratings in this category as of December 31, 2010. 25 A.M. Best, DBRS, Fitch, JCR, Moody's, R&I, and S&P. See Section VI of this report.
12 

model but have recently begun issuing ratings paid for by the rated entity or issuer of the 

rated security. 26 Only EJR operates fully under the subscriber-pay model. The NRSROs 

operating primarily under the issuer-pay model account for approximately 99% of the 

total outstanding NRSRO credit ratings reported by NRSROs as of December 31, 2010. 

 Market concentration is generally measured using the Herfindahl-Hirschman 

Index (“HHI”), which is a measure of the size of firms in relationship to the industry and 

is an indicator of the amount of competition among them. It is calculated by taking the 

market share27 of each firm competing in the market, multiplying that proportion by 100 

and squaring the result, and then summing the resulting numbers. The HHI is measured 

on a scale of 0 to 10,00028 points and approaches zero when a market consists of a large 

number of firms of relatively equal size.29 The HHI increases both as the number of 

firms in the market decreases and as the disparity in size between those firms increases.30 

According to the U.S. Department of Justice, markets in which the HHI is between 1,000 

and 1,800 points are considered to be moderately concentrated, and those in which the 

HHI is in excess of 1,800 points are considered to be concentrated.31 The inverse of the 

HHI (“HHI Inverse”) is an approximation of the number of equally sized firms which 

would constitute an equivalent level of concentration for a given HHI, and is calculated 

by dividing 10,000 by the HHI. 

 The HHI for all NRSROs based on the number of credit ratings outstanding as of 

December 31, 2010 is 3,472 (a “concentrated” market), which is the equivalent of 

approximately 2.88 equally sized firms.32 In last year’s report, the Commission 

calculated an HHI based on credit ratings outstanding of 3,495, the equivalent of 

approximately 2.86 equally sized firms, indicating that the level of market concentration 

based on ratings outstanding is essentially unchanged. 

 

 

26 See Exhibit 2 to KBRA’s Form NRSRO, as of its annual certification dated March 30, 2011, in

which KBRA states that it offers issuer-paid ratings as well as subscriptions to its ratings and 

describes its process for determining each type of rating; Exhibit 2 to Morningstar’s Form 

NRSRO, as of its update of registration dated June 6, 2011, in which Morningstar states that it 

generally issues ratings either as a rating agency selected and paid by the arranger or as a nonselected rating agency providing a final rating and surveillance to subscribers on a subscriptionpay basis. 27 For NRSROs, one way of determining market share is by dividing an NRSRO’s outstanding 

ratings by the aggregate of outstanding ratings issued by all NRSROs. 28 If there is only one firm with 100% of the market, the HHI would be 100 times 100, or 10,000 

points.

29 For example, if there are 1,000,000 firms, each with an equal share (.0001%) of the market, the 

HHI would be .0001 squared (=.00000001) times 1,000,000 = .01 points. 30 For example, if there are five firms, one with 80% of the market and the remaining four each with 

5% of the market, the HHI would be 6500 points (80 x 80 = 6400; 5 x 5 = 25; 6400 + (4 x 25) = 

6500). 31 http://www.usdoj.gov/atr/public/testimony/hhi.htm. 32 If the ten firms each had an equal share (10%) of the market, the HHI would be 10 squared (= 100) 

times 10 = 1,000 points.
13 

The table below reports the HHI Inverse statistic calculated for the ratings 

outstanding in each class of ratings and in total for the years 2008 through 2010. 

HHI Inverse for Each Class of Ratings

Year

Financial 

Institutions

Insurance 

Companies

Corporate 

Issuers

Issuers of 

AssetBacked 

Securities

Issuers of 

Government 

Securities Total 

2008 3.72 4.05 3.79 2.82 2.83 2.99

2009 3.85 3.84 3.18 3.18 2.65 2.86

2010 3.99 3.37 3.17 3.20 2.69 2.88

The class of government, municipal and sovereign securities was the most 

concentrated class of ratings in 2010 with an HHI Inverse of 2.69. The class of financial 

institutions was the least concentrated with an HHI Inverse of 3.99. The largest annual 

change in 2010 occurred in the class of insurance companies where the HHI Inverse 

dropped from 3.84 in 2009 to 3.37 in 2010, indicating a higher level of concentration. 

The change appears to have resulted primarily from a decline in the number of 

outstanding insurance company ratings reported by Fitch. Fitch reported 1,657 

outstanding ratings of insurance companies in 2010, which was a decrease of 

approximately 64% from the 4,599 ratings it reported in the category in 2009. 

Between 2008 and 2010, the HHI Inverse for the ABS sector increased from 2.82 

to 3.20, indicating a lower level of concentration. All NRSROs, except DBRS, reported a 

decline in the number of ABS ratings outstanding during this period. S&P reported the 

largest decline, from 198,200 ratings in 2008 to 117,900 outstanding ratings in 2010, a 

decline of approximately 40%. S&P issued about 49% of all ABS ratings outstanding in 

2008. By 2010, this percentage had decreased to 39%. During the same time period, the 

combined percentage of outstanding ABS ratings of Moody’s and Fitch increased from 

approximately 46% in 2008 to approximately 55% in 2010. Overall, the market share of 

ABS ratings of the largest three NRSROs decreased from approximately 96% in 2008 to 

approximately 94% in 2010. Additionally, the percentage of ratings outstanding for 

DBRS increased from 1.86% in 2008 to 3.34% in 2010. The percentage of ratings 

outstanding for Morningstar increased from 2.29% to 2.75% during the same period. 

2. Number of Credit Analysts 

The table below provides the total number of credit analysts and credit analyst 

supervisors reported by each NRSRO in Exhibit 8 of its most recent Form NRSRO 

during the reporting period. 
14 

Credit Analysts and Credit Analyst Supervisors 

 

NRSRO Credit 

Analysts 

Credit 

Analyst 

Supervisors*

A.M. Best 77 43

DBRS 75 20

EJR 2 3

Fitch 712 337

JCR 27 30

KBRA 9 4

Moody's 1,088 116

Morningstar 17 7

R&I 74 4

S&P 1,109 236

Total 3,190 800

*Some credit analyst supervisors may also have analytical 

responsibilities.

 The three largest NRSROs report having 2,909 credit analysts, or approximately 

91% of the total number of credit analysts of the ten NRSROs. Among the other 

NRSROs, A.M. Best and DBRS reported the largest number of credit analysts (77 and 

75, respectively, or approximately 5% each, of the total number of credit analysts). 

3. NRSRO Financial Results

 Section 15E(k) of the Exchange Act33 requires each NRSRO to file, on a 

confidential basis, such financial statements and information concerning its financial 

condition as the Commission may prescribe by rule. Exchange Act Rule 17g-334 requires 

each NRSRO to provide the Commission with annual financial reports not more than 90 

calendar days after the end of its fiscal year. In particular, Rule 17g-3(a)(1) requires 

NRSROs to provide audited financial statements, which must include a balance sheet, an 

income statement and statement of cash flows, and a statement of changes in ownership 

equity. 

The total revenue reported by all of the NRSROs for the most recent financial 

report made in the reporting period was approximately $4.2 billion, up from 

approximately $3.7 billion reported last year.35

 

33 15 U.S.C. 78o-7(k).

 The HHI based on total revenue reported 

by NRSROs is 3,326 points, the equivalent industry concentration of approximately 3 

equally sized firms. The HHI based on net income reported by NRSROs is 3,573 points, 

the equivalent industry concentration of approximately 2.8 equally sized firms. The HHI 

based on net income is higher than the HHI based on revenue because the firms which 

34 17 CFR 240.17g-3. 35 Seven NRSROs have fiscal years ending on December 31; others have fiscal years ending on 

March 31, September 30, or November 30.
15 

reported the largest amounts of revenue also tended to have higher after-tax profit 

margins. The net income amounts reported by the three largest NRSROs made up 

approximately 97% of the total net income reported by all of the NRSROs. 

B. Demand for Ratings 

 Investors, both individual and institutional, look to credit rating agencies to 

provide an independent assessment of the relative or absolute credit risk of a particular 

debt obligation or obligor. Credit ratings also provide rated issuers with less costly 

access to debt markets.36 Furthermore, parties can write contracts that create obligations 

based on a change in credit ratings—the use of so-called “ratings triggers.”37 In many 

cases, investment managers and financial institutions have been required by regulations, 

including Commission rules, to use credit ratings to establish investment risk standards 

for their portfolio holdings.38 However, as noted above, Section 939A of the Dodd-Frank 

Act requires federal agencies to modify their regulations to remove requirements of 

reliance on credit ratings and for each rule to substitute an alternative standard of 

creditworthiness.39 

 In addition to NRSROs and other credit rating agencies, there are other providers 

of credit research and analysis.40

 

36 See, e.g., Michael Faulkender and Mitchell A. Petersen, “Does the Source of Capital Affect 

Capital Structure?” Review of Financial Studies, 9(1), 45-79 (2006). Frank Partnoy, “The Siskel 

and Ebert of Financial Markets?: Two Thumbs Down for the Credit Ratings Agencies,” 

Washington University Law Quarterly, 77 (3), 619-714 (1999); Arnoud W.A. Boot, Todd T. 

Milbourn and Anjolein Schmeits, “Credit Ratings as Coordination Mechanisms,” Review of 

Financial Studies, 19 (1), 81-118 (2006); Deiter Kerwer, “Ratings Agencies: Setting a Standard 

for Global Financial Markets,” Economic Sociology European Electronic Newsletter, 3 (3), 40-46

(2002); Timothy J. Sinclair, “Reinventing Authority: Embedded Knowledge Networks and the 

New Global Finance,” Environment and Planning C: Government and Policy, 18 (4), 487-502 

(2000) (these articles, among other things, argue that credit rating agencies create value through 

standardizing the credit assessment process).

Credit models and assessments by third-party providers 

may be used by investors as indicators of value or price for a given debt obligation. 

Where available, third-party providers of credit analytics and internal models are natural 

competitors to NRSROs for all non-regulatory uses and may serve as a check on NRSRO 

ratings quality or substitutes for non-regulatory uses if they provide more accurate or 

useful ratings. 

37 See additional discussion in Section IV.C. of this report. 38 See, Joint Forum Report, “Stocktaking on the Use of Credit Ratings,” June 2009 (available at 

http://www.bis.org/publ/joint22.pdf?noframes=1) (shorten link) (discussing, among other things, 

the use of credit ratings in “(a) determining capital requirements; (b) identifying or classifying 

assets, usually in the context of eligible investments or permissible asset concentrations; (c) 

providing a credible evaluation of the credit risk associated with assets purchased as part of a 

securitization offering or a covered bond offering; (d) determining disclosure requirements; and 

(e) determining prospectus eligibility”).

39 The Commission has taken certain actions in response to the “reference removal” mandate. See

Section II of this report. 40 See, e.g., Arturo Estrella, “Credit Ratings and Complementary Sources of Credit Quality 

Information,” Basel Committee on Banking Supervision Working Papers, Aug. 2000.
16 

Economists point to several factors that have increased the demand for credit 

ratings over the years.41 Structural changes in financial markets increased the number of 

participants, their anonymity, and the complexity of their investment strategies. Credit 

ratings have offered a time-saving and comparative tool to evaluate the growing number 

of debt issues. Also, financial disintermediation and an increase in the proportion of 

credit supplied by capital markets rather than banks has been accompanied by the 

creation of increasingly complex securitization instruments. This increasing complexity 

likely contributed to additional demand from investors for NRSRO credit ratings as they 

provided a single summary measure of the credit risks of difficult to evaluate financial 

instruments. 

 As noted above, NRSROs are one type of entity providing third-party credit 

assessments to the market. When users of credit assessments for non-regulatory purposes 

also need NRSRO credit ratings for regulatory purposes, they may choose to purchase 

only NRSRO credit ratings to avoid purchasing both. The economic case for purchasing 

a non-NRSRO credit assessment may be even more difficult if the entity is a newer 

entrant to the third-party credit assessment field, without the same established level of 

reputation as more well-known entities, even when that assessment is valuable to the 

investor. However, there are a number of credit rating agencies operating in the U.S. that 

have not registered as NRSROs.

C. Regulatory and Economic Factors that Potentially Affect Competition in 

the Credit Rating Industry 

 In enacting the Rating Agency Act, Congress found that “the 2 largest credit 

rating agencies [Moody’s and S&P] serve the vast majority of the market, and additional 

competition is in the public interest.”42 Further, the Senate Report accompanying the 

Rating Agency Act quoted witnesses testifying before Congress as describing the largest 

two NRSROs as a “partner-monopoly” and an “oligopoly.”43 Information obtained from 

NRSROs about the number of ratings they have outstanding, the number of credit 

analysts, and their financial results, as presented above, suggests that, in combination 

with Fitch, these entities are the dominant market players. 

 Economists note that the credit rating industry has exhibited a high level of 

concentration throughout much of its history, dating from the early twentieth century.44 

Analysts have cited the regulatory use of ratings as a factor that has created barriers to 

 

41 See, e.g., Fabian Dittrich, 2007, “The Credit Rating Industry: Competition and Regulation,” 

Doctoral Dissertation, Universitat zu Koln, Koln, Germany; Isabelle Gras, “The Power to Rate,” 

REGEM Analysis No. 6 (2003). 42 See Section 2 of the Rating Agency Act. 43 See Report of the Senate Committee on Banking, Housing, and Urban Affairs to Accompany S. 

3850, Credit Rating Agency Reform Act of 2006, S. Report No. 109-326, 109th Cong., 2d Sess. 

(Sep. 6, 2006) (“Senate Report”), p.5. 44 See, e.g., Richard Sylla, “A Historical Primer on the Business of Credit Ratings” and Lawrence J. 

White, “The Credit Rating Industry: an Industrial Organization Analysis” both papers in Ratings, 

Rating Agencies and the Global Financial System (2002).
17 

entry and led to concentration in the credit rating industry.45 Financial regulators 

including the Federal Reserve Banks, the Office of the Comptroller of the Currency, and 

state banking and insurance departments have used credit ratings to assist them in their 

oversight of financial institutions since the 1930s. Early ratings-dependent rules included 

requirements to mark-to-market lower rated bonds and restrictions on the purchase of 

speculative securities. In the 1950s, the National Association of Insurance Companies 

increased capital requirements on lower rated bonds held by insurance companies.46 

 The Commission first used the term NRSRO in 1975 in the net capital rule for 

broker-dealers as an objective benchmark to prescribe capital charges for different types 

of debt securities. Since then, the Commission has used the designation in a number of 

regulations. Although the use of the term NRSRO was originated for a narrow purpose in 

the Commission's own regulations, ratings by NRSROs have come to be used widely as 

benchmarks in federal and state legislation as well as in rules issued by other financial 

regulators. 

 Congress incorporated the NRSRO concept into other pieces of financial 

legislation. For example, when Congress defined the term “mortgage related security” in 

Section 3(a)(41) of the Exchange Act as part of the Secondary Mortgage Market 

Enhancement Act of 1984, it required that such securities be rated in one of the two 

highest rating categories by at least one NRSRO. 47 Further, in 1989, Congress added 

the NRSRO concept to the Federal Deposit Insurance Act, prescribing that corporate debt 

securities are not “investment grade” unless they are rated in one of the four highest 

categories by at least one NRSRO.48

 Finally, a number of other federal and state laws and regulations employed the 

NRSRO concept. For example, the U.S. Department of Education used ratings from 

NRSROs to set standards of financial responsibility for institutions that wish to 

participate in student financial assistance programs under Title IV of the Higher 

Education Act of 1965, as amended. In addition, several state insurance codes relied, 

directly or indirectly, on NRSRO ratings in determining appropriate investments for 

insurance companies. More recently, credit ratings were used to determine the eligibility 

of assets for a number of the programs established by the Federal Reserve and the 

Department of the Treasury in response to the credit crisis.49

 

45 See, e.g., Partnoy (1999), White (2001). 46 See, e.g., Richard Cantor and Frank Packer, “The Credit Rating Industry,” FRBNY Quarterly 

Review, Summer-Fall, 1994. 47 Section 939(e) of the Dodd-Frank Act amended Section 3(a)(41) and Section 3(a)(53) (the 

definition of “small business related security”) of the Exchange Act to replace the words “is rated 

in one of the two highest rating categories by at least one [NRSRO]” with the words “meets 

standards of credit-worthiness as established by the Commission.” 48 See “Report on the Role and Function of Credit Rating Agencies in the Operation of the 

Securities Markets As Required by Section 702(b) of the Sarbanes-Oxley Act of 2002” (2003),

http://www.sec.gov/news/studies/credratingreport0103.pdf. 49 See, e.g., “Term Asset-Backed Securities Loan Facility: Terms and Conditions,” (2009), 

http://www.newyorkfed.org/markets/talf_terms.html. 
18 

 As discussed above, however, the Dodd-Frank Act requires every federal agency 

to review rules that use credit ratings as an assessment of credit-worthiness, modify its 

regulations to remove references to or requirements of reliance on credit ratings, and for 

each rule, substitute an alternative standard of creditworthiness. 

 Credit ratings are used widely by financial regulators outside the United States.50 

According to a Basel Committee on Banking Supervision (BCBS) study published in 

2000, eleven out of twelve countries that are members of the BCBS used the ratings of 

credit rating agencies in financial regulatory supervision.51 The Basel II framework, 

which has been implemented by members of the European Union, relies on the ratings of 

credit rating agencies recognized as External Credit Assessment Institutions to calculate 

bank capital requirements within its standardized approach for credit risk measurement.52

Economies of scale, sunk costs, and access to a historical default distribution may 

be economic factors which may favor the larger, more established rating agencies. Large 

rating agencies can allocate the costs of, among other things, analytical software, 

administrative, legal, compliance, marketing and support staff across a wider range of 

ratings, providing a more efficient cost base. In addition, these rating agencies have, over 

the years, used substantial resources to, for example, develop ratings methodologies and 

procedures.53

 

 A long history of providing credit risk assessment is also important in 

credit rating agencies’ ability to develop statistical models that rely on historical default 

probability distribution.

 The importance of reputation is another economic factor that is often cited by 

analysts.54 When the quality of a firm’s product is difficult to assess at the time of 

purchase, consumers often use the quality of prior products produced by the firm as a 

benchmark for their purchasing decision.55 A firm that has a long history of producing 

quality products develops a reputational asset which allows it to command a higher price. 

The value of this reputational asset can provide an incentive for the firm to continue to 

produce high quality products.56

 Credit ratings are an example of a product whose quality, at time of issuance or 

purchase, is particularly difficult to evaluate. In most cases, credit ratings are estimates 

about the probability of default or expected loss for a given debt obligation or obligor. 

 

50 See The Joint Forum, “Stocktaking on the Use of Credit Ratings,” (June 2009)

http://www.bis.org/publ/joint22.pdf. 51 See Arturo Estrella, “Credit Ratings and Complementary Sources of Credit Quality Information,” 

Basel Committee on Banking Supervision Working Papers No. 3 (Aug. 2000). 52 See Basel Committee on Banking Supervision, “International Convergence of Capital 

Measurement and Capital Standards: A Revised Framework - Comprehensive Version,” (June 

2006). 53 See, e.g., Herwig M. Langohr, “The Credit Rating Agencies and Their Credit Ratings,” address 

given to the Bond Market Association (Feb. 2006). 54 See, e.g., Dittrich (2007). 55 See, e.g., Carl Shapiro, “Premiums for High Quality Products as Returns to Reputations,” 

Quarterly Journal of Economics 98(4): 659-79 (Nov. 1983). 56 See, e.g., Benjamin Klein and Keith Leffler, “The Role of Market Forces in Assuring Contractual 

Performance,” Journal of Political Economy, Vol. 89, No. 41 (1981).
19 

Defaults are expected to occur rarely at the higher rating levels and are highly sensitive to 

macroeconomic forces which may be difficult to forecast. The accuracy and consistency 

of ratings produced by a given rating agency may only be revealed over an extended 

period. Because it is difficult to evaluate a particular credit rating easily, establishing and 

maintaining a reputation for ratings accuracy, a process which can take years, is very 

important for any credit rating agency. 

 A rating agency’s reputation can be damaged by a failure to continue to assign 

ratings accurately. The assignment of high credit ratings to many residential mortgagebacked securities (“RMBS”) and collateralized debt obligations (“CDOs”) in recent 

years, followed by the scope and magnitude of subsequent downgrades during the current 

credit crisis, appears to have resulted in a loss of confidence among at least some 

investors in the reliability of credit ratings issued by the largest NRSROs in this sector. 

Ratings on these RMBS and CDOs did not measure up to similarly rated obligors and 

securities, with respect to rating transitions and defaults, within and among the asset 

classes. There had also been a broader dislocation in the credit markets, to which any 

loss of confidence could have contributed. The integrity of all ABS ratings has been 

questioned and the uncertainty around ABS credit quality has increased, contributing to 

the decline in investors’ willingness to purchase ABS. This is consistent with the 

dramatic drop-off in ABS issuances since mid-2007. ABS issuance increased slightly in 

2009, but decreased again in 2010, remaining far below pre-crisis levels (see the chart 

below). 

In the wake of these events, the NRSROs that rated ABS have come under intense 

scrutiny and criticism. However, their overall market share does not seem to have been 

affected within this asset class as reflected in the number of ABS ratings each of their 

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

USD Millions

Year

US ABS Issuance

Source: SIFMA US ABS Issuance (excluding mortgage-backed securities)
20 

Form NRSROs. However, some of the smaller NRSROs appear to have increased their 

market share in new issue ratings for some types of ABS.57

 Network externalities, or a “network effect,” may also play a role in the credit 

rating industry. Network externalities, which are often considered in connection with 

such products as computer operating systems or video recorders, exist when the value of 

a product increases as more people use it.58 Network externalities can create a significant 

obstacle to entry for a new entrant in an industry where these effects are strong. In these 

types of industries, a company may make a product which has superior attributes to an 

entrenched competitor and still fail to win market share. The procedures and 

methodologies of a rating agency create a standardized way of looking at credit risk, and 

one function of the rating is to facilitate communication about credit risk among market 

participants.59 Another function of credit ratings is to facilitate comparisons among credit 

instruments within a sector and potentially across sectors. Market participants may 

consider how widely the ratings of a particular rating agency are used by other investors 

and the breadth of coverage a rating agency provides as factors in determining the 

usefulness of its ratings.60

A wide range of private contractual agreements which reference the ratings of 

particular rating agencies create another barrier to entry for new entrants.61 These 

include, for example, minimum ratings requirements that specify the ratings of specific 

rating agencies in the investment management contracts of institutional fund managers 

and the investment guidelines of fixed income mutual fund managers, pension plan 

sponsors, and endowment fund managers. In addition, fixed income indices used to 

evaluate the performance of investment managers often have inclusion characteristics 

which refer to the ratings of specific rating agencies. The effect of these contractual 

agreements can be to increase the demand and liquidity for securities bearing the ratings 

of specific providers. 

 In addition, ratings triggers are commonly found in bank loan agreements, 

guaranteed investment contracts, and the credit support annexes and other provisions of 

 

57 Asset-Backed Alert “Rating-Agency Shares of US ABS and MBS Issuance in 2010” (Dec. 31, 

2010); Commercial Mortgage Alert “Rating Agencies for CMBS Issued in First Half” (June 30, 

2011). 58 See, e.g., Michael L. Katz and Carl Shapiro, “Network Externalities, Competition, and 

Compatibility,” The American Economic Review, Vol. 75, No. 3, pp. 424-440, (June 1985). For 

application to credit rating industry see Jerome S. Fons, “White Paper on Rating Competition and 

Structured Finance,” (Jan. 2008).

59 See, e.g., Kerwer (2002). 60 See, e.g., Fons (2008). 61 See, e.g., Richard Cantor, Owain ap Gwilym, Stephen Thomas, “The Use of Credit Ratings in 

Investment Management in the U.S. and Europe,” The Journal of Fixed Income, Vol. 17, No. 2 

(Fall 2007); H. Kent Baker and Sattar A. Mansi, “Assessing Credit Rating Agencies by Bond 

Issuers and Institutional Investors,” Journal of Business Finance & Accounting, Vol. 29, Numbers 

9-10 (November/December 2002); G. Timothy Haight, George Engler and Kenneth J. Smith, “An 

Examination of the Characteristics of College Endowment Funds,” Journal of Investing (Fall 

2006). 
21 

derivatives contracts.62 When ratings triggers are present, a decline in the rating of an 

issuer or obligor below a certain level can alter the obligations of parties to an agreement. 

For example, a ratings trigger can provide a counterparty to a derivatives contract the 

right to demand collateral or lenders with the right to demand repayment of a loan. The 

ratings of specific rating agencies are often specified in such agreements. 

Barriers that prevent some NRSROs from obtaining information needed to assign 

ratings may also limit competition, particularly with respect to structured finance 

products. Generally, when the issuer-paid model is employed, much of the information 

relied on by the hired NRSROs to rate structured finance products is non-public. In the 

past, this made it difficult for other NRSROs to rate these securities. As a result, the 

products frequently were issued with ratings from only one or two NRSROs and only by 

NRSROs that are hired by the issuer, sponsor, or underwriter. In addition, investors may 

also have tended to place greater weight on an opinion that is based, in part, on access to 

privileged information.63 The Commission’s November 2009 amendments to Rule 17g-5 

were designed to reduce these barriers by prohibiting an NRSRO from issuing an issuerpaid rating on a structured finance product unless certain information about the 

transaction is disclosed to other NRSROs.

64

D. The State of Competition among NRSROs 

As discussed above, since the enactment of the Rating Agency Act and the 

adoption of the Commission’s rules under the Rating Agency Act, ten firms have 

registered as NRSROs with the Commission. The first seven firms applied for 

registration as NRSROs in June of 2007 under the new registration and oversight 

program adopted by the Commission that month and were granted registration on 

September 24, 2007. By June 23, 2008, the Commission had granted three additional 

credit rating agencies NRSRO registration. As of December 31, 2010, these three 

NRSROs accounted for approximately 27,000 credit ratings, slightly less than 1% of the 

total outstanding NRSRO ratings. In addition, these three NRSROs operated primarily 

under the subscriber-pay compensation model at the time of initial registration, providing 

users of ratings an alternative to the issuer-pay model employed by the seven NRSROs 

that applied for registration in June 2007. However, as mentioned above, two of these 

agencies which had previously operated primarily under the subscriber-pay compensation 

model have recently introduced an issuer-pay compensation model for part of their 

business. 

Although the credit ratings of the two largest NRSROs now represent a slightly 

smaller proportion of all NRSRO ratings, the Commission is unable to discern from this 

data the impact of NRSRO registration on the demand for or the provision of credit 

ratings for several reasons. First, the registration and oversight program implemented by 

 

62 See, e.g., Moody’s Special Comment, “2008 Rating Trigger Trends in the U.S. Life (Re) 

Insurance Industry,” (Jan. 2009). 63 See, e.g., Philippe Jorion, Zhu Liu, and Charles Shi, “Informational Effects of Regulation FD: 

Evidence from Rating Agencies,” Journal of Financial Economics, (May 2005). 64 See Rule 17g-5(a)(3) (17 CFR 240.17g-5(a)(3)). 
22 

the Commission under the Rating Agency Act that requires disclosure of information 

about outstanding ratings for NRSROs has been in existence only since the third quarter 

of 2007. In addition, the recent credit crisis, while potentially creating additional long 

term demand for providers of credit assessment tools, also reduced debt issuance in a 

number of sectors. Issuance levels have recovered in some sectors, such as corporate 

debt, but remain well below levels prior to the crisis in other areas, notably for ABS. 

Consequently, there is insufficient historical data to evaluate the impact that being 

registered as an NRSRO has had on obtaining additional business, particularly for the 

newer NRSROs. 

 Second, comparing the number of ratings outstanding for large, established 

NRSROs and newly registered NRSROs may not provide a complete picture. The large 

NRSROs have a significantly longer history of issuing ratings and their ratings include 

those for debt obligations (and obligors) that were rated long before the establishment of 

the newer entrants. Consequently, a comparison of the number of ratings issued on more 

recent issuances may provide a better gauge of how well newer entrants are competing 

with more established firms. 

 Third, as noted above, all seven of the NRSROs which applied for registration in 

June 2007 operate primarily on an issuer-pay compensation model, whereas the three 

more recently registered NRSROs, at the time of their registration, relied primarily on a 

subscriber-pay compensation model. For the earlier-registered NRSROs, outstanding 

ratings were solicited from a paying client (the issuer) for that individual rating. 

Increases and decreases in the total number of outstanding ratings reflect trends in 

securities issuances and the demand for ratings by clients of that NRSRO. For 

subscriber-pay NRSROs, on the other hand, investors and other market participants 

purchase the right to access the pool of credit ratings issued by the NRSRO, and are not 

necessarily users of all credit ratings issued by the NRSRO. Thus, a reported increase in 

the number of securities rated by the NRSRO as part of its regulatory filings does not 

necessarily demonstrate that those additional credit ratings are being widely relied upon 

by market participants.

E. Assessing the Impact of Additional Competition

The Senate Report accompanying the Rating Agency Act stated that the statute’s 

purpose was to “improve ratings quality for the protection of investors and in the public 

interest by fostering accountability, transparency, and competition in the credit rating 

industry.”65 The Senate Report also noted that competition would “provide investors 

with more choices, higher quality ratings, and lower costs.”66

 

65 See Senate Report, p. 1. 66 See Senate Report, p. 7.

 Competition can lead to 

credit ratings that are of higher value to investors along one or more dimensions (for 

example, greater accuracy or timeliness) or ratings that are of equivalent value at a lower 

cost. Competition may also lead to improved management of conflicts of interest, to the 
23 

extent investors can discern whether rating agencies are properly managing these 

conflicts.67

It should be noted, however, that increasing the number of entities that are treated 

as NRSROs, in itself, may not have a significant effect on competition. The newer 

NRSROs, by providing ratings that are superior in either quality or price, could create 

additional competition. Nevertheless, it may take time before the impact of increased 

competition can be observed because of the importance of reputation, the difficulty in 

establishing a reputation quickly, and various economic factors. Gaining acceptance in 

the market for a new NRSRO may be even more difficult when investors and their agents 

rely upon written policies and procedures requiring the use of ratings provided by the 

large well-established NRSROs. Altering such policies and procedures would require 

proactive steps on the part of investors.

F. The Potential Impact on Competition of NRSRO Rules 

 The Rating Agency Act and the registration and oversight program for NRSROs 

implemented by the Commission pursuant to authority granted by the Rating Agency Act 

are designed, among other things, to promote competition. For example, the registration 

process prescribed by the Rating Agency Act and Rule 17g-1 were designed to make it 

easier for credit rating agencies to become NRSROs as compared to the process in place 

before the enactment of the Rating Agency Act.68 In addition, the disclosure 

requirements of Form NRSRO are intended to make it easier for users of credit ratings to 

compare NRSROs and, therefore, for an NRSRO to distinguish itself from its peers. For 

example, the disclosure of performance statistics and the methodologies and procedures 

for determining credit ratings provides a means for assessing the accuracy of an 

NRSRO’s credit ratings and how well its procedures and methodologies are designed to 

achieve accuracy. Moreover, the disclosures of conflicts, the procedures for managing 

conflicts, and the procedures for protecting material, nonpublic information allow users 

of credit ratings to assess the steps an NRSRO has taken to ensure the integrity of its 

credit rating processes. 

Other Commission rules for NRSROs also contain provisions that were designed 

to promote competition. For example, Rule 17g-2(d)(3) requires NRSROs to publicly 

provide ratings histories for all credit ratings initially determined on or after June 26, 

2007. Further, as discussed below, the Commission’s May 2011 proposal, if adopted, 

would expand and enhance these disclosure requirements. These enhanced disclosures 

with respect to the performance of NRSROs’ credit ratings are designed to foster greater 

comparability and accountability of NRSROs with respect to their credit ratings as well 

as competition among NRSROs by making it easier for users of credit ratings to assess

the performance of NRSROs’ credit ratings. Ultimately, if adopted, these changes could 

make it easier for a smaller, newer NRSRO to demonstrate that it produces more accurate 

ratings. 

 

67 As discussed in section VI, some analysts believe that competition can lead to “ratings shopping”, 

which can result in ratings of lower credit quality. 68 See Senate Report p. 6-7.
24 

 

 As discussed above, NRSROs competing in the structured finance sector will 

potentially be affected by the November 2009 amendments to Rule 17g-5 prohibiting an 

NRSRO from issuing an issuer-paid rating on a structured finance product unless certain 

information about the transaction is disclosed to other NRSROs.69 An NRSRO may then 

be able to provide unsolicited ratings on these securities and establish itself as a provider 

of high quality ratings of structured finance products.70 

The Commission is aware of concerns that increased regulatory burdens on 

NRSROs could decrease competition in the credit rating industry by unduly burdening 

smaller NRSROs or deterring new entrants. In proposed rules implementing the NRSRO 

mandates of the Dodd-Frank Act, the Commission has made every effort to avoid 

impeding competition and has sought out comments regarding the effect that the 

proposals would have on competition. In addition, in the past, the Commission has 

granted exemptive relief from certain rules on a temporary basis to smaller NRSROs.71

V. COMMISSION’S VIEW ON TRANSPARENCY 

 

The fact that two of the smaller NRSROs (KBRA and Morningstar) were purchased by 

larger non-NRSRO entities suggests that participants in the credit rating industry 

continue to value the NRSRO designation. 

Congress described the Rating Agency Act as an act to improve ratings quality 

“by fostering accountability, transparency, and competition in the credit rating agency 

industry.”72 Similarly, Section 932 of the Dodd-Frank Act is titled “Enhanced regulation, 

accountability, and transparency of [NRSROs].” Both Acts contain various provisions to 

increase the transparency—through clear disclosure open to public scrutiny—of, among 

other things, NRSROs’ credit rating procedures and methodologies, business practices, 

and credit ratings performance. 

 

69 See Rule 17g-5(a)(3) (17 CFR 240.17g-5(a)(3)). 70 Commenters have stated that some provisions of the rule have acted as a deterrent to its use and 

have suggested revisions to the rule to increase the issuance of unsolicited ratings. See, e.g., 

September 13, 2011 letter to Elizabeth Murphy, Secretary, U.S. Securities and Exchange 

Commission from The Securities Industry and Financial Markets Association, 

http://www.sec.gov/comments/4-629/4629-9.pdf.; and September 12, 2011 letter to Securities and 

Exchange Commission from The American Securitization Forum, 

http://www.sec.gov/comments/4-629/4629-12.pdf, in response to the Commission’s request for 

comment to assist it in carrying out a study required by Section 939 of the Dodd-Frank Act on, 

among other matters, the feasibility of establishing a system in which a public or private utility or 

a self-regulatory organization assigns NRSROs to determine credit ratings for structured finance 

products, Solicitation of Comment to Assist in Study on Assigned Credit Ratings, Exchange Act 

Release No. 64456 (May 10, 2011), http://www.sec.gov/rules/other/2011/34-64456.pdf. 71 See, e.g., Order Granting Temporary Exemption of Kroll Bond Rating Agency, Inc. from the 

Conflict of Interest Prohibition in Rule 17g-5(c)(1) of the Securities Exchange Act of 1934, 

Exchange Act Release No. 65339 (Sept. 14, 2011). 72 See the preamble to the Rating Agency Act.
25 

 The Rating Agency Act added Section 15E(a)(3) of the Exchange Act,73 which 

requires the Commission to issue rules requiring an NRSRO to make certain information 

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

means. Exchange Act Rule 17g-1(i)74 specifies that the information consists of the 

NRSRO’s current Form NRSRO and Exhibits 1 through 9 to Form NRSRO. These 

exhibits contain information about each NRSRO’s performance statistics; procedures and 

methodologies for determining credit ratings; procedures to prevent the misuse of 

material, non-public information; organizational structure; code of ethics (or explanation 

of why it does not have a code of ethics); conflicts of interest; procedures to manage 

conflicts of interest; credit analysts; and designated compliance officers.75

The following is a list of the Internet website links where Form NRSRO and 

Exhibits 1 through 9 for each NRSRO currently can be obtained:76

A.M. Best 

http://www.ambest.com/nrsro/index.html

 

DBRS 

http://dbrs.com/about/regulatoryAffairs 

 EJR 

http://www.egan-jones.com/nrsro.aspx 

 

Fitch 

http://www.fitchratings.com/jsp/corporate/PolicyRegulation.faces?context=3&det

ail=4 

 

 JCR

http://www.jcr.co.jp/english/nrsro/index.html

 KBRA

http://www.krollbondratings.com/regulatory.php

 Moody’s 

http://v3.moodys.com/Pages/reg001002.aspx

 

 Morningstar 

https://www.realpoint.com/PublicDocs/NRSRO%20Application.pdf

 

73 15 U.S.C. 78o-7(a)(3). 74 17 CFR 240.17g-1(i). 75 The Commission’s examination staff focuses on the quality and accuracy of an NRSRO’s 

disclosures during an examination of an NRSRO. Prior to the implementation of the NRSRO 

registration and oversight program, certain credit rating agencies disclosed some of this 

information, particularly with respect to credit rating performance statistics and their procedures 

and methodologies for determining credit ratings. 76 These links were current as of October 2011. 
26 

 R&I

http://www.r-i.co.jp/eng/rating/nrsro/nrsro.html 

 S&P 

http://www.standardandpoors.com/regulatory-affairs/ratings/en/us 

 The Dodd-Frank Act contains a number of provisions relating to NRSRO 

transparency.77 Section 943, for example, requires the Commission to prescribe rules on 

the use of representations and warranties in the market for ABS that, among other things, 

require NRSROs to include in any report accompanying a credit rating a description of 

the representations, warranties, and enforcement mechanisms available to investors and 

how they differ from the representations, warranties, and enforcement mechanisms in 

issuances of similar securities. In January 2011, the Commission adopted new rules 

related to representations and warranties in ABS offerings, including new Rule 17g-7, 

which tracks the statutory language.78

 

 In addition, Section 938(a) of the Dodd-Frank Act, 

among other things, requires the Commission to adopt rules requiring NRSROs to have 

procedures to clearly define the meaning of symbols used to denote credit ratings and to 

apply those symbols consistently. 

 Section 932(a)(8) of the Dodd-Frank Act added Sections 15E(q), (r), and (s) to the 

Exchange Act.79 Section 15E(q)(1) requires the Commission to issue rules to require an 

NRSRO to publicly disclose certain information on its initial credit ratings and any 

subsequent changes to the credit ratings, for the purpose of allowing users of credit 

ratings to evaluate the accuracy of ratings and compare the performance of ratings by 

different NRSROs. Section 15E(q)(2) requires that the disclosures are comparable 

among NRSROs, are clear and informative for investors having a wide range of 

sophistication, include performance information over a range of years and for a variety of 

types of credit ratings, are published and made freely available by the NRSRO on an 

easily accessible portion of its website, and in writing, when requested, are appropriate to 

the business model of a NRSRO, and that an NRSRO include an attestation with any 

credit rating it issues affirming that no part of the rating was influenced by any other 

business activities, that the rating was based solely on the merits of the instruments being 

rated, and that such rating was an independent evaluation of the risks and merits of the 

instrument. 

 Currently, the Commission’s rules require NRSROs to publish two types of 

information about the performance of their credit ratings: (1) performance statistics80

77 See Section VI of this report for a discussion of the disclosure requirements in Section 15E(h)(4) 

of the Exchange Act, added by Section 932(a)(4) of the Dodd-Frank Act, and proposed Rule 17g8(c), which relate to “look-back” reviews.

 and 

78 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). 79 15 U.S.C. 78o-7(q), (r), and (s). 80 See the instructions for Exhibit 1 to Form NRSRO. This type of disclosure shows the 

performance of an NRSRO’s credit ratings in the aggregate. Performance statistics consist of the 

percent of rated obligors, securities, and money market instruments in each category of credit 

 
27 

(2) ratings histories.81 The Commission has proposed to implement the rulemaking 

mandated in Section 15E(q) of the Exchange Act, in substantial part, by significantly 

enhancing the requirements for generating and disclosing this information by amending 

the instructions for Exhibit 1 to Form NRSRO and amending Rule 17g-1, Rule 17g-2, 

and Rule 17g-7.82

 The Commission has proposed amending the instructions for Exhibit 1 to 

standardize the production and presentation of the transition and default statistics. The 

Commission has also proposed amending paragraph (i) of Rule 17g-1 to require an 

NRSRO to make Form NRSRO and Exhibits 1 through 9 freely available on an easily 

accessible portion of its website, removing the option to make it available through 

“another comparable, readily accessible means,” and freely available in writing when 

requested. In addition, the Commission has proposed adding new paragraph (b) to Rule 

17g-7. This proposed amendment would implement rulemaking mandated in Section 

15E(q) of the Exchange Act by: (1) re-codifying in paragraph (b) of Rule 17g-7 

requirements currently contained in paragraph (d)(3) of Rule 17g-2 (the “100% Rule”); 

and (2) substantially enhancing those requirements. First, new proposed paragraph (b)(1) 

of Rule 17g-7 would require the NRSRO, among other things, to publicly disclose the 

ratings history information for free on an easily accessible portion of its corporate 

Internet website. The second enhancement would broaden the scope of credit ratings 

subject to the disclosure requirements. The third enhancement would increase the scope 

of information that must be disclosed about a rating action. The fourth enhancement 

would be to require that a rating history not be removed from the disclosure until 20 years 

after the NRSRO withdraws the credit rating assigned to the obligor, security, or money 

market instrument. In light of these proposed enhancements, as well as the proposed 

amendments to Exhibit 1 to Form NRSRO, the Commission has proposed repealing 

paragraph (d)(2) of Rule 17g-2 (the “10% Rule”). 

 Section 15E(r) of the Exchange Act requires the Commission to issue rules that 

require an NRSRO to have procedures: (1) to ensure that credit ratings are determined 

using procedures and methodologies, including qualitative and quantitative data and 

models, that are approved by the board of the NRSRO and are in accordance with the 

policies and procedures of the NRSRO for the development and modification of credit 

rating procedures and methodologies; (2) to ensure that when material changes to credit 

rating procedures and methodologies are made, that the changes are applied consistently 

 rating in the NRSRO’s rating scale that, over a given time period, were downgraded or upgraded 

to another credit rating category or went into default. The goal is to provide a mechanism for 

users of credit ratings to compare the performance of credit ratings across NRSROs. 81 See Rule 17g-2(d). This type of disclosure consists of the credit rating history of an obligor, 

security, or money market instrument rated by an NRSRO. A credit rating history includes the 

initial credit rating and all subsequent modifications to the credit rating (such as upgrades, 

downgrades, and placements on watch) and the dates of such actions. The goal is to allow users of 

credit ratings to compare how different NRSROs rated an individual obligor, security, or money 

market instrument and how and when those ratings were changed over time. The disclosure of 

ratings histories also is designed to provide “raw data” that can be used by third parties to generate 

independent performance statistics such as transition and default rates. 82 See May 2011 Proposing Release, 76 FR 33433-33452.
28 

to all credit ratings to which the changed procedures and methodologies apply, to the 

extent that changes are made to credit rating surveillance procedures and methodologies, 

the changes are applied to then-current credit ratings by the NRSRO within a reasonable 

time period determined by the Commission, by rule, and the NRSRO publicly discloses 

the reason for the change; and (3) to notify users of credit ratings of the version of a 

procedure or methodology used with respect to a particular credit rating, when a material 

change is made to a procedure or methodology, when a significant error is identified in a 

procedure or methodology that may result in credit rating actions, and of the likelihood of 

a material change resulting in a change in current credit ratings. 

To implement Section 15E(r), the Commission has proposed paragraph (a) of new 

Rule 17g-8.83 Proposed Rule 17g-8(a) would require an NRSRO to have policies and 

procedures with respect to the procedures and methodologies the NRSRO uses to 

determine credit ratings that are reasonably designed to ensure that: the procedures and 

methodologies are approved by its board of directors and are developed and modified in 

accordance with the policies and procedures of the NRSRO; material changes to the 

procedures and methodologies are applied consistently to all credit ratings to which the 

changed procedures or methodologies apply; material changes to the procedures and 

methodologies are, to the extent that the changes are to surveillance or monitoring 

procedures and methodologies, applied to then-current credit ratings within a reasonable 

period of time taking into consideration the number of ratings impacted, the complexity 

of the procedures and methodologies used to determine the credit ratings, and the type of 

obligor, security, or money market instrument being rated; the NRSRO promptly 

publishes on an easily accessible portion of its corporate Internet website material 

changes to the procedures and methodologies, the reason for the changes, and the 

likelihood the changes will result in changes to any current ratings; the NRSRO promptly 

publishes on an easily accessible portion of its corporate Internet website significant 

errors identified in a procedure or methodology that may result in a change in current 

credit ratings; and it discloses the version of a credit rating procedure or methodology, 

used with respect to a particular credit rating. 

Section 15E(s)(1) of the Exchange Act requires the Commission to issue rules 

requiring an NRSRO to accompany the publication of each credit rating with a form that 

discloses: information relating to the assumptions underlying credit rating procedures 

and methodologies, the data that was relied on to determine the credit rating, how the 

NRSRO used servicer or remittance reports, and with what frequency, to conduct 

surveillance of the credit rating, and information that can be used by investors and other 

users of credit ratings to better understand credit ratings issued by the NRSRO. Section 

15E(s)(2) of the Exchange Act requires that the form be easy to use and helpful for users 

of credit ratings to understand the information contained in the report, require the 

NRSRO to provide the content in a manner that is directly comparable across types of 

securities, and be made readily available to users of credit ratings, in electronic or paper 

form, as the Commission may, by rule, determine. Section 15E(s)(3) of the Exchange Act 

requires that the form contain nine enumerated types of qualitative information and four 

enumerated types of quantitative information. Section 15E(s)(4) of the Exchange Act 

 

83 See May 2011 Proposing Release, 76 FR 33452.
29 

requires that the issuer or underwriter of any ABS make publicly available the findings 

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

underwriter, in any case in which third-party due diligence services are employed by a 

NRSRO, an issuer, or an underwriter, the person providing the due diligence services 

provide to any NRSRO that produces a rating to which such services relate, written 

certification, in a form that the Commission must establish. In addition, the Commission 

must adopt rules requiring a NRSRO, at the time at which the NRSRO produces a rating, 

to disclose the certification to the public in a manner that allows the public to determine 

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

 The Commission has proposed adding new paragraphs (a)(1) and (2) to Rule 17g7 to implement rulemaking mandated in Sections 15E(s)(1), (2), (3), and (4)(D) of the 

Exchange Act. Proposed new paragraphs (a)(1) and (2) of Rule 17g-7 would require, 

respectively, an NRSRO when taking a rating action to publish a form containing 

information about the credit rating resulting from or subject to the rating action; and any 

certification of a provider of third-party due diligence services received by the NRSRO 

that relates to the credit rating. 

 Section 938(a) of the Dodd-Frank Act requires the Commission to issue rules 

requiring NRSROs to have policies and procedures with respect to the symbols, numbers, 

or scores it uses to denote credit ratings reasonably designed to: assess the probability 

that an issuer of a security or money market instrument will default, fail to make timely 

payments, or otherwise not make payments to investors in accordance with the terms of 

the security or money market instrument; clearly define the meaning of each symbol, 

number, or score in the rating scale used by the NRSRO to denote a credit rating 

category; and apply any such symbol, number, or score in a manner that is consistent for 

all types of obligors, securities and money market instruments for which the symbol, 

number, or score is used. 

 The Commission has proposed paragraph (b) of new Rule 17g-884 to implement 

rulemaking mandated in Section 938(a) of the Dodd-Frank Act. Proposed Rule 17g-8(b) 

would closely track the statutory text. 

An NRSRO currently submits the Form NRSROs required under Rule 17g-1 and 

the annual reports required under Rule 17g-3 to the Commission in paper form. As part 

of the May 2011 Proposing Release,85 the Commission proposed amending Rule 17g-1, 

the Instructions to Form NRSRO, Rule 17g-3, and Regulation S-T86

 

84 See May 2011 Proposing Release, 76 FR 33480. 85 See May 2011 Proposing Release, 76 FR 33482-33484. 86 17 CFR 232 et seq. 

to require an 

NRSRO to use the Commission’s Electronic Data Gathering, Analysis, and Retrieval 

(EDGAR) system to: (1) electronically file or furnish, as applicable, Form NRSRO and 

the information and documents contained in Exhibits 1 through 9 of Form NRSRO if the 

submission is made pursuant to paragraph (e), (f), or (g) of Rule 17g-1 (that is, an update 
30 

of registration, an annual certification, or a withdrawal from registration, respectively)87

and (2) electronically file or furnish, as applicable, the annual reports required by Rule 

17g-3.88

 

 

 

 One of the primary goals of the EDGAR system is to facilitate the rapid 

dissemination of financial and business information in connection with filings the 

Commission receives. Although paragraph (i) of Rule 17g-1 currently requires NRSROs 

to make the public portions of their current Form NRSROs publicly available on its 

website or through another comparable, readily accessible means within 10 business days 

after submission to the Commission, if adopted, the amendments would make such 

information available immediately in one location. 

VI. COMMISSION’S VIEW ON CONFLICTS OF INTEREST

Credit rating agencies operate under one of two business models (or a 

combination of them), and there are potential conflicts of interest inherent in both. As 

discussed above, the business model of the largest NRSROs is an “issuer pay” business 

model, which means that, for example, an issuer of bonds pays the rating agency to rate 

its bonds. This “issuer-pay” model is subject to a potential conflict in that, if the bond 

issuer can “shop” for another rating by a different rating agency, the NRSRO, in order to 

gain favor with the issuer and retain its business, may issue a credit rating that is higher 

than the NRSRO’s objective analysis would otherwise determine. This conflict could be 

broader if, for example, the fact that an NRSRO issues higher credit ratings with respect 

to a class of issuers results in the NRSRO retaining or attracting business across all 

issuers in that class.

The other business model is the “subscriber-pay” model, which means that 

investors pay the rating agency a subscription fee to access its ratings. This model also is 

subject, albeit perhaps to a lesser degree, to potential conflicts of interest. For example, 

the NRSRO may be aware that an influential subscriber holds a securities position (long 

or short) that could be advantaged if a credit rating upgrade or downgrade causes the 

market value of the security to increase or decrease; or that the subscriber invests in 

newly issued bonds and would obtain higher yields if the bonds have lower ratings. In 

another example, the NRSRO may be aware that a subscriber wishes to acquire a 

particular security but is prevented from doing so because its credit rating is lower than 

internal investment guidelines or an applicable contract permit. An upgrade of the credit 

rating of the security by the NRSRO could remove this impediment to investing in the 

security. These potential conflicts are mitigated, however, to the extent that subscribers 

have different interests with respect to an upgrade or downgrade of a particular security. 

 

87 See 17 CFR 240.17g-1(e), (f), and (g). The electronic submissions of Form NRSRO and Exhibits 

1 through 9 of Form NRSRO would be made available to the public immediately upon filing. 88 See 17 CFR 240.17g-3. An NRSRO is not required to make the Rule 17g-3 annual reports

publicly available and the reports would not be available to the public on EDGAR. The 

information collected pursuant to Rule 17g-3 is, and would continue to be, kept confidential to the 

extent permitted by the Freedom of Information Act (15 U.S.C. 552 et seq.).
31 

 Other potential conflicts are common to both business models. For example, an 

employee of the NRSRO may have an ownership interest in an issuer that is subject to a 

credit rating of the NRSRO.89

 A number of studies have attempted to identify cases of “ratings shopping” 

behavior, where, under the issuer-pay model, issuers seek to hire rating agencies that 

provide more favorable ratings. For example, according to one study of RMBS 

transactions in the early to mid 1990s, rating agencies whose rating methodologies 

required lower levels of credit enhancement than competitors tended to increase their 

market share.

 Another potential conflict, which, as discussed below, was 

addressed by the Dodd-Frank Act, may arise when a credit analyst who participated in 

rating an issuer was also seeking employment with the issuer.

90 A more recent study of corporate ratings concluded that the presence of a 

new entrant could result in more “issuer-friendly” ratings.91 Other analysts, however, 

have argued that the incentives for a rating agency to maintain its reputation outweigh the 

short term gain which can be achieved by issuing ratings of lower quality.92

The potential for conflicts of interest may be particularly acute in the structured 

product area, including, among other instruments, RMBS and CDOs, where issuers are 

separate legal entities created and operated by a relatively concentrated group of 

sponsors, underwriters and managers (collectively “arrangers”). These products are 

highly complex and require specific and technical knowledge of financial engineering 

and valuation of the underlying assets. But the complexity of the products and the 

issuers’ ability to control the flow of information about the underlying assets may lead to 

an outcome where the arranger has more or better information about the transaction than 

the investor.93 This informational imbalance, combined with very high concentration in 

NRSRO credit raters, increases the potential for conflicts of interest to impair market 

integrity. As discussed above, however, reputational risk provides incentives for firms to 

produce high quality ratings. 

 The Dodd-Frank Act contains several provisions that address conflicts of interest. 

Section 932(a)(4) of the Dodd-Frank Act added new subparagraph (3) (“Separation of 

ratings from sales and marketing”) to Exchange Act Section 15E(h) (“Conflicts of 

interest”).94

89 Rule 17g-5(c)(2) (17 CFR 240.17g-5(c)(2)) prohibits an NRSRO from issuing or maintaining a 

credit rating with respect to an issuer where the NRSRO, a credit analyst who participated in 

determining the rating, or a person responsible for approving the rating has any direct ownership 

interest in the issuer.

 Section 15E(h)(3) requires the Commission to issue rules to prevent the 

90 See Cantor and Packer (1994).

91 See Bo Becker, and Todd Milbourn. "How Did Increased Competition Affect Credit Ratings?" 

Journal of Financial Economics 101, no. 1 (July 2011): 2011-2012. 92 See, e.g., Steven L. Schwarcz, “Private Ordering of Public Markets: The Rating Agency

Paradox,” University of Illinois Law Review, Vol. 2002, No. 2 (Feb. 2002); Daniel M. Covitz and 

Paul Harrison, "Testing Conflicts of Interest at Bond Ratings Agencies with Market Anticipation: 

Evidence that Reputation Incentives Dominate," FEDS Working Paper No. 2003-68 (Dec. 2003).

93 Economists typically refer to this outcome as the existence of information asymmetries. See, e.g., 

George A. Akerlof, "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism," 

Quarterly Journal of Economics 84(3): 488–500 (1970).

94 15 U.S.C. 78o-7(h).

 
32 

sales and marketing considerations of an NRSRO from influencing the production of 

credit ratings by the NRSRO. Section 15E(h)(3) requires that the rules provide for 

exceptions for small NRSROs where the Commission determines that the separation of 

ratings production and sales and marketing activities is not appropriate, and for 

suspension or revocation of an NRSRO’s registration if the Commission finds, on the 

record, after notice and opportunity for a hearing, that the NRSRO has violated a rule 

issued “under this subsection” and the violation affected a rating. 

 The Commission has proposed to implement this provision by amending Rule 

17g-5.95

 Section 932(a)(4) of the Dodd-Frank Act also added new paragraph (h)(4), a 

“Look-back requirement,” to Section 15E of the Exchange Act.

 New Rule 17g-5(c)(8) would prohibit an NRSRO from issuing or maintaining a 

credit rating where an employee of the NRSRO who participates in the sales or marketing 

of a product or service of the NRSRO or of a person associated with the NRSRO also 

participates in determining or monitoring a credit rating or developing or approving 

procedures used for determining a credit rating. New paragraph (f) of Rule 17g-5 would 

provide that, upon written application by an NRSRO, the Commission may exempt it 

from Rule 17g-5(c)(8) if the Commission finds that due to the small size of the NRSRO it 

is not appropriate to require the separation of the production of ratings from sales and 

marketing activities. New paragraph (g) of Rule 17g-5 would provide that in a 

proceeding pursuant to Section 15E(d) or 21C of the Exchange Act, the Commission 

shall suspend or revoke the registration of an NRSRO if it finds that the NRSRO has 

violated a rule issued under Section 15E(h), that the violation affected a rating, and that 

suspension or revocation is necessary for the protection of investors and in the public 

interest.

96

 To implement this provision, the Commission has proposed paragraph (c) of new 

Rule 17g-8,

 Section 15E(h)(4) 

requires an NRSRO to have policies and procedures reasonably designed to ensure that in 

the case in which a former employee who participated in determining a credit rating, and 

was subsequently employed – within one year – by an entity or issuer, underwriter, or 

sponsor of a security subject to that credit rating, the NRSRO will conduct a “look-back” 

review to determine whether any conflicts of interest influenced the credit rating and take 

action to revise the rating, if appropriate, in accordance with such rules as the 

Commission shall prescribe. 

97

 

95 See May 2011 Proposing Release, 76 FR 33426.

 which would require that the NRSRO have such policies and procedures 

that include, at a minimum, those reasonably designed to ensure that if the “look-back” 

review determined that a conflict influenced a rating, the NRSRO would: immediately 

place the credit rating on a credit watch and include, among other things, an explanation 

that the reason for the action is that the rating was influenced by a conflict of interest; 

promptly determine whether the credit rating must be revised so it no longer is influenced 

by a conflict of interest; and promptly publish a revised credit rating or an affirmation of 

the credit rating, if appropriate. 

96 15 U.S.C. 78o-7(h)(4). 97 See May 2011 Proposing Release, 76 FR 33429.
33 

VII. CONCLUSION

 As described above, the Commission took a number of actions during the 

reporting period with respect to NRSROs. The Commission will continue to engage in 

rulemaking and other initiatives with respect to NRSROs to implement mandates of the 

Dodd-Frank Act and to otherwise enhance its oversight of NRSROs.