UNITED STATES OF AMERICA

before the

SECURITIES AND EXCHANGE COMMISSION

SECURITIES EXCHANGE ACT OF 1934

Release No. 90037 / September 29, 2020

ADMINISTRATIVE PROCEEDING 

File No. 3-20097

In the Matter of

KROLL BOND RATING 

AGENCY, LLC,

Respondent.

ORDER INSTITUTING 

ADMINISTRATIVE AND 

CEASE-AND-DESIST PROCEEDINGS 

PURSUANT TO SECTIONS 15E(d) AND 

21C OF THE SECURITIES EXCHANGE 

ACT OF 1934, MAKING FINDINGS, AND 

IMPOSING REMEDIAL SANCTIONS 

AND A CEASE-AND-DESIST ORDER

I.

The Securities and Exchange Commission (“Commission”) deems it appropriate and in the 

public interest that public administrative and cease-and-desist proceedings be, and hereby are, 

instituted pursuant to Sections 15E(d) and 21C of the Securities Exchange Act of 1934 (“Exchange 

Act”), against Kroll Bond Rating Agency, LLC. (“KBRA” or “Respondent”).

II.

In anticipation of the institution of these proceedings, KBRA has submitted an Offer of 

Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose 

of these proceedings and any other proceedings brought by or on behalf of the Commission, or to 

which the Commission is a party, and without admitting or denying the findings herein, except as 

to the Commission’s jurisdiction over it and the subject matter of these proceedings, which are 

admitted, KBRA consents to the entry of this Order Instituting Administrative and 

Cease-and-Desist Proceedings Pursuant to Sections 15E(d) and 21C of the Securities Exchange 

Act of 1934, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order 

(“Order”), as set forth below.

III.

On the basis of this Order and KBRA’s Offer, the Commission finds that:

Summary

1. This matter concerns KBRA’s failure to establish, maintain, enforce and document 

policies and procedures reasonably designed to assess the probability that an issuer of 
2

collateralized loan obligation (“CLO”) combination notes (“Combo Notes”) will default, fail to 

make timely payments, or otherwise not make payments to investors in accordance with the terms 

of the security, as required by Rule 17g-8(b)(1) of the Exchange Act.

2. From at least November 2018, KBRA failed to establish, maintain, enforce and 

document the required policies and procedures. As a consequence, KBRA issued and maintained 

ratings of CLO Combo Notes that departed from the objectives set forth in Rule 17g-8(b)(1).

3. Specifically, KBRA assigned ratings to CLO Combo Notes that were limited to the 

repayment of a defined “Rated Balance” amount. KBRA’s ratings of CLO Combo Notes did not 

include cash flows payable to CLO Combo noteholders beyond the Rated Balance amount, even 

though noteholders were entitled to these payments under the terms of the security. The Rated 

Balance was not the entire promise to noteholders under the terms of the security.

Respondent

4. KBRA is a Delaware limited liability company, headquartered in New York, New 

York and has been registered as a Nationally Recognized Statistical Rating Organization 

(“NRSRO”) since 2008.

Facts

KBRA Rated CLO Combo Notes to a “Rated Balance”

that is Different from the Payout to Investors

5. Since November 2018, upon engagement by certain entities, KBRA has issued 

credit ratings for CLO Combo Notes, which are a type of re-securitization of CLOs. CLOs are 

structured finance vehicles typically backed by portfolios of corporate loans and are usually 

structured by the issuer or sponsor as a series of tranches of interest-paying securities, along with 

a tranche of unrated equity. CLO Combo Notes can combine some or all of the unrated equity 

with one or more rated debt tranches of a given CLO into a pass-through security without 

additional credit enhancement. The ultimate cash flows payable to a holder of a CLO Combo Note 

are the same as the cash flows payable to a holder of the corresponding portions of the underlying

component CLO tranches. The risk of non-payment of the promised cash flows to the holder of 

the CLO Combo Note is also the same as the risk of non-payment of the ultimate return to a holder 

of the corresponding portions of the underlying component CLO tranches. 

6. In a 2019 publication, KBRA described that a Combo Note’s “main purpose” was 

to “improve overall capital efficiency” and noted that the “blending of notes and equity prevents 

the combo notes from incurring large losses, while providing an enhanced yield.” 

7. The CLO Combo Notes rated by KBRA included a defined Rated Balance amount 

and directed that noteholders were entitled to receive cash flows from the underlying components 

of the CLO Combo Note after the Rated Balance was reduced to zero. KBRA’s ratings of CLO 

Combo Notes were limited to repayment of the Rated Balance amount of each CLO Combo Note 

and did not reflect the risk associated with any cash flows payable to holders of the CLO Combo 

Note over and above the Rated Balance, even though such amounts could materialize, and would 

be payable to the holders of the CLO Combo Note.
3

8. During the relevant period, KBRA used its Global Structured Credit Global Rating 

Methodology (“Methodology”) to rate CLO Combo Notes. KBRA’s Methodology “was 

developed with the goal of producing credit ratings that perform in accordance with KBRA’s 

published rating definitions.” For ratings of CLO Combo Notes, CLO tranches, and other 

structured finance vehicles, KBRA defines its ratings using a “long-term credit” rating scale. 

KBRA’s long-term credit rating scales states that its ratings “are intended to reflect both the 

probability of default and severity of loss in the event of default, with greater emphasis on 

probability of default at higher rating categories.” Each of the CLO Combo Notes rated by KBRA 

was assigned ratings of “BBB-” or higher. KBRA defines a rating of “BBB-” to mean that the 

security is “determined to be of medium quality with some risk of loss due to credit-related events. 

Such issuers and obligations may experience credit losses during stress environments.” For 

long-term credit, not including declarations of bankruptcy or distressed asset sales, KBRA defines 

default as occurring if “there is a missed interest payment, principal payment, or preferred dividend 

payment, as applicable, on a rated obligation which is unlikely to be recovered.”

9. KBRA’s Methodology allowed KBRA to rate only the Rated Balance of a CLO 

Combo Note. During the relevant period, KBRA’s Methodology stated that “transactions may 

issue combination notes, which are generally comprised of two or more tranches of a transaction’s 

issued securities and/or equity.” For transactions in which the payments from the underlying 

components are used to reduce the outstanding balance of the CLO Combo Note, KBRA’s 

Methodology stated that “such obligations may carry a rating from KBRA that only addresses the 

repayment of principal.” The Methodology thus allowed KBRA to, under some circumstances, 

rate only the likelihood of the repayment of the notional amount of a CLO Combo Note, even 

though the CLO Combo Notes KBRA rated entitled noteholders to receive cash flows of the 

underlying components after the Rated Balance was reduced to zero. The KBRA rating did not 

reflect the risk associated with cash flows payable to noteholders over and above the Rated 

Balance, even though such amounts could materialize as the components continued to perform, 

and would be payable to the noteholders.

10. Consequently, KBRA’s CLO Combo Note ratings addressed only the Rated 

Balance amount set by the issuer in the CLO Combo Note’s transaction documents. The Rated 

Balance did not reflect the actual promise to noteholders. By limiting KBRA’s rating to the Rated 

Balance, and not including cash flows payable beyond that amount, KBRA’s CLO Combo Note 

ratings did not assess the probability that the issuers will default, fail to make timely payments, or 

otherwise not make payments in accordance with the terms of the security.

Use of KBRA’s Combo Note Ratings

11. Some of the CLO Combo Notes rated by KBRA have been purchased by life 

insurance companies, which are regulated by state insurance commissioners. The National 

Association of Insurance Commissioners (“NAIC”) is the U.S. standard-setting and regulatory 

support organization created and governed by the chief insurance regulators from the 50 states, the 

District of Columbia and five U.S. territories. The NAIC’s Securities Valuation Office (“SVO”), 

is responsible for the day-to-day credit quality assessment of securities owned by state-regulated 

insurance companies. The SVO regulates the investments owned by insurance companies by 

requiring insurance companies to reserve an amount of capital based on the perceived credit risk 

of its investments, also known as risk-based capital (“RBC”) reserves. Generally, investments 
4

with lower risk require a lower RBC, which is calculated as a percentage of the amount invested; 

higher risk investments require a higher percentage of RBC. Under NAIC guidelines, a Combo 

Note rated BBB- by KBRA would incur a 1.3% risk-based capital charge. By contrast, investing 

directly in the unrated equity component of that same Combo Note would require a life insurance 

company to reserve 30% of the investment as a risk-based capital charge.

12. Life insurance companies that invested in KBRA-rated CLO Combo Notes were 

able to use the investment-grade ratings assigned by KBRA to compute RBC charges. KBRA was 

generally aware that insurance companies sometimes purchased the CLO Combo Notes rated by 

KBRA and that its rating letters may be provided to the NAIC.

KBRA’s Policies and Procedures

13. During the relevant time period, KBRA’s rating scales stated that “KBRA’s ratings 

are intended to reflect both the probability of default and severity of loss in the event of default.” 

Default, in turn, is defined as “a missed interest payment, principal payment, or preferred dividend 

payment, as applicable, on a rated obligation which is unlikely to be recovered.” These definitions 

also appear in Exhibit 1 to KBRA’s Form NRSRO, filed with the Commission.

14. KBRA failed to establish, maintain, enforce and document internal policies and 

procedures that were reasonably designed to assess the probability that an issuer of CLO Combo 

Notes will default, fail to make timely payments, or otherwise not make payments to investors in 

accordance with the terms of the security because KBRA’s policies and procedures were not 

reasonably designed to ensure that KBRA’s analysts rate all payments promised to holders of a 

CLO Combo Note as set forth in the transaction documents. KBRA had no other policies or 

procedures that addressed this requirement.

Violation

15. Section 938 of the Dodd-Frank Act, entitled “Universal Ratings Symbols,” 

provides that the Commission shall require, by rule, each NRSRO to establish, maintain, and 

enforce written policies and procedures that, in relevant part, “(1) 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.” See Dodd-Frank Act, Pub. L. No. 111-203, 938(a)(1) (2010).

16. The Commission implemented Section 938(a) by adopting Rule 17g-8(b) of the 

Exchange Act. Rule 17g-8(b)(1) provides, in relevant part: “A[n NRSRO] must establish, 

maintain, enforce, and document policies and procedures that are reasonably designed to: (1) 

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.”
5

17. As a result of the conduct described above, KBRA willfully1violated Rule 

17g-8(b)(1) of the Exchange Act.

IV.

Undertakings

Respondent has undertaken to do the following within 180 days of the entry of this Order:

A. KBRA shall complete a comprehensive review of its policies, procedures, and 

internal controls that relate to the findings in this Order, including to assess compliance with Rule 

17g-8(b)(1).

B. KBRA shall submit a report summarizing actions taken to comply with the 

undertaking, and describing the revised or new policies and procedures established and 

documented under Rule 17g-8(b)(1), and the actions taken to maintain and enforce the revised or 

new policies and procedures as required by the rule. The report shall be supported by exhibits 

sufficient to demonstrate compliance, including but not limited to KBRA’s revised or newly 

established policies and procedures, and any revisions made to existing ratings. The Staff may 

make reasonable requests for further evidence of compliance and KBRA agrees to provide such 

evidence. The report and supporting material shall be submitted no later than 180 days from the 

date of this Order to Jeffrey P. Weiss, Assistant Director, Division of Enforcement, Securities and 

Exchange Commission, 100 F Street, N.E., Washington, DC 20549. Respondent agrees that if the 

Division of Enforcement believes that Respondent has not satisfied these undertakings, it may 

petition the Commission to reopen the matter to determine whether additional sanctions are 

appropriate.

C. Certify, in writing, compliance with the undertaking(s) set forth above. The 

certification shall identify the undertaking(s), provide written evidence of compliance in the form 

of a narrative, and be supported by exhibits sufficient to demonstrate compliance. The 

Commission staff may make reasonable requests for further evidence of compliance, and KBRA

agrees to provide such evidence. The certification and supporting material shall be submitted to 

Jeffrey P. Weiss, Assistant Director, Division of Enforcement, Securities and Exchange 

Commission, 100 F Street, N.E., Washington, DC 20549, with a copy to the Office of Chief 

Counsel of the Enforcement Division, no later than sixty (60) days from the date of the completion 

of the undertakings.

D. Deadlines for procedural dates shall be counted in calendar days, except that if the 

last day falls on a weekend or federal holiday, the next business day shall be considered to be the 

 

1

“Willfully,” for purposes of imposing relief under Section 15E(d) of the Exchange Act, “‘means no more than that 

the person charged with the duty knows what he is doing.’” Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) 

(quoting Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)). There is no requirement that the actor “also be aware 

that he is violating one of the Rules or Acts.” Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965). The decision in The 

Robare Group, Ltd. v. SEC, which construed the term “willfully” for purposes of a differently structured statutory 

provision, does not alter that standard. 922 F.3d 468, 478-79 (D.C. Cir. 2019) (setting forth the showing required to 

establish that a person has “willfully omit[ted]” material information from a required disclosure in violation of 

Section 207 of the Advisers Act).
6

last day. For good cause shown, the Staff may extend any of the procedural dates relating to the 

undertakings.

V.

In view of the foregoing, the Commission deems it appropriate to impose the sanctions 

agreed to in Respondent KBRA’s Offer.

Accordingly, pursuant to Sections 15E(d) and 21C of the Exchange Act, it is hereby 

ORDERED that:

A. KBRA cease and desist from committing or causing any violations and any future 

violations of Rule 17g-8(b)(1) of the Exchange Act;

B. KBRA is hereby censured;

C. KBRA shall pay disgorgement of $160,000.00, prejudgment interest of $4,836.33

and civil penalties of $600,000.00, to the Securities and Exchange Commission. Payment shall be 

made in the following installments: KBRA shall pay $60,000.00 of the disgorgement amount and 

all prejudgment interest within thirty (30) days of the entry of this Order. KBRA shall pay the 

remaining $100,000.00 of disgorgement within 364 days of the entry of this Order. KBRA shall 

pay $130,000.00 of the civil penalty within thirty (30) days of the entry of this Order. KBRA shall 

pay the remaining $470,000.00 of the civil penalty amount within 364 days of the entry of this 

Order. Payments shall be applied first to post-order interest, which accrues pursuant to SEC Rule 

of Practice 600 and/or pursuant to 31 U.S.C. §3717. Prior to making the final payment set forth 

herein, Respondent shall contact the staff of the Commission for the amount due. If Respondent

fails to make any payment by the date agreed and/or in the amount agreed according to the schedule 

set forth above, all outstanding payments under this Order, including post-order interest, minus 

any payments made, shall become due and payable immediately at the discretion of the staff of the 

Commission without further application to the Commission.

Payments must be made in one of the following ways:

(1) KBRA may transmit payment electronically to the Commission, which will provide 

detailed ACH transfer/Fedwire instructions upon request;

(2) KBRA may make direct payment from a bank account via Pay.gov through the SEC 

website at http://www.sec.gov/about/offices/ofm.htm; or

(3) KBRA may pay by certified check, bank cashier’s check, or United States postal 

money order, made payable to the Securities and Exchange Commission and 

hand-delivered or mailed to:

Enterprise Services Center

Accounts Receivable Branch

HQ Bldg., Room 181, AMZ-341

6500 South MacArthur Boulevard

Oklahoma City, OK 73169
7

Payments by check or money order must be accompanied by a cover letter identifying 

KBRA as a Respondent in these proceedings, and the file number of these proceedings; a copy of 

the cover letter and check or money order must be sent to Jeffrey P. Weiss, Assistant Director, 

Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 

20549.

D. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, a Fair Fund is 

created for the disgorgement, prejudgment interest and penalties referenced in paragraph C above. 

Amounts ordered to be paid as civil money penalties pursuant to this Order shall be treated as 

penalties paid to the government for all purposes, including all tax purposes. To preserve the 

deterrent effect of the civil penalty, Respondent agrees that in any Related Investor Action, it shall 

not argue that it is entitled to, nor shall it benefit by, offset or reduction of any award of 

compensatory damages by the amount of any part of Respondent’s payment of a civil penalty in 

this action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty 

Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting the 

Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the Penalty 

Offset to the Securities and Exchange Commission. Such a payment shall not be deemed an 

additional civil penalty and shall not be deemed to change the amount of the civil penalty imposed 

in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a private 

damages action brought against Respondent by or on behalf of one or more investors based on 

substantially the same facts as alleged in the Order instituted by the Commission in this proceeding.

E. KBRA shall comply with the undertakings enumerated in Section IV above. 

By the Commission.

Vanessa A. Countryman 

Secretary