6378 Federal Register / Vol. 72, No. 27 / Friday, February 9, 2007 / Proposed Rules 

1See Adoption of Amendments to Rule 15c3–1 

and Adoption of Alternative Net Capital 

Requirement for Certain Brokers and Dealers, 

Exchange Act Release No. 11497 (June 26, 1975), 40 

FR 29795 (July 16, 1975) and 17 CFR 240.15c3–1. 

2 15 U.S.C. 78a et seq. 

3See 17 CFR 240.15c3–1(c)(2). 

4See 17 CFR 240.15c3–1(c)(2)(vi). 

5See, e.g., 17 CFR 240.15c3–1(c)(2)(vi)(E), (F), 

and (H). 

6See Id. 

7See, e.g., Letter from Gregory C. Yadley, Staff 

Attorney, Division of Market Regulation, SEC, to 

Ralph L. Gosselin, Treasurer, Coughlin & Co., Inc. 

(November 24, 1975). 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 240 and 249b 

[Release No. 34–55231; File No. S7–04–07] 

RIN 3235–AJ78 

Oversight of Credit Rating Agencies 

Registered as Nationally Recognized 

Statistical Rating Organizations 

AGENCY: Securities and Exchange 

Commission (‘‘Commission’’). 

ACTION: Proposed rule. 

SUMMARY: The Commission is proposing 

for comment rules to implement 

provisions of the Credit Rating Agency 

Reform Act of 2006 (the ‘‘Act’’), enacted 

on September 29, 2006. The Act defines 

the term ‘‘nationally recognized 

statistical rating organization,’’ provides 

authority for the Commission to 

implement registration, recordkeeping, 

financial reporting, and oversight rules 

with respect to registered credit rating 

agencies, and directs the Commission to 

issue final implementing rules no later 

than 270 days after its enactment (or by 

June 26, 2007). 

DATES: Comments should be received on 

or before March 12, 2007. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/proposed.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number S7–04–07 on the subject line; 

or 

• Use the Federal eRulemaking Portal 

(http://www.regulations.gov). Follow the 

instructions for submitting comments. 

Paper Comments 

• Send paper comments in triplicate 

to Nancy M. Morris, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number S7–04–07. This file number 

should be included on the subject line 

if e-mail is used. To help us process and 

review your comments more efficiently, 

please use only one method. The 

Commission will post all comments on 

the Commission’s Internet Web site 

(http://www.sec.gov/rules/ 

proposed.shtml). Comments are also 

available for public inspection and 

copying in the Commission’s Public 

Reference Room, 100 F Street, NE., 

Washington, DC 20549. All comments 

received will be posted without change; 

we do not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make publicly available. 

FOR FURTHER INFORMATION CONTACT: 

Michael A. Macchiaroli, Associate 

Director, at (202) 551–5525; Thomas K. 

McGowan, Assistant Director, at (202) 

551–5521; Randall W. Roy, Branch 

Chief, at (202) 551–5522; Rose Russo 

Wells, Attorney, at (202) 551–5527; 

Sheila Swartz, Attorney, at (202) 551– 

5545, Division of Market Regulation, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–6628. 

SUPPLEMENTARY INFORMATION: 

I. Background 

The credit rating business has 

expanded significantly over the last 100 

years. Credit rating agencies now issue 

credit ratings for debt securities of 

public companies, sovereign 

governments, and municipalities, and 

for structured products such as asset 

backed securities. They also issue 

ratings on money market instruments 

such as commercial paper and with 

respect to obligors (that is, a credit 

assessment of an entity as opposed to 

the entity’s securities). Obligor ratings 

are issued on, among other entities, 

public companies, sovereign 

governments, and non-public 

companies such as banks and insurance 

companies. 

The scope of the credit rating business 

reflects the importance of credit ratings 

to securities market participants and 

other creditors. Investors use credit 

ratings to make investment decisions. 

Large public institutions, such as 

pension funds, also use credit ratings to 

prescribe the types of securities the 

institution is permitted to hold. 

Creditors, such as commercial and 

investment banks, use credit ratings to 

manage credit risk and govern 

transactional agreements. For example, 

credit agreements frequently contain 

trigger provisions requiring more 

collateral if the creditor’s credit rating 

drops. 

In addition, regulatory bodies have 

come to rely on credit ratings. In 1975, 

the Commission adopted the term 

‘‘nationally recognized statistical rating 

organization’’ or ‘‘NRSRO’’ as part of 

amendments to its broker-dealer net 

capital rule 1 under the Securities 

Exchange Act of 1934 (‘‘Exchange 

Act’’).2 The net capital rule requires a 

broker-dealer to maintain a level of net 

capital generally defined as net worth 

plus subordinated debt less illiquid 

assets and less percentage deductions 

on proprietary securities.3 The net 

capital rule prescribes specific 

percentage deductions for various 

classes of securities based on the 

liquidity and volatility of the type of 

security.4 These deductions, known as 

‘‘haircuts,’’ are intended to provide a 

financial buffer against risks arising 

from the broker-dealer’s business 

activities, including potential losses 

arising from market fluctuations in the 

prices of, or lack of liquidity in, the 

securities. 

The Commission’s incorporation of 

the term ‘‘nationally recognized 

statistical rating organization’’ into the 

net capital rule provided a means to 

distinguish between different classes of 

debt securities for the purpose of 

prescribing applicable haircuts.5 Thus, 

the net capital rule permits a brokerdealer to apply lower haircuts to certain 

types of debt securities that are rated in 

one of the four highest categories 

(known as the ‘‘investment grade’’ 

categories) by at least two NRSROs.6

Although the Commission used the 

term ‘‘nationally recognized statistical 

rating organization’’ in the net capital 

rule, it did not provide a definition. The 

Commission staff has identified 

NRSROs through no-action letters.7 In 

response to a request for a no-action 

letter from a credit rating agency, the 

Commission staff would review 

information and documents submitted 

by the credit rating agency concerning 

its financial and managerial resources, 

methodologies for determining ratings, 

policies for managing activities that 

could impact the impartiality of the 

credit ratings, and recognition in the 

marketplace. Based on this review, the 

Commission staff would determine 

whether the credit rating agency had the 

financial and managerial resources and 

appropriate policies and procedures to 

consistently issue credible and reliable 

credit ratings. The Commission staff 

also would determine whether the 

predominant users of credit ratings 

considered the credit rating agency to be 

credible and reliable. 


sroberts on PROD1PC70 with PROPOSALS
Federal Register / Vol. 72, No. 27 / Friday, February 9, 2007 / Proposed Rules 6379 

8See Letter from Nelson S. Kibler, Assistant 

Director, Division of Market Regulation, 

Commission, to John T. Anderson, Esquire, of Lord, 

Bissell & Brook, on behalf of Duff & Phelps, Inc. 

(February 24, 1982); Letter from Michael A. 

Macchiaroli, Assistant Director, Division of Market 

Regulation, Commission, to Paul McCarthy, 

President, McCarthy, Crisanti & Maffei, Inc. 

(September 13, 1983); Letter from Michael A. 

Macchiaroli, Assistant Director, Division of Market 

Regulation, Commission, to Robin Monro-Davies, 

President, IBCA Limited (November 27, 1990) and 

Letter from Michael A. Macchiaroli, Assistant 

Director, Division of Market Regulation, 

Commission, to David L. Lloyd, Jr., Dewey 

Ballentine, Bushby, Palmer & Wood (October 1, 

1990); Letter from Michael A. Macchiaroli, 

Assistant Director, Division of Market Regulation, 

Commission, to Gregory A. Root, President, 

Thomson BankWatch, Inc. (August 6, 1991) and 

Letter from Michael A. Macchiaroli Assistant 

Director, Division of Market Regulation, 

Commission, to Lee Pickard, Pickard and Djinis LLP 

(January 25, 1999); Letter from Annette L. Nazareth, 

Director, Division of Market Regulation, 

Commission, to Mari-Anne Pisarri, Pickard and 

Djinis LLP (February 24, 2003); and Letter from 

Mark M. Attar, Special Counsel, Division of Market 

Regulation, Commission, to Arthur Snyder, 

President, A.M. Best Company, Inc. (March 3, 

2005). 

9Moody’s and Standard and Poors represent over 

80% of the industry market share as measured by 

revenues according to the 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. (Sept. 6, 2006) (‘‘Senate Report’’). 

10See Commission rules 17 CFR 228.10(e), 

229.10(c), 230.134(a)(14), 230.436(g), 239.13, 

239.32, 239.33, 240.3a1–1(b)(3), 240.10b–10(a)(8), 

240.15c3–1(c)(2)(vi)(E), (F), and (H), 240.15c3–

1a(b)(1)(i)(C), 240.15c3–1f(d), 240.15c3–3a, Item 14, 

Note G, 242.101(c)(2), 242.102(d), 242.300(k)(3) and 

(l)(3), 270.2a–7(a)(10), 270.3a–7(a)(2), 270.5b–3(c), 

and 270.10f–3(a)(3). 

11 17 CFR 270.2a–7. 

12Form S–3 (17 CFR 239.13). 

13See, e.g., 15 U.S.C. 78c(a)(41) (defining the term 

‘‘mortgage related security’’); 15 U.S.C. 

78c(a)(53)(A) (defining the term ‘‘small business 

related security’’); and 15 U.S.C. 80a–

6(a)(5)(A)(iv)(I) (exempting certain companies from 

the provisions of the Investment Company Act of 

1940’’); Gramm-Leach-Bliley Act, Pub. L. No. 106–

102 (1999); Transportation Equity Act for the 21st 

Century, Pub. L. No. 105–178 (1998); Reigle 

Community Development and Regulatory 

Improvement Act of 1994, Pub. L. No. 103–325 

(1994); Department of Commerce, Justice, and State, 

The Judiciary, and Related Agencies Appropriations 

Act, FY2001, Pub. L. No. 106–553 (2000); Higher 

Education Amendments of 1992, Pub. L. No. 102–

325 (1992); Housing and Community Development 

Act of 1992, Pub. L. No. 102–550 (1992); Federal 

Deposit Insurance Corporation Improvement Act of 

1991, Pub. L. No. 102–242 (1991); and Financial 

Institutions Reform, Recovery, and Enforcement Act 

of 1989, Pub. L. No. 101–72 (1989). 

14Pub. L. No. 98–440, § 101, 98 Stat. 1689 (1984). 

15 15 U.S.C. 78c(a)(41). 

16 20 U.S.C. 1070 et seq. and 42 U.S.C. 2751 et 

seq., 34 CFR 668.15(b)(7)(ii) and (8)(ii). 

17For example, the California Insurance Code 

relies on NRSRO ratings in allowing Californiaincorporated insurers to invest excess funds in 

certain types of investments. See Cal. Ins. Code 

1192.10. 

18See, e.g., National Instrument 71–101, The 

Multi-jurisdictional Disclosure System (Oct. 1, 

1998) (Can.) and Law of the Securities Market, El 

Salvador, Title VI, Chapter II, Section 88(a). D.L. 

Not. 374, Published in the Official Newspaper No. 

149, Volume 340 of August 14, 1998. 

19Pub. L. No. 109–291 (2006). 

20See Section 2 of the Act and the Senate Report. 

21See Senate Report. 

22 Id. 

23See e.g., Sarbanes-Oxley Act of 2002, Pub. L. 

No. 107–204, 116 Stat. 745 (2002). 

24See Senate Report. 

25See e.g., Nationally Recognized Statistical 

Rating Organizations, Exchange Act Release No. 

34616 (August 31, 1994), 59 FR 46314 (September 

7, 1994); Capital Requirements for Brokers or 

Dealers Under the Securities Exchange Act of 1934, 

Exchange Act Release No. 39457 (December 17, 

1997), 62 FR 68018 (December 30, 1997); Order In 

the Matter of the Role of Rating Agencies in the U.S. 

Securities Markets Directing Investigation Pursuant 

to Section 21(a) of the Securities Exchange Act of 

1934, and Designating Officers for Such Designation 

(March 19, 2002); The Current Role and Function 

of Credit Rating Agencies in the Operation of the 

Securities Markets, Hearings Before the U.S. 

Securities and Exchange Commission (Nov. 15 and 

21, 2002) (‘‘Commission 2002 CRA Hearings’’) 

(Transcripts available on the Commission’s Web 

site at http://www.sec.gov/spotlight/ 

ratingagency.htm); 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, U.S. Securities 

and Exchange Commission, January 2003 

(‘‘Commission CRA Report’’); Concept Release: 

Rating Agencies and the Use of Credit Ratings 

Under the Federal Securities Laws, Securities Act 

Release No. 8236, 68 FR 35258 (June 12, 2003) 

(‘‘Commission CRA Concept Release’’); and 

Proposed Rule: Definition of Nationally Recognized 

Statistical Rating Organization, Securities Act 

Release No. 8570 (April 22, 2005), 70 FR 21306 

(April 25, 2005). 

26See Statement of Principles Regarding the 

Activities of Credit Rating Agencies, Technical 

Committee, International Organization of Securities 

Commissions (‘‘IOSCO’’) (September 25, 2003); 

Report on the Activities of Credit Rating Agencies, 

The Technical Committee, IOSCO (September 

2003); and Code of Conduct Fundamentals for 

Credit Rating Agencies, Technical Committee of 

IOSCO (December 2004). 

If these assessments were both 

positive, the Commission staff, after 

seeking the advice of the Commission, 

would issue a no-action letter informing 

broker-dealers that they could treat the 

credit rating agency as an NRSRO for 

purposes of the net capital rule.8 Since 

1975, the Commission staff has 

identified nine credit rating agencies as 

NRSROs. However, as a result of 

consolidation, only five credit rating 

agencies currently are identified as 

NRSROs—Moody’s Investors Service, 

Inc., Fitch, Inc., the Standard and Poor’s 

Division of the McGraw-Hill Companies 

Inc., A.M. Best Company, Inc., and 

Dominion Bond Rating Service 

Limited.9

Over time, the Commission has 

imported the NRSRO concept into a 

number of other rules.10 For example, 

definitions in Commission Rule 2a–7 

under the Investment Company Act of 

1940 include the term NRSRO to 

prescribe the type of securities a money 

market fund can hold.11 In addition, 

regulations adopted by the Commission 

under the Securities Act of 1933 permit 

offerings of certain nonconvertible debt, 

preferred, and asset-backed securities 

that are rated investment grade by at 

least one NRSRO to be registered on 

Form S–3—the Commission’s ‘‘shortform’’ registration statement—without 

the issuer satisfying a minimum public 

float test.12

The term ‘‘NRSRO’’ also has been 

incorporated into a wide range of 

federal legislation.13 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 1984,14 it required, 

among other things, that such securities 

be rated in one of the two highest rating 

categories by at least one NRSRO.15

Further, a number of other federal, 

state, and foreign laws and regulations 

have incorporated the term ‘‘NRSRO.’’

For example, the U.S. Department of 

Education uses ratings from NRSROs to 

set standards of financial responsibility 

for institutions seeking to participate in 

student financial assistance programs 

under Title IV of the Higher Education 

Act of 1965, as amended.16 Several state 

insurance codes rely, directly or 

indirectly, on NRSRO ratings in 

determining appropriate investments for 

insurance companies.17 Canada and El 

Salvador also have employed the 

concept.18

II. The Credit Rating Agency Reform 

Act of 2006 

The Act 19 seeks to address two 

important issues that have arisen with 

respect to credit rating agencies.20 First, 

the practice of identifying NRSROs 

through staff no-action letters has been 

criticized as a process that lacks 

transparency and creates a barrier to 

entry for credit rating agencies seeking 

wider recognition and market share.21

Second, the importance of credit ratings 

to the financial markets has raised the 

question of whether greater supervision 

of credit rating agencies is warranted.22

The failures of Enron and WorldCom—

which led to new laws and regulations 

governing a host of market participants 

including public companies, securities 

analysts, and accountants 23—increased 

concerns that credit rating agencies 

were operating outside the scope of any 

meaningful regulatory supervision.24

Over the years, the Commission has 

made attempts to address these issues 25

and has participated in international 

initiatives to address similar issues.26


sroberts on PROD1PC70 with PROPOSALS
6380 Federal Register / Vol. 72, No. 27 / Friday, February 9, 2007 / Proposed Rules 

27See Testimony of Commissioner Annette L. 

Nazareth, then Director, Division of Market 

Regulation, Commission, Before the House 

Subcommittee on Capital Markets, Insurance, and 

Government Sponsored Enterprises, Regarding 

Credit Rating Agencies (April 12, 2005) (Available 

on the Commission’s Web site at http:// 

www.sec.gov/news/testimony/ts041205aln.htm). 

28See Section 2 of the Act and Senate Report. 

29 15 U.S.C. 78c. 

30 15 U.S.C. 78o–7. 

31 15 U.S.C. 78q. 

32See e.g., IOSCO Statement of Principles 

Regarding the Activities of Credit Rating Agencies, 

September 25, 2003; Code of Conduct 

Fundamentals for Credit Rating Agencies (IOSCO 

Technical Committee), December 2004. 

33See Section 15E(l) of the Exchange Act (15 

U.S.C. 78o–7(l)). This provision of the Act renders 

moot the Commission’s earlier proposals to define 

the term ‘‘NRSRO’’ by rule and, consequently, they 

are withdrawn. See Capital Requirements for 

Brokers or Dealers Under the Securities Exchange 

Act of 1934, Exchange Act Release No. 39457 

(December 17, 1997), 62 FR 68018 (December 30, 

1997); Proposed Rule: Definition of Nationally 

Recognized Statistical Rating Organization, 

Securities Act Release No. 8570, (April 22, 2005), 

70 FR 21306 (April 25, 2005). 

34Section 15E(p) of the Exchange Act (15 U.S.C. 

78o–7(p)). The Act was enacted on September 29, 

2006 and June 26, 2007 is 270 days after that date. 35Section 15E(l)(2) of the Exchange Act (15 U.S.C. 

78o–7(l)(2)). 36 Id. 37Section 15E(c)(2) of the Exchange Act (15 

U.S.C. 78o–7(c)(2)). 38 Id. 39The proposed rules would be codified 

respectively at 17 CFR 240.17g–1 (‘‘Rule 17g–1’’); 

17 CFR 240.17g–2 (‘‘Rule 17g–2’’); 17 CFR 240.17g–

3 (‘‘Rule 17g–3’’); 17 CFR 240.17g–4 (‘‘Rule 17g–4’’); 

17 CFR 240.17g–5 (‘‘Rule 17g–5’’); and 17 CFR 

240.17g–6 (‘‘Rule 17g–6’’). Further specifics of this 

proposed regulatory program—including citations 

to provisions in the proposed rules and statutory 

provisions of the Act—are provided in the 

following sections describing the proposed rules 

individually. 

40Proposed Rule 17g–1. 

41See Sections 15E(a)(1)(B) and (b)(1) of the 

Exchange Act (15 U.S.C. 78o–7(a)(1)(B) and (b)(1)), 

Proposed Rule 17g–1, Form NRSRO, and 

instructions for the form. 

42See Senate Report. 

43See Sections 15E(a)(1)(B)(viii) and (ix) of the 

Exchange Act (15 U.S.C. 78o–7(a)(1)(B)(viii) and 

(ix)), proposed Rule 17g–3, Section 24 of the 

Exchange Act (15 U.S.C. 78x), 17 CFR 240.24b–2, 

17 CFR 200.80, and 17 CFR 200.83. 

44See Section 15E(b)(1) of the Exchange Act (15 

U.S.C. 78o–7(a)(1)(B) and (b)(1)), proposed Rule 

17g–1, Form NRSRO, and instructions for the form. 

45Section 15E(b)(2) of the Exchange Act (15 

U.S.C. 78o–7(b)(2)), proposed Rule 17g–1, Form 

NRSRO, and instructions for the form. 

46Proposed Rule 17g–2. 

47Proposed Rule 17g–3. 

However, the Commission’s efforts have 

been hindered by limitations to its 

authority.27 Congress ultimately found 

that legislation was necessary and 

enacted the Act to provide for voluntary 

registration and oversight of NRSROs.28

In overview, the Act adds definitions 

to Section 3 of the Exchange Act,29

creates a new Section 15E of the 

Exchange Act,30 and amends Section 17 

of the Exchange Act.31 These new 

statutory provisions, and the grants of 

Commission rulemaking authority 

under these provisions, establish a 

registration and regulatory program for 

credit rating agencies opting to have 

their credit ratings qualify for purposes 

of laws and rules using the term 

‘‘nationally recognized statistical rating 

organization.’’ These credit rating 

agencies would be required to register 

with the Commission, make public 

certain information to help persons 

assess their credibility, make and retain 

certain records, furnish the Commission 

with certain financial reports, 

implement policies to manage the 

handling of material non-public 

information and conflicts of interest, 

and abide by certain prohibitions 

against unfair, coercive, or abusive 

practices. The Commission notes that 

international standards, such as those 

promulgated by the Technical 

Committee of the International 

Organization of Securities Commissions 

(‘‘IOSCO’’), are generally consistent 

with the Act and the rules the 

Commission is proposing.32

The statutory provisions of the Act 

prohibit reliance on Commission staff 

no-action letters identifying NRSROs.33

These statutory provisions become 

effective on the earlier of June 26, 2007 

(270 days after the date of enactment of 

the Act) or the date the Commission 

issues final rules under the Act.34

However, as a transitional measure, noaction letters issued before the effective 

date may continue to be relied upon by 

regulatory users of credit ratings after 

the effective date if the credit rating 

agency identified in the letter has a 

pending application for registration 

before the Commission.35 In this case, 

the letter becomes void after the 

Commission has acted on the 

application.36

III. Description of the Proposed Rules 

A. Overview 

The Act mandates that the rules 

adopted to implement its provisions be 

‘‘narrowly tailored’’ to meet the Act’s 

requirements.37 Moreover, it provides 

that the rules adopted by the 

Commission may not ‘‘regulate the 

substance of credit ratings or the 

procedures or methodologies by which 

an NRSRO determines credit ratings.’’ 38

Under the proposed rules,39 in 

conjunction with the statutory 

provisions of the Act, a credit rating 

agency seeking to register as an NRSRO 

would need to apply to the Commission 

using Form NRSRO.40 The information 

furnished to the Commission in the 

form would fall broadly into two 

categories. First, the form would elicit 

information the credit rating agency 

would need to make public upon 

registration and thereafter update to 

keep the information current.41 As the 

Senate Report noted, making this 

information public would ‘‘facilitate 

informed decisions by giving investors 

the ratings quality of different firms.’’ 42

The second category of information 

would be submitted on a confidential 

basis to the extent permitted by law and 

the credit rating agency would not need 

to make it public or update it on the 

form (but would have to keep it current 

through proposed financial reporting 

requirements).43

After registration, the credit rating 

agency (now an NRSRO under the Act) 

would need to promptly update the 

information on its Form NRSRO to the 

extent an item or exhibit becomes 

materially inaccurate, with certain 

exceptions.44 In addition, on a calendar 

year basis, the credit rating agency 

would need to furnish the Commission 

with an annual certification on Form 

NRSRO that the information and 

documents in the form continues to be 

accurate and listing any material 

changes that occurred during the year.45

The most recently furnished Form 

NRSRO (initial, amended, or annual 

certification) and public exhibits would 

be the operative registration application 

and would need to be made public by 

the NRSRO (with exceptions for certain 

confidential information). 

After registration, the NRSRO would 

be subject to several substantive rules. 

First, the NRSRO would be subject to a 

recordkeeping rule, under which the 

NRSRO would be required to make and 

retain certain records relating to the 

business of issuing credit ratings.46

These records would assist the 

Commission, through its examination 

process, in monitoring whether the 

NRSRO complies with the requirements 

of the Act. Other required records 

would assist the Commission in 

monitoring whether the NRSRO follows 

its established policies and procedures. 

On an annual fiscal year basis, an 

NRSRO would be required to furnish 

the Commission with audited financial 

statements.47 This requirement is 

designed to assist the Commission in 

monitoring whether the credit rating 

agency continues to maintain adequate 

financial resources to consistently 

produce credit ratings with integrity. 

The financial reports also would 

include a schedule of the NRSRO’s 

largest customers. This would assist the 

Commission in monitoring for potential 

conflicts of interest arising from 


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Federal Register / Vol. 72, No. 27 / Friday, February 9, 2007 / Proposed Rules 6381 

48Section 15E(g) of the Exchange Act (15 U.S.C. 

78o–7(g)), proposed Rule 17g–4. 

49Section 15E(h) of the Exchange Act (15 U.S.C. 

78o–7(h)), proposed Rule 17g–5. 

50Section 15E(i) of the Exchange Act (15 U.S.C. 

78o–7(i)), proposed Rule 17g–6. 

51 15 U.S.C. 78c. 

52See Section 3 of the Act. 

53Section 3(a)(62) of the Exchange Act (15 U.S.C. 

78c(a)(62)). Section 3(a)(64) of the Exchange Act 

defines the ‘‘qualified institutional buyer’’ (‘‘QIB’’) 

as having the ‘‘meaning given such term in [17 CFR 

230.144A(a)] or any successor thereto.’’ 15 U.S.C. 

78c(a)(62). 

54Section 3(a)(61) of the Exchange Act (15 U.S.C. 

78c(a)(61)). 

55Section 3(a)(60) of the Exchange Act (15 U.S.C. 

78c(a)(60)). 

56See Section 3(a)(61)(C) of the Exchange Act (15 

U.S.C. 78c(a)(61)(C)). 

57See Section 3(a)(60) of the Exchange Act (15 

U.S.C. 78c(a)(60)). 

58See Section 3(a)(61)(A) of the Exchange Act (15 

U.S.C. 78c(a)(61)(A). 

59 15 U.S.C. 78o–7(a)(1)(A). 

dealings with the NRSRO’s largest 

customers. 

Finally, all NRSROs would be subject 

to requirements designed to protect 

their impartiality with respect to issuing 

credit ratings. First, they would be 

required to establish, maintain, and 

enforce specific written policies 

designed to prevent the misuse of 

material non-public information.48

Second, they would be subject to 

requirements to avoid, manage, and 

disclose conflicts of interest.49 Third, 

NRSROs would be prohibited from 

engaging in certain unfair, coercive, or 

abusive practices.50

B. Proposed Rule 17g–1—Registration 

Requirements 

The provisions of proposed Rule 17g–

1 would implement rulemaking 

authority under the Act with respect to 

how a credit rating agency must apply 

to be registered as an NRSRO, make the 

non-confidential information in its 

application public, apply to add an 

additional category of credit ratings to 

its registration, update its application, 

furnish the annual certification, and 

withdraw its registration. 

1. Entities Eligible To Apply for 

Registration 

The Act, by adding definitions to 

Section 3 of the Exchange Act,51

identifies the types of entities that may 

apply for registration with the 

Commission as an NRSRO.52 First, it 

defines a ‘‘nationally recognized 

statistical rating organization’’ as a 

credit rating agency that: 

(A) Has been in business as a credit 

rating agency for at least the three 

consecutive years immediately 

preceding the date of its application for 

registration under section 15E [of the 

Exchange Act]; 

(B) 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 

(C) Is registered under section 15E [of 

the Exchange Act].53

Section 3 of the Exchange Act also 

defines the term ‘‘credit rating agency’’

as any person: 

(A) Engaged in the business of issuing 

credit ratings on the Internet or through 

another readily accessible means, for 

free or for a reasonable fee, but does not 

include a commercial credit reporting 

company; 

(B) Employing either a quantitative or 

qualitative model, or both, to determine 

credit ratings; and 

(C) receiving fees from either issuers, 

investors, or other market participants, 

or a combination thereof.54

Finally, Section 3 of the Exchange Act 

defines the term ‘‘credit rating’’ to mean 

‘‘an assessment of the creditworthiness 

of an obligor as an entity or with respect 

to specific securities or money market 

instruments.’’ 55

Taken together, these three definitions 

limit the type of entity eligible to be 

registered with the Commission as an 

NRSRO. First, the entity must meet the 

definition of ‘‘credit rating agency’’ in 

Section 3 of the Exchange Act, which 

means, among other things, it must 

issue ‘‘credit ratings’’ as that term is 

defined in the act. Thus, an entity that 

issues ‘‘credit ratings’’ but does not 

receive compensation from issuers, 

investors, or other market participants 

would not be eligible for registration as 

an NRSRO because it would not meet 

the third prong of the definition of 

‘‘credit rating agency.’’ 56 Similarly, an 

entity would not be eligible for 

registration based solely on the fact that 

it has issued recommendations with 

respect to equity securities (for example, 

buy, sell, or hold) or ratings with respect 

to the quality of a company’s 

management. In either case, the entity 

would not have been issuing ‘‘credit 

ratings’’ as the term is defined because 

the recommendations and ratings are 

not assessments of the creditworthiness 

of an obligor or of specific securities or 

money market instruments.57

Another component of the first prong 

in the definition of ‘‘credit rating 

agency’’ is that the entity must be 

engaged in the business of issuing credit 

ratings on the Internet or through 

another readily accessible means, for 

free or for a reasonable fee.58 The statute 

does not define ‘‘reasonable fee.’’ As a 

preliminary matter, the Commission 

believes that the fees contemplated by 

the definition are those charged by a 

credit rating agency, if any, for a 

customer to access or receive the credit 

ratings of the credit rating agency. The 

fees a credit rating agency charges for 

other services are not part of the 

definition, since regulatory users of 

credit ratings would not need access to 

these other services to comply with 

statutes and regulations using the term 

‘‘NRSRO.’’ These other fees would 

include fees charged to issuers, obligors, 

or underwriters to determine or 

maintain a credit rating, fees charged to 

subscribers for credit analysis reports, 

and fees charged for consulting or other 

services. 

Additionally, the Commission 

preliminarily believes that the 

determination of whether a fee for 

accessing or obtaining credit ratings is 

reasonable would depend on the facts 

and circumstances. The Commission 

requests comment on the issue of 

determination of the reasonableness of 

fees charged by NRSROs for accessing or 

obtaining their credit ratings; in 

particular, the Commission requests 

comment on this issue in the context of 

users of credit ratings for regulatory 

purposes. 

Finally, if an entity meets the 

definition of ‘‘credit rating agency,’’ the 

entity must have been in the business of 

issuing credit ratings for the three years 

immediately preceding the date of its 

application for registration to be eligible 

to apply to register with the 

Commission as an NRSRO. 

2. Description of Proposed Registration 

Rule (Rule 17g–1) 

A credit rating agency that elects to be 

treated as an NRSRO must apply to the 

Commission to be registered as an 

NRSRO. Section 15E(a)(1)(A) of the 

Exchange Act provides that a credit 

rating agency applying for registration 

must furnish the Commission with an 

application in a form prescribed by 

Commission rule.59 In addition, Section 

15E(a)(1)(B) of the Exchange Act 

prescribes certain minimum information 

the credit rating agency must provide in 


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60 15 U.S.C. 78o–7(a)(1)(B). 61See Section 15E(a)(1)(B)(vii) of the Exchange 

Act (15 U.S.C. 78o–7(a)(1)(B)(vii)). 62 15 U.S.C. 78c(a)(62)(B). 63See definition of ‘‘NRSRO’’ in Section 3(a)(62) 

of the Exchange Act (15 U.S.C. 78c(a)(62)). 64This provision would be implemented under 

the Commission’s authority in Section 15E(a)(1)(A) 

of the Exchange Act to prescribe the form of the 

application (15 U.S.C. 78o–7(a)(1)(A)). 65See e.g., 17 CFR 240.15b1–1 and 17 CFR 

240.15b3–1 (broker-dealers); 17 CFR 240.15Ba2–1 

(municipal securities dealers); 17 CFR 240.17Ab2–

1 (clearing agencies); and 17 CFR 240.17Ac2–1 

(transfer agents). 

66 15 U.S.C. 78o–7(a)(2)(A). 

67 15 U.S.C. 78o–7(a)(2)(B). 

68Under Section 15E(a)(2)(B)(iii) of the Exchange 

Act, the Commission can extend this period for an 

additional 90 days for good cause or for such other 

period as the applicant consents (15 U.S.C. 78o–

7(a)(2)(B)(iii)). Practically, an applicant would need 

to consent to extend both the period for the 

Commission to make the initial determination and 

the 120-day period to conclude proceedings, since 

the 120-day period begins when the application is 

furnished to the Commission, not when the 

Commission determines to commence proceedings. 

69See Sections 15E(a)(1)(B)(viii) and (ix) of the 

Exchange Act (15 U.S.C. 78o–7(a)(1)(B)(viii) and 

(ix)). 

70 15 U.S.C. 78o–7(a)(1)(B)(x). 

71The withdrawal of a granted registration is 

discussed separately below. 

72This provision would be implemented under 

the Commission’s authority in Section 15E(a)(1)(A) 

of the Exchange Act to prescribe the form of the 

application (15 U.S.C. 78o–7(a)(1)(A)). 

73 15 U.S.C. 78o–7(a)(3). 

74Section 15E(a)(3) of the Exchange Act (15 

U.S.C. 78o–7(a)(3)). As discussed below, the 

Commission proposes not to require an NRSRO to 

make public certain information required in the 

application, including the information about the 

applicant’s 20 largest issuer and subscriber 

customers and the QIB certifications. 

75See discussion below with respect to Exhibits 

10 through 13 of proposed Form NRSRO. 

76See 17 CFR 200.80 and 17 CFR 200.80a. 

77 15 U.S.C. 78o–7(a)(3). 

the application.60 This includes 

information regarding the categories of 

credit ratings set forth in the definition 

of ‘‘NRSRO’’ in Section 3(a)(62)(B) of 

the Exchange Act with respect to which 

the credit rating agency ‘‘intends to 

apply for registration.’’ 61

Paragraph (a) of proposed Rule 17g–

1 would implement these provisions by 

providing that a credit rating agency 

applying to be registered with the 

Commission as an NRSRO would be 

required to furnish the Commission 

with an application on Form NRSRO. 

As discussed below, a credit rating 

agency would be able to apply to be 

registered for less than all five of the 

categories of credit ratings identified in 

Section 3(a)(62)(B) of the Exchange 

Act.62 For example, the credit rating 

agency might not meet the definitional 

thresholds discussed above with respect 

to a particular category of credit rating 

because it has not issued credit ratings 

in that category for the three years 

preceding the date of its application.63

Paragraph (b)(1) of proposed Rule 

17g–1 provides that an application 

would be considered furnished to the 

Commission on the date that the 

Commission receives a complete and 

properly executed Form NRSRO that 

follows all applicable instructions for 

the form.64 The requirement that an 

application must be accurate and 

complete comports with the 

requirements imposed on other classes 

of registrants under the Exchange Act.65

In addition, Section15E(a)(2)(A) of the 

Exchange Act requires the Commission 

to grant the application for registration 

or commence proceedings on whether to 

deny it within 90 days from the date the 

application is furnished to the 

Commission or a longer period if the 

applicant consents.66 Moreover, if 

proceedings are commenced, Section 

15E(a)(2)(B) of the Exchange Act 67

requires the Commission to conclude 

them within 120 days of the date the 

application was furnished to the 

Commission.68 As a result, the 

Commission must have a complete 

application before the 90-day and 120- 

day periods begin to run. 

Paragraph (b)(1) of proposed Rule 

17g–1 also provides that information 

submitted with the application on a 

confidential basis would be accorded 

confidential treatment to the extent 

permitted by law. As discussed in detail 

below, the information proposed to be 

required in Form NRSRO includes 

information which an NRSRO would 

need to make public after registration 

and information that is submitted on a 

confidential basis to the extent 

permitted by law. Some of the 

confidential information is required by 

Section 15E(a)(1)(B) of the Exchange 

Act.69 The Commission also would 

require certain additional information 

under authority conferred by Section 

15E(a)(1)(B)(x) of the Exchange Act.70

The Commission believes that it would 

be appropriate to provide confidential 

treatment to some of this information as 

well. Because the statute does not 

specifically grant confidential treatment 

to the additional information, the 

Commission would provide it through 

paragraph (b)(1) of proposed Rule 17g–

1 to the extent permitted by law. 

Paragraph (b)(2) of proposed Rule 

17g–1 would provide a mechanism for 

a credit rating agency to withdraw its 

application before the Commission takes 

final action on it.71 Specifically, it 

would require the credit rating agency 

to furnish the Commission with a 

written notice of withdrawal executed 

by a duly authorized person. The 

proposed requirement for execution by 

a duly authorized person is designed to 

ensure that the withdrawal notice 

reflects the intent of the credit rating 

agency. 

Paragraph (c) of proposed Rule 17g–

1 would provide that if information on 

the application becomes materially 

inaccurate before the Commission has 

granted or denied the application, the 

credit rating agency must promptly 

notify the Commission and amend the 

application with accurate and complete 

information by submitting an amended 

initial application on proposed Form 

NRSRO.72 Because preparing and 

furnishing an amended form may take 

time, this proposed notification 

provision is designed to alert the 

Commission as soon as possible that the 

application before it is materially 

inaccurate or incomplete. The intent is 

to avoid situations where the 

Commission continues to review an 

application that is no longer materially 

accurate. 

Section 15E(a)(3) of the Exchange Act 

provides that the Commission, by rule, 

shall require an NRSRO, after 

registration, to make the information 

submitted in its completed application 

and any amendments publicly available 

on its Web site or through another 

comparable, readily accessible means.73

It also permits the Commission to 

determine by rule the information that 

shall be made publicly available.74

Paragraph (d) of proposed Rule 17g–

1 would require that the information be 

made publicly available within five 

business days of the NRSRO being 

registered or furnishing an amendment 

or annual certification. The five 

business-day period is intended to 

provide the NRSRO with sufficient time 

to make the information public while 

also designed to ensure that users of 

credit ratings would have access to 

information within a reasonably short 

timeframe. Under the proposed rule, 

certain additional information 

submitted pursuant to Commission 

rulemaking authority also would not 

need to be made publicly available after 

registration.75 In addition, an applicant 

could seek confidential treatment for 

information in the application under 

existing law and rules governing 

confidential treatment.76 The 

Commission would accord this 

information confidential treatment to 

the extent permitted by law. 

While Section 15E(a)(3) of the 

Exchange Act 77 does not require an 

applicant to make the public 

information in its application publicly 

available until after registration, this 

information typically would be made 

available by the Commission to 


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78See Section 24 of the Exchange Act (15 U.S.C. 

78x), 17 CFR 240.24b–2, 17 CFR 200.80 and 17 CFR 

200.83. 

79Section 15E(a)(1)(B)(vii) of the Exchange Act 

(15 U.S.C. 78o–7(a)(1)(B)(vii)) provides that a credit 

rating agency must submit information with its 

application regarding the categories of credit ratings 

described in Section 3(a)(62)(B) of the Exchange Act 

(15 U.S.C. 78c(a)(62)(B)) for which it ‘‘intends to 

apply for registration.’’

80This provision further implements Section 

15E(a)(1) of the Exchange Act, which requires the 

Commission, by rule, to prescribe the form of an 

application for registration (15 U.S.C. 78o–7(a)(1)). 

81The specific requirements for completing the 

Form NRSRO in this circumstance are described in 

the next section. 

82 15 U.S.C. 78o–7. 

83 15 U.S.C. 78o–7(a)(2)(A) and (B). 

84 15 U.S.C. 78o–7(b)(1). 

85 Id. 

86This provision further implements Section 

15E(a)(1) of the Exchange Act (15 U.S.C. 78o–

7(a)(1)), which requires the Commission, by rule, to 

prescribe the form of an application for registration. 

87 15 U.S.C. 78o–7(b)(2). 

88 Id. 

89 15 U.S.C. 78o–7(e)(1). 

90 15 U.S.C. 78o–7(e)(1). 

91 15 U.S.C. 78o–7(b)(1). 

92Section 15E(c)(2) of the Exchange Act (15 

U.S.C. 78o–7(c)(2)). 

members of the public before the 

application is acted on by the 

Commission. As noted above, an 

applicant could seek confidential 

treatment for information in the 

application under existing laws and 

rules governing confidential 

treatment.78 This would be consistent 

with how the Commission treats 

applications of other entities. 

As noted, a credit rating agency may 

apply to be registered for fewer than all 

five categories of credit ratings 

described in Section 3(a)(62)(B) of the 

Exchange Act.79 Paragraph (e) of 

proposed Rule 17g–1 would create a 

mechanism for an NRSRO registered for 

fewer than the five categories to apply 

to be registered with respect to an 

additional category.80 The proposed 

rule provides that the NRSRO would 

need to furnish an amended Form 

NRSRO and indicate where appropriate 

on the form the additional category for 

which it is applying to be registered.81

The proposed rule also provides that the 

application to register for an additional 

category would be subject to the 

requirements in proposed Rule 17g–1 

and Section 15E of the Exchange Act 82

applicable to an initial application. For 

example, the provisions of paragraph 

(b)(1) of proposed Rule 17g–1 regarding 

when an application is deemed to have 

been furnished to the Commission 

would apply, as would the provisions of 

paragraph (c) with respect to amending 

the application prior to registration 

being granted. The time periods for the 

Commission to act on the application 

set forth in Sections 15E(a)(2)(A) and (B) 

of the Exchange Act also would apply 

to the amended form.83

Section 15E(b)(1) of the Exchange Act 

requires an NRSRO to promptly amend 

its application for registration if, after 

registration, any information or 

document provided as part of the 

application becomes materially 

inaccurate.84 The statute further 

provides that the information on credit 

ratings performance statistics (discussed 

more fully below) need only be updated 

on an annual basis and that the QIB 

certifications need not be updated.85

Paragraph (f) of proposed Rule 17g–1 

provides that an NRSRO would need to 

meet the statutory requirement to 

amend an application if information 

becomes materially inaccurate by 

promptly furnishing the amendment to 

the Commission on Form NRSRO.86 The 

Act does not define the term 

‘‘promptly.’’ The Commission believes 

the amendment should be furnished as 

soon as reasonably practicable after the 

NRSRO determines the information has 

become materially inaccurate. In most 

cases, the Commission believes that 

completing Form NRSRO, attaching any 

amended information and documents, 

and submitting the amendment package 

to the Commission should not take more 

than two days 

Section 15E(b)(2) of the Exchange Act 

requires an NRSRO to furnish the 

Commission with an amendment to its 

registration not later than 90 days after 

the end of each calendar year in a form 

prescribed by Commission rule.87 This 

section further provides that the 

amendment must (1) Certify that the 

information and documents provided in 

the application for registration (except 

the QIB certifications) continue to be 

accurate and (2) list any material change 

to the information and documents 

during the previous calendar year.88

Paragraph (g) of proposed Rule 17g–1 

would implement these statutory 

provisions by requiring an NRSRO to 

furnish the amendment on Form 

NRSRO. 

Finally, Section 15E(e)(1) of the 

Exchange Act provides that an NRSRO 

may withdraw from registration, subject 

to terms and conditions the Commission 

may establish as necessary in the public 

interest or for the protection of 

investors, by furnishing the Commission 

with a written notice of withdrawal.89

Paragraph (h) of proposed Rule 17g–1 

would provide that the notice must be 

executed by a person duly authorized by 

the NRSRO. The proposed requirement 

for execution by a duly authorized 

person is designed to ensure that the 

registration withdrawal notice reflects 

the intent of the credit rating agency. 

Section 15E(e)(1) of the Exchange Act 

also provides the Commission with the 

authority to establish additional terms 

and conditions with respect to the 

withdrawal of a credit rating agency’s 

NRSRO registration as necessary in the 

public interest or for the protection of 

investors.90 Such conditions potentially 

could include a requirement that the 

NRSRO provide public notice that its 

credit ratings will cease to be eligible for 

regulatory use. 

The Commission generally requests 

comment on all aspects of this proposed 

rule. The Commission also seeks 

comment on whether the five-day time 

limit for making the non-confidential 

information in the application publicly 

available should be longer or shorter. 

For example, the Commission seeks 

comment on whether five days is a 

sufficient amount of time to make an 

initial application public, given the 

volume of information that may need to 

be posted on a Web site or made public 

through another comparable means. 

Additionally, the Commission requests 

comment on ways other than the 

Internet that the information could be 

made public that would be comparable 

to posting the information on a Web 

site, particularly in terms of ensuring 

that users of credit ratings would have 

a comparable ease of access to the 

information. Further, the Commission 

seeks comment on whether it should 

define the term ‘‘promptly’’ in section 

15E(b)(1) of the Exchange Act 91 to mean 

a specific time period such as two, five, 

or ten business days or some other 

period. 

C. Proposed Form NRSRO 

1. Overview of How the Form Would Be 

Used 

The Commission is proposing a new 

form, ‘‘Form NRSRO,’’ the ‘‘Application 

for Registration as a Nationally 

Recognized Statistical Rating 

Organization.’’ The form is designed to 

serve four functions: To apply for initial 

registration, to amend the scope of 

registration, to amend public 

information required by the form, and to 

make an annual certification. 

Instructions for the form describe how 

an applicant, and after registration, an 

NRSRO, should complete the form in 

each of these circumstances. The 

Commission construes the Act’s 

requirement that implementing rules be 

‘‘narrowly tailored’’ to also apply to 

proposed Form NRSRO.92

The Commission believes that having 

just one form (and one set of 

instructions) would reduce the burden 

on applicants, NRSROs, and 


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93As discussed below, an NRSRO would need to 

complete Item 7 when furnishing an amendment to 

the form or the annual certification required under 

Section 15E(b)(2) of the Exchange Act (15 U.S.C. 

78o–7(b)(2)). 

94See 15 U.S.C. 78c(a)(61) and 15 U.S.C. 

78c(a)(62). 

95See Section 15E(a)(2)(C) of the Exchange Act 

(15 U.S.C. 78o–7(a)(2)(C)). 

96See Section 15E(a)(2)(C)(ii)(I) of the Exchange 

Act (15 U.S.C. 78o–7(a)(2)(C)(ii)(I)). 

97Section 15E(a)(2)(C)(ii)(II) of the Exchange Act 

(15 U.S.C. 78o–7(a)(2)(C)(ii)(II)) directs the 

Commission to deny a credit rating agency’s 

application for registration as an NRSRO if the 

Commission finds that the applicant, if granted 

registration, would be subject to suspension or 

revocation of its registration under Section 15E(d) 

of the Exchange Act (15 U.S.C. 78o–7(d)). 

98As discussed below, Exhibit 2 would elicit the 

methodologies used by the credit rating agency to 

determine credit ratings. 

99Section 15E(a)(1)(C)(ii) of the Exchange Act 

requires an applicant to provide at least 2 QIB 

certifications for each category of credit rating for 

which the credit rating agency seeks to be registered 

(78o–7(a)(1)(C)(iii)). 

100See Section 15E(b)(1) of the Exchange Act, 

which requires an NRSRO to update certain 

information provided in its application for 

registration (15 U.S.C. 78o–7(b)(1)). 

101As explained below, Item 6 only would be 

used to provide information relating to the 

categories of credit ratings for which a credit rating 

agency was applying for registration. Therefore, 

unless the amendment is furnished to apply for 

registration in an additional category, Item 6 would 

not need to be completed or updated after 

registration. Item 7 requires information relating to 

current credit ratings, including information that 

could change relatively often such as the number 

of credit ratings currently issued. Therefore, this 

item would not need to be updated when 

information in the item materially changed. Instead, 

an NRSRO would be required to update it when 

furnishing a Form NRSRO for another reason. 

102As discussed below, Exhibit 3 requires 

policies and procedures implemented by the 

NRSRO to prevent the misuse of material nonpublic information. 

103 15 U.S.C. 78o–7(b)(2). 

104Section 15E(b)(2)(A) of the Exchange Act (15 

U.S.C. 78o–7(b)(2)(A)). 

105Section 15E(b)(2)(B) of the Exchange Act (15 

U.S.C. 78o–7(b)(2)(B)). 

106 15 U.S.C. 78o–7(b)(1)(A). 

107See Section 15E(b)(2)(A) of the Exchange Act 

(15 U.S.C. 78o–7(b)(2)(A)). 

108See Section 15E(b)(2)(B) of the Exchange Act 

(15 U.S.C. 78o–7(b)(2)(B)). 

Commission staff. For example, it would 

reduce the complexity of having 

different forms for the application, 

amendments, and annual certification. 

Using one form also would allow 

NRSROs to more quickly become 

familiar with the form and its 

instructions, which would reduce the 

potential for making mistakes in 

completing the form. It also would assist 

users of credit ratings in understanding 

the form and public exhibits and where 

to look on the form for specific 

information. 

A credit rating agency applying for 

registration as an NRSRO would need to 

complete the form by providing the 

required information in all the items 

(except Item 7) 93 and attaching all 

exhibits. The credit rating agency also 

would need to attach a minimum of 10 

certifications from QIBs (with at least 

two addressing each category for which 

registration is sought), and a nonresident credit rating agency would 

need to attach the undertaking required 

under proposed Rule 17g–2 (discussed 

below). 

The Commission would use the 

information provided on the form to 

make the threshold determination 

whether the applicant is a ‘‘credit rating 

agency’’ as defined in section 3(a)(61) of 

the Exchange Act and would meet the 

definition of ‘‘NRSRO’’ in section 

3(a)(62) of the Exchange Act.94 The 

Commission also would use the 

information on the form to determine 

whether the applicant meets the 

statutory requirements for registration.95

Specifically, the Commission would use 

the information to determine whether 

the applicant has adequate financial and 

managerial resources to consistently 

produce credit ratings with integrity and 

to comply with its established policies 

and methodologies (e.g., policies for 

determining credit ratings, managing 

material non-public information and 

conflicts of interest, and complying with 

applicable laws and regulations).96 The 

Commission also would use the 

information to determine whether the 

credit rating agency, if granted 

registration, would not be subject to 

having its registration suspended or 

revoked under section 15E(d) of the 

Exchange Act.97

After registration, an NRSRO would 

use Form NRSRO if it sought to apply 

for registration with respect to an 

additional category of credit ratings. In 

this case, the NRSRO would not need to 

update the non-public exhibits, and it 

also would not need to update the 

public exhibits to the extent that 

information or documents previously 

provided remained materially accurate. 

However, the fact that the NRSRO was 

seeking to expand the scope of its 

registration to an additional category of 

credit ratings likely would mean certain 

information provided in the public 

exhibits would no longer be materially 

accurate. For example, the NRSRO may 

have established new or additional 

methodologies to determine credit 

ratings in the category for which it was 

seeking registration. These would need 

to be provided as an update to Exhibit 

2.98 Finally, the NRSRO would need to 

provide two QIB certifications for each 

category of credit rating for which it is 

applying to be registered.99

An NRSRO also would use Form 

NRSRO to amend the information on the 

form and in the public exhibits after 

registration.100 The need to amend the 

form would arise whenever there was a 

material change to information in one of 

the items on the form (except for Items 

6 and 7) 101 or to information or a 

document provided in a public exhibit. 

For example, if the NRSRO materially 

changed its procedures for preventing 

the misuse of material non-public 

information, the NRSRO would be 

required to furnish the Commission 

with an amendment on Form NRSRO 

and include the new procedures as an 

update to Exhibit 3.102 It would not 

need to update the other public exhibits 

if the information in them remained 

materially accurate. 

Finally, an NRSRO would use Form 

NRSRO to furnish the annual 

certification required by Section 

15E(b)(2) of the Exchange Act.103 This 

section requires the NRSRO to certify on 

an annual calendar-year basis that the 

information and documents provided in 

its application continue to be materially 

accurate (other than the QIB 

certifications).104 It also requires the 

NRSRO to identify any material change 

to the information or documents that 

occurred during the previous calendar 

year.105 In addition, Section 15E(b)(1) of 

the Exchange Act provides that the 

performance statistics about the 

NRSRO’s credit ratings need only be 

updated on a yearly basis with the 

annual certification.106

The proposed Form NRSRO is 

designed to meet these statutory 

requirements. First, the certification on 

the facing page would include the 

representations needed for the annual 

certification; namely, that the NRSRO’s 

application on Form NRSRO, as 

amended, continues to be accurate.107

Second, Exhibit 1 would require 

information on credit rating 

performance statistics. The instructions 

would require this information to be 

provided in the initial application and, 

thereafter, updated with the annual 

certification (as opposed to the other 

public exhibits that would need to be 

updated promptly whenever they 

become materially inaccurate). The 

instructions also would require the 

NRSRO to include with the annual 

certification a list of each material 

change made during the previous 

calendar year.108

2. Items on the Form 

Checkboxes indicating nature of 

submission. The first entry an applicant 

or NRSRO would make on Form NRSRO 


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109 15 U.S.C. 78a et seq. 

110This would include the records required to be 

retained in proposed Rule 17g–2. 

111 15 U.S.C. 78o–7(j). 

112 15 U.S.C. 78o–7(a)(3). Paragraph (d) of 

proposed Rule 17g–1 (discussed above) would 

implement this rulemaking authority. 

113 15 U.S.C. 78o–7(a)(1)(D). 

114 15 U.S.C. 78o–7(a)(1)(B)(vii). 

115As discussed above, the definitions of ‘‘credit 

rating,’’ ‘‘credit rating agency,’’ and NRSRO in, 

respectively, Sections 3(a)(60), (61) and (62) of the 

Exchange Act prescribe the type of entity that is 

eligible for registration as an NRSRO (15 U.S.C. 

78c(a)(60), (61) and (62)). 

116Section 3(a)(61)(A) of the Exchange Act (15 

U.S.C. 78c(a)(61)(A)). 

117 Id. 

would be to indicate, by checking the 

appropriate box, the reason the form is 

being furnished: initial application, 

amendment, or annual certification. If 

an amendment, the NRSRO also would 

need to briefly describe the amendment 

on lines under the amendment check 

box. For example, if an NRSRO was 

filing the amendment because its 

address and organizational structure 

changed, the description of the 

amendments should be as brief as ‘‘Item 

1C (address change)’’ and ‘‘Exhibit 4 

(new organizational structure).’’

Item 1 (Identifying information). Item 

1 of proposed Form NRSRO would elicit 

the name and address of the credit 

rating agency, and the name and address 

of the contact person for the credit 

rating agency. The instructions for 

proposed Form NRSRO would provide 

that the individual listed as the contact 

person must be authorized to receive all 

communications and papers from the 

Commission and would be responsible 

for their dissemination within the credit 

rating agency. 

Item 2 (Legal status, place of 

formation, fiscal year end). Item 2 of 

proposed Form NRSRO would elicit the 

legal status of the credit rating agency 

(for example, corporation or 

partnership), the place and date of 

formation of the entity, and the fiscal 

year end of the credit rating agency. The 

information with respect to the fiscal 

year end of the applicant or NRSRO is 

relevant because Form NRSRO would 

require applicants to submit audited 

financial statements with the 

application. Proposed Rule 17g–3 would 

require NRSROs to annually furnish the 

Commission with audited financial 

statements covering the previous fiscal 

year. 

Item 3 (Undertaking by non-resident 

NRSRO). Paragraph (f) of proposed Rule 

17g–2 would require an NRSRO that 

does not reside in the United States to 

execute a written undertaking, in 

substantially the form provided in the 

proposed rule, to promptly provide 

books and records to the Commission in 

a form requested by the Commission, 

including translation into English. The 

proposed undertaking is designed to 

provide a means for the Commission to 

promptly obtain records subject to its 

examination authority located outside 

the U.S. without requiring that 

Commission staff travel to the location. 

In addition, because some non-resident 

NRSROs may maintain original records 

in a language other than English, the 

proposed undertaking would require a 

translation if the Commission requested 

it. 

Item 3 of proposed Form NRSRO 

would require a non-resident applicant 

to attach the required undertaking to its 

initial application. If the application is 

granted, the undertaking would be in 

place when the applicant becomes an 

NRSRO and is subject to the proposed 

recordkeeping requirements. The 

prescribed form of the undertaking 

would make it applicable only to books 

and records a credit rating agency is 

required to make, keep current, retain, 

or produce to the Commission pursuant 

to any provision of the Exchange Act 109

or any regulation under the Exchange 

Act.110 An applicant becomes subject to 

these recordkeeping requirements only 

after registration is granted and the 

applicant becomes an NRSRO. 

Item 4 (Compliance officer). Section 

15E(j) of the Exchange Act requires 

every NRSRO to designate an individual 

responsible for administering the 

policies and procedures of the credit 

rating agency to prevent the misuse of 

nonpublic information, to manage 

conflicts of interest, and to ensure 

compliance with the securities laws and 

the rules and regulations under those 

laws.111 Item 4 of proposed Form 

NRSRO would elicit the name of and 

contact information for this person. 

Item 5 (Method of making form and 

public exhibits readily accessible). 

Section 15E(a)(3) of the Exchange Act 

provides that the Commission shall, by 

rule, require an NRSRO, upon the 

granting of registration, to make the 

non-confidential information and 

documents submitted to the 

Commission in the initial application, 

amendments, or annual certifications 

publicly available on the NRSRO’s Web 

site or through another comparable, 

readily accessible means.112 Item 5 of 

proposed Form NRSRO would elicit 

information on how the applicant 

would make the public information 

readily accessible. Providing this 

information on proposed Form NRSRO 

would assist the Commission in 

verifying that the NRSRO is complying 

with this requirement and assist the 

public in locating the information to 

assess the credibility and integrity of the 

NRSRO. 

Item 6 (Categories of credit ratings for 

which registration is sought and QIB 

certifications). Item 6 of proposed Form 

NRSRO would only need to be 

completed when a credit rating agency 

was furnishing an initial application to 

be registered as an NRSRO and when an 

NRSRO was applying to expand the 

scope of its registration by adding an 

additional class of credit ratings. This 

item would elicit information about the 

categories of credit ratings for which the 

applicant was applying for registration. 

It also would require the applicant to 

attach the QIB certifications to the 

application (unless the applicant was 

exempt from this requirement under 

Section 15E(a)(1)(D) of the Exchange 

Act).113

Section 15E(a)(1)(B)(vii) of the 

Exchange Act requires an applicant for 

NRSRO registration to provide 

information with respect to the 

categories of credit ratings for which it 

is applying to be registered.114 Item 6 of 

proposed Form NRSRO would require a 

credit rating agency applying for 

registration, and an NRSRO applying to 

add a category of credit ratings to its 

registration, to indicate the categories of 

credit ratings for which registration was 

being sought. 

Item 6 also would elicit the 

approximate number of credit ratings 

issued in each category as of the date of 

the application, and the number of 

consecutive years preceding the date of 

the application that the credit rating 

agency has issued credit ratings with 

respect to each category indicated. This 

information would be used by the 

Commission in verifying that the credit 

rating agency meets the definitional 

thresholds for registration as NRSRO, 

including that the entity has been in 

business as a credit rating agency for the 

three consecutive years preceding the 

date of its application.115

Item 6 also would elicit a brief 

description of how the credit rating 

agency makes its credit ratings readily 

accessible. The Commission would use 

this information to verify that the 

applicant meets another definitional 

threshold for registration eligibility; 

namely, that the applicant issues credit 

ratings on the Internet or through 

another readily accessible means, for 

free or for a reasonable fee.116 The Act 

does not define ‘‘readily accessible’’

other than to specify that the method 

must be comparable to the Internet in 

terms of accessibility.117 Moreover, as 

discussed above, the Act does not define 

‘‘reasonable fee.’’ However, the 

Commission believes the ‘‘fee’’


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118 15 U.S.C. 78o–7(a)(1)(B)(ix). 

119See 15 U.S.C. 78o–7(a)(1)(C)(i), (ii) and (iii), 

respectively. 

120 15 U.S.C. 78c(a)(64). 

121 15 U.S.C. 78o–7(a)(1)(C)(iv). 

122The Senate Report further explained that ‘‘a 

QIB whose analysts regularly read and consider [a 

credit rating agency’s] ratings in the course of 

making investment decisions would have ‘‘used’’

them under the meaning of the bill. A QIB whose 

employees subscribe to or regularly receive the 

ratings but do not read them or, if they read them, 

rarely or never consider them in making their 

investment decisions would not be deemed to have 

‘‘used’’ the ratings.’’

123 15 U.S.C. 78o–7(a)(1)(C)(i)(I). 

124 Instructions to Item 6D of proposed Form 

NRSRO. 

125 Id. 

126 15 U.S.C. 78o–7(a)(1)(D). 

127Because Item 7 would not have been filled out 

when the NRSRO applied for registration, it would 

remain blank for a period of time between the 

granting of an initial registration and the time when 

the NRSRO furnishes a new Form NRSRO either as 

an amendment or annual certification. Item 6, 

however, would have been filled out as part of the 

application for registration. This item requires the 

same information as Item 7. Therefore, users of 

credit ratings would have the access to the 

information through Item 6 until the NRSRO 

furnished a new Form NRSRO. Thereafter, the 

information would be located in Item 7. 

128 15 U.S.C. 78o–7(a)(2)(C)(ii)(II). 

129 15 U.S.C. 78o–7(d). 

130 15 U.S.C. 78o–7(d). 

131 15 U.S.C. 78o–7(b)(4)(A), (D), (E), (G) and (H). 

132 15 U.S.C. 78o(b)(4). 

133 15 U.S.C. 78o–7(d). 

contemplated by the statute is the fee 

charged to access or receive the credit 

ratings of the credit rating agency (i.e., 

not the fees charged for other services). 

This information elicited in Item 6 (and 

after registration in Item 7) would assist 

the Commission in monitoring the cost 

to regulatory users of credit ratings of 

accessing or obtaining NRSRO credit 

ratings. 

Finally, Item 6 would require the 

applicant to provide QIB certifications. 

Section 15E(a)(1)(B)(ix) of the Exchange 

Act requires an applicant to submit a 

minimum of ten QIB certifications with 

the application.118 Sections 

15E(a)(1)(C)(i), (ii), and (iii) further 

provide, respectively, that: (1) The 

certifying QIB must not be affiliated 

with the applicant; (2) the certification 

may address more than one of the 

categories of credit ratings for which the 

applicant is seeking registration; and (3) 

at least two of the certifications must 

address each category of credit ratings 

for which the applicant is seeking 

registration.119 Section 15E(a)(1)(C)(iv) 

provides that the QIB must state in the 

certification that it meets the definition 

of a ‘‘QIB’’ in Section 3(a)(64) of the 

Exchange Act 120 and that the QIB has 

used the credit ratings of the applicant 

for at least three years immediately 

preceding the date of the application in 

the subject category or categories of 

subscribers.121 The Senate Report 

explained that the term ‘‘used’’ was 

intended to mean the QIB ‘‘seriously 

considered the ratings in some of [its] 

investment decisions.’’ 122

The proposed instructions to Item 6 

would prescribe the form of the QIB 

certification. For example, consistent 

with Section 15E(a)(1)(C)(i)(I) of the 

Exchange Act 123 and the Senate Report 

explaining that section, the QIB 

certification would be required to 

include a representation that the QIB 

‘‘has seriously considered the credit 

ratings of [the credit rating agency] in 

the course of making investment 

decisions for at least the three years 

immediately preceding the date of this 

certification, in the following classes of 

credit ratings.’’ 124 The QIB certification 

also would be required to be executed 

by a person duly authorized by the QIB 

to make the certification on behalf of the 

QIB.125 This is designed to ensure that 

the certification is that of the QIB and 

not an employee of the QIB who may 

have an interest (distinct from that of 

the QIB) in providing the certification to 

the applicant. In addition, as a measure 

designed to ensure the impartiality of 

the QIB’s assessment, the QIB would 

need to certify that it had not received 

compensation for providing the 

certification. 

Item 6 of proposed Form NRSRO also 

would require the applicant to indicate 

whether it was submitting the QIB 

certifications and, if so, how many 

certifications were being submitted or 

that the applicant was exempt from the 

requirement to provide the 

certifications. Under Section 

15E(a)(1)(D) of the Exchange Act, a 

credit rating agency is not required to 

submit the QIB certifications if it was 

identified as an NRSRO in a 

Commission staff no-action letter issued 

before August 2, 2006.126

The Commission requests comment 

on whether there should be a 

requirement for an NRSRO to notify the 

Commission if a QIB withdraws its 

certification. 

Item 7 (Categories of credit ratings 

covered by current registration). Item 7 

would solicit information about the 

categories of credit ratings for which the 

NRSRO was currently registered, the 

approximate number of credit ratings 

currently outstanding in each category, 

and the number of years the NRSRO has 

issued credit ratings in that category. It 

also would elicit information about how 

the NRSRO makes its credit ratings 

readily accessible to users of credit 

ratings. 

Because some of the information in 

Item 7 may change fairly regularly, this 

Item would need to be updated if it 

became materially inaccurate only when 

the NRSRO furnishes the next Form 

NRSRO either as an amendment or as an 

annual certification. Thus, if the 

information in Item 7 became materially 

inaccurate, it would be updated on an 

annual basis at a minimum. 

The information requested in Item 7 

would allow users of credit ratings to 

assess the NRSRO with respect to the 

number of credit ratings it has issued 

and the number of years it has issued 

credit ratings in each category for which 

it is registered.127

Item 8 (Potential statutory 

disqualifications). Section 

15E(a)(2)(C)(ii)(II) of the Exchange 

Act 128 directs the Commission to deny 

a credit rating agency’s application for 

registration as an NRSRO if the 

Commission finds that the applicant, if 

granted registration, would be subject to 

suspension or revocation of its 

registration under Section 15E(d) of the 

Exchange Act.129 Section 15E(d) of the 

Exchange Act 130 provides that the 

Commission, by order, shall censure, 

place limitations on the activities, 

functions, or operations of, suspend for 

a period not exceeding 12 months, or 

revoke the registration of an NRSRO, if 

the Commission finds that the NRSRO 

or a person associated with the NRSRO 

has committed certain acts described in 

Sections 15(b)(4)(A), (D), (E), (G), or (H) 

of the Exchange Act,131 been convicted 

of certain offenses described in Section 

15(b)(4)(B) of the Exchange Act,132 been 

convicted of certain other offenses, or if 

a person associated with the NRSRO is 

subject to a Commission order 

suspending or barring the person from 

being associated with an NRSRO. Item 

8 of proposed Form NRSRO would ask 

whether the acts, convictions or orders 

described in Section 15E(d) of the 

Exchange Act 133 applied to the credit 

rating agency or any person associated 

with the credit rating agency. 

If a question in Item 8 was answered 

‘‘yes,’’ the credit ratingagency would be 

required to provide additional 

information on a Disclosure Reporting 

Page (DRP) NRSRO as set forth in the 

instructions for Form NRSRO. The 

Commission would then need to 

evaluate whether an applicant’s 

registration could be granted in light of 

the disclosure. After registration, an 

NRSRO would need to update the 

information in Item 8 if there was a 

change. The Commission would then 

evaluate whether it would be 

appropriate to issue an order censuring, 


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134 15 U.S.C. 78o–7(d). 

135 15 U.S.C. 78o–7(a)(1)(B)(i), (ii), (iii), (iv), (v), 

(vi), and (viii). 

136 15 U.S.C. 78o–7(a)(1)(B)(x). 

137See Sections 15E(a)(1)(B)(viii), (a)(1)(B)(ix), 

and (k) of the Exchange Act (15 U.S.C. 78o–

7(a)(1)(B)(viii), (a)(1)(B)(ix), and (k). 

138See also Section 24 of the Exchange Act (15 

U.S.C. 78x), 17 CFR 240.24b–2, 17 CFR 200.80 and 

17 CFR 200.83. 

139See Sections 15E(a)(2)(C) and (d) of the 

Exchange Act (15 U.S.C. 78o–7(a)(2)(C) and (d)). 

140 15 U.S.C. 78o–7(b)(1). 

141 15 U.S.C. 78o–7(a)(1)(B)(i) and (ix). 

142 15 U.S.C. 78o–7(a)(1)(B)(i). 

143The credit rating notches or grades of a credit 

rating agency generally are represented by symbols, 

numbers or other designations that are used to 

distinguish the creditworthiness of the obligors, 

securities and money market instruments the credit 

rating agency rates. For example, some credit rating 

agencies use symbols such as AAA, AA, A, BBB, 

BB, B, CCC, and CC to distinguish the 

creditworthiness of corporate debt securities. AAA 

would be the highest rating and CC would be the 

lowest rating above the default or regulatory 

supervision of the issuer. 

144Section 15E(a)(1)(B)(x) of the Exchange Act 

provides that the Commission can require 

additional information that it finds is necessary or 

appropriate in the public interest or for the 

protection of investors (15 U.S.C. 78o–7(a)(1)(B)(x)). 

145 17 CFR 240.15c3–1(c)(2)(vi)(F). 

146 Id. 

placing limitations on the activities, 

functions, or operations of, suspending 

for a period not exceeding 12 months, 

or revoking the registration of the 

NRSRO as provided for under Section 

15E(d) of the Exchange Act.134

Certification. Proposed Form NRSRO 

would require the signature of an 

authorized person of the credit rating 

agency representing that the information 

and statements contained in the form 

are current, accurate, and complete or, 

if the NRSRO is submitting an annual 

certification, that the application, as 

amended, is current, accurate, and 

complete. 

3. Exhibits to the Form 

Proposed Form NRSRO would have 

13 exhibits. Sections 15E(a)(1)(B)(i), (ii), 

(iii), (iv), (v), (vi), and (viii) of the 

Exchange Act require the furnishing of 

some of this information.135 The 

Commission is proposing to require the 

furnishing of the remainder of the 

information pursuant to its authority 

under Section 15E(a)(1)(B)(x) of the 

Exchange Act.136 The proposed exhibits 

are an important part of the program for 

NRSRO oversight. Therefore, the 

information and documents proposed to 

be provided in the exhibits must be 

sufficiently detailed to allow the 

Commission to evaluate and verify the 

information and, with respect to the 

public exhibits, assist users of credit 

ratings in understanding how the 

NRSRO manages its activities. 

Exhibits 1 through 9 would be public 

exhibits that the NRSRO would be 

required to keep current through 

furnishing updated information and 

make readily accessible to the public. 

The information in these public exhibits 

would be useful to the users of credit 

ratings in assessing the ratings quality of 

the NRSRO and in comparing the 

NRSRO to other NRSROs. 

Exhibits 10 through 13 would be 

accorded confidential treatment by the 

Commission, to the extent permitted by 

law, under provisions of Section 15E of 

the Exchange Act 137 in conjunction 

with proposed Rule 17g–1.138 The 

information in the public and 

confidential exhibits would be used by 

the Commission to make the 

determination whether the credit rating 

agency has adequate financial and 

managerial resources to consistently 

produce credit ratings with integrity and 

to materially comply with the 

methodologies, policies, and procedures 

it discloses in the public exhibits.139

The information in Exhibits 10 

through 13 would not need to be 

updated by furnishing amendments on 

proposed Form NRSRO after registration 

is granted. Instead, this information 

would be updated through the proposed 

financial reporting rule (proposed Rule 

17g–3). Section 15E(b)(1) of the 

Exchange Act 140 provides that 

information submitted with an 

application must be updated promptly 

when the information becomes 

materially inaccurate, except 

information submitted under Sections 

15E(a)(1)(B)(i) and (ix) of the Exchange 

Act (respectively, the performance 

statistics, which must be updated 

annually, and the QIB certifications, 

which need not be updated).141 Thus, 

under the statute, the information 

provided in Exhibits 10 through 13 

would need to be updated promptly if 

it became materially inaccurate. 

However, the Commission is not 

proposing that an NRSRO update these 

exhibits by furnishing the information 

to the Commission in Form NRSRO 

amendments. Rather, the Commission is 

proposing that the NRSRO would 

update this information as part of the 

financial statements that would be 

required to be furnished under proposed 

Rule 17g–3. 

Exhibit 1 (Public). Section 

15E(a)(1)(B)(i) of the Exchange Act 

requires that an application for 

registration as an NRSRO contain credit 

ratings performance measurement 

statistics over short-term, mid-term, and 

long-term periods (as applicable).142

This information would be required as 

Exhibit 1 to proposed Form NRSRO. 

The Exchange Act does not otherwise 

define or identify the particular credit 

rating performance statistics to be 

provided with the application. The 

Commission believes credit rating 

agencies typically generate statistical 

reports showing historical default and 

downgrade rates within each credit 

rating notch or grade.143 Further, the 

Commission believes these types of 

statistics are important indicators of the 

performance of a credit rating agency in 

terms of its ability to assess the 

creditworthiness of issuers and obligors 

and, consequently, would be useful to 

users of credit ratings in evaluating an 

NRSRO. 

In addition to historical default and 

downgrade rates, the instructions to 

proposed Form NRSRO also would 

provide that an applicant or NRSRO 

include in the exhibit definitions of the 

credit ratings (i.e., an explanation of 

each grade or notch) and explanations of 

the performance measurement statistics, 

including the metrics used to derive the 

statistics. The Commission believes that 

requiring this information would be 

necessary or appropriate in the public 

interest or for the protection of investors 

because it would assist users of credit 

ratings in understanding how the 

measurements were derived and in 

making comparisons with the 

measurement statistics of other 

NRSROs.144

The definitions of the notches and 

grades also would assist the 

Commission in assessing whether the 

NRSRO’s ratings, as a practical matter, 

can be used for certain Commission 

rules. For example, 

paragraph(c)(2)(vi)(F) of Commission 

Rule 15c3–1 specifies lower haircuts for 

debt securities that are rated in one of 

the ‘‘four highest rating categories’’ (i.e., 

notches) of at least two NRSROs.145 The 

current NRSROs generally have at least 

eight notches for their debt securities 

with the top four commonly referred to 

as ‘‘investment grade.’’ If an NRSRO 

decided to use less than eight notches, 

the Commission would need to evaluate 

whether, based on the NRSRO’s 

definitions, securities that would be 

included in the top four notches would 

be suitable for the lower haircuts 

specified in paragraph(c)(2)(vi)(F) of 

Rule 15c3–1.146

The Commission generally requests 

comment on Exhibit 1. The Commission 

also requests comment on whether the 

performance measurement statistics 

should use standardized inputs, time 

horizons and metrics to allow for greater 

comparability. Commenters are 

requested to provide specific details as 

to how these statistical measures could 


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147 15 U.S.C. 78o–7(a)(1)(B)(ii). 

148See 15 U.S.C. 78a et seq. 

149See particularly, Section 3(a)(61)(B) of the 

Exchange Act (15 U.S.C. 78c(a)(61)(B)). 

150 15 U.S.C. 78c(a)(61). 

151See Section 3(a)(61) of the Exchange Act 

defining the term ‘‘credit rating agency’’ (15 U.S.C. 

78c(a)(61)). 

152See Sections 15E(a)(2)(C) and 15E(d) of the 

Exchange Act (15 U.S.C. 78o–7(a)(2)(C) and (d)). 

153 15 U.S.C. 78o–7(a)(1)(B)(iii). 

154 15 U.S.C. 78a et seq. 

be standardized. The Commission 

further requests comment on whether 

credit rating agencies or other persons 

currently use other performance 

measurement statistics or whether other 

performance measurement statistics 

would be appropriate as an alternative, 

or in addition, to historical default and 

downgrade rates. For example, the 

Commission requests comment on 

whether Exhibit 1 should require 

measurement of the performance of a 

given credit rating by comparing or 

mapping it to the market value of the 

rated security or to extreme declines in 

the market value of the security after the 

rating. The Commission additionally 

requests comment on whether the 

requirement to include definitions and 

explanations in Exhibit 1 would achieve 

its stated purpose. 

Exhibit 2 (Public). Section 

15E(a)(1)(B)(ii) of the Exchange Act 

requires that an application for 

registration as an NRSRO contain 

information regarding the procedures 

and methodologies used by the credit 

rating agency to determine credit 

ratings.147 This information would be 

required as Exhibit 2 to proposed Form 

NRSRO. The Exchange Act does not 

otherwise define or identify the 

procedures and methodologies that 

must be provided under this section.148

However, the definition of ‘‘credit rating 

agency’’ in Section 3(a)(61) of the 

Exchange Act provides that a ‘‘credit 

rating agency’’ is an entity that, among 

other things, ‘‘employ[s] either a 

quantitative or qualitative model, or 

both, to determine credit ratings.’’ 149

The Commission believes that entities 

meeting the definition of ‘‘credit rating 

agency’’ in Section 3(a)(61) of the 

Exchange Act 150 generally establish 

procedures and methodologies for 

determining credit ratings in the 

following areas: the determination of 

whether to initiate a credit rating; the 

use of public and non-public sources of 

information to perform credit rating 

analysis, including information and 

analysis provided by third-party 

vendors; the use of quantitative and 

qualitative models and metrics to 

determine credit ratings; the interaction 

with the management of a rated obligor 

or issuer of rated securities; the 

establishment of the structure and 

voting process of committees that 

review or approve credit ratings; the 

notification of rated obligors or issuers 

of rated securities about credit rating 

decisions and for appeals of final or 

pending credit rating decisions; 

monitoring, reviewing, and updating of 

credit ratings; and the withdrawal, or 

suspension of the maintenance, of a 

credit rating. 

This list identifies areas where a 

credit rating agency could establish 

procedures and methodologies for 

determining credit ratings. The 

applicability of certain areas to a 

particular credit rating agency may 

depend on whether it uses subjective 

qualitative analysis, purely quantitative 

models or a combination of both.151

Consequently, an applicant and NRSRO 

may not establish a procedure or 

methodology in a given area because 

doing so would not be relevant to how 

the credit rating agency determines 

credit ratings. 

In addition, credit rating agencies that 

issue ‘‘unsolicited’’ credit ratings may 

establish procedures and methodologies 

in the areas described above that are 

unique to such ratings. An 

‘‘unsolicited’’ credit rating is one the 

credit rating agency decides to initiate 

without being requested to do so by an 

issuer, obligor, underwriter, or other 

interested party. Credit rating agencies 

that use a subscription fee based 

business model may only issue 

unsolicited ratings because that 

business model does not rely on fees 

from issuers, obligors, and underwriters 

to determine specific credit ratings 

(issuers, obligors, and underwriters, 

however, may subscribe to receive the 

credit ratings of such credit rating 

agencies). The procedures and 

methodologies these credit rating 

agencies employ, in some respects, may 

be unique to this business model. 

Credit rating agencies that are paid by 

issuers, obligors, and underwriters to 

determine specific credit ratings 

sometimes also issue unsolicited 

ratings. As discussed below with regard 

to proposed Rule 17g–6, this practice 

has led to concerns that unsolicited 

ratings may be used to coerce issuers 

and obligors into ultimately paying the 

credit rating agency to determine and 

maintain the credit rating. 

Consequently, the Commission believes 

that credit rating agencies that rely on 

fees from issuers, obligors, and 

underwriters to determine specific 

credit ratings, but also issue unsolicited 

ratings, often have established 

procedures and methodologies for 

determining unsolicited credit ratings 

that are designed to address this 

concern and the fact that the issuer or 

obligor may not have participated in the 

determination of the credit rating (as is 

frequently the case with a solicited 

credit rating). 

The Commission believes that 

information regarding the procedures 

and methodologies established by an 

NRSRO in the areas described above, 

including those with respect to 

unsolicited credit ratings, as applicable, 

would be useful to users of credit 

ratings. The information would provide 

an understanding of the nature of the 

credit rating agency (i.e., a user of 

quantitative models, qualitative 

analysis, or a combination of both) and 

how the credit rating agency produces 

credit ratings. This would provide a 

basis for comparing NRSROs. The 

disclosure also would provide the 

Commission with an understanding of 

the managerial and financial resources 

required to produce the credit ratings. 

This would assist the Commission in 

evaluating whether an applicant or 

NRSRO has adequate financial and 

managerial resources to consistently 

produce credit ratings with integrity and 

to materially comply with its 

procedures and methodologies.152

The Commission generally requests 

comment on Exhibit 2, as proposed. The 

Commission also requests comment on 

whether the areas identified above are 

the areas where credit rating agencies 

establish procedures and methodologies 

for determining credit ratings. A 

commenter that believes one or more of 

the areas identified above is not one 

where any type of credit rating agency 

establishes procedures and 

methodologies should identify each area 

and explain the reason for such 

conclusion. The Commission also 

requests comment on whether there are 

additional areas where credit rating 

agencies establish procedures and 

methodologies for determining credit 

ratings and, if so, requests that 

commenters identify them. 

Exhibit 3 (Public). Section 

15E(a)(1)(B)(iii) of the Exchange Act 153

requires that an application for 

registration as an NRSRO contain 

information regarding policies or 

procedures adopted and implemented 

by the credit rating agency to prevent 

the misuse, in violation of Exchange 

Act 154 provisions and rules, of material, 

non-public information. Exhibit 3 

would require an applicant and NRSRO 

to furnish its policies and procedures to 

prevent the misuse of material, 

nonpublic information established 


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155 15 U.S.C. 78o–7(g). 

156 15 U.S.C. 78o–7(g)(1). 

157 15 U.S.C. 78a et seq. 

158 15 U.S.C. 78o–7(g)(2). 

159 15 U.S.C. 78o–7(g)(1). 

160 15 U.S.C. 78o–7(a)(1)(B)(iv). 

161 Id, see also, 15 U.S.C. 78a et seq. 

162See Sections 15E(a)(2)(C) and 15E(d) of the 

Exchange Act (15 U.S.C. 78o–7(a)(2)(C) and (d)). 

163See Sections 15E(a)(2)(C) and 15E(d) of the 

Exchange Act (15 U.S.C. 78o–7(a)(2)(C) and (d)). 

164 15 U.S.C. 78o–7(j). 

165See Section 15E(a)(1)(B)(x) of the Exchange 

Act (15 U.S.C. 78o–7(a)(1)(B)(x)). 

166 15 U.S.C. 78o–7(g) and (h). 

167Section 15E(j) of the Exchange Act (15 U.S.C. 

78o–7(j)). 

168 Id. 

169 15 U.S.C. 78o–7. 

170 15 U.S.C. 78o–7(a)(1)(B)(v). 

under Section 15E(g) of the Exchange 

Act 155 and proposed Rule 17g–4. 

Section 15E(g)(1) of the Exchange 

Act 156 requires an NRSRO to establish, 

maintain, and enforce written policies 

and procedures to prevent the misuse of 

material, nonpublic information in 

violation of the Exchange Act.157

Section 15E(g)(2) of the Exchange Act 

provides that the Commission shall 

adopt rules requiring an NRSRO to 

establish specific policies and 

procedures to prevent the misuse of 

material, non-public information.158 As 

discussed below, proposed Rule 17g–4 

would implement this statutory 

provision by requiring an NRSRO’s 

policies and procedures established 

pursuant to Section 15E(g)(1) of the 

Exchange Act 159 to include certain 

specific types of procedures. 

The Commission generally requests 

comment on Exhibit 3, as proposed. 

Exhibit 4 (Public). Section 

15E(a)(1)(B)(iv) of the Exchange Act 

requires that an application for 

registration as an NRSRO contain 

information regarding the organizational 

structure of the applicant.160 This 

information would be required as 

Exhibit 4 to proposed Form NRSRO. 

The Exchange Act does not otherwise 

define or identify the specific type of 

organizational information that should 

be provided under Section 

15E(a)(1)(B)(iv) of the Exchange Act.161

The Commission believes that 

companies typically create, as 

applicable, an organizational chart 

showing ultimate and sub-holding 

companies, subsidiaries, and material 

affiliates; an organizational chart 

showing divisions, departments, and 

business units within the entity; and an 

organizational chart showing the 

management structure and senior 

management reporting lines within the 

entity. 

The Commission believes that, if a 

credit rating agency is part of a holding 

company structure, users of credit 

ratings and the Commission would 

benefit from an organizational chart 

showing the entity’s ultimate and subholding companies, subsidiaries, and 

material affiliates. This chart would 

provide an understanding of where 

potential conflicts of interest relating to 

the business activities of related 

companies might arise. Also, the fact 

that a credit rating agency has a holding 

company that potentially could provide 

financial support would be relevant to 

the Commission’s evaluation of whether 

an applicant or NRSRO has adequate 

financial resources as required under 

the Exchange Act.162

The Commission further believes that, 

if a credit rating agency engages in 

business activities in addition to 

determining credit ratings, users of 

credit ratings and the Commission 

would benefit from an organizational 

chart showing the entity’s divisions, 

departments, and business units. This 

chart would provide an understanding 

of where potential conflicts of interest 

relating to ancillary business activities 

might arise. 

Finally, the Commission believes that 

users of credit ratings and the 

Commission would benefit from an 

organizational chart showing an 

NRSRO’s management structure and 

senior management reporting lines. This 

chart would assist the Commission in 

evaluating whether an applicant and 

NRSRO has adequate managerial 

resources as required under the 

Exchange Act.163 Users of credit ratings 

also would be able to use this 

information to compare the managerial 

resources of different NRSROs. 

Additionally, the instructions to 

proposed Form NRSRO would provide 

that this managerial chart include the 

compliance officer designated by the 

NRSRO pursuant to Section 15E(j) of the 

Exchange Act.164 The Commission 

believes that including the compliance 

officer in the chart would be necessary 

or appropriate in the public interest or 

for the protection of investors because it 

would assist the Commission and users 

of credit ratings in understanding the 

degree of the compliance officer’s 

independence from the business 

managers.165 The Commission believes 

users of credit ratings would find the 

compliance officer’s reporting lines 

relevant in assessing the integrity of the 

credit rating process of a particular 

NRSRO, since the officer is responsible 

for administering the credit rating 

agency’s policies and procedures 

required by Sections 15E(g) and (h) of 

the Exchange Act 166 and for ensuring 

the NRSRO’s compliance with the 

securities laws and rules and 

regulations thereunder.167 In carrying 

out these responsibilities, a compliance 

officer would need to review activities 

overseen by senior business managers. 

The ability of the compliance officer to 

objectively review an area could be 

impacted by whether the officer 

reported to the senior manager 

responsible for the area. Thus, the 

relative independence of the 

compliance officer would be relevant to 

assessing the NRSRO’s ability to ensure 

compliance with its policies and 

procedures. 

For these reasons, Exhibit 4 would 

provide that the information about the 

organizational structure of the applicant 

or NRSRO required to be furnished and 

made public under Section 

15E(a)(1)(B)(iv) of the Exchange Act 168

consist of charts showing the managerial 

structure and senior management 

reporting lines, and, if applicable, the 

ultimate and sub-holding companies, 

subsidiaries, and material affiliates of 

the entity, and the divisions, 

departments, and business units within 

the entity. The exhibit also would 

require that the management chart 

include the designated compliance 

officer. 

The Commission generally requests 

comment on Exhibit 4, as proposed. The 

Commission specifically also requests 

comment on whether including the 

compliance officer in the chart would 

achieve the stated purpose of the 

requirement. The Commission further 

requests comment on whether other 

organizational information should be 

provided, or whether some of the 

information proposed to be required 

should be eliminated or modified. 

Commenters who believe that other 

information should be provided are 

asked to describe the information and 

explain why it would be appropriate 

under Section 15E of the Exchange 

Act.169

Exhibit 5 (Public). Section 

15E(a)(1)(B)(v) of the Exchange Act 

requires that an application for 

registration as an NRSRO contain 

information regarding whether the 

applicant has a code of ethics in effect 

or an explanation of why the applicant 

has not established a code of ethics.170

Exhibit 5 to proposed Form NRSRO 

would elicit this information by 

requiring an applicant and NRSRO to 

attach its code of ethics or an 

explanation of why it does not have a 

code of ethics. The Exchange Act does 

not otherwise define or identify the 

‘‘code of ethics’’ that should be 

provided under Section 


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171 Id. 

172 15 U.S.C. 78o–7(a)(1)(B)(vi). 

173 Id, see also 15 U.S.C. 78a et seq. 

174The section below describing proposed Rule 

17g–5 provides a further discussion of conflicts of 

interest generally and how the types of activities 

described in this list can give rise to conflicts of 

interest. 

175 15 U.S.C. 78o–7(a)(1)(B)(vi). 

176 15 U.S.C. 78o–7(h). 

177See Section 15E(a)(2)(C) Exchange Act (15 

U.S.C. 78o–7(a)(2)(C)). 

178As discussed below, proposed Rule 17g–5 

would prohibit an NRSRO from having a conflict 

with respect to issuing or maintaining a credit 

rating with respect to an affiliate. Thus, this type 

of conflict would need to be avoided rather than 

disclosed and managed. 179See Section 15E(a)(1)(B)(x) of the Exchange 

Act (15 U.S.C. 78o–7(a)(1)(B)(x)). 180 15 U.S.C. 78o–7(h). 181See Section 15E(a)(1)(B)(x) of the Exchange 

Act (15 U.S.C. 78o–7(a)(1)(B)(x)). 182 15 U.S.C. 78o–7(h). 

15E(a)(1)(B)(v).171 The Commission 

believes credit rating agencies should 

have the flexibility to establish a code 

of ethics appropriate for their business 

model and organizational structure and, 

consequently, is not proposing any 

specific elements that should be in the 

code of ethics, if any, furnished in this 

exhibit. 

The Commission generally requests 

comment on Exhibit 5, as proposed. The 

Commission also requests comment on 

whether it should propose specific 

elements to be included in the code of 

ethics provided in Exhibit 5. 

Commenters who believe the 

Commission should propose specific 

elements are asked to describe them. 

The Commission further seeks comment 

on whether it should require in Exhibit 

5 that NRSROs disclose whether they 

comply with international principles 

and codes of conduct related to credit 

rating agencies. 

Exhibit 6 (Public). Section 

15E(a)(1)(B)(vi) of the Exchange Act 

requires that an application for 

registration as an NRSRO contain 

information regarding any conflict of 

interest relating to the issuance of credit 

ratings by the applicant and NRSRO.172

Exhibit 6 to proposed Form NRSRO 

would require an applicant and NRSRO 

to identify, in general terms, the types 

of conflicts of interest that arise from its 

business as a credit rating agency. 

The Exchange Act does not otherwise 

define or identify the types of conflicts 

of interest that should be disclosed 

under Section 15E(a)(1)(B)(vi) of the 

Exchange Act.173 The Commission 

believes that credit rating agencies that 

rely on fees from issuers, obligors and 

underwriters to determine specific 

credit ratings are exposed to a unique 

set of conflicts, as are credit rating 

agencies that operate under a subscriber 

fee based business model. Moreover, 

certain conflicts, such as those arising 

from owning securities of a rated entity, 

can arise under either business model. 

The Commission believes that the 

types of conflicts of interest arising from 

the activities of credit rating agencies 

include, as applicable: receiving 

compensation from rated obligors, 

issuers of rated securities and money 

market instruments, and underwriters of 

rated securities and money market 

instruments to determine or maintain a 

credit rating and for other services; 

owning securities of, or having any 

other form of ownership interest in, a 

rated obligor, issuer of rated securities 

and money market instruments, or 

underwriter of rated securities and 

money market instruments; receiving 

compensation for any service from 

subscribers that use credit ratings for 

regulatory purposes; owning securities 

of, or having any other form of 

ownership interest in, a subscriber that 

uses credit ratings for regulatory 

purposes; and having another material 

business relationship (e.g., a loan) or 

affiliation (e.g., being an officer or 

director) with a rated obligor, issuer of 

rated securities and money market 

instruments, underwriter of rated 

securities and money market 

instruments, or entity that uses credit 

ratings for regulatory purposes. 

The Commission believes the above 

list covers the range of general conflicts 

of interest that arise from the activities 

of credit rating agencies.174 However, as 

noted, based on a particular credit rating 

agency’s business model, some of these 

conflicts would not be evident. The 

Commission further believes that an 

applicant and NRSRO subject to any of 

these types of conflicts would need to 

disclose that fact in a general manner in 

order to comply with Section 

15E(a)(1)(B)(vi) of the Exchange Act.175

Furthermore, the disclosure would 

assist the Commission in evaluating 

whether an applicant has sufficient 

financial and managerial resources to 

comply with the procedures for 

managing conflicts of interest required 

under Section 15E(h) of the Exchange 

Act,176 given the conflicts of interest 

identified by the applicant.177 The 

information also would be useful to 

users of credit ratings in assessing an 

NRSRO by, for example, comparing the 

types of conflicts disclosed by the entity 

in Exhibit 6 with the procedures for 

managing conflicts of interest disclosed 

by the entity in Exhibit 7 (discussed 

next). As noted above, the disclosure of 

the type of conflict only would need to 

be general in nature. For example, an 

NRSRO that receives compensation 

from issuers for rating their securities 

would only need to disclose that fact. It 

would not need to disclose separately 

each time it was compensated by an 

issuer or the identity of each such 

issuer. 

The instructions to Form NRSRO also 

would provide that an applicant and 

NRSRO include in Exhibit 6 the identity 

of any affiliated entity that acts as an 

underwriter or uses credit ratings for 

regulatory purposes.178 The 

Commission believes that requiring a 

credit rating agency to disclose this 

information would be necessary or 

appropriate in the public interest or for 

the protection of investors because it 

would apprise users of credit ratings to 

a potential conflict of interest arising 

from the fact that the affiliate could 

exercise undue influence on the credit 

rating agency to issue a credit rating that 

assists in the marketing of the security 

or that provides a regulatory benefit.179

Users of credit ratings would be able to 

review the NRSRO’s procedures made 

public in Exhibit 7 to understand how 

the credit rating agency addresses these 

potential conflicts. 

The Commission generally requests 

comment on Exhibit 6, as proposed. The 

Commission also requests comment on 

whether there are conflicts of interest 

that should be disclosed in addition to 

those identified above, or whether some 

of the information proposed to be 

required should be eliminated or 

modified. Commenters who believe that 

other conflicts exist should describe 

how they arise from the business of 

credit rating agencies. The Commission 

further requests specific comment on 

whether requiring the identification of 

affiliates that are underwriters and 

regulatory users of credit ratings would 

achieve the stated purpose of the 

requirement. 

Exhibit 7 (Public). Section 15E(h) of 

the Exchange Act requires an NRSRO to 

establish, maintain, and enforce written 

policies and procedures to address and 

manage conflicts of interest.180 These 

policies and procedures would be 

required as Exhibit 7 to proposed Form 

NRSRO. The Commission believes that 

requiring these policies and procedures 

would be necessary or appropriate in 

the public interest or for the protection 

of investors.181 First, their disclosure 

would assist the Commission in 

monitoring whether an NRSRO is 

complying with Section 15E(h) of the 

Exchange Act.182 Second, the disclosure 

would assist the Commission in 

evaluating whether an applicant or 

NRSRO has sufficient financial and 

managerial resources to manage the 

conflicts of interest disclosed by the 


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183See Section 15E(a)(1)(B)(x) of the Exchange 

Act (15 U.S.C. 78o–7(a)(1)(B)(x)). 

184See Sections 15E(a)(2)(C) and (d) of the 

Exchange Act (15 U.S.C. 78o–7(a)(2)(C) and (d)). 

185 15 U.S.C. 78o–7(j). 

186See Sections 15E(a)(2)(C) and (d) of the 

Exchange Act (15 U.S.C. 78o–7(a)(2)(C) and (d)). 

187 15 U.S.C. 78o–7(a)(1)(B)(viii). 

188 Id. 

189 15 U.S.C. 78o–7(a)(1)(B)(x). 

190See 15 U.S.C. 78o–7(a)(1)(B)(viii). 

191 15 U.S.C. 78a et seq. 

credit rating agency in Exhibit 6. Third, 

the disclosure would allow users of 

credit ratings to compare an NRSRO’s 

policies and procedures for managing 

conflicts of interest with the types of 

conflicts disclosed in Exhibit 7. 

The Commission requests general 

comment on Exhibit 7, as proposed, 

including on whether including this 

information would achieve the stated 

purpose of the requirement. 

Exhibits 8 (Public). The ability of a 

credit rating agency to assess the credit 

worthiness of an issuer and obligor 

depends on the competence of the 

personnel responsible for determining 

the entity’s credit ratings (‘‘credit 

analysts’’). This is true regardless of 

whether the credit rating agency uses 

quantitative models or qualitative 

analysis or a combination of both. A 

credit rating agency that solely uses 

quantitative models would be relying on 

credit analysts to understand the model 

inputs and metrics and back test the 

model’s results to judge whether the 

model is producing credible credit 

ratings. A credit rating agency that uses 

qualitative analysis would be relying on 

credit analysts to understand and 

interpret relevant information about an 

obligor or issuer and use the 

information to render a credible 

assessment of the issuer or obligor’s 

creditworthiness. 

The Commission believes that 

requiring an applicant and NRSRO to 

disclose information about the 

responsibilities, experience and 

employment history of its credit 

analysts and supervisors would be 

necessary or appropriate in the public 

interest or for the protection of 

investors.183 First, it would assist users 

of credit ratings in assessing the 

competence of an NRSRO’s credit 

analysts and, thereby, provide a means 

for users to compare NRSROs. Second, 

this information would assist the 

Commission in evaluating whether the 

applicant has adequate managerial 

resources to consistently produce credit 

ratings with integrity and to materially 

comply with its procedures and 

methodologies.184

The Commission requests comment 

on Exhibit 8, as proposed. Comment is 

specifically sought on whether the 

information would be helpful to users of 

credit ratings in comparing the NRSRO 

to other NRSROs. The Commission also 

requests comment on whether other 

information should be provided, or 

whether some of the information 

proposed to be required should be 

eliminated or modified. For example, 

comment is sought on whether Exhibit 

8 should be limited to eliciting 

information about the supervisors of the 

credit analysts. Commenters who 

believe other information should be 

provided should describe the 

information and explain why it would 

be appropriate. 

Exhibit 9 (Public). As discussed 

above, Section 15E(j) of the Exchange 

Act requires every NRSRO to designate 

an individual responsible for 

administering the policies and 

procedures of the credit rating agency to 

prevent the misuse of nonpublic 

information, to manage conflicts of 

interest, and to ensure compliance with 

the securities laws and the rules and 

regulations under those laws.185 The 

ability of the compliance officer to carry 

out these statutorily mandated 

responsibilities would depend, in part, 

on the officer’s experience and 

qualifications. Additionally, based on 

the size of the credit rating agency, it 

may depend also on the experience and 

qualifications of persons who assist the 

designated compliance officer in these 

responsibilities. 

The Commission believes that 

requiring information about the 

experience and employment history of 

the designated compliance officer and 

persons assisting the officer would be 

necessary or appropriate in the public 

interest or for the protection of 

investors. It would assist the 

Commission in evaluating whether the 

applicant has adequate managerial 

resources to consistently produce credit 

ratings with integrity and to materially 

comply with its procedures and 

methodologies.186 It also would be 

useful to users of credit ratings because 

it would provide information regarding 

the resources an NRSRO devotes to 

ensuring, among other things, that credit 

ratings are determined in accordance 

with the procedures and methodologies 

the NRSRO makes public in Exhibit 1. 

The Commission requests comment 

on Exhibit 9, as proposed. The 

Commission also requests comment on 

whether other information should be 

provided, or whether some of the 

information proposed to be required 

should be eliminated or modified. 

Commenters should describe the 

additional information and why it 

would be appropriate. 

Exhibit 10 (Confidential). Section 

15E(a)(1)(B)(viii) of the Exchange Act 

requires that an application for 

registration as an NRSRO include, on a 

confidential basis, a list of the 20 largest 

issuers and subscribers that use the 

credit rating services provided by the 

credit rating agency by amount of net 

revenue received by the credit rating 

agency in the fiscal year immediately 

preceding the date of submission of the 

application.187 This information would 

be required as Exhibit 10 to proposed 

Form NRSRO. An NRSRO would not be 

required to make this information 

public (to the extent permitted by law) 

or update the exhibit after registration. 

However, an NRSRO would be required 

to update this information in the 

audited financial statements provided to 

the Commission under proposed Rule 

17g–3. 

The statute refers to the ‘‘20 largest 

issuers and subscribers.’’ The 

instructions to Exhibit 10 would 

provide that an applicant add certain 

large obligors (i.e., persons who are 

rated as an entity as opposed to having 

their securities rated) and underwriters 

to the list. Specifically, these types of 

customers would need to be added to 

the list if they are determined to have 

provided at least as much net revenue 

as the 20th largest issuer or subscriber. 

Consequently, a credit rating agency 

would be required to identify the 20 

largest issuers and subscribers as 

required by Section 15E(a)(1)(B)(viii) of 

the Exchange Act 188 and add any 

obligor and underwriter customers that 

met the above criteria. 

The Commission believes that adding 

large obligor and underwriter customers 

to the list of the 20 largest issuer and 

subscriber customers would be 

necessary or appropriate in the public 

interest or for the protection of 

investors.189 The Commission views the 

list as a means to identify customers 

that could potentially have undue 

influence on an NRSRO given the 

amount of revenue the customer 

provides the NRSRO. Obligors and 

securities underwriters would have as 

much of an interest in potentially 

influencing a credit rating as issuers and 

subscribers. 

Section 15E(a)(1)(B)(viii) of the 

Exchange Act limits the customers 

required to be included in the list to 

users of the ‘‘credit rating services’’ of 

the applicant and NRSRO.190 The 

Exchange Act 191 does not define the 

term ‘‘credit rating services.’’ The 

Commission would interpret this term 

to mean any of the following: Rating an 


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192 15 U.S.C. 78o–7(a)(1)(B)(viii). 

193 15 U.S.C. 78a et seq. 

194 15 U.S.C. 78o–7(a)(1)(B)(viii). 

195See 15 U.S.C. 78o–7(a)(2)(C). 

196See 15 U.S.C. 78o–7(a)(2)(C)(ii)(I). 

197See Section 3(a)(62)(A) of the Exchange Act 

(15 U.S.C. 78c(a)(62)(A)). 198 Id. 

obligor (regardless of whether the 

obligor or any other person paid for the 

credit rating); rating an issuer’s 

securities or money market instruments 

(regardless of whether the issuer, 

underwriter, or any other person paid 

for the credit rating); and providing 

credit ratings to a subscriber. The intent 

of this interpretation is to include—

along with customers that pay for credit 

ratings and subscriptions—customers 

that are rated, or whose securities or 

money market instruments are rated, but 

that did not pay for the credit rating. 

Even though these customers may not 

have paid for the credit rating, they 

potentially could have undue influence 

on the credit rating agency if they 

provide substantial net revenue for 

other services or products. 

Section 15E(a)(1)(B)(viii) of the 

Exchange Act provides that the 

determination of the 20 largest issuers 

and subscribers is to be based on ‘‘net 

revenue’’ received from the issuer or 

subscriber.192 The Exchange Act 193

does not define the term ‘‘net revenue.’’

The Commission proposes to interpret 

the term ‘‘net revenue’’ for the purposes 

of Section 15E(a)(1)(B)(viii) of the 

Exchange Act 194 to mean all fees, sales 

proceeds, commissions, and other 

revenue received by the applicant and 

its affiliates for any type of service or 

product, regardless of whether related to 

credit ratings, and net of any fees, sales 

proceeds, rebates, commissions, and 

other monies paid to the customer by 

the credit rating agency and its affiliates. 

The risk is that a large customer may be 

in a position to influence the 

determination of the credit rating. 

Limiting the interpretation of net 

revenue to revenues relating to ‘‘credit 

rating services’’ may not capture the 

largest customers of the NRSRO or its 

affiliates as these customers may use 

credit rating services of the NRSRO and 

other services of the NRSRO and its 

affiliates. The instructions for proposed 

Form NRSRO would implement this 

proposed interpretation by providing 

that the calculation of net revenue 

should include all revenue received 

from the customer. 

The Commission requests comment 

on Exhibit 10, as proposed. The 

Commission specifically requests 

comment on its proposal to include 

large obligor and underwriter customers 

in the list. The Commission further 

requests comment on the proposed 

interpretations of ‘‘credit rating 

services’’ and ‘‘net revenue.’’

Specifically, the Commission requests 

comment on how these interpretations 

affect the determination of large 

customers. If a commenter believes they 

are not practicable, the commenter 

should provide alternative 

interpretations and explain how they 

would achieve the goal of identifying 

large customers that could potentially 

exercise undue influence on the 

NRSRO. 

Exhibit 11 (Confidential). Exhibit 11 

would require the applicant to furnish 

audited financial statements for the past 

three fiscal or calendar years 

immediately preceding the date of the 

application. An NRSRO would not need 

to make the information in Exhibit 11 

public (to the extent permitted by law) 

or update the exhibit after registration. 

An NRSRO would, however, be required 

to provide audited financial statements 

to the Commission annually under 

proposed Rule 17g–3. 

The Commission believes this 

financial information would be 

necessary or appropriate in the public 

interest or for the protection of investors 

because it would assist the Commission 

in making the finding required by 

Section 15E(a)(2)(C) of the Exchange 

Act.195 This section directs the 

Commission to grant a credit rating 

agency’s application for registration as 

an NRSRO unless, among other things, 

the Commission finds that the applicant 

does not have adequate financial and 

managerial resources to consistently 

issue ratings with integrity and to 

materially comply with its procedures 

and methodologies furnished in the 

public exhibits and with the 

requirements in Sections 15E(g), (h), (i) 

and (j) of the Exchange Act.196 The 

financial statements would provide the 

Commission with information as to the 

applicant’s net worth and income, 

which would assist it in determining 

whether the applicant has sufficient 

financial resources. Financial 

statements for three years would 

provide information that would assist 

the Commission in verifying that the 

applicant has been in the business of 

issuing credit ratings for the three years 

immediately preceding the date of its 

application for registration. An 

applicant must have been in the 

business of issuing credit ratings for the 

three years preceding the application to 

be eligible for registration with the 

Commission as an NRSRO.197 The 

information also would alert the 

Commission to a significant downward 

trend in the applicant’s financial 

condition, which could be relevant to 

whether it has adequate financial 

resources. 

The proposed requirement that the 

financial statements be audited would 

provide the Commission with an 

independent verification of the 

information in the statements. However, 

the Commission anticipates that some 

applicants may not have been audited in 

the past. In this case, the applicant 

would only need to provide an audited 

financial statement for the fiscal year 

immediately preceding the date of the 

application. The other years could be 

covered by unaudited statements. The 

applicant would need to attach to the 

unaudited financial statements a 

statement by a duly authorized person 

of the applicant that the financial 

statements present fairly, in all respects, 

the financial condition, results of 

operations, and the cash flows of the 

applicant. This would provide a level of 

assurance that the information in the 

financial statements had been reviewed 

and verified by the applicant. 

In addition, the Commission also 

anticipates that some applicants would 

be subsidiaries of holding companies. In 

this case, the applicant would be able to 

provide consolidated and consolidating 

financial statements of the parent 

company. This would diminish the 

burden on applicants that have a 

holding company audit but not an audit 

of the subsidiary credit rating agency. 

Consolidated and consolidating 

financial statements would provide 

sufficient information about the 

subsidiary credit rating agency for the 

Commission to evaluate whether its 

financial resources meet the 

requirements of Section 

15E(a)(2)(C)(ii)(I) of the Exchange 

Act.198

The Commission requests comment 

on whether the furnishing of audited 

financial statements would achieve the 

stated purposes of the requirement. 

Exhibit 12 (Confidential). Exhibit 12 

would require an applicant to provide 

information as to the amount of revenue 

generated from various credit rating 

services and a separate computation of 

total revenue from all other services. 

The information would be for the most 

recently completed fiscal or calendar 

year and would not have to be audited. 

An NRSRO would not need to make the 

information in Exhibit 12 public (to the 

extent permitted by law) or update the 

exhibit after registration. An NRSRO 

would, however, be required to update 

this information with the annual 

audited financial statements provided to 


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199See 15 U.S.C. 78o–7(a)(2)(C). 

200See 1 U.S.C. 78o–7(a)(2)(C). 

201See Section 5 of the Act and 15 U.S.C. 

78q(a)(1). 

202See 15 U.S.C. 78q(b)(1). 

203 203 15 U.S.C. 78q. 

204See Electronic Storage of Broker-Dealer 

Records, Exchange Act Release No. 47806 (May 7, 

2003), 68 FR 25281 (May 12, 2003); see also 

Commission order in Matter of Deutsche Bank 

Securities, Inc. et al, Exchange Act Release No. 

46937 (December 3, 2002) (‘‘The record keeping 

rules are ‘a keystone of the surveillance of brokerdealers’ ’’) (citations omitted); Commission order in 

Matter of J.P. Morgan Securities Inc., Exchange Act 

Release No. 51200 (February 14, 2005); Electronic 

Recordkeeping by Investment Companies and 

Investment Advisers, Investment Company Act 

Release No. 24991 (May 24, 2001) (‘‘The 

recordkeeping requirements are a key part of the 

Commission’s regulatory program for funds and 

advisers, as they allow [the Commission] to monitor 

fund and adviser operations, and to evaluate their 

compliance with federal securities laws.’’). 

205 15 U.S.C. 78o–7. 

the Commission under proposed Rule 

17g–3. 

As described in the instructions for 

proposed Form NRSRO, the specific 

revenue items would be, as applicable: 

• Revenue from determining and 

maintaining credit ratings. 

• Revenue from subscribers. 

• Revenue from granting licenses or 

rights to publish credit ratings. 

• Revenue from determining credit 

ratings that are not made readily 

accessible (private ratings). 

• Revenue from all other services and 

products offered by the rating 

organization (include descriptions of 

any major sources of revenue). 

The Commission believes this 

revenue information would be necessary 

or appropriate in the public interest or 

for the protection of investors because it 

would assist the Commission in making 

the finding with respect to adequate 

financial resources required by Section 

15E(a)(2)(C) of the Exchange Act.199

This information would augment the 

financial statements that would be 

required under proposed Exhibit 11 in 

that it would provide detail as to the 

revenues generated by different types of 

services. 

The Commission requests comment 

on whether the furnishing of this 

revenue information would achieve the 

stated purposes of the requirement, or 

whether any additions, deletions or 

modifications should be made. The 

Commission also requests comment on 

any difficulties a credit rating agency 

may confront in determining its 

revenues from these various sources. If 

a commenter believes it would not be 

practicable to do so, the commenter 

should explain why. 

Exhibit 13 (Confidential). Exhibit 13 

would require an applicant to provide 

the amount of total aggregate annual 

compensation paid to its credit analysts 

and the median compensation. The 

information would be for the most 

recently completed fiscal or calendar 

year and would not have to be audited. 

An NRSRO would not need to make the 

information in Exhibit 13 public (to the 

extent permitted by law) or update the 

exhibit after registration. An NRSRO 

would, however, be required to update 

this information with the annual 

audited financial statements provided to 

the Commission under proposed Rule 

17g–3. 

The Commission believes this 

compensation information would be 

necessary or appropriate in the public 

interest or for the protection of investors 

because it would assist the Commission 

in making the finding with respect to 

adequate financial resources required by 

Section 15E(a)(2)(C) of the Exchange 

Act.200 Similar to the revenue 

information, this information would 

augment the financial statements that 

would be required under Exhibit 11 

because it provides detail on the 

expenses necessary to retain the credit 

rating agency’s credit analysts. 

The Commission requests comment 

on Exhibit 13, as proposed. The 

Commission also requests comment on 

any difficulties a credit rating agency 

would have in determining these 

compensation amounts. If a commenter 

believes it would not be practicable to 

do so, the commenter should explain 

why. 

Request for comment. In addition to 

the specific requests for comment above, 

the Commission requests comment on 

all aspects of proposed Form NRSRO 

and the proposed instructions to the 

form, including whether the proposals 

could be more narrowly tailored and 

still meet the stated goals. Further, the 

Commission solicits comment about 

whether other requirements should be 

added, or whether items and exhibits 

proposed should be eliminated or 

modified. Commenters are asked to 

explain their conclusions. 

D. Proposed Rule 17g–2—

Recordkeeping 

The Act amends Section 17(a)(1) of 

the Exchange Act to add NRSROs to the 

list of entities required to make and 

keep such records, and make and 

disseminate such reports, as the 

Commission prescribes by rule as 

necessary or appropriate in the public 

interest, for the protection of investors, 

or otherwise in furtherance of the 

Exchange Act.201 The inclusion of 

NRSROs on the list also provides the 

Commission with authority under 

Section 17(b)(1) of the Exchange Act to 

examine all the records of an NRSRO.202

Proposed Rule 17g–2, ‘‘Records to be 

made and retained by nationally 

recognized statistical rating 

organizations,’’ would implement the 

Commission’s recordkeeping 

rulemaking authority under Section 

17(a) of the Exchange Act.203 The 

proposed rule would require an NRSRO 

to make and retain certain records 

relating to its business and to retain 

certain other business records, if such 

records are made. The rule also would 

prescribe the time periods and manner 

in which all these records must be 

retained. 

With respect to other regulated 

entities, the Commission has made clear 

that books and records rules are 

‘‘integral to the Commission’s investor 

protection function because the 

preserved records are the primary 

means of monitoring compliance with 

applicable securities laws.’’ 204 Proposed 

Rule 17g–2 is designed to ensure that an 

NRSRO makes and retains records that 

would assist the Commission in 

monitoring, through its examination 

authority, whether an NRSRO was 

complying with the provisions of 

Section 15E of the Exchange Act 205 and 

the rules thereunder. For example, 

examiners would use the records to 

monitor whether an NRSRO was 

following its disclosed procedures and 

methodologies for determining credit 

ratings, its disclosed policies and 

procedures for preventing the misuse of 

material non-public information, and 

managing conflicts of interest, and 

whether it was complying with 

proposed Rules 17g–4, 17g–5 and 17g–

6 discussed below. 

1. Paragraph (a): Records To Be Made 

and Retained 

Paragraph (a) of proposed Rule 17g–

2 would require an NRSRO to make and 

retain certain books and records. Under 

the proposed rule, the records required 

in paragraph (a) must be complete and 

current. Consequently, it would be a 

violation of the proposed rule to falsify 

a record or fail to update a record when 

the information on the record becomes 

stale or incomplete. The Commission 

believes the records required to be made 

and retained under paragraph (a) of 

proposed Rule 17g–2 would be 

necessary or appropriate in the public 

interest, for the protection of investors, 

or otherwise in furtherance of the 

Exchange Act because, as described 

below, they would assist the 

Commission in monitoring whether an 

NRSRO was complying with Section 


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206See 15 U.S.C. 78q(a)(1). 

207See 15 U.S.C. 78o–7(b)(1). 

208 15 U.S.C. 78o–7. 

209See 15 U.S.C 78q(a)(1). 

15E of the Exchange Act and the rules 

thereunder.206 The Commission does 

not intend that these provisions of 

proposed Rule 17g–2 require a specific 

form of record. An NRSRO would have 

the flexibility to implement a 

recordkeeping system that captured the 

following information in a manner that 

conformed to the NRSRO’s internal 

processes. 

Paragraph (a)(1). Paragraph (a)(1) of 

proposed Rule 17g–2 would require an 

NRSRO to make records of original 

entry into the rating organization’s 

accounting system, and records 

reflecting entries to and balances in all 

general ledger accounts of the rating 

organization for each fiscal year. These 

are fundamental business records and 

necessary for the preparation of the 

audited financial statements and 

schedules that would need to be 

prepared under proposed Rule 17g–3. 

Paragraph (a)(2). Paragraph (a)(2) of 

proposed Rule 17g–2 would require an 

NRSRO to make and retain the 

following records with respect to each 

of the NRSRO’s current credit ratings, as 

applicable: the identity of any credit 

analyst(s) that determined the credit 

rating; the identity of the person(s) who 

approved the credit rating before it was 

issued; the procedures and 

methodologies used to determine the 

credit rating; the method by which the 

credit rating was made readily 

accessible; whether the credit rating was 

solicited or unsolicited; and the date the 

credit rating action was taken. As noted 

above, the NRSRO would not be 

required to make a single record 

containing all this information for each 

current credit rating. Rather, the NRSRO 

would have the flexibility to implement 

a recordkeeping system that captured 

this information in different records in 

a manner that conformed to the 

NRSRO’s internal processes. 

The information in these records 

about the identity of the credit analysts, 

the persons who approved the credit 

rating, the methodology used to 

determine the credit rating, and whether 

the credit rating was solicited or 

unsolicited, collectively would assist 

the Commission in monitoring whether 

the NRSRO was following its 

procedures and methodologies for 

determining credit ratings. The 

information about the identity of the 

credit analysts, and the persons who 

approved the credit rating, also would 

assist the Commission in monitoring 

whether the NRSRO was complying 

with procedures designed to prevent the 

misuse of material nonpublic 

information. 

Paragraph (a)(3). Paragraph (a)(3) of 

proposed Rule 17g–2 would require a 

record identifying each person that 

solicits the NRSRO to determine or 

maintain a credit rating (e.g., an obligor, 

issuer, or underwriter) and the credit 

ratings determined for the person. This 

information would assist the 

Commission in monitoring whether the 

NRSRO was complying with procedures 

for addressing and managing conflicts of 

interest as well as complying with the 

requirements in proposed Rule 17g–5 

prohibiting certain conflicts of interest. 

Paragraph (a)(4). Paragraph (a)(4) of 

proposed Rule 17g–2 would require a 

record for each person that subscribes to 

receive the credit ratings of the NRSRO. 

Similar to the records that would be 

required under paragraph (a)(3), this 

information would assist the 

Commission in monitoring whether the 

NRSRO was complying with procedures 

for addressing and managing conflicts of 

interest as well as complying with the 

requirements in proposed Rule 17g–5 

prohibiting certain conflicts of interest. 

Paragraph (a)(5). Paragraph (a)(5) of 

proposed Rule 17g–2 would require a 

record describing each type of service 

and product offered by the NRSRO. This 

record would provide the Commission 

with details of the ancillary business 

activities of the credit rating agency and, 

therefore, would be useful in identifying 

potential conflicts of interest that arise 

from such activities. Commission 

examiners would then be able to review 

whether the NRSRO had implemented 

procedures to manage these potential 

conflicts. 

Request for comment. The 

Commission requests comment on 

whether the records that would be 

required to be made and retained under 

paragraph (a) of proposed Rule 17g–2 

would achieve the stated purposes of 

the requirements. Commenters should 

explain any conclusions they reach on 

this question with respect to each type 

of record. The Commission also requests 

comment on whether there are other 

types of records that should be required, 

or whether any of the proposed 

requirements should be modified or 

omitted. Commenters that believe 

additional records should be required 

are asked to describe the record and 

explain why the Commission should 

require that it be made and retained. 

2. Records To Be Retained if Made 

There are certain records an NRSRO 

may make or receive as a matter of 

business practice. The Commission does 

not believe an NRSRO should be 

required, by rule, to make these records. 

However, the Commission believes an 

NRSRO should be required to retain 

these records for a period of time 

because the records would assist the 

Commission’s oversight of NRSROs. 

Accordingly, paragraph (b) of proposed 

Rule 17g–2 would require that an 

NRSRO retain certain records, if they 

are made or received by the NRSRO. 

Since these are not records that are 

required to be made, they would not 

need to be updated under the 

requirements of proposed Rule 17g–2. 

Rather, the rule would require that the 

NRSRO retain the original record in an 

unaltered form or a true copy of the 

original record for the prescribed 

retention period. The Commission 

notes, however, that, under Section 

15E(b)(1) of the Exchange Act,207 an 

NRSRO must update, as provided in 

that section, the forms and exhibits 

(Form NRSRO) that would be required 

to be retained under paragraph (b)(9) of 

proposed Rule 17g–2 (discussed below). 

The Commission believes the records 

required to be retained under paragraph 

(b) of proposed Rule 17g–2 would be 

necessary or appropriate in the public 

interest, for the protection of investors, 

or otherwise in furtherance of the 

Exchange Act because, as described 

below, they would assist the 

Commission in monitoring whether an 

NRSRO was complying with Section 

15E of the Exchange Act 208 and the 

rules thereunder.209

Paragraph (b)(1). Paragraph (b)(1) of 

proposed Rule 17g–2 would require an 

NRSRO to retain all significant records 

underlying the information included in 

the credit rating agency’s annual 

audited financial statements and 

schedules required under proposed Rule 

17g–3. This would require the NRSRO 

to retain records such as bank 

statements, bills payable and receivable, 

trial balances and records relating to the 

determination of the largest customers 

for the list required under paragraph 

(b)(iii) of proposed Rule 17g–3. These 

records would assist Commission 

examiners in understanding and 

verifying the basis for information 

provided in the audited financial 

statements and schedules the NRSRO 

would be required to annually furnish 

to the Commission. For example, 

examiners could use the records relating 

to the list of the largest customers to 

verify that the NRSRO had identified 

such customers in accordance with 

proposed Rule 17g–3. 

Paragraph (b)(2). Paragraph (b)(2) of 

proposed Rule 17g–2 would require an 

NRSRO to retain internal records, 

including non-public information and 


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210 15 U.S.C. 78o–7(f). 

211See e.g., Commission complaint in 

Commission v. Citigroup Global Markets Inc., 03 CV 

2945 (WHP) (S.D.N.Y.) (April 28, 2003); 

Commission complaint in Commission v. Merrill, 

Lynch, Pierce, Fenner & Smith, 03 CV 2941 (WHP) 

(S.D.N.Y) (April 28, 2003); Commission Order in 

Matter of Columbia Management Advisers, Inc. and 

Columbia Funds Distributor, Inc., Securities Act 

Release No. 8534 (February 9, 2005). 212See 15 U.S.C 78q(a)(1). 

work papers, used to determine a credit 

rating. These records would include, for 

example, notes of conversations with 

the management of an issuer or obligor 

that was the subject of the credit rating 

and the inputs and raw results of a 

quantitative model used to determine 

the credit rating. The retention of this 

information, and other internal records 

used to determine a credit rating, would 

assist the Commission in verifying 

whether an NRSRO was complying with 

its procedures and methodologies for 

determining credit ratings and for 

preventing the misuse of material 

nonpublic information. 

Paragraph (b)(3). Paragraph (b)(3) of 

proposed Rule 17g–2 would require an 

NRSRO to retain credit analysis reports, 

credit assessment reports, and private 

credit rating reports and internal 

records, including nonpublic 

information and work papers, used to 

form the basis for the opinions 

expressed in these reports. These 

reports—which credit rating agencies 

commonly create and sell as an 

ancillary service to the issuance of 

credit ratings—generally provide a 

detailed analysis of the information and 

assumptions underlying a credit rating. 

In developing these reports, the credit 

analyst may receive material nonpublic 

information about an issuer or obligor. 

For example, an issuer may request a 

private credit rating report to 

understand how a contemplated 

transaction would impact the current 

publicly available credit rating of its 

debt securities. Consequently, the 

retention of these reports and internal 

records used to form the basis of the 

reports would assist the Commission in 

monitoring whether the NRSRO was 

complying with its policies and 

procedures for preventing the misuse of 

material nonpublic information. 

Paragraph (b)(4). Paragraph (b)(4) of 

proposed Rule 17g–2 would require an 

NRSRO to retain all compliance reports 

and exception reports relating to the 

business of operating as credit rating 

agency. The retention of these reports 

would identify activities of the NRSRO 

that its designated compliance officer 

had determined raised, or did not raise, 

compliance and control issues. 

Examiners would then be able to review 

how the NRSRO addressed the 

compliance issues. This could lead to 

more focused examinations, which also 

would decrease the burden on the 

NRSRO. The reports also would provide 

information as to whether the NRSRO 

was complying with its rating credit 

ratings methodologies, procedures, and 

policies. 

Paragraph (b)(5). Paragraph (b)(5) of 

proposed Rule 17g–2 would require an 

NRSRO to retain all internal audit plans, 

internal audit reports, and documents 

relating to internal audit follow-up 

measures relating to the business of 

operating as credit rating agency and all 

records identified by the NRSRO’s 

internal auditors as necessary to 

perform the audit of an activity relating 

to the business of operating as credit 

rating agency. Similar to the compliance 

reports, the retention of these records 

would identify activities of the NRSRO 

that its internal auditors determined 

raised, or did not raise, compliance or 

control issues. They also would assist 

the Commission in verifying whether 

the NRSRO was complying with its 

stated methods, procedures, and 

policies. 

Paragraph (b)(6). Paragraph (b)(6) of 

proposed Rule 17g–2 would require an 

NRSRO to retain all marketing materials 

relating to the business of operating as 

credit rating agency. Section 15E(f) of 

the Exchange Act prohibits an NRSRO 

from representing that it has been 

designated, recommended, or approved, 

or that its abilities or qualifications have 

been passed upon by any federal agency 

or officer.210 The retention of marketing 

materials would assist the Commission 

in verifying that the NRSRO was 

complying with this statutory provision. 

Paragraph (b)(7). Paragraph (b)(7) of 

proposed Rule 17g–2 would require an 

NRSRO to retain all external and 

internal written communications, 

including electronic communications, 

received and sent by the NRSRO and its 

employees relating to initiating, 

determining, maintaining, changing or 

withdrawing a credit rating. The 

retention of written communications 

has played an important role in assisting 

the Commission in identifying legal 

violations and compliance issues with 

respect to other regulated entities.211

Paragraph (b)(8). Paragraph (b)(8) of 

proposed Rule 17g–2 would require an 

NRSRO to retain the record that must be 

made under paragraph (b) of proposed 

Rule 17g–6 with respect to declining to 

determine or withdrawing a credit 

rating with respect to a structured 

product. The retention of this record 

would assist the Commission in 

understanding the reason behind an 

NRSRO’s decision to take one of these 

actions and, therefore, to monitor its 

compliance with the prohibitions in 

proposed Rule 17g–6. 

Paragraph (b)(9). Paragraph (b)(9) of 

proposed Rule 17g–2 would require an 

NRSRO to retain the forms and exhibits 

(Form NRSRO) furnished to the 

Commission under proposed Rule 17g–

1. This would make the forms and 

exhibits subject to the retention and 

production requirements in proposed 

Rule 17g–2. For example, they would 

need to be retained in a manner that 

makes them easily accessible to the 

NRSRO’s principal office. This would 

assist Commission examiners, 

particularly examiners in regional and 

district offices, in accessing the records 

on site during an examination. 

Request for comment. The 

Commission requests comment on 

whether the retention of the records 

under paragraph (b) of proposed Rule 

17g–2 would achieve the stated 

purposes of the requirements. 

Commenters should explain any 

conclusions they reach on this question 

with respect to each type of record. The 

Commission also requests comment on 

whether there are other standards or 

criteria that could be used to further 

tailor these requirements. The 

Commission further requests comment 

on whether there are other types of 

records that should be required to be 

retained, or whether any proposed 

requirements should be eliminated or 

modified. Commenters that believe 

additional records should be retained 

are asked to describe the record and 

explain why requiring its retention 

would be necessary. 

3. Remaining Provisions 

Proposed Rule 17g–2 has additional 

provisions that would prescribe how 

long the records in paragraphs (a) and 

(b) would need to be retained, the 

manner in which they would need to be 

retained and the manner in which they, 

and any other records subject to the 

Commission’s examination authority, 

would need to be produced. The 

Commission believes the additional 

provisions of proposed Rule 17g–2 

would be necessary or appropriate in 

the public interest, for the protection of 

investors, or otherwise in furtherance of 

the Exchange Act because, as described 

below, they would assist the 

Commission in monitoring whether an 

NRSRO was complying with Section 

15E of the Exchange Act and the rules 

thereunder.212

Paragraph (c). Paragraph (c) of 

proposed Rule 17g–2 would prescribe 

how long the records identified in 

paragraphs (a) and (b) would need to be 


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213See 15 U.S.C 78q(b). 

214See e.g., 17 CFR 240.17a–7 and 17 CFR 275.0 

–2. 

215 15 U.S.C. 78o–7(k). 

216 Id. 

217See 15 U.S.C. 78o–7(k). 

218 15 U.S.C. 78o–7(d). 

219 Id. 

220 15 U.S.C. 78o–7(b)(1). 

retained by an NRSRO. Specifically, the 

records required to be made pursuant to 

paragraph (a) would need to be retained 

for three years after the record is 

replaced with an updated record, except 

that the records with respect to 

customers would need to be retained for 

three years after the NRSRO’s business 

relationship with the customer ended. 

The records required to be retained 

under paragraph (b) would need to be 

retained for three years after the record 

is made or received by the NRSRO. The 

three year retention periods are 

designed to ensure that the records are 

preserved for at least one internal audit 

or Commission exam cycle. 

Paragraph (d). Paragraph (d) of 

proposed Rule 17g–2 would provide 

that records retained pursuant to 

paragraphs (a) and (b) must be retained 

in a manner that makes them easily 

accessible to the principal office and 

any other office that conducted 

activities causing the record to be made 

or received. This provision is designed 

to facilitate Commission examination of 

the NRSRO and to avoid delays in 

obtaining the records during an on-site 

examination. The proposed rule does 

not specify the format in which the 

records must be retained. NRSROs 

could retain them in, for example, paper 

form, on microfilm or microfiche, and 

electronically. 

Paragraph (e). Paragraph (e) of 

proposed Rule 17g–2 would provide 

that records identified in paragraphs (a) 

and (b) could be made or retained by a 

third-party record custodian, provided 

the NRSRO furnishes the Commission 

with a written undertaking of the 

custodian. The proposed form of the 

undertaking is designed to ensure that 

storing the records with a third-party 

does not make them less accessible than 

records stored at an NRSRO’s offices. 

Thus, the third-party would undertake 

that the records are the exclusive 

property of the NRSRO, will be 

produced promptly to the NRSRO or the 

Commission and its representatives at 

the request of the NRSRO, and will be 

available for inspection by the 

Commission and its representatives. The 

proposed rule also would provide that 

an NRSRO would remain responsible 

for complying with the Commission’s 

books and records rules, 

notwithstanding the fact that a thirdparty was making and/or storing the 

records. 

Paragraph (f). Paragraph (f) of 

proposed Rule 17g–2 would provide 

that a non-resident NRSRO (defined in 

paragraph (h)) must undertake to send 

books and records to the Commission 

and its representatives upon request. 

The undertaking would need to be 

attached to an initial application for 

registration as an NRSRO (see Item 3 of 

proposed Form NRSRO). This proposed 

requirement is designed to provide a 

mechanism for the Commission 

examination staff to inspect records 

maintained overseas without having to 

travel to the location. In addition, 

because some non-resident NRSROs 

may maintain original records in a 

language other than English, the 

proposed undertaking would require a 

translation if the Commission requested 

it. 

Paragraph (g). Paragraph (g) of 

proposed Rule 17g–2 would require an 

NRSRO to promptly furnish the 

Commission with copies of the records 

that it would have to retain under 

proposed Rule 17g–2 and any other 

records of the NRSRO that are subject to 

examination by the Commission under 

Section 17(b) of the Exchange Act 213

that are requested by the Commission 

and its staff. Similar to the ‘‘easily 

accessible’’ requirement of paragraph 

(d), this proposed requirement is 

designed to facilitate Commission 

examinations of NRSROs by requiring 

an NRSRO to promptly produce 

requested records. 

Paragraph (h). Paragraph (h) of 

proposed Rule 17g–2 would define the 

term non-resident rating organization to 

mean an NRSRO that is located or has 

its principal office in a location outside 

the U.S., its territories, or possessions. 

This definition is similar to definitions 

of non-resident entities in other 

Commission rules.214

Request for comment. The 

Commission requests comment on 

whether the additional provisions of 

proposed Rule 17g–2 would achieve the 

stated purposes of the requirements. 

Commenters should explain any 

conclusions they reach on this question 

with respect to a provision. The 

Commission also requests comment on 

whether there are other provisions that 

should be required, or whether any 

proposed requirements should be 

modified or omitted. Commenters that 

believe additional provisions would be 

appropriate are asked to describe the 

nature of the provision and explain why 

it should be required. 

More broadly, the Commission 

requests comment on all aspects of 

proposed Rule 17g–2, including 

whether the proposals could be more 

narrowly tailored and still meet the 

stated goals, or whether items should be 

added, eliminated, or modified. 

Commenters are asked to explain their 

conclusions. 

E. Proposed Rule 17g–3 Annual Audit 

Section 15E(k) of the Exchange Act 

requires an NRSRO to furnish to the 

Commission, on a confidential basis and 

at intervals determined by the 

Commission, such financial statements 

and information concerning its financial 

condition that the Commission, by rule, 

may prescribe as necessary or 

appropriate in the public interest or for 

the protection of investors.215 The 

section also provides that the 

Commission may, by rule, require that 

the financial statements be certified by 

an independent public accountant.216

For the reasons discussed below, the 

Commission believes proposed Rule 

17g–3 requiring annual financial 

statements and schedules would be 

necessary or appropriate in the public 

interest or for the protection of 

investors.217

First, Section 15E(d) of the Exchange 

Act provides that the Commission shall, 

by order, censure, place limitations on 

the activities, functions or operations of, 

suspend for a period not exceeding 12 

months, or revoke the registration of an 

NRSRO if, among other things, the 

NRSRO fails to maintain adequate 

financial and managerial resources to 

consistently produce credit ratings with 

integrity.218 The audited financial 

statements and schedules required to be 

furnished by an NRSRO on an annual 

basis under proposed Rule 17g–3 would 

assist the Commission in monitoring the 

NRSRO’s financial resources and 

whether the resources were at a level 

that would necessitate the Commission 

taking action under Section 15(d) of the 

Exchange Act.219

Second, Section 15E(b)(1) of the 

Exchange Act requires an NRSRO to 

promptly amend its application for 

registration, as prescribed in that 

section, if any information or document 

provided in the application becomes 

materially inaccurate.220 As discussed 

above, the application (proposed Form 

NRSRO) would require the following 

financial information: a list of large 

customers in terms of net revenues, 

audited financial statements, 

information about revenues, and 

information about credit analyst 

compensation. This information would 

need to be as of, or for, the previous 

fiscal year. Accordingly, information 


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221 17 CFR 210.1–01 et seq. 

222 15 U.S.C. 78o–7(d). 223See Final Rule: Strengthening the 

Commission’s Rules Regarding Auditor 

Independence, Securities Act Release No. 8183 

(January 28, 2003), 68 FR 6005 (February 5, 2003). 224 17 CFR 240.17a–5(e)(2). 

225 15 U.S.C. 78o–7(g)(1). 

226 15 U.S.C. 78a et seq. 

227 15 U.S.C. 78o–7(g)(2). 

only would become materially 

inaccurate and, therefore, need to be 

updated on an annual basis. In addition, 

the information would be furnished in 

the application on a confidential basis 

and, to the extent permitted by law, 

would not need to be made public. 

Therefore, because the information only 

would be disclosed to the Commission, 

it would be more appropriate to update 

this information by furnishing an 

annual financial statement and 

schedules than by furnishing an 

amended Form NRSRO. 

Paragraph (a). Paragraph (a) of 

proposed Rule 17g–3 would require an 

NRSRO to furnish the audited financial 

statements to the Commission annually, 

as of the fiscal year end indicated on the 

NRSRO’s current Form NRSRO, within 

90 calendar days after the end of such 

fiscal year. The financial statements 

would include the schedules discussed 

below. The requirement that the 

financial statements be audited, 

therefore, would provide the 

Commission with an independent 

verification that the information in the 

financial statements is presented fairly, 

in all material respects, and that the 

schedules are presented fairly, in all 

material respects, based on the financial 

statements taken as a whole. The 90 day 

time period would be consistent with 

the time period for furnishing the 

annual certification with respect to 

NRSROs whose fiscal year-end is the 

end of the calendar year. These NRSROs 

could furnish both the annual audited 

financial statements and the annual 

certification to the Commission at the 

same time. 

Paragraph (a) also would provide that 

the financial statements be prepared 

according to generally accepted 

accounting principles and comply with 

applicable provisions of the 

Commission’s Regulation S–X.221 These 

requirements are designed to ensure that 

the financial statements comport with 

accounting standards and Commission 

rules. 

Paragraph (b). Paragraph (b) of 

proposed Rule 17g–3 would require an 

NRSRO to include three supporting 

schedules in the audited financial 

statements. These schedules would be 

the mechanism by which an NRSRO 

would update the list of large 

customers, information about revenues, 

and information about total aggregate 

credit analyst compensation and median 

compensation originally furnished in 

the NRSRO’s initial application for 

registration. 

As discussed above with respect to 

Exhibit 10, the list of the largest 

customers would assist the Commission 

in identifying customers of an NRSRO 

that could potentially have undue 

influence on the NRSRO given the 

amount of revenue they provide the 

credit rating agency. The largest 

customers would be determined using 

the same definitions of ‘‘net revenues’’

and ‘‘credit rating services’’ discussed 

with respect to Exhibit 10. In addition, 

just as with Exhibit 10, obligor and 

underwriter customers would be added 

to the list to the extent they were as 

large as, or larger than, the 20th largest 

issuer or subscriber customer. 

The information on revenue sources 

and analyst compensation that would be 

required in the schedule would be the 

same as the information that would be 

required in Exhibits 12 and 13, 

respectively. The information on 

revenue sources and credit analyst 

compensation would augment the 

financial statements by providing detail 

as to the revenues generated specifically 

from credit rating services and the 

expenses necessary to retain the credit 

rating agency’s credit analysts. This 

information collectively would assist 

the Commission in monitoring whether 

an NRSRO maintains adequate financial 

resources to consistently produce credit 

ratings with integrity.222

Paragraph (c). Paragraph (c)(1) of 

proposed Rule 17g–3 would require that 

the financial statements be certified by 

an independent public accountant in 

accordance with the provisions the 

Commission’s Regulation S–X. These 

provisions are designed to ensure that 

auditors are independent of their audit 

clients.223

Paragraph (c)(2) of proposed Rule 

17g–3 would require that the NRSRO 

attach to the financial statements a 

statement by a duly authorized person 

of the NRSRO that the financial 

statements present fairly, in all respects, 

the financial condition, results of 

operations, and the cash flows of the 

NRSRO. This would provide a level of 

assurance that the information in the 

financial statements had been reviewed 

and verified by the NRSRO. This 

proposed requirement parallels 

Commission Rule 17a–5(e)(2), which 

requires a duly authorized officer of a 

broker-dealer (or, in the case of a general 

partnership, the general partner) to 

attach an oath or affirmation stating the 

financial statements and schedules 

required under that rule are true and 

correct.224

Finally, Paragraph (d) of proposed 

Rule 17g–3 would provide that the 

Commission may grant an extension of 

time from any requirements in the 

proposed rule either unconditionally or 

on specified terms and conditions on 

the written request of an NRSRO, if the 

Commission finds that such exemption 

is necessary or appropriate in the public 

interest, and is consistent with the 

protection of investors. The Commission 

believes the 90-day period after the end 

of the fiscal year to prepare and furnish 

the financial statements and schedules 

required under proposed Rule 17g–3 

would be a sufficient amount of time to 

fulfill these requirements. However, 

there may be situations where an 

NRSRO would require more time. In 

such cases, the NRSRO would be 

required to request an extension in 

writing and the Commission could grant 

it unconditionally or subject to certain 

specified terms and conditions. 

Request for comment. The 

Commission requests comment on all 

aspects of proposed Rule 17g–3, 

including whether the proposed 

requirements could be more narrowly 

tailored and still meet the stated goals. 

Further, the Commission solicits 

comment on whether any additional 

requirements should be added, or 

whether any of the proposed 

requirements should be omitted or 

modified. The Commission also requests 

comment on the 90-day time period to 

provide the audited financial statements 

and, in particular, whether that time 

frame is too long or too short. The 

Commission further requests comment 

on whether the requirement that the 

schedules to the financial statements be 

audited is practicable, given the 

information to be included in them. 

Commenters that believe it would not be 

practicable should explain the reasons 

for their conclusion. 

F. Proposed Rule 17g–4—Procedures to 

Prevent the Misuse of Material NonPublic Information 

Section 15E(g)(1) of the Exchange 

Act 225 requires an NRSRO to establish, 

maintain, and enforce written policies 

and procedures to prevent the misuse of 

material, nonpublic information in 

violation of the Exchange Act.226

Section 15E(g)(2) of the Exchange Act 

provides that the Commission shall 

adopt rules requiring an NRSRO to 

establish specific policies and 

procedures to prevent the misuse of 

material, non-public information.227


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6398 Federal Register / Vol. 72, No. 27 / Friday, February 9, 2007 / Proposed Rules 

228 15 U.S.C. 78o–7(g)(1). 

229See Proposed Rule: Definition of Nationally 

Recognized Statistical Rating Organization, 

Securities Act Release No. 8570 (April 22, 2005), 70 

FR 21306 (April 25, 2005). 

230See Id. 

231See 17 CFR 243.100. 

232 17 CFR 243.100(b)(2)(iii). 

233See Commission 2003 CRA Report and 

Commission 2003 Concept Release, Securities Act 

Release No. 8236 (June 4, 2003), 68 FR 35258 (June 

12, 2003), noting the concern raised by some that 

subscribers may have preferential access to credit 

analysts and, as a result, may inappropriately learn 

material non-public information in the possession 

of a credit analyst. 

234 Id. 

235See e.g., Commission complaint in 

Commission v. Rick A. Marano, William Marano 

and Carl Loizzi, 04 CV 5828 (Judge Kimba Wood) 

(S.D.N.Y.); see also Commission Litigation Release 

No. 18799 (July 27, 2004). 

Proposed Rule 17g–4 would implement 

this statutory provision by requiring that 

an NRSRO’s policies and procedures 

established pursuant to Section 

15E(g)(1) of the Exchange Act 228

include three specific types of 

procedures. 

First, paragraph (a) of proposed Rule 

17g–4 would require procedures 

designed to prevent the inappropriate 

dissemination within and outside the 

NRSRO of material nonpublic 

information obtained for the purpose of 

developing a credit rating. Some credit 

rating agencies, as part of their analysis, 

contact senior management of the 

obligors and issuers subject to their 

credit ratings. In the course of these 

contacts, an issuer or obligor may 

provide the credit rating agency with 

nonpublic information including 

contemplated business transactions or 

estimated financial projections.229

Credit rating agencies have commented 

that this confidential information 

greatly assists them in issuing credible 

and reliable ratings.230 In fact, the 

Commission’s Regulation FD, which 

governs the disclosure of material nonpublic information by issuers, contains 

an exception that permits issuers to 

intentionally disclose material nonpublic information to a credit rating 

agency without making a simultaneous 

public disclosure of the information.231

The selective disclosure to the credit 

rating agency, however, must be solely 

for the purpose of developing a publicly 

available credit rating.232

Under paragraph (a) of proposed Rule 

17g–4, a credit rating agency that 

permits its credit analysts to contact an 

issuer or obligor in the process of 

determining or maintaining a credit 

rating would be required to, for 

example, have procedures reasonably 

designed to prevent material, nonpublic information obtained by the 

credit analyst from being shared with or 

made readily accessible to any person 

outside the NRSRO or to persons 

employed by the NRSRO who do not 

need to know the information because 

they are not involved in determining or 

approving the credit rating. One concern 

that has been raised in the past is that 

subscribers to a credit rating agency’s 

more detailed credit reports also may be 

granted direct access to the credit 

analysts.233 If the credit analyst is in 

possession of material non-public 

information, there is a risk the 

information may be inappropriately 

disclosed to the subscriber during the 

course of communications with the 

credit analyst.234

The Commission believes NRSROs 

should have flexibility to develop 

procedures tailored to their specific 

organizational structures and business 

models and, consequently, is not 

proposing to prescribe specific 

procedures. Nonetheless, as applicable 

to the business model of the NRSRO, an 

NRSRO could have procedures 

requiring credit analysts to receive 

training in the laws governing the 

misuse of material non-public 

information; defining the persons 

within the NRSRO with whom the 

credit analyst can share the information; 

prohibiting the credit analyst from 

disclosing the information to any other 

persons; and requiring the credit analyst 

to take steps to safeguard documents 

containing the information. An NRSRO 

that does not use management contacts 

as part of its methodology for 

determining credit ratings could 

prohibit credit analysts from contacting 

rated issuers or obligors. 

Paragraph (b) of proposed Rule 17g–

4 would require an NRSRO to 

implement specific procedures designed 

to prevent an associated person or 

member of an associated person’s 

household from purchasing, selling, or 

otherwise benefiting from any 

transaction in securities or money 

market instruments when the person 

possesses or has access to material 

nonpublic information obtained for the 

purpose of developing a credit rating. 

This proposed rule recognizes the risk 

that individuals in possession of, or 

with access to, material nonpublic 

information about an issuer or obligor 

may trade securities or money market 

instruments on the information.235

Again, the Commission does not intend 

to prescribe exact procedures. However, 

as applicable to the business model of 

the NRSRO, an NRSRO could have 

policies prohibiting associated persons 

from purchasing or selling a security or 

money market instrument that is subject 

to a pending rating action; requiring 

associated persons to obtain preapproval before purchasing or selling a 

security or money market instrument; 

and requiring associated persons to be 

notified of securities or money market 

instruments that are on a ‘‘do not trade’’

list. 

Paragraph (c) of proposed Rule 17g–

4 would require an NRSRO to 

implement specific procedures designed 

to prevent the inappropriate 

dissemination within and outside the 

NRSRO of a credit rating action prior to 

making the action readily accessible. 

This provision recognizes that a credit 

rating action of an NRSRO that is not yet 

public may be material, non-public 

information. Consequently, an NRSRO 

should have policies designed to ensure 

that its pending credit rating actions are 

not disclosed in a manner that allows a 

person to trade on the information 

before the action is widely disseminated 

to the market. Once again, the 

Commission does not intend to 

prescribe specific procedures. However, 

as applicable to the business model of 

the NRSRO, these policies could 

include procedures designed to ensure 

that a credit rating action is issued in a 

way that makes it readily accessible to 

the market place, such as posting the 

credit rating or an announcement of the 

credit rating action on the NRSRO’s 

Web site or through a news or 

information service used by market 

participants. The policies also could 

include procedures prohibiting credit 

analysts from selectively disclosing the 

pending action to persons outside the 

NRSRO and to persons inside the 

NRSRO who do not need to know of the 

pending action. 

At the same time, the Commission 

understands that some credit rating 

agencies, as part of their methodologies 

for determining credit ratings, will 

discuss a proposed credit rating action 

with the management of the issuer or 

obligor being rated to solicit their views 

or provide an opportunity to appeal the 

decision. NRSROs engaging in this 

practice should have procedures 

designed to ensure that the discussions 

with the issuer or obligor do not lead to 

the selective disclosure of the 

information to persons other than those 

persons within the issuer or obligor who 

are authorized to receive the 

information. 

The Commission requests comment 

on all aspects of this proposed rule, 

including whether the proposals could 

be more narrowly tailored and still meet 

the stated goals. The Commission also 

requests comment on whether other 

types of specific procedures should be 


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236 15 U.S.C. 78o–7(h)(1). 

237 15 U.S.C. 78o–7(h)(2). 

238 15 U.S.C. 78o–7(a)(1)(B)(vi). 

239 Id. 

240Paragraph (b)(1) of proposed Rule 17g–5. See 

15 U.S.C. 78o–7(h)(2)(A). 

241See Commission 2003 CRA Report noting 

concerns of some that conflicts in this area could 

become much greater if these ancillary services 

were to become a substantial portion of an NRSRO’s 

business. See also Commission 2003 CRA Concept 

Release, Securities Act Release No. 8236 (June 4, 

2003), 68 FR 35258 (June 12, 2003), noting concerns 

of some that greater concerns about conflicts of 

interest arise when a credit rating agency offers 

consulting or other advisory services to issuers it 

rates. 

242Form S–3 (17 CFR § 239.13). 

243Paragraph (b)(2) of proposed Rule 17g–5. See 

15 U.S.C. 78o–7(h)(1)(C); see also Proposed Rule: 

Definition of Nationally Recognized Statistical 

Rating Organization, Securities Act Release No. 

8570 (April 22, 2005), 70 FR 21306 (April 25, 2005), 

which noted that conflicts may arise when a person 

associated with a credit rating agency also is 

associated with, or has an interest in, an issuer that 

is being rated. 

244Several commenters to the 2005 proposing 

release recommended prohibiting a credit rating 

agency and its analysts from owning securities in 

the companies they rate. Letters from Charles D. 

Brown, General Counsel, Fitch, Inc., dated June 9, 

2005; Marjorie E. Gross, Senior Vice President and 

Regulatory Counsel, The Bond Market Association 

and Frank A. Fernandez, Senior Vice President and 

Chief Economist, Securities Industry Association, 

dated June 9, 2005; and Larry G. Mayewski, 

Executive Vice President & Chief Rating Officer, 

A.M. Best Company, Inc., dated June 9, 2005. 

245Cf. 17 CFR 275.204A–1(e)(1) (defining ‘‘access 

person’’ for purposes of requiring investment 

advisers to establish procedures requiring access 

persons to report their personal securities holdings). 

246Paragraph (b)(3) of proposed Rule 17g–5. 

247See, 17 CFR 240.15c3–1(c)(2)(vi)(E), (F), and 

(H). 

248Paragraph (b)(4) of proposed Rule 17g–5. 

required, or whether any of the 

proposed requirements should be 

omitted or modified. 

G. Proposed Rule 17g–5—Management 

of Conflicts of Interest 

Section 15E(h)(1) of the Act requires 

an NRSRO to establish, maintain, and 

enforce policies and procedures 

reasonably designed, taking into 

consideration the nature of its business, 

to address and manage conflicts of 

interest.236 Section 15E(h)(2) of the Act 

requires the Commission to adopt rules 

to prohibit or require the management 

and disclosure of conflicts of interest 

relating to the issuance of credit 

ratings.237 Proposed Rule 17g–5 would 

implement this statutory provision by 

requiring an NRSRO to disclose and 

manage certain conflicts of interest and 

prohibiting other conflicts of interest. 

Paragraph (a) of proposed Rule 17g–

5 would make it unlawful for an NRSRO 

to have a conflict of interest relating to 

the issuance of a credit rating that is 

identified in paragraph (b) of the 

proposed rule unless the NRSRO has 

publicly disclosed the type of conflict of 

interest in compliance with Rule 17g–1 

and has implemented policies and 

procedures to address and manage such 

conflict of interest in accordance with 

Section 15E(h)(1) of the Exchange Act. 

As discussed, Rule 17g–1 would require 

an NRSRO to apply for registration and 

update its registration using Form 

NRSRO. Exhibit 6 to proposed Form 

NRSRO would require the NRSRO to 

identify and publicly disclose the types 

of conflicts of interest that arise from its 

business activities as required by 

Section 15E(a)(1)(B)(vi) of the Exchange 

Act.238 As mentioned above, Section 

15E(h)(1) of the Exchange Act requires 

an NRSRO to establish, maintain, and 

enforce written policies and procedures 

to address conflicts of interest.239

Accordingly, under proposed Rule 17g–

5, it would be unlawful for an NRSRO 

to have a conflict of interest identified 

in paragraph (b) of the rule if it had not 

complied with its regulatory and 

statutory requirements with respect to 

disclosing and managing types of 

conflicts of interest. The Commission 

believes that these requirements in 

proposed Rule 17g–5 would be 

appropriate in the public interest and 

for the protection of investors because 

they are designed to ensure that users of 

credit ratings are made aware of the 

potential conflicts of interest that arise 

from an NRSRO’s business activities 

and that an NRSRO establishes policies 

and procedures for managing the 

specific conflicts. 

The types of conflicts identified in 

paragraph (b) of proposed Rule 17g–5 

are those that a credit rating agency 

commonly faces, depending on its 

business model. Consequently, 

prohibiting them outright could 

adversely impact the ability of an 

NRSRO to operate as a credit rating 

agency. Nonetheless, the conflicts 

should be managed through policies and 

procedures and disclosed so that users 

of the credit ratings can assess whether 

the conflict impacts the NRSRO’s 

judgment. 

The first type of conflict identified in 

paragraph (b) of proposed Rule 17g–5 

involves receiving compensation from a 

rated person for a service or product of 

the NRSRO or its affiliates.240 This type 

of conflict arises from a common 

business model in the credit rating 

industry; namely, charging issuers and 

obligors to determine and maintain a 

credit rating of the issuer or obligor. A 

related conflict may arise when the 

credit rating agency offers other services 

and products of its own and its affiliates 

to rated issuers and obligors, including 

credit assessment and risk management 

consulting.241 Furthermore, an NRSRO 

could potentially issue a credit rating 

that the rated issuer or obligor uses for 

regulatory purposes. For example, an 

issuer may rely on the credit rating to 

qualify for Form S–3—the Commission’s 

‘‘short-form’’ registration statement.242

The second type of conflict identified 

in paragraph (b) of proposed rule 17g–

5 involves having an ownership interest 

(securities or otherwise) in an issuer or 

obligor subject to a credit rating of the 

NRSRO.243 As discussed below, this 

conflict would be prohibited under 

paragraph (c) of proposed Rule 17g–5 if 

the NRSRO, credit analyst, or an 

associated person approving the credit 

rating had the ownership interest.244

However, it may be appropriate for an 

NRSRO to permit employees that have 

no involvement in determining or 

approving the credit rating of an obligor 

or issuer to own securities of the 

entity.245 For example, a prohibition for 

all employees could be a particular 

hardship if the NRSRO issued credit 

ratings with respect to most public 

companies. 

The third type of conflict identified in 

paragraph (b) of proposed rule 17g–5 

involves receiving compensation from 

subscribers that use the credit ratings of 

the NRSRO for regulatory purposes.246

As discussed in section I, numerous 

federal and state statutes and 

regulations use the term ‘‘NRSRO.’’ A 

subscriber potentially could be subject 

to one or more of these statutes and 

regulations and, consequently, benefit 

depending on how the NRSRO rates 

securities held by the subscriber. For 

example, a broker-dealer subscriber 

holding debt securities would be able to 

apply lower haircuts when computing 

its net capital under Exchange Act Rule 

15c3–1, if the securities are rated 

investment grade by two NRSROs.247

Regulatory users of credit ratings such 

as broker-dealers likely also would be 

subscribers to an NRSRO’s credit ratings 

or credit analysis. Therefore, prohibiting 

this conflict could be impractical, 

particularly for NRSROs that rely solely 

on a subscription-based business model. 

The fourth type of conflict identified 

in paragraph (b) of proposed rule 17g–

5 involves having an ownership interest 

in a subscriber that uses the NRSRO’s 

credit ratings for regulatory purposes.248

This potentially could create an 

incentive for the credit rating agency or 

an associated person to issue a credit 

rating that allows the subscriber to take 

advantage of a benefit in a statute or 

regulation using the NRSRO concept. 

The fifth type of conflict identified in 

paragraph (b) of proposed rule 17g–5 

involves having a business or personal 


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6400 Federal Register / Vol. 72, No. 27 / Friday, February 9, 2007 / Proposed Rules 

249Paragraph (b)(5) of proposed Rule 17g–5. 

250See 15 U.S.C. 78o–7(h)(2)(C). 

251See 15 U.S.C. 78o–7(h)(2)(D). 

252Paragraph (b)(5) of proposed Rule 17g–5. 

253 15 U.S.C. 78o–7(a)(1)(B)(vi). 

254See 15 U.S.C. 78o–7(h)(2)(E). 

255Paragraph (c)(1) of proposed Rule 17g–5. The 

determination of ‘‘net revenue’’ would be same as 

the determination of net revenue for purposes of 

Form NRSRO and proposed Rule 17g–3. 

256As noted in the Commission 2003 CRA Report, 

some participants in the Commission 2002 CRA 

Hearings expressed concern that ancillary services 

could become much greater in the future and 

suggestions were made that their percentage 

contribution to total revenue be capped. 

257As noted in the Commission 2003 CRA Report, 

fees from any single issuer typically comprise a 

very small percentage—less than 1%—of a credit 

rating agency’s total revenue. 

258Paragraph (c)(2) of proposed Rule 17g–5. 

259The Senate Report notes that rating agencies 

argue that although the pay-for-rating business 

model presents inherent conflicts of interest, the 

conflict is effectively managed inasmuch as credit 

analysts do not benefit financially from any of their 

ratings decisions. The Senate Report further notes 

that credit analysts are not permitted to own any 

of the securities they follow. 

260Paragraph (c)(3) of proposed Rule 17g–5. 

261Paragraph (c)(4) of proposed Rule 17g–5. Cf. 

Rule 2711 of the National Association of Securities 

Dealers, Inc. (‘‘NASD’’) allowing a securities 

research analyst to be an officer or director of a 

subject company if proper disclosure is made. 

relationship or affiliation with a rated 

issuer or obligor, underwriter of a rated 

issuer’s securities, or a subscriber that 

uses the credit ratings for regulatory 

purposes.249 An example of this conflict 

would include a person associated with 

the NRSRO having a relative or spouse 

who worked for a rated issuer, obligor, 

or underwriter of a rated issuer’s 

securities. It also would include a 

person associated with the NRSRO 

having a business relationship with one 

of these types of entities, for example, 

receiving a loan from a bank that is 

rated.250 The Commission believes, 

however, that prohibiting these types of 

relationships outright may be 

unnecessary or could prove impractical. 

However, an NRSRO should have robust 

policies and procedures to manage 

conflicts arising from these 

relationships. Moreover, paragraph (c) 

of proposed Rule 17g–5 would not 

prohibit a credit analyst or associated 

person approving the credit rating from 

having these types of relationships with 

the rated issuer or obligor or 

underwriter of the rated issuer’s 

securities.251 However, there may be 

circumstances where an NRSRO, as part 

of its policies and procedures, should 

prohibit the conflict. One potential 

example would be if the credit analyst’s 

spouse or close family member works 

for the rated issuer or obligor. 

The sixth type of conflict identified in 

paragraph (b) of proposed rule 17g–5 

involves being an officer or director of 

a rated issuer or obligor, underwriter of 

a rated issuer’s securities, or subscriber 

that uses the NRSRO’s credit ratings for 

regulatory purposes.252 As discussed 

below, this type of conflict would be 

prohibited under paragraph (c) of 

proposed Rule 17g–5 if the credit 

analyst or associated person responsible 

for approving the credit rating was an 

officer or director of one of these 

entities. However, it may be 

appropriate, subject to adequate policies 

and procedures, for other employees of 

the NRSRO and its affiliates to serve in 

these roles, since they would have no 

direct role in determining the credit 

rating. 

The seventh type of conflict identified 

in paragraph (b) of proposed rule 17g–

5 would be any other type of conflict 

that the NRSRO identifies on proposed 

Form NRSRO in compliance with 

Section 15E(a)(1)(B)(vi) of the Exchange 

Act 253 and proposed Rule 17g–1. This 

catchall provision would capture 

conflict types not specifically listed in 

paragraph (b) of Rule 17g–5 that the 

NRSRO has identified on Exhibit 6 to 

proposed Form NRSRO as arising from 

its business activities.254

Paragraph (c) of proposed Rule 17g–

5 would specifically prohibit four types 

of conflicts of interest. The Commission 

preliminarily believes that prohibiting 

such conflicts of interest would be 

appropriate in the public interest and 

for the protection of investors. 

The first proposed prohibition would 

make it unlawful for an NRSRO to have 

a conflict relating to the issuance of a 

credit rating where the person soliciting 

the credit rating was the source of 10% 

or more of the total net revenue of the 

NRSRO and its affiliates in the most 

recently ended fiscal year.255 Such a 

person would be in a position to 

exercise substantial influence on the 

NRSRO.256 It would be difficult for the 

NRSRO to remain impartial, given the 

impact on the NRSRO’s income if the 

issuer, obligor or underwriter withdrew 

its business. Given our understanding 

that fees from a single entity generally 

compose a very small percentage of the 

revenues of entities currently identified 

as NRSROs, the Commission 

preliminarily believes that a 10% 

threshold is a reasonable benchmark for 

registered NRSROs.257

The second proposed prohibition 

would make it unlawful for an NRSRO 

to have a conflict relating to the 

issuance of a credit rating where the 

NRSRO, a credit analyst responsible for 

the credit rating, or a person associated 

with the NRSRO responsible for 

approving the credit rating, owns 

securities of, or has any other ownership 

interest in the rated person, or is a 

borrower or lender with respect to the 

rated person.258 The Commission 

preliminarily believes that the NRSRO, 

credit analyst responsible for 

determining the credit rating, and 

person responsible for approving the 

credit rating should not have a direct 

financial interest in the rated issuer or 

obligor. The Commission preliminarily 

believes an NRSRO or associated person 

having such a financial interest could 

not remain impartial and issue an 

objective credit rating in these 

circumstances.259

The third proposed prohibition would 

make it unlawful for an NRSRO to have 

a conflict relating to the issuance of a 

credit rating where the rated entity is a 

person associated with the NRSRO.260

The Commission preliminary believes 

an NRSRO would not be able to 

maintain an appropriate level of 

impartiality when issuing a credit rating 

with respect to an affiliated entity. 

The fourth proposed prohibition 

would make it unlawful for an NRSRO 

to have a conflict relating to the 

issuance of a credit rating where the 

credit analyst responsible for the credit 

rating, or a person associated with the 

NRSRO responsible for approving the 

credit rating, also is an officer or 

director of the person that is the subject 

of the credit rating.261 Again the 

Commission preliminarily believes that 

an NRSRO or person associated with the 

NRSRO having such a position could 

not issue an objective credit rating in 

these circumstances. 

The Commission requests comment 

on all aspects of proposed Rule 17g–5, 

including whether the proposals could 

be more narrowly tailored and still meet 

the stated goals. The Commission also 

requests comment on whether 

paragraph (b) of proposed Rule 17g–5 

captures all the types of conflicts that 

arise from the activities of a credit rating 

agency. Comment also is sought on 

whether proposed Rule 17g–5 should 

contain materiality thresholds insomuch 

as some conflicts may be 

inconsequential. The Commission seeks 

comment on whether the focus of the 

proposal on the ‘‘type’’ of conflict of 

interest would appropriately capture the 

conflicts that arise from the business of 

a credit rating agency. In addition, the 

Commission requests comment on the 

prohibited conflicts and whether these 

conflicts should be permitted if a credit 

rating agency discloses them and has 

procedures in place to manage such 

conflicts. If so, what specific disclosures 

should be required? Alternatively, 

should the rule prohibit other types of 


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262 15 U.S.C. 78o–7(i)(1). 

263 15 U.S.C. 78o–7(i)(1)(A), (B) and (C). 

264 Id. 

265 15 U.S.C. 78o–7(i)(1). 

266See Commission 2003 CRA Report, which 

noted that some participants in the Commission 

2002 CRA Hearings questioned the appropriateness 

of unsolicited credit ratings because they could 

used to engage in ‘‘strong-arm’’ tactics to induce 

payment for a credit rating an issuer did not 

request. 

267 15 U.S.C. 78o–7(i)(1)(A). 

268See Commission 2003 CRA Report, which 

noted that some participants in the Commission’s 

2002 CRA Hearings worried that issuers could be 

unduly pressured to purchase advisory services, 

particularly in cases where they were solicited by 

the credit rating analyst. 

269See Commission 2003 CRA Report, which 

noted that by the mid-1970s credit rating agencies 

began charging issuers for ratings, due to difficulties 

in limiting access to their credit ratings to 

subscribers, as well as to respond to the demand for 

more comprehensive and resource-intensive 

analysis of issuers. 

270 15 U.S.C. 78o–7(i)(1)(C). 

271Paragraph (a)(2) of proposed Rule 17g–6. 

272Presumably, an issuer or obligor would not 

agree to compensate an NRSRO for a credit rating 

that was lower than would result from applying the 

NRSRO’s methodologies. Nonetheless, if an NRSRO 

agreed to issue a lower than warranted credit rating 

in return for compensation, the NRSRO would 

violate paragraph (a)(2) as well. 

conflicts of interest, or should some of 

the proposed requirements be 

eliminated or modified? The 

Commission further requests comment 

on whether there should be specific 

exceptions to the proposed prohibitions. 

For example, should the prohibition 

against ownership of securities in a 

rated company apply to indirect 

ownership of securities such as through 

a mutual fund. The Commission also 

requests comment on whether the 10% 

net revenue threshold in proposed Rule 

17g–5(c)(1) is appropriate, or should a 

higher or lower threshold be applied. 

H. Proposed Rule 17g–6—Prohibited 

Unfair, Coercive, or Abusive Practices 

Section 15E(i)(1) of the Exchange 

Act 262 provides that the Commission 

shall adopt rules prohibiting any act or 

practice by an NRSRO that the 

Commission determines is unfair, 

abusive, or coercive, including certain 

acts and practices set forth in 

paragraphs (i)(1)(A)–(C) of Section 15E 

of the Exchange Act.263 In explaining 

this statutory provision, the Senate 

Report stated that ‘‘the Commission, as 

a threshold consideration, must 

determine that the practices subject to 

prohibition under this section are 

unfair, coercive or abusive before 

adopting rules prohibiting such 

practices.’’ The Commission has made a 

preliminary determination that the acts 

and practices described in paragraphs 

(i)(1)(A)–(C) of Section 15E of the 

Exchange Act 264 would be unfair, 

coercive, or abusive. Consequently, the 

Commission is proposing to prohibit 

them in proposed Rule 17g–6, with one 

conditional exception. Further, the 

Commission also has made a 

preliminary determination that an 

additional act and practice relating to 

unsolicited credit ratings (as noted 

above, these are credit ratings that are 

not initiated at the request of the issuer, 

obligor or underwriter) would be unfair, 

coercive, or abusive and, consequently, 

is proposing to use its authority under 

Section 15E(i)(1) of the Exchange Act 265

to prohibit such act and practice.266

Section 15E(i)(1)(A) of the Exchange 

Act provides that the Commission shall 

prohibit the following practice if the 

Commission determines it is unfair, 

coercive, or abusive: 

Conditioning or threatening to condition 

the issuance of a credit rating on the 

purchase by the obligor or an affiliate thereof 

of other services or products, including precredit rating assessment products of the 

nationally recognized statistical rating 

organization or any person associated with 

such nationally recognized statistical rating 

organization[.] 267

The Commission has preliminarily 

determined that this practice would be 

unfair, coercive, or abusive and 

proposes to prohibit it. Paragraph (a)(1) 

of Proposed Rule 17g–6 would prohibit 

an NRSRO from conditioning or 

threatening to condition the issuance of 

a credit rating on the purchase of other 

products or services, including precredit rating assessment products.268

Credit ratings play an important role 

in financial markets. Market 

participants use them in making 

financial decisions whether to buy or 

sell debt securities and extend credit to 

rated entities. Moreover, credit ratings 

of NRSROs are used in federal and state 

laws and regulations to establish limits 

or confer exemptions or privileges. 

Consequently, an entity may benefit 

from having an NRSRO credit rating 

because it makes its securities more 

marketable or the rating would qualify 

the entity for an exemption or privilege 

in one of these rules or statutes or make 

holding the entity’s debt securities or 

transacting with the entity more 

attractive to other regulated entities. An 

NRSRO could abuse this incentive by 

using it to coerce an issuer or obligor to 

purchase services from the NRSRO or its 

affiliates. Accordingly, the Commission 

is proposing to prohibit this potential 

practice. 

An NRSRO would be allowed to 

condition the issuance and maintenance 

of a credit rating on the issuer or obligor 

paying for the service of determining 

and monitoring the credit rating. As 

noted above, this is a longstanding 

business model in the credit rating 

industry.269 However, as discussed, the 

NRSRO could not condition the 

issuance of the credit rating on the 

purchase of any other service or product 

offered by the NRSRO and its affiliates. 

This practice would violate paragraph 

(a)(1) of proposed Rule 17g–6 even if the 

NRSRO agreed to issue or did issue a 

credit rating that otherwise was 

determined in accordance with its 

methodologies for issuing credit ratings. 

Section 15E(i)(1)(C) of the Exchange 

Act provides that the Commission shall 

prohibit the following practices if the 

Commissions determines they are 

unfair, coercive, or abusive: 

Modifying or threatening to modify a credit 

rating or otherwise departing from systematic 

procedures and methodologies in 

determining credit ratings, based on whether 

the obligor, or an affiliate of the obligor, 

purchases or will purchase the credit rating 

or any other service or product of the 

nationally recognized statistical rating 

organization or any person associated with 

such organization.270

The Commission has preliminarily 

determined that these practices would 

be unfair, coercive, or abusive and, 

consequently, proposes to prohibit them 

through paragraphs (a)(2) and (a)(3) of 

proposed Rule 17g–6. Paragraph (a)(2) 

would prohibit an NRSRO from issuing, 

or offering or threatening to issue, a 

credit rating that is not determined in 

accordance with the NRSRO’s 

established procedures for determining 

credit ratings based on whether the 

rated person purchases or will purchase 

the credit rating or another product or 

service.271 Thus, an NRSRO would be 

prohibited from issuing or threatening 

to issue a credit rating that is lower than 

would result from using its 

methodology for determining credit 

ratings based on whether the issuer or 

obligor pays for the credit rating or any 

other service or product of the NRSRO 

and its affiliates. The NRSRO also 

would be prohibited from issuing or 

promising to issue a higher credit rating 

in these circumstances.272

The practice proposed to be 

prohibited in this paragraph is 

distinguishable from the practice 

proposed to be prohibited in Paragraph 

(a)(1). Paragraph (a)(1) addresses the 

situation where an NRSRO conditions 

the issuance of a credit rating on the 

purchase of another service or product. 

Paragraph (a)(2) addresses the situation 

where an NRSRO conditions the 

conclusion reached in the credit rating 

on the purchase of the credit rating or 


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273See Commission 2003 CRA Report, which 

noted that some participants in the Commission 

2002 CRA Hearings believed that, even if the 

purchase of ancillary services did not impact the 

credit rating decision, issuers may be pressured into 

using the services out of fear that their failure to do 

so may adversely impact their credit rating. 

274The Commission is mindful of the limitation 

in Section 15E(c)(2) of the Exchange Act that the 

rules the Commission adopts under the Exchange 

Act not regulate the substance of credit ratings (15 

U.S.C. 78o–7(c)(2)). The Commission does not 

believe that this prohibition would interfere with 

the process by which an NRSRO assesses the 

creditworthiness of a security, money market 

instrument or obligor. An issuer’s or obligor’s 

agreement or refusal to pay the NRSRO or its 

affiliate for a service or product is not, necessarily 

of itself, relevant to a credit assessment of the issuer 

or obligor. Moreover, this is a practice that Congress 

specifically identified in Section 15E(i)(1)(C) of the 

Exchange Act as potentially unfair, coercive, or 

abusive (15 U.S.C. 78o–7(i)(1)(C)). 

275 15 U.S.C. 78o–7(i)(1)(A). 

276See Commission 2003 CRA Report, which 

noted that one credit rating agency that participated 

in the Commission 2002 CRA Hearings complained 

that other credit rating agencies were attempting to 

squeeze it out of certain structured finance markets 

by engaging in the practice of ‘‘notching.’’

277The Commission 2003 CRA Report noted that 

the credit rating agency that raised the concern 

about ‘‘notching’’ in Commission 2002 Hearings 

suggested, as a possible solution, that NRSROs be 

required to recognize the credit ratings of other 

NRSROs as their own for purposes of rating these 

asset pools. 

another service.273 Thus, unlike 

paragraph (a)(1), an NRSRO would 

violate paragraph (a)(2) if it conditioned 

the issuance of the credit rating on the 

obligor or issuer paying for the credit 

rating. This is because the NRSRO 

would not be agreeing to determine a 

credit rating that reflected the NRSRO’s 

assessment of the creditworthiness of 

the issuer or obligor as determined by 

its methodologies (including, as 

applicable, quantitative and qualitative 

models). Rather, the NRSRO would be 

agreeing to skew the rating higher based 

on the issuer or obligor agreeing to pay 

for it. 

Paragraph (a)(3) of proposed Rule 

17g–6 would prohibit an NRSRO from 

modifying, or offering or threatening to 

modify, a credit rating in a manner 

contrary to its procedures for modifying 

a credit rating based on whether the 

rated person, or an affiliate of the rated 

person, purchases or will purchase the 

credit rating or any other service or 

product of the NRSRO and its affiliates. 

The prohibition in paragraph (a)(2) of 

proposed Rule 17g–6, as discussed, 

would apply to threats or promises with 

respect to the issuance of a credit rating. 

Paragraph (a)(3) would extend this 

prohibition to threats or promises with 

respect to changing an existing credit 

rating. 

The potential for an NRSRO to use the 

threat of a lower or the promise of a 

higher credit rating to obtain business 

arises from the fact that an entity’s cost 

of credit and, in some cases, ability to 

obtain credit, generally depends on its 

credit rating. Entities with lower credit 

ratings must pay higher interest rates to 

borrow funds or issue debt. In some 

cases, a low credit rating could block an 

entity’s access to credit. Thus, it is in a 

borrower’s economic interest to have a 

high credit rating. This creates the 

potential for an NRSRO to have 

inappropriate leverage over an issuer or 

obligor. The NRSRO could use this 

leverage to obtain business by 

threatening to issue or modify a credit 

rating in a manner that results in a 

lower rating than would have resulted 

from using its established 

methodologies. The NRSRO also could 

issue a lower rating or lower an existing 

rating to punish an issuer or obligor for 

not purchasing the credit rating or 

another service or product of the 

NRSRO and its affiliates. Conversely, 

the NRSRO could promise to issue or 

modify a credit rating in a manner that 

results in a higher rating than would 

have resulted from using its established 

methodologies as a reward for 

purchasing the credit rating or other 

services or products. Proposed Rule 

17g–6 would provide a check on the 

potential inappropriate influence an 

NRSRO may have over issuers and 

obligors by prohibiting an NRSRO from 

using this leverage to coerce an issuer or 

obligor into purchasing a credit rating or 

other services and products of the 

NRSRO and its affiliates. 

A second reason to prohibit these 

practices is that they would lead to 

credit ratings that could mislead the 

marketplace and undermine the 

regulatory use of NRSRO credit ratings. 

An NRSRO that follows through on a 

threat to issue a low credit rating or 

promise to issue a high credit rating 

would be issuing a credit rating that 

does not accurately reflect the credit 

rating agency’s true assessment of the 

creditworthiness of the issuer or obligor. 

The credibility and reliability of an 

NRSRO and its credit ratings depends 

on the NRSRO developing and 

implementing sound methodologies for 

determining credit ratings and following 

those methodologies. The fact that an 

issuer or obligor agrees or refuses to 

purchase a credit rating or other service 

or product from the NRSRO and its 

affiliates should have no bearing on the 

NRSRO’s credit assessment of the issuer 

or obligor.274

Section 15E(i)(1)(B) of the Exchange 

Act provides that the Commission by 

rule shall prohibit the following 

practices if the Commission determines 

they are unfair, coercive, or abusive: 

Lowering or threatening to lower a credit 

rating on, or refusing to rate, securities or 

money market instruments issued by an asset 

pool or as part of any asset-backed or 

mortgage-backed securities transaction, 

unless a portion of the assets within such 

pool or part of such transaction, as 

applicable, also is rated by the nationally 

recognized statistical rating 

organization[.] 275

In explaining this statutory provision, 

the Senate Report stated that ‘‘there may 

be instances when a rating agency may 

refuse to rate securities or money market 

instruments for reasons that are not 

intended to be anti-competitive.’’ The 

Senate Report further stated that ‘‘the 

Commission * * * should prohibit only 

those ratings refusals that occur as part 

of unfair, coercive or abusive conduct.’’

This provision in the statute is 

seeking to address a practice, sometimes 

referred to as ‘‘notching,’’ where a credit 

rating agency refuses to rate securities or 

money market instruments issued by an 

asset pool or as part of any asset-backed 

or mortgage-backed securities 

transaction (collectively, a ‘‘structured 

product’’) or discounts the rating for a 

structured product because it has not 

rated all of the underlying assets. Critics 

of this practice argue that it forces 

issuers of structured products to obtain 

credit ratings from the same credit 

rating agencies that rated the underlying 

assets.276 They argue this makes it 

difficult for other credit rating agencies 

to develop a market in rating structured 

products. On the other hand, credit 

rating agencies that rate structured 

products argue that their rating of the 

structured product necessarily must 

involve assessments of the 

creditworthiness of the underlying 

assets. They do not believe it would be 

appropriate to rely on credit ratings of 

the underlying assets issued by another 

credit rating agency because those 

ratings may have been determined using 

different methodologies and may reflect 

different assessments of the 

creditworthiness of the asset.277

The Commission preliminarily 

determines that it would be unfair, 

coercive, or abusive for an NRSRO to 

issue or threaten to issue a lower credit 

rating, lower or threaten to lower an 

existing credit rating, refuse to issue a 

credit rating, or to withdraw a credit 

rating with respect to a structured 

product unless a portion of the assets 

underlying the structured product also 

are rated by the NRSRO. Consequently, 

the Commission proposes to prohibit 

these practices in paragraph (a)(4) of 

Proposed Rule 17g–6. 


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278Anecdotally, the Commission understands 

that several of the credit rating agencies currently 

subject to a staff no-action letter have procedures 

under which they will undertake to issue a credit 

rating for a structured product where they have 

rated approximately 80% to 90% of the market 

value of the underlying assets. 

279 15 U.S.C. 78o–7(i)(1). 

280As discussed above, some participants in the 

Commission 2002 CRA Hearings questioned the 

appropriateness of unsolicited credit ratings 

because they could be used to engage in ‘‘strongarm’’ tactics to induce payment for a credit rating 

an issuer did not request. Potential tactics identified 

included sending a bill for an unsolicited rating or 

sending a fee schedule and encouraging payment. 

See Commission 2003 CRA Report. 

281 44 U.S.C. 3501 et seq. 5 CFR 1320.11. 

282Pub. L. No. 109–291 (2006). 

283See Section 15E of the Exchange Act (15 

U.S.C. 78o–7)). 

284Section 15E(a)(1) of the Exchange Act (15 

U.S.C. 78o–7(a)(1)) and proposed Rule 17g–1(a). 

285Proposed Rule 17g–1(c); see also Section 

15E(a)(1) of the Exchange Act (15 U.S.C. 78o–

7(a)(1)). 

At the same time, the Commission 

believes there could be legitimate 

reasons for an NRSRO to refuse to rate 

a structured product where the NRSRO 

has not rated the underlying assets. 

Therefore, the Commission is proposing 

that an NRSRO could refuse to initiate 

a rating or withdraw an existing rating 

in certain circumstances. This exception 

only would apply to the prohibition in 

paragraph (a)(4) against refusing to rate 

the security or withdrawing a rating. It 

would not apply to issuing or 

threatening to issue a lower credit rating 

or lowering or threatening to lower an 

existing credit rating. 

Under the exception to the 

prohibition, an NRSRO could refuse to 

issue the rating or withdraw the rating 

if the NRSRO has rated less than 85% 

of the market value of the assets 

underlying the structured product. This 

is designed to address the concern that 

an NRSRO when assessing the credit 

worthiness of the structured product 

would be forced to issue a rating either 

when a portion of the underlying assets 

are not rated or when the underlying 

assets have been rated by another credit 

rating agency. If the underlying assets 

were unrated, the NRSRO may not have 

sufficient information for issuing a 

rating on the structured product. In 

cases where the underlying assets were 

rated by another credit rating agency, 

the other credit rating agency may have 

used different methodologies to assess 

the creditworthiness of the asset and 

may have determined a credit rating that 

is different than the credit rating the 

NRSRO would issue, if it had rated the 

asset. The Commission preliminarily 

does not believe it would be appropriate 

to require the NRSRO to issue or 

maintain a rating when the NRSRO has 

rated less than 85% of the market value 

of the underlying assets.278

Finally, the Commission is proposing 

to prohibit a practice that is not 

specifically identified in Section 

15E(i)(1) of the Exchange Act 279 but is 

related to the practices described in the 

statute. Specifically, the Commission 

has preliminarily determined that it 

would be unfair, coercive or abusive to 

issue an unsolicited credit rating and 

communicate with the rated person to 

induce or attempt to induce the rated 

person to pay for the rating or another 

product or service of the NRSRO or its 

affiliates. Consequently, paragraph (a)(5) 

of proposed Rule 17g–6 would prohibit 

this practice. 

It may be appropriate for an NRSRO 

that operates under a business model 

where issuers or obligors pay for the 

credit ratings to issue a credit rating that 

the issuer or obligor has not requested. 

For example, an NRSRO may want to 

have an active credit rating for every 

major issuer in a given industry. 

It would not be appropriate, however, 

to determine an unsolicited credit rating 

and then to contact the issuer or obligor 

to solicit them to pay for the rating.280

As discussed, an NRSRO may yield a 

degree of influence on issuers and 

obligors, given the impact a credit rating 

can have on the issuer’s or obligor’s 

access to credit and cost of credit. Thus, 

an issuer or obligor may agree to pay for 

an unsolicited credit rating to placate 

the NRSRO, rather than because they 

want to be rated. For example, the issuer 

or obligor may already be paying other 

credit rating agencies for a credit rating 

and, therefore, would derive no 

additional benefit from having an 

additional credit rating. 

The Commission requests comment 

on all aspects of proposed Rule 17g–6, 

particularly on whether the proposed 

rule’s requirements that prohibit certain 

acts and practices could be more 

narrowly tailored and still meet the 

stated goals. The Commission also 

requests comment on whether there are 

any other unfair, coercive, or abusive 

practices which should be prohibited 

under the proposed rules, or whether 

any of the practices proposed to be 

prohibited should not be subject to 

prohibition. The Commission further 

requests comment on whether any of the 

proposed prohibitions should be 

modified. With respect to the exception 

to the prohibition in paragraph (a)(4) of 

the Rule 17g–6, the Commission 

requests comment on whether the 

proposed exception permitting an 

NRSRO to refuse to issue a credit rating 

or withdraw a credit rating of structured 

product when it has not rated all the 

underlying assets should be modified or 

deleted and whether the 85% threshold 

in that exception should be higher or 

lower. 

IV. Paperwork Reduction Act 

Certain provisions of the proposed 

rules contain a ‘‘collection of 

information’’ within the meaning of the 

Paperwork Reduction Act of 1995 

(‘‘PRA’’).281 The Commission has 

submitted the proposed rules to the 

Office of Management and Budget 

(‘‘OMB’’) for review in accordance with 

the PRA. An agency may not conduct or 

sponsor, and a person is not required to 

comply with, a collection of information 

unless it displays a currently valid 

control number. The titles for the 

collections of information are: 

(1) Rule 17g–1, Application for 

registration as a nationally recognized 

statistical rating agency; Form NRSRO 

and the Instructions for Form NRSRO; 

(2) Rule 17g–2, Records to be made 

and retained by national recognized 

statistical rating organizations; 

(3) Rule 17g–3, Annual audited 

financial statements to be furnished by 

nationally recognized statistical rating 

organizations; 

(4) Rule 17g–4, Prevention of Misuse 

of Material Nonpublic Information; and 

(5) Rule 17g–6, Prohibited Acts and 

Practices. 

A. Collections of Information Under the 

Proposed Amendments 

The Commission is proposing for 

comment rules to implement 

registration, recordkeeping, financial 

reporting, and oversight rules under the 

Credit Rating Agency Reform Act of 

2006 (the ‘‘Act’’).282 The proposed rules 

contain recordkeeping and disclosure 

requirements that are subject to the 

PRA. The collection of information 

obligations imposed by the proposed 

rules would be mandatory. The 

proposed rules, however, would apply 

only to credit rating agencies that are 

registered with the Commission as 

NRSROs and registration is 

voluntary.283

In summary, the proposed rules 

would require an NRSRO to: (1) 

Complete an initial application for 

registration on Form NRSRO; 284 (2) 

provide written notice to the 

Commission if information submitted 

on the application is materially 

inaccurate, as well as furnishing an 

updated Form NRSRO to the 

Commission, prior to final action by the 

Commission; 285 (3) if applicable, 

provide a written notice of withdrawal 

of the application prior to final action 


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286Proposed Rule 17g–1(b)(2); see also Section 

15E(a)(1) of the Exchange Act (15 U.S.C. 78o–

7(a)(1)). 

287Section 15E(a)(3) of the Exchange Act (15 

U.S.C. 78o–7(a)(3)) and proposed Rule 17g–1(d). 

288Proposed Rule 17g–1(e). 

289Section 15E(b)(1) of the Exchange Act (15 

U.S.C. 78o–7(b)(1)) and proposed Rule 17g–1(f). 

290Section 15E(b)(2) of the Exchange Act (15 

U.S.C. 78o–7(b)(2)) and proposed Rule 17g–1(g). 

291Section 15E(e)(1) of the Exchange Act (15 

U.S.C. 78o–7(e)(1)) and proposed Rule 17g–1(h). 

292Proposed Rule 17g–2 under authority in 

Section 17(a)(1) of the Exchange Act (15 U.S.C. 

78q(a)(1)). 

293Proposed Rule 17g–2(e) under authority in 

Section 17(a)(1) of the Exchange Act (15 U.S.C. 

78q(a)(1)). 

294Proposed Rule 17g–2(f) under authority in 

Section 17(a)(1) of the Exchange Act (15 U.S.C. 

78q(a)(1)). 

295Section 15E(k) of the Exchange Act (15 U.S.C. 

78o–7(k)) and Proposed Rule 17g–3. 

296Section 15E(g) of the Exchange Act (15 U.S.C. 

78o–7(g)) and proposed Rule 17g–4. 

297See Proposed Rule 17g–6(b)(2) under authority 

in Section 17(a)(1) of the Exchange Act (15 U.S.C. 

78q(a)(1)). 

298See 15 U.S.C. 78o–7. 

299 15 U.S.C. 78o–7. 

300See 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. (Sept. 

6, 2006) (‘‘Senate Report’’). 

301 15 U.S.C. 78c. 

302See Section 3 of the Act. 

303Section 3(a)(62) of the Exchange Act (15 U.S.C. 

78c(a)(62)). Section 3(a)(64) of the Exchange Act 

defines the ‘‘qualified institutional buyer’’ (‘‘QIB’’) 

as having the ‘‘meaning given such term in [17 CFR 

230.144A(a)] or any successor thereto.’’ 15 U.S.C. 

78c(a)(62). 

304Section 3(a)(61) of the Exchange Act (15 U.S.C. 

78c(a)(61)). 305Section 3(a)(61)(A) of the Exchange Act (15 

U.S.C. 78c(a)(61)(A)). 306Section 3(a)(60) of the Exchange Act (15 U.S.C. 

78c(a)(60)). 307The Basel Committee on Banking Supervision 

is comprised of members from Belgium, Canada, 

France, Germany, Italy, Japan, Luxembourg, the 

Netherlands, Spain, Sweden, Switzerland, the 

United Kingdom and the United States. Countries 

are represented by their central bank and also by 

the authority with formal responsibility for the 

prudential supervision of banking business where 

this is not the central bank. More information about 

the Basel Committee for Banking Supervision can 

be found at: http://www.bis.org/. 

308Credit Ratings and Complementary Sources of 

Credit Quality Information, Working group of the 

Basel Committee on Banking Supervision, No. 3—

August 2000 (‘‘Basel Report’’). 

309 Id. 

310 Id. 

by the Commission; 286 (4) make the 

current Form NRSRO, including nonconfidential exhibits, publicly available 

on its Web site or through another 

comparable, readily accessible 

means; 287 (5) if applicable, apply to be 

registered for an additional category of 

credit ratings by furnishing an amended 

Form NRSRO; 288 (6) update its Form 

NRSRO after registration with the 

Commission; 289 (7) furnish an annual 

certification to the Commission with 

respect to Form NRSRO; 290 (8) if 

applicable, provide a written notice of 

withdrawal of registration; 291 (9) make, 

keep and preserve certain records; 292

(10) if applicable, furnish the 

Commission with an undertaking from a 

third-party custodian; 293 (11) if 

applicable, provide an undertaking with 

respect to producing records to the 

Commission; 294 (12) furnish the 

Commission with annual audited 

financial statements; 295 (13) develop 

procedures to prevent the misuse of 

material nonpublic information; 296 and 

(14) if applicable, document, in writing, 

the reason for refusing to initiate a 

rating, or withdrawing an existing 

rating, with respect to an asset-backed 

or mortgaged-backed security.297 Many 

of these requirements are prescribed in 

Section 15E of the Exchange Act.298

B. Proposed Use of Information 

Proposed Rules 17g–1 through 17g–6, 

Form NRSRO, and the Instructions for 

Form NRSRO, would create a 

framework for Commission oversight of 

NRSROs. The collections of information 

in the proposed rules are designed to 

allow the Commission to determine 

whether an entity should be registered 

as an NRSRO. Further, they would assist 

the Commission in effectively 

monitoring, through its examination 

function, whether an NRSRO is 

conducting its activities in accordance 

with Section 15E of the Exchange 

Act 299 and the rules thereunder. These 

proposed rules also are designed to 

assist users of credit ratings by requiring 

the disclosure of information with 

respect to an NRSRO that could be used 

to compare the credit ratings quality of 

different NRSROs. The information 

would include methods for determining 

credit ratings, organizational structure, 

policies for managing material, nonpublic information, information 

regarding conflicts of interest, policies 

for managing conflicts of interest, credit 

analyst experience, and management 

experience. As noted in the Senate 

Report accompanying the Act, the 

information that NRSROs would have to 

make public ‘‘will facilitate informed 

decisions by giving investors the 

opportunity to compare ratings quality 

of different firms.’’ 300

C. Respondents 

The number of respondents that 

would be subject to the proposed rules 

would depend, in part, on the number 

of entities that meet the statutory 

requirements to be eligible for 

registration. The Act, by adding 

definitions to Section 3 of the Exchange 

Act,301 identifies the types of entities 

that may apply for registration with the 

Commission as an NRSRO.302 First, it 

defines an ‘‘NRSRO’’ as a ‘‘credit rating 

agency’’ that, in pertinent part, has been 

in business as a credit rating agency for 

at least three consecutive years 

immediately preceding the date of its 

application for registration; issues credit 

ratings certified by 10 QIBs (unless 

exempted from that requirement) with 

respect to financial institutions, brokers, 

dealers, insurance companies, corporate 

issuers, issuers of asset-backed 

securities (as that term defined in 17 

CFR 229.1101(c)), issuers of government 

securities, issuers of municipal 

securities, or issuers of foreign 

government securities; and is registered 

with the Commission.303

Section 3 of the Exchange Act also 

defines the term ‘‘credit rating agency’’

as, in pertinent part, any person engaged 

in the business of issuing credit ratings 

on the Internet or through another 

readily accessible means, for free or for 

a reasonable fee; employing either a 

quantitative or qualitative model, or 

both, to determine credit ratings; and 

receiving fees from either issuers, 

investors, or other market participants, 

or a combination of these persons.304

The definition specifically excludes a 

commercial credit reporting 

company.305 Finally, Section 3 of the 

Exchange Act defines the term ‘‘credit 

rating’’ to mean ‘‘an assessment of the 

creditworthiness of an obligor as an 

entity or with respect to specific 

securities or money market 

instruments.’’ 306

These definitions create threshold 

eligibility requirements with respect to 

the entities that would be eligible to 

apply for registration as an NRSRO. 

Because NRSROs have not previously 

been supervised as such, and because 

credit rating agencies include publicly 

and privately held companies located 

throughout the world, it is difficult to 

estimate the number of entities that 

would be eligible to register as NRSROs. 

In 2000, a working group of the Basel 

Committee on Banking Supervision 307

issued a report on credit rating agencies 

that was based, in part, on surveys of 28 

credit rating agencies located around the 

world, including the five credit rating 

agencies currently identified as NRSROs 

through the Commission’s no-action 

letter process.308 In its report, the 

working group estimated that there were 

approximately 150 credit rating agencies 

located world-wide.309 The working 

group also noted that there was a wide 

disparity in size among credit rating 

agencies in terms of number of 

employees and credit ratings issued.310

In addition, the working group noted 


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311 Id. 

312See http://www.defaultrisk.com 

(‘‘DefaultRisk.com’’). 

313 Id. 

314 15 U.S.C. 78o–7(a)(1). 

315 15 U.S.C. 78o–7. 

316 15 U.S.C. 78o–7. 

316aThis total is derived from the total annual 

hours set forth in the order that the totals appear 

in the text: 1 + 1,500 + 300 + 300 + 7,620 + 6,000 

+ 300 = 16,021 hours. 

316bThis total is derived from the total one-time 

hours set forth in the order that the totals appear 

in the text: 9,000 + 125 + 900 + 9,000 + 100 + 1,500 

= 21,825 hours. 

317 15 U.S.C. 78o–7(a)(1)(B). 

318 15 U.S.C. 78o–7. 

319 Id. 

that some credit rating agencies focus 

exclusively on issuers in the countries 

where they are located.311 More 

recently, the Web site http:// 

www.DefaultRisk.com has tracked the 

number of credit rating agencies. This 

site identifies 57 credit rating agencies 

as of February 2006 and indicates that 

this count reflects a decrease from a 

previous count of 74.312 The Web site 

attributed the decrease to smaller firms 

either being consolidated into larger 

firms or ceasing operations.313

The Commission believes the 

estimates in the 2000 Basel Report and 

by DefaultRisk.Com provide some basis 

upon which to estimate the number of 

entities engaging in the business of 

issuing credit ratings. The Commission, 

however, cannot determine whether the 

entities included in these estimates 

would meet the statutory requirements 

to apply for, and be registered as, an 

NRSRO. 

In addition, the Commission cannot 

estimate with certitude how many credit 

rating agencies ultimately would opt to 

be registered as NRSROs. Section 

15E(a)(1) of the Exchange Act makes 

registration voluntary.314 Some credit 

rating agencies may decide not to seek 

registration because, for example, they 

do not believe that being an NRSRO 

would benefit them based on their 

business model. The Commission staff’s 

experience with the current no-action 

letter process of identifying NRSROs 

provides some support for the 

conclusion that a substantial number of 

credit rating agencies may not apply for 

registration. Specifically, assuming the 

number of credit rating agencies has 

fluctuated over the years from between 

approximately 150 as of 2000 (Basel 

Report) and 57 as of February 2006 

(DefaultRisk.com), then a large majority 

of these firms have not applied to the 

Commission to be identified as NRSROs 

under the current no-action letter 

process. It is possible that certain firms 

that did not seek NRSRO status 

previously would seek it under Section 

15E of the Exchange Act 315 and any 

rules adopted thereunder. In addition, 

the use of QIB certifications as a 

prerequisite to registration (as opposed 

to the no-action letter process which 

evaluated national recognition) also may 

increase the number of credit rating 

agencies that would be eligible for 

registration as an NRSRO. 

For all these reasons, the Commission 

estimates that the number of credit 

rating agencies applying for registration 

would be larger than the sum of the 

number of credit rating agencies 

currently identified as NRSROs plus the 

handful of entities with pending 

requests for no-action letters. At the 

same time, the Commission does not 

believe that all of the 57 credit rating 

agencies identified by DefaultRisk.Com 

would apply for, or be granted, 

registration. Consequently, the 

Commission estimates that 

approximately 30 credit rating agencies 

would be registered as NRSROs under 

Section 15E of the Exchange Act.316

The Commission requests comment 

on this estimate and whether more or 

fewer credit rating agencies would be 

registered as NRSROs. The Commission 

also requests comment on whether the 

sources of industry information used in 

arriving at the estimate (the Basel Report 

and the DefaultRisk.Com Web site) 

provide a reasonable basis for arriving at 

the estimate of 30 NRSROs. The 

Commission further requests comment 

on whether there are other industry 

sources that could provide credible 

statistics that could be used to 

determine the number of credit rating 

agencies that would be registered as 

NRSROs. Commenters should identify 

any such sources and explain how a 

given source would be used to either 

support the Commission’s estimate of 30 

NRSROs or arrive at a different estimate. 

D. Total Annual Recordkeeping and 

Reporting Burden 

As discussed in further detail below, 

the Commission estimates the total 

recordkeeping burden resulting from 

these proposed rules would be 

approximately 16,021 hours 316a on an 

annual basis and 21,825 hours 316b on a 

one-time basis. 

The total annual and one-time hour 

burden estimates described below are 

averages across all types of expected 

NRSROs. The size and complexity of 

NRSROs would range from small 

entities to entities that are part of 

complex global organizations employing 

thousands of credit analysts. The 

Commission believes that larger 

NRSROs generally would have 

established written policies and 

procedures and recordkeeping systems 

that would comply with a substantial 

portion of the requirements in the 

proposed rules. For example, many of 

the requirements in the proposed rules 

are consistent with the IOSCO Code, 

which a number of credit rating 

agencies have adopted. These firms 

might only be required to augment or 

modify existing policies and procedures 

and recordkeeping systems to comply 

with the proposed rules. 

Some smaller entities also would have 

implemented the policies, procedures, 

and recordkeeping systems necessary to 

comply with the proposed rules. 

Moreover, given their smaller size and 

simpler structure, smaller entities 

would require significantly fewer hours 

to comply with a substantial portion of 

the requirements in the proposed rules. 

Consequently, the burden hour 

estimates represent the average time 

across all NRSROs (regardless of size) 

and taking into account that many firms 

would only need to augment existing 

policies, procedures, and recordkeeping 

systems and processes to comply with 

the proposed rules. The Commission 

further notes that, given the significant 

variance in size between the largest 

credit rating agencies and the smaller 

firms, the burden estimates, as averages 

across all NRSROs, are skewed higher 

by the largest firms. Furthermore, 

because the Commission is proposing to 

require additional information in Form 

NRSRO beyond that prescribed in 

Section 15E(1)(B) of the Exchange 

Act,317 the burden estimates for 

proposed Rule 17g–1 include estimates 

that arise from requirements imposed by 

Section 15E of the Exchange Act.318 The 

intent is to quantify the incremental 

burden of complying with these 

statutory requirements as a result of the 

additional information that would be 

required under proposed Rule 17g–1. 

Thus, the estimates do not seek to 

capture paperwork burden that would 

be solely attributable to requirements in 

Section 15E of the Exchange Act.319

The Commission seeks comment on 

whether these factors have been 

reasonably incorporated into the burden 

estimates. 

1. Proposed Rule 17g–1, Form NRSRO 

and Instructions for Form NRSRO 

Section 15E(a)(1) of the Exchange Act 

requires a credit rating agency applying 

for registration with the Commission to 

furnish an application containing 

certain specified information and such 

other information as the Commission 

prescribes as necessary or appropriate in 


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320 15 U.S.C. 78a–7(a)(1). 

321 15 U.S.C. 78o–7. 

322As a comparison, the Commission notes that 

Form ADV, the registration form for investment 

advisers, is estimated to take approximately 22.25 

hours to complete. See Investment Advisor Act of 

1940 Release No. 2266 (July 20, 2004). The 

Commission estimates that the hour burden under 

Rule 17g–1 would be greater, given the substantially 

larger amount of information that would be 

required in proposed Form NRSRO. 

323 300 hours × 30 entities = 9,000 hours. 

324 $400 per hour × 40 hours = $16,000. 

325 $16,000 × 30 NRSROs = $480,000. 

326See Exchange Act Release No. 49830 (June 8, 

2004), at note 89; see also 17 CFR 240.17a–11. 

327 (1 hour × 1 entity) = 1 hour. 

328See proposed Rule 17g–1(e). 

329As noted above, the Commission’s burden 

estimate for Form ADV is approximately 22.25 

hours to complete. See Investment Advisor Act of 

1940 Release No. 2266 (July 20, 2004). 

330Section 3(a)(62)(B) of the Exchange Act (15 

U.S.C. 78c(a)(62)(B)). 

331Section 3(a)(62)(B)(v) of the Exchange Act (15 

U.S.C. 78c(a)(62)(B)(v)). 

332Section 3(a)(62)(B)(iv) of the Exchange Act (15 

U.S.C. 78c(a)(62)(B)(iv)). 

333 25 hours × 5 NRSROs = 125 hours. 

334 15 U.S.C. 78o–7(b)(1). 

335This estimate also is based on the estimates for 

the collection of information on Rule 17i–2 of the 

Exchange Act. See 17 CFR 240.17i–2. 

the public interest or for the protection 

of investors.320 Proposed Rule 17g–1 

would implement this statutory 

provision by requiring a credit rating 

agency to furnish an initial application 

on Form NRSRO to the Commission to 

apply to be registered under Section 15E 

of the Exchange Act.321 The 

Commission estimates that the average 

time necessary to complete the initial 

Form NRSRO, and compile the various 

attachments, would be approximately 

300 hours per applicant. This estimate 

is based on staff experience with the 

current NRSRO no-action letter 

process.322 The Commission, therefore, 

estimates that the total one-time burden 

to the industry as a result of this 

requirement would be approximately 

9,000 hours.323

The Commission also anticipates that 

an NRSRO likely would engage outside 

counsel to assist it in the process of 

completing and submitting a Form 

NRSRO. The amount of time an outside 

attorney would spend on this work 

would depend on the size and 

complexity of the NRSRO. Therefore, 

the Commission estimates that, on 

average, an outside counsel would 

spend approximately 40 hours assisting 

an NRSRO in preparing its application 

for registration for a one-time aggregate 

burden to the industry of 1,200 hours. 

The Commission further estimates that 

this work would be split between a 

partner and associate, with an associate 

performing a majority of the work. 

Therefore, the Commission estimates 

that the average hourly cost for an 

outside counsel would be 

approximately $400 per hour. For 

reasons, the Commission estimates that 

the average one-time cost to an NRSRO 

would be $16,000324 and the one-time 

cost to the industry would be 

$480,000.325

As noted, proposed Rule 17g–1 would 

require a credit rating agency to provide 

the Commission with a written notice if 

it intends to withdraw its application 

prior to final Commission action. Based 

on staff experience, the Commission 

estimates that one credit rating agency 

per year would withdraw a Form 

NRSRO prior to final Commission 

action on the application and, 

consequently, would furnish a notice of 

its intent to withdraw the application. 

Based on the Commission’s current 

estimates for a broker-dealer to file a 

notice with the Commission under Rule 

17a–11, the Commission estimates the 

average burden to an NRSRO to furnish 

the notice of withdrawal would be one 

hour.326 Thus, the Commission 

estimates that the aggregate annual 

burden to the industry of providing a 

notice of withdrawal prior to final 

Commission action would be one hour 

per year.327

Proposed Rule 17g–1 also would 

require that an NRSRO registered for 

fewer than the five categories of credit 

ratings listed in Section 3(a)(62)(B) of 

the Exchange Act would apply to be 

registered for an additional category by 

furnishing an amendment on Form 

NRSRO.328 The Commission estimates 

that it would take an NRSRO 

substantially less time to update the 

Form NRSRO for this purpose than to 

prepare the initial application. For 

example, much of the information on 

the form and many of the exhibits 

would still be current and not have to 

be updated. Based on the Commission’s 

estimate of the burden to complete a 

Form ADV, the Commission estimates 

that filing an amended Form NRSRO for 

this purpose would take an average of 

approximately 25 hours per NRSRO.329

The Commission further estimates 

based on staff experience that 

approximately five of the 30 credit 

rating agencies expected to register with 

the Commission would apply to register 

for additional categories of credit ratings 

within the first year. The Commission 

believes that almost all NRSROs would 

initially apply to register for the first 

three categories of credit ratings 

identified in the definition of NRSRO: 

(1) Financial institutions, brokers, or 

dealers; (2) insurance companies; and 

(3) corporate issuers.330 The 

Commission believes these are the most 

common types of credit ratings issued, 

particularly since some credit rating 

agencies limit their credit ratings to 

domestic companies. The Commission 

believes that, after these three 

categories, the next largest category of 

credit ratings for which most NRSROs 

would be registered would be for credit 

ratings with respect to issuers of 

government securities, municipal 

securities, and foreign government 

securities.331 These types of credit 

ratings take additional expertise. 

Finally, the Commission believes the 

category of credit ratings for which the 

least number of NRSROs would be 

registered would be credit ratings of 

issuers of asset-backed securities (as that 

term defined in 17 CFR 229.1101(c)).332

This assumption is based on the fact 

that determining a credit rating for an 

asset-backed security takes specialized 

expertise beyond that for determining 

credit ratings of corporate issuers and 

obligors. For example, it requires 

analysis of complex legal structures. 

For these reasons, the Commission 

anticipates that a number of NRSROs 

may register for less than all five 

categories of credit ratings. Moreover, 

some of these NRSROs , in time, may 

develop their businesses to include 

issuing credit ratings of a category for 

which they are not initially registered. 

Based on staff experience, the 

Commission estimates that 

approximately five of the estimated 30 

NRSROs would apply to add another 

category of credit ratings to their 

registration within the first year. 

Therefore, given the 25 hour per NRSRO 

average burden estimate, the total 

aggregate one-time burden to the 

industry for filing the amended Form 

NRSRO to change the scope of 

registration would be approximately 125 

hours.333

Section 15E(b)(1) of the Exchange Act 

requires an NRSRO to promptly amend 

its application for registration if any 

information or document provided in 

the application becomes materially 

inaccurate.334 Proposed Rule 17g–1 

would require an NRSRO to comply 

with this statutory requirement by 

furnishing the amendment on Form 

NRSRO. Based on staff experience, the 

Commission estimates that an NRSRO 

would file two amendments of its Form 

NRSRO per year on average. 

Furthermore, for the reasons discussed 

above, the Commission estimates that it 

would take an average of approximately 

25 hours to prepare and furnish an 

amendment on Form NRSRO.335

Therefore, the Commission estimates 

that the total aggregate annual burden to 

the industry to update Form NRSRO 


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336 25 hours per amendment × 2 amendments × 

30 NRSROs = 1,500 hours. 

337 15 U.S.C. 78o–7(b)(2). 

338See proposed Rule 17g–1(g). 

339See 17 CFR 240.17h–1T and 2T. 

340 10 hour × 30 NRSROs = 300 hours. 

341 15 U.S.C. 78o–7(a)(3). 

342See proposed Rule 17g–1(d). 

343 30 hours × 30 NRSROs. 

344 10 hours × 30 NRSROs. 

345See Section 5 of the Act. 

346See Section 5 of the Act and 15 U.S.C. 

78q(a)(1). 

347 15 U.S.C. 78o–7. 

348See 17 CFR 15c3–1g. 

349See 17 CFR 240.17a–4 (recordkeeping 

requirements for broker-dealers). This rule has 

previously has been subject to notice and comment 

and has been approved by OMB. The Commission 

notes that proposed Rule 17g–2 is based, in part, on 

Exchange Act Rules 17a–3 (17 CFR 240.17a–3) and 

17a–4. The annual hour burden estimate for the 

proposed rule, however, is based only on the PRA 

estimate for Rule 17a–4. The proposed rule would 

require substantially less records to be made and 

maintained than Rules 17a–3 and 17a–4. Therefore, 

the Commission is basing its estimate that the 

burden estimate for only Rule 17a–4 (as opposed to 

Rules 17a–3 and 17a–4 combined). 

350 300 hours × 30 NRSROs = 9,000 hours. 

351 254 hours × 30 NRSROs = 7,620 hours. 

352The estimated 10 hours includes drafting, 

legal review and receiving corporate authorization 

to file the undertaking with the Commission. 

353 (10 hours × 5 NRSROs) + (10 hours × 5 

NRSROs) = 100 hours. 

354 15 U.S.C. 78o–7(k). 

355 Id. 

would be approximately 1,500 hours 

each year.336

Section 15E(b)(2) of the Exchange Act 

requires an NRSRO to furnish an annual 

certification.337 Proposed Rule 17g–1 

would require an NRSRO to furnish the 

annual certification on Form NRSRO.338

The Commission estimates that the 

annual certification, generally, would 

take less time than an amendment to 

Form NRSRO because it would be done 

on a regular basis (albeit yearly) and, 

therefore, become more a matter of 

routine over time. Consequently, the 

Commission estimates that the burden 

would be similar to that of brokerdealers filing the quarterly reports 

required under Rules 17h–1T and 17h–

2T, which is approximately 10 hours 

per year for each respondent.339

Therefore, the Commission estimates it 

would take an NRSRO approximately 10 

hours to complete the annual 

certification for a total aggregate annual 

hour burden to the industry of 300 

hours.340

Finally, section 15E(a)(3) of the 

Exchange Act requires an NRSRO to 

make the information and documents 

submitted in its application publicly 

available on its Web site or through 

another comparable readily accessible 

means.341 Proposed Rule 17g–1 would 

require that this be done within five 

business days of the granting of an 

NRSRO’s registration or the furnishing 

of an amendment to the form or annual 

certification.342 The Commission 

assumes that each NRSRO already 

would have a Web site and would 

choose to use their Web site to comply 

with Section 15E(a)(3) of the Exchange 

Act (15 U.S.C. 78o–7(a)(3)). Therefore, 

based on staff experience, the 

Commission estimates that, on average, 

an NRSRO would spend 30 hours to 

disclose the information in its initial 

application on its Web site and, 

thereafter, 10 hours per year to disclose 

updated information. Accordingly, the 

total aggregate one-time burden to the 

industry to make Form NRSRO publicly 

available would be 900 hours 343 and the 

total aggregate annual burden would be 

300 hours.344

2. Proposed Rule 17g–2 

Section 17(a)(1) of the Exchange Act 

(as amended by the Act)345 provides the 

Commission with authority to require 

an NRSRO to make and maintain such 

records as the Commission prescribes by 

rule as necessary or appropriate in the 

public interest, for the protection of 

investors, or otherwise in furtherance of 

the Exchange Act.346 Proposed Rule 

17g–2 would implement this 

rulemaking authority by requiring an 

NRSRO to make and keep current 

certain records relating to its business. 

In addition, the proposed rule would 

require an NRSRO to preserve those and 

other records for certain prescribed time 

periods. This proposed rule is designed 

to assist the Commission monitor, 

through its examination function, 

whether NRSROs are complying with 

the requirements of Section 15E of the 

Exchange Act 347 and the regulations 

thereunder. The Commission estimates 

that the average one-time burden of 

implementing a recordkeeping system to 

comply with this proposed rule would 

be approximately 300 hours. This 

estimates is based on the Commission’s 

experience with, and burden estimates 

for, certain recordkeeping requirements 

of consolidated supervised entities 

(‘‘CSEs’’) subject to Commission 

supervision.348

The Commission also estimates that 

an NRSRO may need to purchase 

recordkeeping system software to 

establish a recordkeeping system in 

conformance with the proposed rule. 

The Commission estimates that the cost 

of the software would vary based on the 

size and complexity of the NRSRO. 

Also, the Commission estimates that 

some NRSRO’s would not need such 

software because they already have 

adequate recordkeeping systems or, 

given their small size, such software 

would not be necessary. Based on these 

estimates, the Commission estimates 

that the average cost for recordkeeping 

software across all NRSROs would be 

approximately $1000 per firm. 

Therefore, the one-time cost to the 

industry would be $30,000. 

Additionally, the Commission 

estimates that the average annual 

amount of time that an NRSRO would 

spend to make and maintain these 

records would be approximately 254 

hours per year. The estimate for annual 

hours is based on the Commission’s 

present estimate the amount of time it 

would take a broker-dealer to comply 

with the recordkeeping rule, Rule 17a–

4.349 Therefore, the Commission 

estimates that the one-time hour burden 

for making and preserving the records 

under proposed Rule 17g–2 would be 

approximately 9,000 hours 350 and the 

total annual hour burden would be 

approximately 7,620 hours per year.351

Proposed Rule 17g–2 also would 

require that an NRSRO that uses a thirdparty record custodian furnish the 

Commission with an undertaking from 

the custodian. Based on staff 

experience, the Commission estimates 

that approximately five NRSROs would 

file this undertaking on a one-time 

basis. Proposed Rule 17g–2 also would 

require that a non-resident NRSRO 

provide an undertaking to the 

Commission. The Commission 

estimates, based on staff experience, 

approximately five non-resident 

NRSROs would provide this 

undertaking to the Commission. The 

Commission estimates, based on staff 

experience, it would take an NRSRO 

approximately 10 hours to complete an 

undertaking prior to furnishing it to the 

Commission.352 Therefore, the 

Commission estimates the total one-time 

hour burden for these undertakings 

would be 100 hours.353

3. Proposed Rule 17g–3 

Section 15E(k) of the Exchange Act 

requires an NRSRO to furnish to the 

Commission, on a confidential basis and 

at intervals determined by the 

Commission, such financial statements 

and information concerning its financial 

condition that the Commission, by rule, 

may prescribe as necessary or 

appropriate in the public interest or for 

the protection of investors.354 The 

section also provides that the 

Commission may, by rule, require that 

the financial statements be certified by 

an independent public accountant.355


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356See proposed Rule 17g–3. 

357See 17 CFR 240.15c3–1g and 17i–5. 

358 200 hours × 30 NRSROs = 6,000 hours. 

359 $15,000 ×30 NRSROs = $450,000. 

360 15 U.S.C. 78o–7(g)(1). 

361 15 U.S.C. 78a et seq. 

362 15 U.S.C. 78o–7(g)(2). 

363 15 U.S.C. 78o–7(g)(1). 

364See proposed Rule 17g–4. 

365For example, the IOSCO Code requires credit 

rating agencies to develop such procedures. 

366 50 hours × 30 NRSROs = 1,500 hours. 

367 (2 hours × 5 refusals) × 30 NRSROs = 300 

hours. 

368 15 U.S.C. 78o–7(k). 

369See proposed Rule 17g–2(c). 

Proposed Rule 17g–3 would 

implement this statutory provision by 

requiring an NRSRO to furnish audited 

annual financial statements to the 

Commission, including certain specified 

schedules.356 The Commission 

estimates that, on average, it would take 

an NRSRO approximately 200 hours to 

prepare for and file the annual audit. 

This estimate is based on the current 

PRA estimates used for CSEs under 

Appendix G to Exchange Act Rule 

15c3–1, as well the PRA estimates for 

supervised investment bank holding 

companies under Rule 17i–5.357

Therefore, the Commission estimates 

that the total annual hour burden to 

prepare and furnish annual audited 

financial statements with the 

Commission would be approximately 

6,000 hours.358

To comply with proposed Rule 17g–

3, an NRSRO would need to engage the 

services of independent public 

accountant. The cost of hiring an 

accountant would vary substantially 

based on the size and complexity of the 

NRSRO. For example, the Commission 

notes, based on staff experience, that the 

annual audit costs of a small brokerdealer generally range from $3,000 to 

$5,000 a year. The Commission 

estimates that the annual audit costs for 

a small NRSRO would be comparable. 

The costs for a large NRSRO would be 

much greater. However, many of these 

firms already are audited by a public 

accountant for other regulatory 

purposes. These firms, however, may 

incur some incremental costs, given the 

schedules in proposed Rule 17g–3. For 

these reasons, the Commission estimates 

that the average annual cost across all 

NRSROs to engage the services of an 

independent public accountant would 

be approximately $15,000. Therefore, 

the annual cost to the industry would be 

$450,000.359

4. Proposed Rule 17g–4 

Section 15E(g)(1) of the Exchange 

Act 360 requires an NRSRO to establish, 

maintain, and enforce written policies 

and procedures to prevent the misuse of 

material, nonpublic information in 

violation of the Exchange Act.361

Section 15E(g)(2) of the Exchange Act 

provides that the Commission shall 

adopt rules requiring an NRSRO to 

establish specific policies and 

procedures to prevent the misuse of 

material, non-public information.362

Proposed Rule 17g–4 would implement 

this statutory provision by requiring that 

an NRSRO’s policies and procedures 

established pursuant to Section 

15E(g)(1) of the Exchange Act 363

include three specific types of 

procedures.364

The Commission expects that most 

credit rating agencies already have 

procedures in place to address the 

specific misuses of material nonpublic 

information identified in proposed Rule 

17g–4.365 Nonetheless, the Commission 

anticipates that some NRSROs may need 

to modify their procedures to comply 

with the specific procedures that would 

be required by the proposed rule. Based 

on staff experience, the Commission 

estimates that it would take 

approximately 50 hours for an NRSRO 

to establish procedures in conformance 

with the proposed rule for a total onetime burden of 1,500 hours.366

5. Proposed Rule 17g–6(b) 

Proposed Rule 17g–6(b) would require 

an NRSRO using the exception in the 

rule to document in writing the reasons 

for refusing to issue a credit rating or 

withdrawing a credit rating in 

connection with a mortgaged-backed or 

asset-backed security. Based on staff 

experience, the Commission estimates 

that each NRSRO would need to 

document approximately five refusals 

per year and that it would take 

approximately two hours to create the 

record. The two hour estimate is based 

on staff experience and on the current 

one-hour estimate for a broker-dealer to 

file the notice under Rule 17a–11. The 

Commission has adjusted this estimate 

upwards to two hours because the 

Commission believes that an NRSRO 

would take longer to explain the 

applicability of the safe harbor than to 

explain the reasons for the notices 

required under Rule 17a–11. For these 

reasons, the Commission estimates that 

the total annual hour burden for this 

proposed rule would be 300 hours per 

year.367

E. Collection of Information Is 

Mandatory 

These recordkeeping and notice 

requirements are mandatory, where 

applicable. 

F. Confidentiality 

Pursuant to section 15E(a)(1)(B) of the 

Exchange Act, certain information 

collected in Form NRSRO required 

under Rule 17g–1(a) would not be 

confidential. However, other 

information would be confidential 

under section 15E(a)(1)(B) of the 

Exchange Act and proposed Rule 17g–

1(b). The Commission would keep this 

information confidential to the extent 

permitted by law. The books and 

records information collected under 

proposed Rules 17g–2, 17g–4, and 17g–

6 would be stored by the NRSRO and 

made available to the Commission and 

its representatives as required in 

connection with examinations, 

investigations, and enforcement 

proceedings. 

The information collected under Rule 

17g–3 (the annual audited financial 

statements) would be generated from the 

internal records of the NRSRO. Pursuant 

to Section 15E(k) of the Exchange Act, 

the annual audit would be furnished to 

the Commission on a confidential basis, 

to the extent permitted by law.368

G. Record Retention Period 

Paragraph (c) of proposed Rule 17g–

2 would require an NRSRO to retain the 

records for at least three years, except 

records relating to customers would 

need to be retained until three years 

after the business relationship with the 

customer ended.369

H. Request for Comment 

The Commission requests comment 

on the proposed collections of 

information in order to: (1) Evaluate 

whether the proposed collection of 

information is necessary for the proper 

performance of the functions of the 

Commission, including whether the 

information would have practical 

utility; (2) evaluate the accuracy of the 

Commission’s estimate of the burden of 

the proposed collection of information; 

(3) determine whether there are ways to 

enhance the quality, utility, and clarity 

of the information to be collected; (4) 

evaluate whether there are ways to 

minimize the burden of the collection of 

information on those who respond, 

including through the use of automated 

collection techniques or other forms of 

information technology; and (5) evaluate 

whether the proposed rules would have 

any effects on any other collection of 

information not previously identified in 

this section. 

Persons who desire to submit 

comments on the collection of 

information requirements should direct 


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370For the purposes of this cost/benefit analysis, 

the Commission is using salary data from the SIA 

Report on Management and Professional Earnings 

in the Securities Industry 2005 (‘‘SIA Management 

Report 2005’’), which provides base salary and 

bonus information for middle-management and 

professional positions within the securities 

industry. The positions in the report are divided 

into the following categories: Accounting, 

Administration & Finance, Compliance, Customer 

Service, Floor/Trading, Human Resources 

Management, Internal Audit, Legal, Marketing/ 

Corporate Communications, New Business 

Development, Operations, Research, Systems/ 

Technology, Wealth Management, and Business 

Continuity Planning. The Commission believes that 

the salaries for these securities industry positions 

would be comparable to the salaries of similar 

positions in the credit rating industry. The 

Commission also notes that it is using salaries for 

New York-based employees, which tend to be 

higher than the salaries for comparable positions 

located outside of New York. This conservative 

approach is intended to capture unforeseen costs. 

Finally, the salary costs derived from the SIA 

Management Report 2005 and referenced in this 

cost benefit section, are modified to account for an 

1800-hour work year and multiplied by 5.35 to 

account for bonuses, firm size, employee benefits 

and overhead. 

371 15 U.S.C. 78o–7. 

372Pub. L. No. 109–291 (2006). 

373See 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. (Sept. 

6, 2006) (‘‘Senate Report’’). 

374 Id. 

375Section 15E of the Exchange Act (15 U.S.C. 

78o–7). 

376Sections 15E(a)(1) and (b)(1) of the Exchange 

Act (15 U.S.C. 78o–7(a)(1) and (b)(1)). 

377Section 15E(k) of the Exchange Act (15 U.S.C. 

78o–7(k)). 

378Sections 15E(g) and (h) of the Exchange Act 

(15 U.S.C. 78o–7(g) and (h)). 

379Section 15E(i) of the Exchange Act (15 U.S.C. 

78o–7(i)). 

380See 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. (Sept. 

6, 2006) (‘‘Senate Report’’). 

381Section 3(a)(61) of the Exchange Act (15 U.S.C. 

78c(a)(61)). 

their comments to the OMB, Attention: 

Desk Officer for the Securities and 

Exchange Commission, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503, and should also 

send a copy of their comments to Nancy 

M. Morris, Secretary, Securities and 

Exchange Commission, 100 F Street, 

NE., Washington, DC 20549–1090, and 

refer to File No. S7–04–07. OMB is 

required to make a decision concerning 

the collections of information between 

30 and 60 days after publication of this 

document in the Federal Register; 

therefore, comments to OMB are best 

assured of having full effect if OMB 

receives them within 30 days of this 

publication. The Commission has 

submitted the proposed collections of 

information to OMB for approval. 

Requests for the materials submitted to 

OMB by the Commission with regard to 

these collections of information should 

be in writing, refer to File No. S7–04–

07, and be submitted to the Securities 

and Exchange Commission, Records 

Management, Office of Filings and 

Information Services, 100 F Street, NE., 

Washington, DC 20549. 

V. Costs and Benefits of the Proposed 

Rules 

The Commission is sensitive to the 

costs and benefits that result from its 

rules. The Commission has identified 

certain costs and benefits of the 

proposed rules and requests comment 

on all aspects of this cost-benefit 

analysis, including identification and 

assessment of any costs and benefits not 

discussed in the analysis.370 The 

Commission seeks comment and data on 

the value of the benefits identified. The 

Commission also welcomes comments 

on the accuracy of its cost estimates in 

each section of this cost-benefit 

analysis, and requests those commenters 

to provide data so the Commission can 

improve the cost estimates, including 

identification of industry statistics 

relied on by commenters to reach 

conclusions on cost estimates. The 

Commission also seeks comment on the 

extent to which costs are attributable to 

requirements set forth in Section 15E of 

the Exchange Act,371 rather than the 

proposed rules. Finally, the Commission 

seeks estimates and views regarding 

these costs and benefits for particular 

types of market participants, as well as 

any other costs or benefits that may 

result from the adoption of these 

proposed rules. 

A. Benefits 

The purposes of the Credit Rating 

Agency Reform Act of 2006 (the 

‘‘Act’’) 372 are 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.373 As the Senate Report states, 

the Act establishes ‘‘fundamental reform 

and improvement of the designation 

process,’’ and ‘‘eliminating the artificial 

barrier to entry will enhance 

competition and provide investors with 

more choices, higher quality ratings, 

and lower costs.’’ 374

To these ends, the Act establishes—

through statutory provisions and the 

grant of Commission rulemaking 

authority—a regulatory program for 

credit rating agencies opting to have 

their credit ratings qualify for purposes 

of laws and rules using the term 

‘‘NRSRO.’’ Specifically, the Act sets out 

a voluntary mechanism for credit rating 

agencies to register with the 

Commission as an NRSRO.375 It requires 

an NRSRO to make public certain 

information to help users of credit 

ratings assess the NRSRO’s credibility 

and compare the NRSRO with other 

NRSROs.376 The Act also requires an 

NRSRO to furnish the Commission with 

periodic financial reports.377 Further, 

the Act requires an NRSRO to 

implement policies to manage the 

handling of material non-public 

information and conflicts of interest.378

Pursuant to authority under the Act, the 

Commission would prohibit certain acts 

and practices the Commission 

determines to be unfair, coercive, or 

abusive.379

The rules proposed by the 

Commission under the Act would be 

issued pursuant to specific grants of 

rulemaking authority in the Act. They 

are designed to further the goals of the 

Act. A primary purpose of the Act is to 

foster ‘‘competition in the credit rating 

agency business.’’ 380 The practice of 

identifying NRSROs through staff noaction letters has been criticized as a 

process that lacks transparency and 

creates a barrier for credit rating 

agencies seeking wider recognition and 

market share. The Commission believes 

that these proposed rules further the 

Act’s goal of increasing competition 

because they would provide credit 

rating agencies with a transparent 

process to apply for registration as an 

NRSRO that does not favor a particular 

business model or larger, established 

firms. This would make it easier for 

more credit rating agencies to apply for 

registration. Increased competition in 

the credit ratings business could lower 

the cost to issuers, obligors, and 

underwriters of obtaining credit ratings. 

In addition, the Act requires NRSROs 

to make their credit ratings and 

information about themselves available 

to the public. Part of the definition of 

‘‘credit rating agency’’ in the Act is that 

the entity must be in the business of 

issuing credit ratings on the Internet or 

through another readily accessible 

means, for free or for a reasonable fee.381

Under the Act and the rules proposed to 

be adopted thereunder, an NRSRO 

would need to disclose important 

information such as its credit ratings 

performance statistics, its methods for 

determining credit ratings, its 

organizational structure, its procedures 

to prevent the misuse of material nonpublic information, the conflicts of 

interest that arise from its business 

activities, its code of ethics, and the 

qualifications of its credit analysts, 

credit analyst supervisors and 

compliance personnel. The Commission 

believes that these disclosures under the 


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382 15 U.S.C. 78o–7. 

383See proposed Rule 17g–1. 

384See Section 15E(a)(1)(B) of the Exchange Act. 

15 U.S.C. 78o–7(a)(1)(B). See Section III.C.2. 

(discussing the items included in Form NRSRO). 

385See 15 U.S.C. 78o–7(a)(2)(C)(ii)(I). 

386 15 U.S.C. 78o–7(a)(1)(B). 

387 15 U.S.C. 78o–7(g), (h), (i) and (j). 

388 15 U.S.C. 78q(a)(1). 

389See proposed Rule 17g–2. 

390 15 U.S.C. 78o–7(k). 

391 Id. 

392See proposed Rule 17g–3. 

393 15 U.S.C. 78o–7(d). 

394See e.g., proposed Rule 17g–5(c)(1) prohibiting 

an NRSRO from issuing or maintaining a credit 

rating for a person that, in the most recently ended 

fiscal year, provided the NRSRO with net revenue 

equaling or exceeding 10% of the NRSRO’s total 

revenue for the year. 

395 15 U.S.C. 78o–7(g)(1). 

396 15 U.S.C. 78a et seq. 

397 15 U.S.C. 78o–7(g)(2). 

398 15 U.S.C. 78o–7(g)(1). 

399See proposed Rule 17g–4. 

400 15 U.S.C. 78o–7(g). 

401 15 U.S.C. 78o–7(h)(2). 

402See proposed Rule 17g–5. 

403 15 U.S.C. 78o–7(a)(1)(B)(vi) and (h). 

proposed rules would allow users of the 

credit ratings to compare the ratings 

quality of different NRSROs. Although 

the information an NRSRO would 

provide on its Form NRSRO and to 

comply with the proposed rules cannot 

substitute for an investor’s due diligence 

in evaluating a credit rating, it would 

aid investors by providing a publicly 

accessible foundation of basic 

information about an NRSRO. 

In addition, the proposed rules 

implement provisions of the Act that are 

designed to improve the integrity of 

NRSROs. For example, the registration 

of a credit rating agency as an NRSRO 

would allow the Commission to conduct 

regular examinations of the credit rating 

agency to evaluate compliance with the 

regulatory scheme set forth in Section 

15E of the Exchange Act 382 and the 

proposed rules and would subject an 

NRSRO to disclosure, recordkeeping, 

and annual audit requirements, as well 

as requirements regarding the 

prevention of misuse of material, 

nonpublic information, the management 

of conflicts of interest, and certain 

prohibited acts and practices. Increased 

confidence in the integrity of NRSROs 

and the credit ratings they issue could 

promote participation in the securities 

markets. Better quality ratings could 

also reduce the likelihood of an 

unexpected collapse of a rated issuer or 

obligor, reducing risks to individual 

investors and to the financial markets. 

In addition to improving the quality of 

credit ratings, increased oversight of 

NRSROs could increase the 

accountability of an NRSRO to its 

subscribers, investors, and other persons 

who rely on the credibility and 

objectivity of credit ratings in making an 

investment decision. 

Proposed Rule 17g–1 prescribes a 

process for a credit rating agency to 

register with the Commission as an 

NRSRO.383 This proposed rule would 

require a credit rating agency apply for 

registration using Form NRSRO. 

Proposed Form NRSRO would require 

that a credit rating agency provide 

information required under Section 

15E(a)(1)(B) of the Exchange Act and 

certain additional information.384 The 

additional information would assist the 

Commission in making the assessment 

regarding financial and managerial 

resources required under Section 

15E(a)(2)(C)(ii)(I) of the Exchange 

Act.385 This section directs the 

Commission to grant a credit rating 

agency’s application for registration as 

an NRSRO unless, among other things, 

the Commission finds that the applicant 

does not have adequate financial and 

managerial resources to consistently 

issue ratings with integrity and to 

materially comply with its procedures 

and methodologies disclosed under 

Sections 15E(a)(1)(B) of the Exchange 

Act 386 and with the requirements in 

Sections 15E(g), (h), (i) and (j) of the 

Exchange Act.387 Certain other 

additional information that would need 

to be made public would assist users of 

credit ratings in assessing the credibility 

of the NRSRO and to compare the 

NRSRO with other NRSROs. 

Proposed Rule 17g–2 would 

implement the Commission’s 

recordkeeping and rulemaking authority 

under Section 17(a) of the Exchange 

Act 388 by requiring an NRSRO to make 

and retain certain records related to its 

business as a credit rating agency.389

The proposed recordkeeping rule would 

assist the Commission in monitoring 

whether an NRSRO is complying with 

provisions of Section 15E of the 

Exchange Act and the rules thereunder. 

This would include monitoring whether 

it is operating consistently with the 

methodologies and procedures it 

establishes (and discloses) to determine 

credit ratings and its policies and 

procedures designed to ensure the 

impartiality of its credit ratings. 

Section 15E(k) of the Exchange Act 

requires an NRSRO to furnish to the 

Commission, on a confidential basis and 

at intervals determined by the 

Commission, such financial statements 

and information concerning its financial 

condition that the Commission, by rule, 

may prescribe as necessary or 

appropriate in the public interest or for 

the protection of investors.390 The 

section also provides that the 

Commission may, by rule, require that 

the financial statements be certified by 

an independent public accountant.391

Proposed Rule 17g–3 would require an 

NRSRO to furnish annual audited 

financial statements to the 

Commission.392 This proposed rule 

would enhance Commission oversight 

of an NRSRO. Specifically, it would aid 

the Commission in monitoring whether 

the initiation of a proceeding under 

Section 15E(d) of the Exchange Act 

would be appropriate because the 

NRSRO ‘‘fails to maintain adequate 

financial and managerial resources to 

consistently produce credit ratings with 

integrity.’’ 393 In addition, the audited 

financial statements also would assist 

the Commission in monitoring potential 

conflicts of interests of a financial 

nature which may arise in the operation 

of an NRSRO.394

Section 15E(g)(1) of the Exchange 

Act 395 requires an NRSRO to establish, 

maintain, and enforce written policies 

and procedures to prevent the misuse of 

material, nonpublic information in 

violation of the Exchange Act.396

Section 15E(g)(2) of the Exchange Act 

provides that the Commission shall 

adopt rules requiring an NRSRO to 

establish specific policies and 

procedures to prevent the misuse of 

material, non-public information.397

Proposed Rule 17g–4 would implement 

this statutory provision by requiring that 

an NRSRO’s policies and procedures 

established pursuant to Section 

15E(g)(1) of the Exchange Act 398

include three specific types of 

procedures.399 These specific 

procedures would establish a baseline 

for the type of procedures an NRSRO 

must implement to meet the statutory 

requirement in Section 15E(g) of the 

Exchange Act.400 In this way, the 

proposed rule is designed to ensure that 

an NRSRO establishes adequate 

procedures and controls to protect 

material nonpublic information. 

Proposed Rule 17g–5 would 

implement Section 15E(h)(2) of the 

Exchange Act 401 by requiring an 

NRSRO to disclose and manage certain 

conflicts of interest, as well as 

specifically prohibiting other conflicts 

of interest.402 The proposed rule would 

promote the disclosure and management 

of conflicts of interest required by 

Sections 15E(a)(1)(B)(vi) and 15E(h) of 

the Exchange Act and mitigate potential 

undue influences on an NRSRO’s credit 

rating process.403

Proposed Rule 17g–6 would prohibit 

an NRSRO from engaging in certain 

unfair, abusive, or coercive acts or 

practices, including practices with 


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404See proposed Rule 17g–6. 

405 15 U.S.C. 78o–7(c)(2). 

406 44 U.S.C. 3501 et seq.; 5 CFR 1320.11. 

407 15 U.S.C. 78o–7(a)(1)(B). 

408 15 U.S.C. 78o–7. 

409 Id. 

410This total is derived from the total one-time 

costs set forth in the order that they appear in the 

text: $2,007,000 + $480,000 + $25,625 + $30,000 + 

$241,200 + $1,845,000 + $307,500 = $4,936,325. 

411This total is derived from the total annual 

costs set forth in the order that they appear in the 

text: $307,500 + $61,500 + $80,400 + $1,562,100 + 

$1,494,000 + $450,000 = $3,505,500. 

412 15 U.S.C. 78o–7(a)(1). 

413 15 U.S.C. 78o–7. 

414There is no filing fee for a Form NRSRO. 

415The Commission estimates that a credit rating 

agency would have a senior compliance examiner 

perform these responsibilities. The SIA 

Management Report 2005 (Senior Compliance 

Examiner) indicates that the average hourly cost for 

a senior compliance examiner is $223. Therefore, 

the average one-time cost per NRSRO would be 

approximately $66,900 [(300 hours) × ($223 per/ 

hour)]. 

416 30 NRSROs × $66,900 = $2,007,000. 

417 $400 per hour × 40 hours = $16,000. 

418 $16,000 × 30 NRSROs = $480,000. 

respect to unsolicited ratings.404 These 

proposed prohibitions are designed to 

enhance the integrity of NRSROs, 

promote competition and fulfill a 

statutory mandate. 

We request comment on available 

metrics to quantify these benefits and 

any other benefits the commenter may 

identify, including the identification of 

sources of empirical data that could be 

used for such metrics. 

B. Costs 

The Act requires that the rules and 

regulations that the Commission may 

prescribe under the Act ‘‘shall be 

narrowly tailored’’ to meet its 

requirements.405 The rules proposed by 

the Commission are designed to adhere 

to this statutory mandate and, thereby, 

keep compliance costs as low as 

possible. 

The cost of compliance to a given 

NRSRO would depend on its size and 

the complexity of its business activities. 

As discussed above, the size and 

complexity of credit rating agencies 

varies significantly. Therefore, it is 

difficult to quantify a cost per NRSRO. 

Instead, the Commission is providing 

estimates of the average cost per NRSRO 

taking into consideration the range in 

size and complexity of NRSROs and the 

fact that many already may have 

established policies, procedures and 

recordkeeping systems and processes 

that would comply substantially with 

the proposed requirements. 

The Commission believes that larger 

NRSROs generally would already have 

established written policies and 

procedures and recordkeeping systems 

that would comply with a substantial 

portion of the requirements in the 

proposed rules. Many of the 

requirements in the proposed rules are 

consistent with the IOSCO Code, which 

a number of credit rating agencies 

(including the largest) have adopted. 

These firms would need to augment or 

modify existing policies and procedures 

and recordkeeping systems to comply 

with the proposed rules (rather than 

establish new ones). Some smaller 

credit rating agencies also have 

implemented the policies, procedures, 

and recordkeeping systems necessary to 

comply with the proposed rules. 

Moreover, given their smaller size and 

simpler structure, smaller entities 

would require less effort and incur less 

cost to comply with a substantial 

portion of the requirements in these 

proposed rules. 

For these reasons, the cost estimates 

represent the average cost across all 

NRSROs (regardless of size) and take 

into account that many firms would 

only need to augment existing policies, 

procedures and recordkeeping systems 

and processes to come into compliance 

with the proposed rules. Furthermore, 

as discussed with respect to the 

Paperwork Reduction Act of 1995 

(‘‘PRA’’),406 the Commission is 

proposing to require additional 

information in Form NRSRO beyond 

that prescribed in Section 15E(1)(B) of 

the Exchange Act.407 Therefore, the cost 

estimates for proposed Rule 17g–1 

include estimates that arise from 

requirements imposed by Section 15E of 

the Exchange Act.408 The intent is to 

quantify the incremental burden of 

complying with these statutory 

requirements as a result of the 

additional information that would be 

required under the proposed Rule 17g–

1. Thus, those estimates do not seek to 

capture costs that would be solely 

attributable to requirements in Section 

15E of the Exchange Act.409 The 

Commission requests commenters to 

provide data for the costs that would be 

solely attributable to the requirements of 

Section 15E of the Exchange Act. 

Given the estimates set forth below, 

the Commission estimates that the total 

one-time estimated cost to NRSROs 

resulting from these rule proposals 

would be approximately $4,936,325 410

and the total estimated annual cost to 

NRSROs resulting from these rule 

proposals would be approximately 

$3,955,500 per year.411

1. Proposed Rule 17g–1, Form NRSRO 

and Instructions to Form NRSRO 

Section 15E(a)(1) of the Exchange Act 

requires a credit rating agency applying 

for registration with the Commission to 

furnish an application containing 

certain specified information and such 

other information as the Commission 

prescribes as necessary or appropriate in 

the public interest or for the protection 

of investors.412 Proposed Rule 17g–1 

would implement this statutory 

provision by requiring a credit rating 

agency to furnish an initial application 

on Form NRSRO to apply to be 

registered under section 15E of the 

Exchange Act.413

NRSROs would incur costs to register 

under Section 15E of the Exchange Act 

and proposed Rule 17g–1 thereunder.414

As discussed above with respect to PRA, 

the Commission estimates that an 

NRSRO would spend approximately 300 

hours to complete and furnish an initial 

Form NRSRO. Also, as discussed with 

respect to the PRA, the Commission 

estimates there would be 30 NRSROs. 

For these reasons, the Commission 

estimates that the average one-time cost 

to an NRSRO would be $66,900 415 and 

the total aggregate one-time cost to the 

industry would be $2,007,000.416

Also, as discussed with respect to the 

PRA, the Commission also anticipates 

that an NRSRO likely would engage 

outside counsel to assist it in the 

process of completing and submitting a 

Form NRSRO. The amount of time an 

outside attorney would spend on this 

work would depend on the size and 

complexity of the NRSRO. Therefore, 

the Commission estimates that, on 

average, an outside counsel would 

spend approximately 40 hours assisting 

an NRSRO in preparing its application 

for registration. The Commission further 

estimates that this work would be split 

between a partner and associate, with an 

associate performing a majority of the 

work. Therefore, the Commission 

estimates that the average hourly cost 

for an outside counsel would be 

approximately $400 per hour. For these 

reasons, the Commission estimates that 

the average one-time cost to an NRSRO 

would be $16,000 417 and the one-time 

cost to the industry would be 

$480,000.418

Under proposed Rule 17g–1, an 

NRSRO applying to be registered for an 

additional category of credit ratings 

would need to file an amended Form 

NRSRO with the Commission. As 

discussed with respect to the PRA, the 

Commission estimates, on average, an 

NRSRO would spend 25 hours 

completing and furnishing a Form 

NRSRO for this purpose. The 

Commission also estimates with respect 

to the PRA that five of the 30 NRSROs 

would apply to register for an additional 


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419The Commission estimates an NRSRO would 

have a senior compliance person perform these 

responsibilities. The SIA Management Report 2005 

(Compliance Officer) indicates that the average 

hourly cost for a compliance manager is $205. 

Therefore, the average cost to an NRSRO would be 

$5,125 [(25 hours for one year) × ($205)]. 

420 5 NRSROs × $5,125 = $25,625. 

421 $1,000 × 30 NRSROs = $30,000. 

422 15 U.S.C. 78o–7(b)(1). 

423Based on the PRA estimates, an NRSRO would 

spend approximately 50 hours each year updating 

its application on Form NRSRO (25 hours per 

amendment × two amendments). The Commission 

estimates an NRSRO would have a senior 

compliance person perform these responsibilities. 

The SIA Management Report 2005 (Compliance 

Officer) indicates that the average hourly cost for a 

compliance manager is $205. Therefore, the total 

average annual cost to an NRSRO to update its 

registration on Form NRSRO would be $10,250 [(50 

hours per year) × ($205 per hour)]. 

424 $10,250 × 30 NRSROs = $307,500. 

425 15 U.S.C. 78o–7(b)(2). 

426See proposed Rule 17g–1(g). 

427The Commission estimates an NRSRO would 

have a senior compliance person perform these 

responsibilities. The SIA Management Report 2005 

(Compliance Officer) indicates that the average 

hourly cost for a compliance manager is $205. 

Therefore, the average annual cost would be $2,050 

[(10 hours per year) × ($205 per hour)]. 

428 $2,050 × 30 NRSROs = $61,500. 

429 15 U.S.C. 78o–7(a)(3). 

430See proposed Rule 17g–1(d). 

431The Commission estimates that an NRSRO 

would have a Senior Programmer perform this 

work. The SIA Management Report 2005 (Senior 

Programmer) indicates that the average hourly cost 

for a senior programmer is $268. Therefore, the 

average one-time cost would be $8,040 [(30 hours) 

× ($268 per hour)] and the average annual cost 

would be $2,680 [(10 hours per year) × ($268 per 

hour)]. 

432 $8,040 × 30 NRSROs = $241,200. 

433 $2,680 × 30 NRSROs = $80,400. 

434See Section 5 of the Act. 

435See Section 5 of the Act and 15 U.S.C 

78q(a)(1). 

436The Commission estimates that an NRSRO 

would have a compliance manager perform these 

responsibilities. The SIA Management Report 2005 

indicates that the average hourly cost for a 

compliance manager is $205. Therefore, the average 

one-time cost would be $61,500 [(300 hours) × 

($205 per hour)] and the average annual cost would 

be $52,070 [(254 hours per year) × ($205 per hour)]. 

437 $61,500 × 30 NRSROs = $1,845,000. 

438 $52,070 × 30 NRSROs = $1,562,100. 

category of credit ratings. For these 

reasons, the Commission estimates that 

the average one-time cost to an NRSRO 

would be $5,125 419 and the total 

aggregate one-time cost to the industry 

would be $25,625.420

Furthermore, as discussed above with 

respect to the PRA, the Commission also 

estimates that an NRSRO may need to 

purchase recordkeeping system software 

to establish a recordkeeping system in 

conformance with the proposed rule. 

The Commission estimates that the cost 

of the software would vary based on the 

size and complexity of the NRSRO. 

Also, the Commission estimates that 

some NRSRO’s would not need such 

software because they already have 

adequate recordkeeping systems or, 

given their small size, such software 

would not be necessary. Based on these 

estimates, the Commission estimates 

that the average cost for recordkeeping 

software across all NRSROs would be 

approximately $1000 per firm. 

Therefore, the one-time cost to the 

industry would be $30,000.421

Section 15E(b)(1) of the Exchange Act 

requires an NRSRO to promptly amend 

its application for registration if any 

information or document provided in 

the application becomes materially 

inaccurate.422 Proposed Rule 17g–1 

would require an NRSRO to comply 

with this statutory requirement by 

furnishing the amendment on Form 

NRSRO. As discussed with respect to 

the PRA, the Commission estimates that 

an NRSRO would furnish two 

amendments on Form NRSRO per year 

on average. The Commission also 

estimates with respect to the PRA that 

it would take approximately 25 hours to 

prepare and furnish an amendment and 

that there would be 30 NRSROs. For 

these reasons, the Commission estimates 

that the average annual cost to an 

NRSRO would be $10,250 423 and the 

total aggregate annual cost to the 

industry would be $307,500.424

Section 15E(b)(2) of the Exchange Act 

requires an NRSRO to furnish an annual 

certification.425 Proposed Rule 17g–1 

would require an NRSRO to furnish the 

annual certification on Form NRSRO.426

As discussed with respect to the PRA, 

the Commission estimates an NRSRO 

would spend approximately 10 hours 

per year completing and furnishing the 

annual certification and that there 

would be 30 NRSROs. For these reasons, 

the Commission estimates that the 

average annual cost to an NRSRO would 

be $2,050 427 and the total aggregate 

annual cost to the industry would be 

$61,500.428

Section 15E(a)(3) of the Exchange Act 

requires an NRSRO to make certain 

information and documents submitted 

in its application publicly available on 

its Web site or through another 

comparable readily accessible means.429

Proposed Rule 17g–1 would require that 

this be done within five business days 

of the granting of an NRSRO’s 

registration or the furnishing of an 

amendment to the form or annual 

certification.430 As discussed with 

respect to the PRA, the Commission 

estimates that the average hour burden 

for an NRSRO to disclose this 

information on its Web site would be 

approximately 30 hours on a one-time 

basis and 10 hours per year. 

Furthermore, as discussed with respect 

to the PRA, the Commission estimates 

that there would be 30 NRSROs. For 

these reasons, the Commission estimates 

that an NRSRO would incur an average 

one-time cost of $8,040 and an average 

annual cost of $2,680.431 Consequently, 

the total aggregate one-time cost to the 

industry would be $241,200 432 and total 

aggregate annual cost to the industry 

would be $80,400 per year.433

The Commission believes the 

requirements in proposed Rule 17g–1 to 

provide notices when a credit rating 

agency withdraws its application or an 

NRSRO withdraws its registration 

would result in de minimis costs. 

As noted above, we request comment 

on these proposed cost estimates. We 

also request comment on whether there 

would be costs in addition to those 

identified above, such as costs arising 

from systems changes. We also request 

comment on whether these proposals 

would impose costs on other market 

participants, including persons who use 

credit ratings to make investment 

decisions or for regulatory purposes, 

and persons who purchase services and 

products from NRSROs. Commenters 

should identify the metrics and sources 

of any empirical data that support their 

costs estimates. 

2. Proposed Rule 17g–2 

Section 17(a)(1) of the Exchange 

Act 434 provides the Commission with 

authority to require an NRSRO to make 

and maintain such records as the 

Commission prescribes by rule as 

necessary or appropriate in the public 

interest, for the protection of investors, 

or otherwise in furtherance of the 

Exchange Act.435 Proposed Rule 17g–2 

would implement this rulemaking 

authority by requiring an NRSRO to 

make and preserve specified records 

related to its credit rating business. 

As discussed with respect to the PRA, 

the Commission estimates that an 

NRSRO, on average, would spend 

approximately 300 hours on a one-time 

basis to establish a recordkeeping 

system and 254 hours each year 

updating its books and records. For 

these reasons, the Commission estimates 

that an NRSRO would incur an average 

one-time cost of $61,500 and an average 

annual cost of $52,070.436

Consequently, the total aggregate onetime cost to the industry would be 

$1,845,000,437 and the total aggregate 

annual cost to the industry would be 

$1,562,100 per year.438

As noted above, we request comment 

on these proposed cost estimates. We 

also request comment on whether there 

would be costs in addition to those 


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439 15 U.S.C. 78o–7(k). 

440 Id. 

441See proposed Rule 17g–3. 

442The Commission estimates that a senior 

internal auditor would perform these 

responsibilities. The SIA Management Report 2005 

(Senior Internal Auditor) indicates that the average 

hourly cost for a senior internal auditor is $249. 

Therefore, the average annual cost would be 

$49,800 [(200 hours per year) × ($249 per hour)]. 

443 $49,800 × 30 NRSROs = $1,494,000. 

444 $15,000 × 30 NRSROs = $450,000. 

445 15 U.S.C. 78o–7(g)(1). 

446 15 U.S.C. 78a et seq. 

447 15 U.S.C. 78o–7(g)(2). 

448 15 U.S.C. 78o–7(g)(1). 

449See proposed Rule 17g–4. 

450The Commission estimates an NRSRO would 

have a senior compliance person perform these 

responsibilities. The SIA Management Report 2005 

(Compliance Officer) indicates that the average 

hourly cost for a compliance manager is $205. 

Therefore, the average one-time cost to an NRSRO 

would be $10,250 [(50 hours) × ($205)]. 

451 30 NRSROs × $10,250 = $307,500. 

452Paragraph (b) of Rule 17g–6 does require a 

record to be made in certain situations. However, 

the Commission estimates that this requirement 

would impose de minimis costs. 

identified above, such as costs arising 

from restructuring business practices. 

We also request comment on whether 

these proposals would impose costs on 

other market participants, including 

persons who use credit ratings to make 

investment decisions or for regulatory 

purposes, and persons who purchase 

services and products from NRSROs. 

Commenters should identify the metrics 

and sources of any empirical data that 

support their costs estimates. 

3. Proposed Rule 17g–3 

Section 15E(k) of the Exchange Act 

requires an NRSRO to furnish to the 

Commission, on a confidential basis and 

at intervals determined by the 

Commission, such financial statements 

and information concerning its financial 

condition that the Commission, by rule, 

may prescribe as necessary or 

appropriate in the public interest or for 

the protection of investors.439 The 

section also provides that the 

Commission may, by rule, require that 

the financial statements be certified by 

an independent public accountant.440

Proposed Rule 17g–3 would 

implement this statutory provision by 

requiring an NRSRO to furnish audited 

annual financial statements to the 

Commission, including certain specified 

schedules.441 As discussed above with 

respect to the PRA, the Commission 

estimates that NRSRO, on average, 

would spend approximately 200 hours 

per year preparing for and furnishing 

the annual audit. For these reasons, the 

Commission estimates that the average 

annual cost to an NRSRO would be 

$49,800 442 and the total aggregate 

annual cost to the industry would be 

$1,494,000.443

As noted above, the average one-time 

and annual costs to NRSROs would vary 

widely depending on the size and 

complexity of the NRSRO. Moreover, 

some large credit rating agencies already 

prepare audited financial statements in 

accordance with other regulatory 

requirements. Nonetheless, these credit 

rating agencies, if they become NRSROs, 

may need to make changes to their 

accounting systems to comply with 

proposed annual audit requirements in 

Rule 17g–3. The Commission believes 

these costs would vary, depending on 

the size and complexity of the NRSRO, 

and seeks comment on the costs that 

would be incurred to make changes to 

their accounting systems. 

Furthermore, as discussed above with 

respect to the PRA, an NRSRO would 

need to engage the services of an 

independent public accountant to 

comply with proposed Rule 17g–3. The 

cost of hiring an accountant would vary 

substantially based on the size and 

complexity of the NRSRO. As noted 

above, based on staff experience, the 

annual audit costs of a small brokerdealer generally range from $3,000 to 

$5,000 a year. As the Commission 

estimated above, the annual audit costs 

for a small NRSRO would likely be 

comparable to the costs incurred by a 

small broker-dealer. The costs for a large 

NRSRO would be much greater. 

However, many of these firms already 

are audited by a public accountant for 

other regulatory purposes. These firms, 

however, may incur some incremental 

costs, given the schedules in proposed 

Rule 17g–3. For these reasons, the 

Commission estimates that the average 

annual cost across all NRSROs to engage 

the services of an independent public 

accountant would be approximately 

$15,000. Therefore, the annual cost to 

the industry would be $450,000.444

As noted above, we request comment 

on these proposed cost estimates. We 

also request comment on whether there 

would be costs in addition to those 

identified above, such as costs arising 

from systems changes. We also request 

comment on whether these proposals 

would impose costs on other market 

participants, including persons who use 

credit ratings to make investment 

decisions or for regulatory purposes, 

and persons who purchase services and 

products from NRSROs. Commenters 

should identify the metrics and sources 

of any empirical data that support their 

cost estimates. 

4. Proposed Rule 17g–4 

Section 15E(g)(1) of the Exchange 

Act 445 requires an NRSRO to establish, 

maintain, and enforce written policies 

and procedures to prevent the misuse of 

material, nonpublic information in 

violation of the Exchange Act.446

Section 15E(g)(2) of the Exchange Act 

provides that the Commission shall 

adopt rules requiring an NRSRO to 

establish specific policies and 

procedures to prevent the misuse of 

material, non-public information.447

Proposed Rule 17g–4 would implement 

this statutory provision by requiring that 

an NRSRO’s policies and procedures 

established pursuant to Section 

15E(g)(1) of the Exchange Act 448

include three specific types of 

procedures.449

As discussed above with respect to 

PRA, the Commission estimates that it 

would take approximately 50 hours for 

an NRSRO to establish procedures in 

conformance with the proposed rule 

and that there would be 30 NRSROs. For 

these reasons, the Commission estimates 

that the average one-time cost to an 

NRSRO would be $10,250 450 and the 

total aggregate one-time cost to the 

industry would be $307,500.451

As noted above, we request comment 

on these proposed cost estimates. We 

also request comment on whether there 

would be costs in addition to those 

identified above, such as costs arising 

from systems changes and restructuring 

business practices. We also request 

comment on whether these proposals 

would impose costs on other market 

participants, including persons who use 

credit ratings to make investment 

decisions or for regulatory purposes, 

and persons who purchase services and 

products from NRSROs. Commenters 

should identify the metrics and sources 

of any empirical data that support their 

costs estimates. 

5. Proposed Rules 17g–5 and 17g–6 

Proposed Rules 17g–5 and 17g–6 are 

conduct rules that would require 

NRSROs respectively to avoid certain 

conflicts of interest and unfair, abusive 

or coercive acts and practices and, 

consequently, do not require an NRSRO 

to make records or reports or create 

recordkeeping or accounting systems.452

Moreover, 15E(1)(B)(vi) of the Exchange 

Act requires an NRSRO to disclose any 

conflicts of interest. Additionally, 

Section 15E(h) of the Exchange Act 

requires an NRSRO establish, maintain, 

and enforce written policies and 

procedures reasonable designed to 

address and manage any conflicts of 

interest that can arise from its business. 

Therefore, the Commission does not 

anticipate that proposed Rule 17g–5 


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6414 Federal Register / Vol. 72, No. 27 / Friday, February 9, 2007 / Proposed Rules 

453 15 U.S.C. 78c(f). 

454 15 U.S.C. 78w(a)(2). 

455Pub. L. No. 109–291 (2006). 

456See 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. (Sept. 

6, 2006) (‘‘Senate Report’’). 

457Section 3(a)(61) of the Exchange Act (15 U.S.C. 

78c(a)(61)). 

458Pub. L. No. 104–121, Title II, 110 Stat. 857 

(1996) (codified in various sections of 5 U.S.C., 15 

U.S.C. and as a note to 5 U.S.C. 601). 

would result in any significant 

incremental costs. 

Proposed Rules 17g–5 and 17g–6 do 

prohibit respectively certain conflicts of 

interest and unfair, coercive and abusive 

acts and practices. The Commission 

believes that most entities that would 

become NRSROs do not engage in these 

types of conflicts, acts and practices. 

Therefore, the Commission estimates 

that these proposed rules generally 

would impose de minimis costs. 

However, the Commission recognizes 

that an NRSRO may incur costs related 

to training employees about the 

requirements in these proposed rules. It 

also is possible that the proposed rules 

could require some NRSROs to 

restructure their business models or 

activities. The Commission, therefore, 

requests comment on such training and 

restructuring costs. The Commission 

also request comment on whether there 

are any other costs associated with these 

proposed rules. 

VI. Consideration of Burden on 

Competition and Promotion of 

Efficiency, Competition, and Capital 

Formation 

Under Section 3(f) of the Exchange 

Act,453 the Commission must, when 

engaging in rulemaking that requires the 

Commission to consider or determine if 

an action is necessary or appropriate in 

the public interest, consider whether the 

action will promote efficiency, 

competition, and capital formation. 

Section 23(a)(2) of the Exchange Act 454

requires the Commission to consider the 

anticompetitive effects of any rules the 

Commission adopts under the Exchange 

Act. Section 23(a)(2) prohibits the 

Commission from adopting any rule that 

would impose a burden on competition 

not necessary or appropriate in 

furtherance of the purposes of the 

Exchange Act. 

The Commission’s preliminary view 

is that the proposed rules should 

promote efficiency, competition, and 

capital formation. As discussed above 

with respect to the costs and benefits of 

the proposed rules, the primary purpose 

of the Credit Rating Agency Reform Act 

of 2006 (the ‘‘Act’’) 455 is to foster 

‘‘competition in the credit rating agency 

business.’’ 456 The practice of 

identifying NRSROs through staff noaction letters has been criticized as a 

process that lacks transparency and 

creates a barrier for credit rating 

agencies seeking wider recognition and 

market share. The Commission believes 

that these proposed rules implementing 

provisions of the Act further the Act’s 

goal of increasing competition because 

they would provide credit rating 

agencies with a transparent process to 

apply for registration as an NRSRO that 

does not favor a particular business 

model or larger, established firms. This 

would make it easier for more credit 

rating agencies to apply for registration. 

Increased competition in the credit 

ratings business could lower the cost to 

issuers, obligors, and underwriters of 

obtaining credit ratings. 

In addition, the Act requires NRSROs 

to make their credit ratings and 

information about themselves available 

to the public. Part of the definition of 

‘‘credit rating agency’’ in the Act is that 

the entity must be in the business of 

issuing credit ratings on the Internet or 

through another readily accessible 

means, for free or for a reasonable fee.457

Under the Act and the rules proposed to 

be adopted thereunder, an NRSRO 

would need to disclose important 

information such as its credit ratings 

performance statistics, its methods for 

determining credit ratings, its 

organizational structure, its procedures 

to prevent the misuse of material nonpublic information, the conflicts of 

interest that arise from its business 

activities, its code of ethics, and the 

qualifications of its credit analysts, 

credit analyst supervisors and 

compliance personnel. The Commission 

believes that these disclosures under the 

proposed rules would allow users of the 

credit ratings to compare the ratings 

quality of different NRSROs. Although 

the information an NRSRO would 

provide on its Form NRSRO and to 

comply with the proposed rules cannot 

substitute for an investor’s due diligence 

in evaluating a credit rating, it would 

aid investors by providing a publicly 

accessible foundation of basic 

information about an NRSRO. 

In addition, the proposed rules 

implement provisions of the Act that are 

designed to improve the integrity of 

NRSROs. For example, the registration 

of a credit rating agency as an NRSRO 

would allow the Commission to conduct 

regular examinations of the credit rating 

agency to evaluate compliance with the 

regulatory scheme set forth in Section 

15E of the Exchange Act and the 

proposed rules and would subject an 

NRSRO to disclosure, recordkeeping, 

and annual audit requirements, as well 

as requirements regarding the 

prevention of misuse of material, 

nonpublic information, the management 

of conflicts of interest, and certain 

prohibited acts and practices. Increased 

confidence in the integrity of NRSROs 

and the credit ratings they issue could 

promote participation in the securities 

markets. Better quality ratings could 

also reduce the likelihood of an 

unexpected collapse of a rated issuer or 

obligor, reducing risks to individual 

investors and to the financial markets. 

In addition to improving the quality of 

credit ratings, increased oversight of 

NRSROs could increase the 

accountability of an NRSRO to its 

subscribers, investors, and other persons 

who rely on the credibility and 

objectivity of credit ratings in making an 

investment decision. 

The Commission solicits comment on 

these matters with respect to the 

proposed rules. In particular, the 

Commission solicits comment on 

whether the proposed rules would have 

an adverse effect on competition that is 

neither necessary nor appropriate in 

furtherance of the purposes of the 

Exchange Act. In addition, comment is 

sought on whether the proposed rules, 

if adopted, would promote efficiency, 

competition, and capital formation. 

Commenters are requested to provide 

empirical data and other factual support 

for their views, if possible. 

VII. Consideration of Impact on the 

Economy 

For purposes of the Small Business 

Regulatory Enforcement Fairness Act of 

1996, or ‘‘SBREFA,’’ 458 the Commission 

must advise OMB whether a proposed 

regulation constitutes a major rule. 

Under SBREFA, a rule is ‘‘major’’ if it 

has resulted in, or is likely to result in: 

• An annual effect on the economy of 

$100 million or more 

• A major increase in costs or prices 

for consumers or individual industries; 

or 

• A significant adverse effect on 

competition, investment, or innovation. 

If a rule is ‘‘major,’’ its effectiveness 

will generally be delayed for 60 days 

pending Congressional review. The 

Commission requests comment on the 

potential impact of each of the proposed 

rules on the economy on an annual 

basis. Commenters are requested to 

provide empirical data and other factual 

support for their view to the extent 

possible. 


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459 5 U.S.C. 603. 

460Pub. L. No. 109–291 (2006). 

461See 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. (Sept. 

6, 2006) (‘‘Senate Report’’). 

462 15 U.S.C. 78a et seq. 

463 15 U.S.C. 78o–7. 

464 17 CFR 240.0–10(a). 

465See 17 CFR 240.0–10(a). 

466 Id. 

467Proposed Rule 17g–1. 

468 Id. 

469Proposed Rule 17g–2. 

470Proposed Rule 17g–3. 

VIII. Initial Regulatiry Flexibility 

Analysis 

The Commission has prepared the 

following Initial Regulatory Flexibility 

Analysis (IRFA), in accordance with the 

provisions of the Regulatory Flexibility 

Act,459 regarding proposed rules 17g–1, 

17g–2, 17g–3, 17g–4, 17g–5, and 17g–6 

and proposed Form NRSRO under the 

Exchange Act. 

The Commission encourages 

comments with respect to any aspect of 

this IRFA, including comments with 

respect to the number of small entities 

that may be affected by the proposed 

rules. Comments should specify the 

costs of compliance with the proposed 

rules and suggest alternatives that 

would accomplish the goals of the rules. 

Comments will be considered in 

determining whether a Final Regulatory 

Flexibility Analysis is required and will 

be placed in the same public file as 

comments on the proposed rules. 

Comments should be submitted to the 

Commission at the addresses previously 

indicated. 

A. Reasons for the Proposed Action 

The proposed rules would implement 

specific provisions of the Credit Rating 

Agency Reform Act of 2006 (the 

‘‘Act’’).460 The Act defines the term 

‘‘nationally recognized statistical rating 

organization’’ as a credit rating agency 

registered with the Commission, 

provides authority for the Commission 

to implement registration, 

recordkeeping, financial reporting, and 

oversight rules with respect to registered 

credit rating agencies, and directs the 

Commission to issue final implementing 

rules no later than 270 days after its 

enactment. 

B. Objectives 

The proposed rules would implement 

specific provisions of the Act. The 

objectives of the Act are ‘‘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.’’ 461 The proposed rules are 

designed to further these objectives and 

assist the Commission in determining 

whether an entity should be registered 

as an NRSRO, monitoring whether an 

NRSRO complies with the provisions of 

the Act and rules thereunder, fulfilling 

the Commission’s statutory mandate to 

adopt rules to implement the NRSRO 

regulatory program, and provide 

information regarding NRSROs to the 

public and to users of credit ratings. 

C. Legal Basis 

Pursuant to the Exchange Act 462 and, 

particularly, Section 15E of the 

Exchange Act.463

D. Small Entities Subject to the Rule 

Paragraph (a) of Rule 0–10 provides 

that for purposes of the Regulatory 

Flexibility Act, a small entity ‘‘[w]hen 

used with reference to an ‘issuer’ or a 

‘person’ other than an investment 

company’’ means ‘‘an ‘issuer’ or ‘person’

that, on the last day of its most recent 

fiscal year, had total assets of $5 million 

or less.’’ 464 The Commission believes 

that an NRSRO with total assets of $5 

million or less would qualify as a 

‘‘small’’ entity for purposes of the 

Regulatory Flexibility Act. 

As noted above, the Commission 

believes that approximately 30 credit 

rating agencies would be registered as 

an NRSRO. Moreover, as also noted 

above, the Senate Report accompanying 

the Act states that the two largest credit 

rating agencies have about 80% of the 

market share as measured by revenues. 

The Senate Report also states that these 

two firms rate more than 99% of the 

debt obligations and preferred stock 

issues publicly traded in the United 

States. Given these figures, the 

Commission believes that the majority 

of the credit rating agencies registered 

with the Commission would be ‘‘small’’

entities.465 Consequently, the 

Commission estimates that, of the 

approximately 30 credit rating agencies 

estimated to be registered with the 

Commission, approximately 20 would 

be ‘‘small’’ entities for purposes of the 

Regulatory Flexibility Act.466

E. Reporting, Recordkeeping, and Other 

Compliance Requirements 

A credit rating agency seeking to 

apply to the Commission for registration 

as a nationally recognized statistical 

rating organization would apply using 

proposed Form NRSRO.467 The Form 

would elicit certain information and 

require the credit rating agency to attach 

a number of documents, including 

exhibits (some of which would have to 

be made publicly available and some of 

which would be eligible for confidential 

treatment) and certifications from 

qualified institutional buyers. The 

public exhibits would consist of 

information such as performance data 

for the credit ratings, organizational 

structure, the methods used by the 

credit rating agency for issuing credit 

ratings, the policies used by the credit 

rating agency to manage activities that 

could potentially risk the impartiality of 

its credit ratings, and information about 

managers and credit analysts. To the 

extent permitted by law, the 

confidential exhibits would consist of 

information about the credit rating 

agency’s financial condition, revenues 

and credit analyst compensation. 

After registration, the credit rating 

agency (now an NRSRO under the Act) 

would generally need to promptly 

update the public information on its 

Form NRSRO whenever an item or 

exhibit becomes materially inaccurate. 

To update information, the NRSRO 

would furnish the Commission with an 

amendment using Form NRSRO. In 

addition, the NRSRO would need to 

furnish the Commission with an annual 

certification on Form NRSRO.468 The 

annual certification would represent 

that all information on the form, as 

amended, continues to be accurate, 

would require the credit rating agency 

to list any material changes made during 

the previous year, and would include an 

update to the public exhibit relating to 

the performance statistics of its credit 

ratings. After its application for 

registration is approved, the NRSRO 

would be required to make Form 

NRSRO and the public exhibits 

submitted to the Commission, and all 

amendments, readily accessible to the 

public. 

NRSROs would also be subject to a 

recordkeeping rule.469 This rule would 

require the NRSRO to make and retain 

certain records relating to the business 

of issuing credit ratings. These records 

would assist the Commission, through 

its examination process, in monitoring 

whether the NRSRO continues to 

maintain adequate financial and 

managerial resources to consistently 

produce credit ratings with integrity (as 

required under the Act) and whether the 

NRSRO was complying with the 

provisions of the Act, the rules adopted 

under the act, and the NRSRO’s 

disclosed policies and procedures. 

On an annual fiscal year basis, an 

NRSRO would be required to furnish 

the Commission with audited financial 

statements.470 This requirement is 

designed to assist the Commission in 

monitoring whether the NRSRO 

continues to maintain adequate 

financial resources to consistently 


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471Proposed Rule 17g–4. 

472Proposed Rule 17g–6. 

473 5 U.S.C. 603(c). 

474 5 U.S.C. 603. 

475 15 U.S.C. 78c(b), 78o–7, 78q, 78w, and 78mm. 

produce credit ratings with integrity. It 

also is designed to assist the 

Commission in monitoring whether the 

NRSRO is complying with provisions of 

the Act and the rules adopted 

thereunder regarding the potential 

conflicts of interest arising from 

dealings with large customers in terms 

of revenues earned. 

Finally, all NRSROs would be subject 

to requirements designed to protect 

their impartiality with respect to issuing 

credit ratings. First, they would be 

required to establish, maintain and 

enforce specific written policies 

designed to prevent the misuse of 

material non-public information.471

Second, NRSROs would be prohibited 

from having certain general conflicts 

unless they, as required under the Act, 

disclosed the conflict and adopted 

procedures to manage the conflict. 

Further certain conflicts of interest—for 

example, rating a security owned by the 

NRSRO—would be prohibited. Third, 

NRSROs would be prohibited from 

engaging in certain practices that the 

Commission has determined to be 

unfair, coercive or abusive practices.472

F. Duplicative, Overlapping, or 

Conflicting Federal Rules 

The Commission believes that there 

are no federal rules that duplicate, 

overlap, or conflict with the proposed 

rules. 

G. Significant Alternatives 

Pursuant to section 3(a) of the RFA,473

the Commission must consider certain 

types of alternatives, including: (1) The 

establishment of differing compliance or 

reporting requirements or timetables 

that take into account the resources 

available to small entities; (2) the 

clarification, consolidation, or 

simplification of compliance and 

reporting requirements under the rule 

for small entities; (3) the use of 

performance rather than design 

standards; and (4) an exemption from 

coverage of the rule, or any part of the 

rule, for small entities. 

The Commission does not believe it is 

necessary or appropriate to establish 

different compliance or reporting 

requirements or timetables; clarify, 

consolidate, or simplify compliance and 

reporting requirements under the rule 

for small entities; or exempt small 

entities from coverage of the rule, or any 

part of the rule. The Act and the 

proposed rules establish a voluntary 

program of registration and supervision 

that allows NRSROs the flexibility to 

develop procedures tailored to their 

specific organizational structure and 

business models. The Commission also 

does not believe that it is necessary to 

consider whether small entities should 

be permitted to use performance rather 

than design standards to comply with 

the proposed rules as the rules already 

propose performance standards and do 

not dictate for entities of any size any 

particular design standards that must be 

employed to achieve the objectives of 

the proposed rules. 

H. Request for Comments 

The Commission encourages the 

submission of comments to any aspect 

of this portion of the IRFA. Comments 

should specify costs of compliance with 

the proposed rules and suggest 

alternatives that would accomplish the 

objective of the proposed rules. 

The Commission specifically requests 

comment on the estimate that 30 credit 

rating agencies would be registered as 

NRSROs with the Commission, and that 

20 of those 30 NRSROs would be small 

entities for purposes of the Regulatory 

Flexibility Act.474 Commenters that 

disagree with these estimates are 

requested to describe in detail the basis 

for their conclusions and identify the 

sources of any industry statistics they 

relied on to reach their conclusions. 

IX. Statutory Authority 

The Commission is proposing Form 

NRSRO and Rules 17g–1, 17g–2, 17g–3, 

17g–4, 17g–5 and 17g–6 under the 

Exchange Act pursuant to the authority 

conferred by the Exchange Act, 

including Sections 3(b), 15E, 17, 23(a) 

and 36.475

Text of Proposed Rules 

List of Subjects in 17 CFR Parts 240 and 

249b 

Brokers, Reporting and recordkeeping 

requirements, Securities. 

In accordance with the foregoing, the 

Commission hereby proposes that Title 

17, Chapter II of the Code of Federal 

Regulation be amended as follows. 

PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934 

1. The authority for Part 240 

continues to read in part as follows: 

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 

77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 

77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, 

78j–l, 78k, 78k–1, 78l, 78m, 78n, 78o, 78p, 

78q, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 80a–

20, 80a–23, 80a–29, 80a–37, 80b–3, 80b–4, 

80b–11, and 7201 et seq.; and 18 U.S.C. 1350, 

unless otherwise noted. 

* * * * * 

2. Sections 240.17g–1 through 

240.17g–6 are added to read as follows: 

Nationally Recognized Statistical 

Rating Organizations 

Sec. 

240.17g–1 Application for registration as a 

nationally recognized statistical rating 

organization. 

240.17g–2 Records to be made and retained 

by nationally recognized statistical rating 

organizations. 

240.17g–3 Annual audited financial 

statements to be furnished by nationally 

recognized statistical rating 

organizations. 

240.17g–4 Prevention of misuse of material 

nonpublic information. 

240.17g–5 Conflicts of interest. 

240.17g–6 Prohibited acts and practices. 

§ 240.17g–1 Application for registration as 

a nationally recognized statistical rating 

organization. 

(a) Form of registration. A credit 

rating agency applying to the 

Commission to be registered under 

section 15E of the Act (15 U.S.C. 78o–

7) as a nationally recognized statistical 

rating organization with respect to one 

or more of the categories of credit 

ratings described in section 3(a)(62)(B) 

of the Act (15 U.S.C. 78c(a)(62)(B)) must 

furnish the Commission with an initial 

application on Form NRSRO (§ 249b.300 

of this chapter) that follows all 

applicable instructions for the form. 

(b) Furnishing and withdrawing initial 

application. (1) An initial application 

will be considered furnished to the 

Commission on the date the 

Commission receives a complete and 

properly executed initial application on 

Form NRSRO that follows all 

instructions for the form. Information 

submitted on a confidential basis will be 

accorded confidential treatment to the 

extent permitted by law. 

(2) The applicant may withdraw an 

application prior to the date of a 

Commission order granting or denying 

the application. To withdraw the 

application, the applicant must furnish 

the Commission with a written notice of 

withdrawal executed by a duly 

authorized person. 

(c) Updating application prior to final 

action by the Commission. The 

applicant must promptly furnish the 

Commission with a written notice if 

information submitted to the 

Commission on Form NRSRO, including 

exhibits and attachments, is found to be 

or becomes materially inaccurate prior 

to the date of a Commission order 

granting or denying the application. The 

notice must describe the circumstances 

in which the information was found to 


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be inaccurate. The applicant must also 

update the application with accurate 

and complete information by promptly 

furnishing the Commission with an 

amended initial application on Form 

NRSRO that follows all applicable 

instructions for the form. 

(d) Public availability of Form 

NRSRO. A credit rating agency 

registered as a nationally recognized 

statistical rating organization (‘‘rating 

organization’’) must make the current 

Form NRSRO and non-confidential 

exhibits publicly available by posting 

them on its Web site or by another 

comparable and readily accessible 

means within 5 business days of the 

date of the Commission order granting 

the application and, subsequently, 

within 5 business days of furnishing an 

amendment or an annual certification 

on Form NRSRO. 

(e) Amending scope of registration. A 

rating organization that is registered for 

fewer than the five categories of credit 

ratings described in section 3(a)(62)(B) 

of the Act (15 U.S.C. 78c(a)(62)(B)) may 

apply to be registered for an additional 

category by furnishing the Commission 

with an amendment on Form NRSRO 

indicating where appropriate on the 

Form the additional class for which 

registration is sought and following all 

applicable instructions for the Form. 

The application to amend the scope of 

the registration will be subject to the 

requirements of this section and section 

15E(a)(2) of the Act (15 U.S.C. 78o–

7(a)(2)) applicable to an initial 

application for registration, including 

with respect to the time periods and 

requirements for the Commission to 

grant or deny the application. 

(f) Updating Form NRSRO after 

registration. A rating organization 

amending its application for registration 

pursuant to the requirements of section 

15E(b)(1) of the Act (15 U.S.C. 78o–

7(b)(1)) must promptly furnish the 

Commission with the amendment on 

Form NRSRO that follows all applicable 

instructions for the Form. 

(g) Annual certification. A rating 

organization submitting its annual 

certification pursuant to the 

requirements of section 15E(b)(2) of the 

Act (15 U.S.C. 78o–7(b)(2)) must furnish 

the Commission with the annual 

certification on Form NRSRO that 

follows all applicable instructions for 

the Form not later than 90 days after the 

end of each calendar year. 

(h) Withdrawal of registration. A 

rating organization withdrawing its 

registration must furnish the 

Commission with a written notice of 

withdrawal executed by a duly 

authorized person. 

§ 240.17g–2 Records to be made and 

retained by nationally recognized statistical 

rating organizations. 

(a) Records required to be made and 

retained. Every credit rating agency 

registered with the Commission as a 

nationally recognized statistical rating 

organization (‘‘rating organization’’) 

must make and retain the following 

books and records, which must be 

complete and current: 

(1) Records of original entry into the 

rating organization’s accounting system 

and records reflecting entries to and 

balances in all general ledger accounts 

of the rating organization for each fiscal 

year. 

(2) Records with respect to each of the 

rating organization’s current credit 

ratings indicating (as applicable): 

(i) The identity of any credit analyst(s) 

that determined the rating; 

(ii) The identity of the person(s) who 

approved the rating before it was issued; 

(iii) The procedures and 

methodologies used to determine the 

rating; 

(iv) The method by which the credit 

rating was made readily accessible; 

(v) Whether the credit rating was 

solicited or unsolicited; and 

(vi) The date the credit rating action 

was taken. 

(3) A record for each person (for 

example, an obligor, issuer, underwriter, 

or other user) that solicits the rating 

organization to determine or maintain a 

credit rating indicating: 

(i) The identity and principal business 

address of the person; and 

(ii) The credit rating(s) determined for 

the person. 

(4) A record for each subscriber to the 

credit ratings and/or credit analysis of 

the rating organization indicating the 

identity and principal business address 

of the subscriber and the compensation 

received from the subscriber. 

(5) A record describing each type of 

service and product offered by the rating 

organization. 

(b) Records required to be retained. A 

rating organization must retain the 

following books and records: 

(1) All significant records (for 

example, bank statements, invoices, and 

trial balances) underlying the 

information included in the rating 

organization’s annual audited financial 

statements and schedules furnished to 

the Commission pursuant to § 240.17g–

3. 

(2) Internal records, including nonpublic information and work papers, 

used to determine a credit rating. 

(3) Credit analysis reports, credit 

assessment reports, and private rating 

reports and internal records, including 

non-public information and work 

papers, used to form the basis for the 

opinions expressed in these reports. 

(4) All compliance reports and 

compliance exception reports that relate 

to its business as a credit rating agency. 

(5) All internal audit plans, internal 

audit reports, documents relating to 

internal audit follow-up measures that 

relate to its business as a credit rating 

agency, and all records identified by the 

rating organization’s internal auditors as 

necessary to perform the audit of an 

activity that relates to its business as a 

credit rating agency. 

(6) All marketing materials that relate 

to its business as a credit rating agency. 

(7) All external and internal 

communications, including electronic 

communications, received and sent by 

the rating organization and its 

employees relating to initiating, 

determining, maintaining, changing, or 

withdrawing a credit rating. 

(8) All records made pursuant to 

paragraph (b) of § 240.17g–6. 

(9) All Form NRSROs (including 

information and documents in the 

exhibits thereto) furnished to the 

Commission. 

(c) Record retention periods. (1) The 

records required to be retained pursuant 

to paragraphs (a)(1), (a)(2), and (a)(5) of 

this section must be retained for three 

years after the date the record is 

replaced with an updated record. 

(2) The records required to be retained 

pursuant to paragraphs (a)(3) and (a)(4) 

of this section must be retained for three 

years after the date of the last receipt by 

the person in the record of a service or 

product of the rating organization. 

(3) The records required to be retained 

pursuant to paragraphs (b)(1) through 

(b)(9) of this section must be retained for 

three years after the date the record is 

made or received by the NRSRO. 

(d) Manner of retention. An original 

or true and complete copy of the 

original of each record required to be 

retained pursuant to paragraphs (a) and 

(b) of this section must be maintained in 

a manner that, for the applicable 

retention period specified in paragraph 

(c) of this section, makes the original 

record or copy easily accessible to the 

rating organization’s principal office 

and to any other office that conducted 

activities causing the record to be made 

or received. 

(e) Third-party record custodian. The 

records required to be retained pursuant 

to paragraphs (a) and (b) of this section 

may be made or retained by a thirdparty record custodian, provided the 

rating organization furnishes the 

Commission at its principal office in 

Washington, DC with a written 

undertaking of the custodian executed 

by a duly authorized person. The 


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undertaking must acknowledge that the 

records are the property of the rating 

organization, will be surrendered 

promptly on request of the rating 

organization, and that the custodian will 

permit the Commission or its 

representatives to examine the records. 

The undertaking must be in 

substantially the following form: 

The undersigned acknowledges that books 

and records it has made or is retaining for 

[the rating organization] are the exclusive 

property of [the rating organization] and the 

undersigned undertakes that upon the 

request of [the rating organization] it will 

promptly provide the books and records to 

[the rating organization] or the U.S. 

Securities and Exchange Commission 

(‘‘Commission’’) and its representatives and 

that upon the request of the Commission it 

will promptly permit examination by the 

Commission and its representatives of the 

records at any time or from time to time 

during business hours, and promptly furnish 

to the Commission and its representatives a 

true and complete copy of any or all or any 

part of such books and records. 

A rating organization that agrees with 

a third-party custodian to have the 

custodian make or retain any record 

specified in paragraphs (a) and (b) of 

this section remains responsible for 

complying with every provision in this 

section, notwithstanding the agreement. 

(f) Non-resident undertaking. A nonresident rating organization, as defined 

in paragraph (h) of this section, must 

undertake to provide books and records 

to the Commission upon demand. The 

undertaking must be attached to the 

rating organization’s initial application 

for registration as a nationally 

recognized statistical rating 

organization, signed by a duly 

authorized person, marked ‘‘NonResident Books and Records 

Undertaking,’’ and in substantially the 

following form: 

Upon a request by the U.S. Securities and 

Exchange Commission (‘‘Commission’’) and 

its representatives, [the rating organization] 

will furnish at its own expense to the 

Commission and its representatives, at its 

principal office in Washington, DC, an 

accurate copy of any book(s) and record(s) 

which [the rating organization] is required to 

make, keep current, retain, or produce to the 

Commission pursuant to any provision of the 

Securities Exchange Act of 1934 or any 

regulation under that Act. [The rating 

organization] will produce the requested 

copy of the book(s) or record(s), in a form 

acceptable to the Commission and its 

representatives, including translation into 

English, within 14 days of receiving the 

request or within a longer period of time if 

the Commission consents to that longer time 

period. 

(g) A rating organization must 

promptly furnish the Commission and 

its representatives with legible, 

complete, and current copies of those 

records of the rating organization 

required to be retained under this 

section, or any other records of the 

rating organization subject to 

examination under section 17(b) of the 

Act (15 U.S.C. 78q(b)) that are requested 

by the Commission and its 

representatives. 

(h) Where used in this section nonresident rating organization means a 

rating organization that: 

(1) If a corporation, is incorporated or 

has its principal office in a location 

outside the United States, its territories, 

or possessions; or 

(2) If a partnership or other 

unincorporated organization or 

association, is organized under the laws 

of a jurisdiction or has its principal 

office in a location outside the United 

States, its territories, or possessions. 

§ 240.17g–3 Annual audited financial 

statements to be furnished by nationally 

recognized statistical rating organizations. 

(a) A credit rating agency registered 

with the Commission as a nationally 

recognized statistical rating organization 

(‘‘rating organization’’) annually must 

furnish the Commission, at its principal 

office in Washington, DC, with audited 

financial statements. The audited 

financial statements must be prepared 

in accordance with generally accepted 

accounting principles, must comply 

with applicable provisions of Regulation 

S–X (§ 210.1–01—§ 210.12–29, of this 

chapter), must be as of the fiscal year 

end indicated on the rating 

organization’s current Form NRSRO, 

and must be furnished not more than 90 

calendar days after the end of the fiscal 

year. 

(b) The audited financial statements 

must include the following supporting 

schedules: 

(1) A schedule separately itemizing 

the following aggregate revenues (as 

applicable): 

(i) Revenue from determining and 

maintaining credit ratings; 

(ii) Revenue from subscribers; 

(iii) Revenue from granting licenses or 

rights to publish credit ratings; 

(iv) Revenue from determining credit 

ratings that are not made readily 

accessible (private ratings); and 

(v) Revenue from all other services 

and products offered by the rating 

organization (include descriptions of 

any major sources of revenue); 

(2) A schedule providing the total 

aggregate and median annual 

compensation of the rating 

organization’s credit analysts; and 

(3) A schedule listing the 20 largest 

issuers and subscribers that used credit 

rating services provided by the rating 

organization by amount of net revenue 

received by the rating organization and 

its affiliates from the issuer or 

subscriber during the fiscal year. In 

addition, add to the list any obligor or 

underwriter that used credit rating 

services provided by the rating 

organization if the net revenue received 

by the rating organization and its 

affiliates from the obligor or underwriter 

during the fiscal year equaled or 

exceeded the net revenue received from 

the 20th largest issuer or subscriber. 

Include the net revenue amount for each 

customer. 

Note to paragraph (b)(3): A customer 

would have used the ‘‘credit rating services’’

of the rating organization if the customer was 

any of the following: an obligor that is rated 

by the rating organization (regardless of 

whether the obligor paid for the credit 

rating); an issuer that has securities or money 

market instruments rated by the rating 

organization (regardless of whether the issuer 

paid for the credit rating); any other person 

that has paid the rating organization to 

determine a credit rating with respect to a 

specific obligor, security, or money market 

instrument; or a subscriber to the credit 

ratings of the rating organization. In 

calculating net revenue received from a 

customer, the rating organization should 

include all fees, sales proceeds, commissions, 

and other revenue received by the rating 

organization and its affiliates for any type of 

service or product, regardless of whether 

related to credit rating services, and net of 

any fees, sales proceeds, rebates, and monies 

paid to the customer by the rating 

organization and its affiliates. 

(c) The audited financial statements 

must be furnished in accordance with 

the following: 

(1) They must be certified by an 

accountant who is qualified and 

independent in accordance with 

paragraphs (a) through (c) of § 210.2–01 

of this chapter, and the accountant must 

give an opinion on the financial 

statements and schedules in accordance 

with paragraphs (a) through (d) of 

§ 210.2–02 of this chapter; and 

(2) The rating organization must 

attach to the financial statements a 

signed statement by a duly authorized 

person at the rating organization that the 

person has responsibility for the 

financial statements and, to the best 

knowledge of the person, the financial 

statements fairly present, in all material 

respects, the financial condition, results 

of operations, and cash flows of the 

rating organization for the period 

presented. 

(d) The Commission may grant an 

extension of time from any requirements 

in this section either unconditionally or 

on specified terms and conditions on 

the written request of a rating 

organization if the Commission finds 


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that such exemption is necessary or 

appropriate in the public interest, and is 

consistent with the protection of 

investors. 

§ 240.17g–4 Prevention of misuse of 

material nonpublic information. 

The written policies and procedures a 

nationally recognized statistical rating 

organization (‘‘rating organization’’) 

establishes, maintains, and enforces to 

prevent the misuse of material 

nonpublic information in accordance 

with section 15E(g)(1) of the Act (15 

U.S.C. 78o–7(g)(1)) must include: 

(a) Procedures designed to prevent the 

inappropriate dissemination within and 

outside the rating organization of 

material nonpublic information 

obtained in connection with the 

performance of credit rating services; 

(b) Procedures designed to prevent a 

person associated with the rating 

organization or any member of an 

associated person’s household from 

purchasing, selling, or otherwise 

benefiting from any transaction in 

securities or money market instruments 

when the person possesses or has access 

to material nonpublic information 

obtained in connection with the 

performance of credit rating services 

that affects the securities or money 

market instruments; and 

(c) Procedures designed to prevent the 

inappropriate dissemination within and 

outside the rating organization of a 

pending credit rating action prior to 

making the action readily accessible. 

§ 240.17g–5 Conflicts of interest. 

(a) It shall be unlawful for a nationally 

recognized statistical rating organization 

(‘‘rating organization’’) or a person 

associated with the rating organization 

to have a conflict of interest relating to 

the issuance of a credit rating identified 

in paragraph (b) of this section, unless: 

(1) The rating organization has 

disclosed the type of conflict of interest 

on Form NRSRO in accordance with 

section 15E(a)(1)(B)(vi) of the Act (15 

U.S.C. 78o–7(a)(1)(B)(vi)); and 

(2) The rating organization has 

implemented policies and procedures to 

address and manage conflicts of interest 

in accordance with section 15E(h) of the 

Act (15 U.S.C. 78o–7(h)). 

(b) Conflicts of interest. For purposes 

of this section, each of the following is 

a conflict of interest: 

(1) Receiving compensation for any 

type of service or product from a person 

that is subject to a pending or issued 

credit rating of the rating organization. 

(2) Owning securities or money 

market instruments of a person that is 

subject to a pending or issued credit 

rating of the rating organization. 

(3) Receiving compensation from a 

subscriber that uses the credit ratings of 

the rating organization for regulatory 

purposes. 

(4) Owning securities or money 

market instruments of, or having any 

other form of ownership interest in, a 

subscriber that uses the credit ratings of 

the rating organization for regulatory 

purposes. 

(5) Having any other business, 

personal, or ownership relationship or 

affiliation with a person that is subject 

to a credit rating of the rating 

organization, an underwriter of 

securities or money market instruments 

rated by the rating organization, or a 

subscriber that uses the credit ratings of 

the rating organization for regulatory 

purposes. 

(6) Being an officer or director of a 

person that is subject to a credit rating 

of the rating organization, an 

underwriter of securities or money 

market instruments rated by the rating 

organization, or a subscriber that uses 

the credit ratings of the rating 

organization for regulatory purposes. 

(7) Any other type of conflict of 

interest identified by the rating 

organization on Form NRSRO in 

accordance with section 15E(a)(1)(B)(vi) 

of the Act (15 U.S.C. 78o–7(a)(1)(B)(vi)). 

(c) Prohibited conflicts. It shall be 

unlawful for a rating organization to 

have a conflict of interest relating to the 

issuance of a credit rating in the 

following circumstances: 

(1) The rating organization issues or 

maintains a credit rating solicited by a 

person that, in the most recently ended 

fiscal year, provided the rating 

organization and its affiliates with net 

revenue (as determined under 

§ 240.17g–3) equaling or exceeding 10% 

of the total net revenue of the rating 

organization and its affiliates for the 

year; 

(2) The rating organization issues or 

maintains a credit rating with respect to 

a person where the rating organization, 

a credit analyst who participated in 

determining the credit rating, or a 

person associated with the rating 

organization responsible for approving 

the credit rating, owns securities of, or 

has any other ownership interest in, the 

rated person or is a borrower or lender 

with respect to the rated person; 

(3) The rating organization issues or 

maintains a credit rating with respect to 

a person associated with the rating 

organization; or 

(4) The rating organization issues or 

maintains a credit rating where a credit 

analyst who participated in determining 

the credit rating, or a person associated 

with the rating organization responsible 

for approving the credit rating, is also an 

officer or director of the person that is 

subject to the credit rating. 

§ 240.17g–6 Prohibited acts and practices. 

(a) Prohibitions. It shall be unlawful 

for a nationally recognized statistical 

rating organization (‘‘rating 

organization’’) to engage in any of the 

following unfair, coercive, or abusive 

practices: 

(1) Conditioning or threatening to 

condition the issuance of a credit rating 

on the purchase by an obligor or issuer, 

or an affiliate of the obligor or issuer, of 

any other services or products, 

including pre-credit rating assessment 

products, of the rating organization or 

any person associated with the rating 

organization. 

(2) Issuing, or offering or threatening 

to issue, a credit rating that is not 

determined in accordance with the 

rating organization’s established 

procedures and methodologies for 

determining credit ratings, based on 

whether the rated person, or an affiliate 

of the rated person, purchases or will 

purchase the credit rating or any other 

service or product of the rating 

organization or any person associated 

with the rating organization. 

(3) Modifying, or offering or 

threatening to modify, a credit rating in 

a manner that is contrary to the rating 

organization’s established procedures 

and methodologies for modifying credit 

ratings based on whether the rated 

person, or an affiliate of the rated 

person, purchases or will purchase the 

credit rating or any other service or 

product of the rating organization or any 

person associated with the rating 

organization. 

(4) Issuing or threatening to issue a 

lower credit rating, or lowering or 

threatening to lower an existing credit 

rating, or refusing to issue a credit rating 

or withdrawing a credit rating, with 

respect to securities or money market 

instruments issued by an asset pool or 

as part of any asset-backed or mortgagebacked securities transaction, unless a 

portion of the assets which comprise the 

asset pool or the asset-backed or 

mortgage-backed securities also are 

rated by the rating organization. The 

prohibitions on refusing to issue a credit 

rating or withdrawing a credit rating 

shall not apply if the rating organization 

has rated less than 85% of the market 

value of the assets underlying the asset 

pool or the asset-backed or mortgagebacked securities. 

(5) Issuing an unsolicited credit rating 

and communicating with the rated 

person to induce or attempt to induce 

the rated person to pay for the credit 

rating or any other service or product of 


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the rating organization or a person 

associated with the rating organization. 

(b) A rating organization refusing to 

issue a credit rating or withdrawing a 

credit rating with respect to an asset 

pool or the asset-backed or mortgagebacked security must document in 

writing the reason for the refusal or 

withdrawal. 

* * * * * 

PART 249b—FURTHER FORMS, 

SECURITIES EXCHANGE ACT OF 1934 

3. The authority citation for Part 249b 

continues to read in part as follows. 

Authority: 15 U.S.C. 78a et seq., unless 

otherwise noted; 

* * * * * 

4. Section 249b.300 and Form NRSRO 

are added to read as follows: 

§ 249b.300 Form NRSRO, application for 

registration as a nationally recognized 

statistical rating organization pursuant to 

section 15E of the Securities Exchange Act 

of 1934 and § 240.17g–1 of this chapter. 

This form shall be used for 

application for, and amendments to 

applications for, registration as a 

nationally recognized statistical rating 

organization pursuant to section 15E of 

the Securities Exchange Act of 1934 (15 

U.S.C. 78o–7) and § 240.17g–1 of this 

chapter. 

Note: The text of Form NRSRO will not 

appear in the Code of Federal Regulations. 

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Form NRSRO Instructions 

A. General Instructions 

1. Form NRSRO is the Application for 

Registration as a Nationally Recognized 

Statistical Rating Organization 

(‘‘NRSRO’’) under Section 15E of the 

Securities Exchange Act of 1934 

(‘‘Exchange Act’’). Exchange Act Rule 

17g–1 requires credit rating agencies to 

use Form NRSRO to submit an INITIAL 

APPLICATION to apply to register with 

the U.S. Securities and Exchange 

Commission (‘‘Commission’’) as an 

NRSRO, to submit updated information 

as required by Section 15E(b)(1) of the 

Exchange Act as an AMENDMENT to 

Form NRSRO, and to submit the 

ANNUAL CERTIFICATION required by 

Section 15E(b)(2) of the Exchange Act. 

2. Exchange Act Rule 17g–1(c) 

requires a credit rating agency to 

promptly furnish the Commission with 

a written notice if information 

submitted on an INITIAL 

APPLICATION, including exhibits and 

attachments, is found to be or becomes 

materially inaccurate before the 

Commission has granted or denied the 

application. The notice must describe 

the circumstances in which the 

information was found to be materially 

inaccurate, and the credit rating agency 

must promptly update the application 

with accurate information by furnishing 

the Commission with an amended 

INITIAL APPLICATION on Form 

NRSRO. 

3. An INITIAL APPLICATION will be 

considered furnished to the Commission 

on the date the Commission receives a 

complete and properly executed Form 

NRSRO. Section 15E(a)(2) of the 

Exchange Act prescribes time periods 

and requirements for the Commission to 

grant or deny the application after it has 

been furnished to the Commission. 

4. Type or clearly print all 

information. Provide the name of the 

credit rating agency and the date on 

each page. Use only the current version 

of Form NRSRO or a reproduction of it. 

5. Mark each page of information that 

is submitted on a confidential basis 

‘‘Confidential.’’ The Commission will 

accord that information confidential 

treatment to the extent permitted by 

law. 

6. Section 15E of the Exchange Act 

(15 U.S.C. 78o–7) authorizes the 

Commission to collect the Information 

on this form from Applicants and 

NRSROs. The principal purpose of this 

form is to determine whether an 

Applicant should be granted registration 

as an NRSRO and, once registration is 

granted, whether a credit rating agency 

continues to meet the criteria for 

registration as an NRSRO. Intentional 

misstatements or omissions constitute 

federal criminal violations under 18 

U.S.C. 1001. 

The information collection is in 

accordance with the clearance 

requirements of Section 3507 of the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3507). The Commission may not 

conduct or sponsor, and you are not 

required to respond to, a collection of 

information unless it displays a valid 

Office of Management and Budget 

(OMB) control number. The time 

needed to complete and file this form 

will vary depending on individual 

circumstances. The estimated average 

time is displayed on the facing page of 

this form. Send comments regarding this 

burden estimate or suggestions for 

reducing the burden to Director, Office 

of Information Technology, Securities 

and Exchange Commission, 100 F 

Street, NE., Washington, DC 20549. 

The information contained in this 

form is part of a system of records 

subject to the Privacy Act of 1974, as 

amended (5 U.S.C. 552a). The 

Commission has published in the 

Federal Register the Privacy Act 

Systems of Records Notice for these 

records, and the Commission may make 

‘‘routine use’’ disclosure of the 

information as outlined under the 

Notice. 

7. Exchange Act Rule 17g–2(b)(9) 

requires a credit rating agency to retain 

copies of all information and documents 

submitted to the Commission with Form 

NRSRO These records must be made 

available for inspection upon a 

regulatory request. 

8. ADDRESS—The mailing address 

for Form NRSRO is: U. S. Securities and 

Exchange Commission, Form NRSRO 

Mailbox, Mail Stop, 100 F Street, NE., 

Washington, DC 20549–

B. Instructions for Initial Applications 

1. Check the appropriate box at the 

top of Form NRSRO; 

2. All Items must be answered and all 

required responses must be complete. 

Enter ‘‘None’’ or ‘‘N/A’’ where 

appropriate; 

3. Provide all required information 

and attachments, including 

undertakings, exhibits, certifications, 

and Disclosure Reporting Pages, as 

applicable; 

4. If information submitted, including 

exhibits and attachments, is found to be 

or becomes materially inaccurate before 

the Commission approves the 

application, promptly furnish the 

Commission with accurate information, 

pursuant to Rule 17g–1(c); and 

5. Execute the Form. 

C. Instructions for Amendments 

1. Submit an AMENDMENT to Form 

NRSRO in order to: 


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6428 Federal Register / Vol. 72, No. 27 / Friday, February 9, 2007 / Proposed Rules 

a. Promptly provide accurate 

information to the Commission in the 

event that information on the current 

Form NRSRO, on any Disclosure 

Reporting Page (NRSRO), or on Exhibits 

2 through 9 becomes materially 

inaccurate, pursuant to Section 

15E(b)(1) of the Exchange Act; or 

b. Change the scope of an existing 

registration to add a class of credit 

ratings. 

2. To submit an AMENDMENT: 

a. Check the appropriate box at the 

top of Form NRSRO and briefly describe 

the nature of the amendment; 

b. Complete Items 1, 2, 4, 5, 7, 8 (with 

Disclosure Reporting Pages, as 

applicable), and update, as required, 

Exhibits 2 through 9, to provide 

accurate information. (Do not update or 

attach Exhibits 2 through 9 if the 

information in them remains materially 

accurate.) If applying to change the 

scope of an existing registration, 

complete Item 6. An NRSRO is not 

required to update certifications by 

qualified institutional buyers. (See 

instructions for Item 6 below.); and 

c. Execute the Form. 

D. Instructions for Annual Certifications 

1. Submit an ANNUAL 

CERTIFICATION on Form NRSRO 

within 90 days after the end of each 

calendar year, in accordance with 

Section 15E(b)(2) of the Exchange Act; 

2. Check the appropriate box at the 

top of Form NRSRO; 

3. Complete and update, as required, 

Items 1, 2, 4, 5, 7, 8 (with Disclosure 

Reporting Pages, as applicable), and 

update, as required, Exhibits 2 through 

9, to provide accurate and complete 

information; 

4. Update Exhibit 1; 

5. Attach a list of all AMENDMENTs 

submitted during the previous calendar 

year; and 

6. Execute the Form. 

E. Instructions for Specific Line Items 

Item 1E. The individual listed as the 

contact person must be authorized to 

receive all communications from the 

Commission and must be responsible 

for their dissemination within the credit 

rating agency’s organization. 

Item 3. Exchange Act Rule 17g–4(c) 

requires a non-resident rating 

organization to undertake to provide 

books and records upon Commission 

request. The undertaking must be signed 

by a person duly authorized by the 

credit rating agency, must be attached to 

the INITIAL APPLICATION, must be 

marked ‘‘Non-Resident Books and 

Records Undertaking,’’ and must be in 

substantially the following form: 

‘‘Upon a request by the U.S. Securities and 

Exchange Commission (‘‘Commission’’) and 

its representatives, [the rating organization] 

will furnish at its own expense to the 

Commission and its representatives, at its 

principal office in Washington, D.C., an 

accurate copy of any book(s) or record(s) 

which [the rating organization] is required to 

make, keep current, retain, or produce to the 

Commission pursuant to any provision of the 

Securities Exchange Act of 1934 or any 

regulation under that Act. [The rating 

organization] will produce the requested 

copy of the book(s) or record(s), in a form 

acceptable to the Commission and its 

representatives, including translation into 

English, within 14 days of receiving the 

request or within a longer period of time if 

the Commission consents to that longer time 

period. 

lllllllllllllllllllll

Signature’’

Item 4. Section 15E(j) of the Exchange 

Act requires an NRSRO to designate a 

compliance officer responsible for 

administering the policies and 

procedures of the credit rating agency 

established pursuant to Sections 15E(g) 

and (h) of the Exchange Act 

(respectively, to prevent the misuse of 

material nonpublic information and 

address and manage conflicts of 

interest) and for ensuring compliance 

with applicable securities laws, rules, 

and regulations. 

Item 5. Section 15E(a)(3) of the 

Exchange Act and Exchange Act Rule 

17g–1(d) require a credit rating agency 

to make certain information and 

documents submitted to the 

Commission publicly available on its 

Web site or through another 

comparable, readily accessible means 

within 5 business days of the date of the 

Commission order granting the 

application for registration as an 

NRSRO, and, subsequently, within 5 

business days of furnishing an amended 

Form NRSRO to the Commission. All 

information and documents submitted 

to the Commission in the completed 

INITIAL APPLICATION, any 

AMENDMENT, and the ANNUAL 

CERTIFICATION must be made publicly 

available except Exhibits 10 through 13, 

the certifications from qualified 

institutional buyers, and the nonresident undertaking. Describe in detail 

how that information will be made 

readily accessible. If the information 

and documents will be posted on the 

credit rating agency’s Web site, for 

example, give the Internet address and 

link to the information and documents. 

Item 6. Complete Item 6 only if 

submitting an INITIAL REGISTRATION 

or changing the scope of an existing 

registration to add a class of credit 

ratings. 

Item 6A. Pursuant to Section 

15E(a)(1)(B)(vii) of the Exchange Act, a 

credit rating agency applying for 

registration as an NRSRO must disclose 

in the application the classes of credit 

ratings for which the credit rating 

agency is applying to be registered. 

Indicate these classes by checking the 

appropriate box or boxes. Pursuant to 

the definition of ‘‘nationally recognized 

statistical rating agency’’ in Section 

3(a)(62) of the Exchange Act, a credit 

rating agency must have been in 

business as a credit rating agency for at 

least the 3 consecutive years 

immediately preceding the date of its 

application for registration as an 

NRSRO. For each class of credit ratings, 

provide the approximate number of 

ratings the credit rating agency currently 

has outstanding and the number of 

consecutive years immediately 

preceding the date of the application 

that the credit rating agency has issued 

ratings as a credit rating agency, as 

defined in Section 3(a)(61) of the 

Exchange Act, with respect to that class. 

Item 6B. Pursuant to Section 

3(a)(61)(A) of the Exchange Act, a 

‘‘credit rating agency’’ issues ‘‘credit 

ratings on the Internet or through 

another readily accessible means, for 

free or for a reasonable fee.’’ Briefly 

describe how the credit rating agency 

makes the credit ratings in the classes 

indicated in Item 6A readily accessible 

for free or for a reasonable fee. 

Item 6C. Section 15E(a)(1)(B)(ix) of 

the Exchange Act requires that an 

application for registration as an NRSRO 

include written certifications from 

qualified institutional buyers, as defined 

in paragraph Section 3(a)(64) of the 

Exchange Act, except that, under 

Section 15E (a)(1)(D), a credit rating 

agency is not required to submit these 

certifications if it has received a noaction letter from Commission staff 

prior to August 2, 2006 stating that the 

staff would not recommend enforcement 

action to the Commission against any 

broker or dealer that uses credit ratings 

issued by the credit rating agency to 

compute capital charges under 

Exchange Act Rule 15c3–1. If the credit 

rating agency is required to submit 

certifications, paragraph Section 

15E(a)(1)(C) of the Exchange Act 

requires the credit rating agency to 

submit a minimum of 10 certifications 

from qualified institutional buyers, none 

of which is affiliated with the credit 

rating agency. Each certification may 

address more than one class of credit 

ratings. Of the submitted certifications, 

at least two must address each class of 

credit rating identified in Item 6A under 

‘‘Applying for Registration.’’ If this is an 

AMENDMENT to an existing 


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registration to add one or more classes 

of credit ratings to the scope of its 

NRSRO registration, the NRSRO must 

submit at least two certifications that 

address each additional class of credit 

ratings. 

The required certifications must be 

signed by a person duly authorized by 

the certifying entity, must be notarized, 

must be marked ‘‘Certification from 

Qualified Institutional Buyer,’’ and must 

be in substantially the following form: 

‘‘I, [Executing official], am authorized by 

[Certifying entity] to execute this certification 

on behalf of [Certifying entity]. I certify that 

all actions by stockholders, directors, general 

partners, and other bodies necessary to 

authorize me to execute this certification 

have been taken and that [Certifying entity]: 

(i) Meets the definition of a ‘qualified 

institutional buyer’ as set forth in section 

3(a)(64) of the Securities Exchange Act of 

1934 (15 U.S.C. 78c(a)(64)) pursuant to 

following subsection(s) of 17 CFR 

230.144A(a)(1) [insert applicable citations]; 

(ii) Has seriously considered the credit 

ratings of [the credit rating agency] in the 

course of making investment decisions for at 

least the three years immediately preceding 

the date of this certification, in the following 

classes of credit ratings: 

[Applicable classes of credit ratings]; and 

(iii) Has not received compensation either 

directly or indirectly from [the credit rating 

agency] for executing this certification. 

lllllllllllllllllllll

Signature’’

The certifications should be marked 

‘‘Confidential,’’ and the Commission 

will accord them confidential treatment 

to the extent permitted by law. A credit 

rating agency is not required to make 

them publicly available. 

Item 7. Check the appropriate boxes 

indicating the classes of credit ratings 

for which the credit rating agency is 

currently registered as an NRSRO. 

Complete other parts of this Item 

according to the instructions for Item 6. 

Item 8. Answer each question by 

checking the appropriate box. 

Information that relates to an affirmative 

answer must be provided on a 

Disclosure Reporting Page (NRSRO) and 

attached to Form NRSRO. The 

Disclosure Reporting Page (NRSRO) is 

attached to these instructions. 

Item 9. Exhibits. Section 15E(a)(1)(B) 

of the Exchange Act requires an 

application for registration as an NRSRO 

to contain certain specific information 

and documents and, pursuant to Section 

15E(a)(1)(B)(x), any other information 

and documents concerning the 

applicant and any person associated 

with the applicant that the Commission 

requires as necessary or appropriate in 

the public interest or for the protection 

of investors. 

A. Initial Application. An Initial 

Application must include Exhibits 1 

through 13. 

B. Amendment. Update Exhibits 2 

through 9 promptly with new 

information and documents whenever 

the existing information or documents 

contained in the exhibit becomes 

materially inaccurate (see Section 

15E(b)(1) of the Exchange Act). Do not 

update Exhibits 10 through 13 after 

registration is granted. 

C. Annual Certification. Section 

15E(b)(2) of the Exchange Act requires 

an NRSRO to certify annually that the 

information and documents attached to 

Form NRSRO are accurate and to list 

any material changes that occurred to 

the information and documents during 

the previous year. Section 15E(b)(1) of 

the Exchange Act requires that an 

NRSRO amend the information 

provided with Exhibit 1 in the 

ANNUAL CERTIFICATION. 

D. If any information or document 

required to be included with any exhibit 

is maintained in a language other than 

English, provide both the original 

document (or a true and complete copy 

of the original document) and a version 

of the document translated into English. 

Attach a certification by an authorized 

person that the translated version is a 

true, accurate, and complete English 

translation of the information or 

document. 

E. Attach exhibits to Form NRSRO in 

numerical order. Bind each exhibit 

separately, and mark each exhibit or 

bound volume of the exhibit with the 

appropriate exhibit number. The 

information provided in the exhibits 

must be sufficiently detailed to allow for 

verification. The information and 

documents required to be provided in 

Exhibits 1 through 9 must be made 

publicly available (see Item 5); the 

information and documents required to 

be provided in Exhibits 10 through 13 

should be marked ‘‘Confidential.’’ The 

Commission will accord them 

confidential treatment to the extent 

permitted by law. The credit rating 

agency is not required to make them 

publicly available. 

Exhibit 1. This exhibit must include 

credit ratings performance measurement 

statistics over short-term, mid-term, and 

long-term periods (as applicable) of the 

credit rating agency through the most 

recent calendar year-end, including, as 

applicable: historical down-grade and 

default rates within each credit rating 

category (ranking) of the credit rating 

agency. As part of this exhibit, define 

the credit ratings used by the credit 

rating agency and explain the 

performance measurement statistics, 

including the metrics used to determine 

the statistics. 

Exhibit 2. This exhibit must include 

the procedures and methodologies that 

the credit rating agency uses to 

determine credit ratings, including 

unsolicited credit ratings. The 

procedures and methodologies 

furnished in this exhibit should include, 

as applicable: policies for determining 

whether to initiate a credit rating; a 

description of the public and non-public 

sources of information used in 

determining credit ratings, including 

information and analysis provided by 

third-party vendors; a description of any 

quantitative and qualitative models and 

metrics used to determine credit ratings; 

procedures for interacting with the 

management of a rated obligor or issuer 

of rated securities or money market 

instruments; the structure and voting 

process of committees that review or 

approve credit ratings; procedures for 

informing rated obligors or issuers of 

rated securities or money market 

instruments about credit rating 

decisions and for appeals of final or 

pending credit rating decisions; 

procedures for monitoring, reviewing, 

and updating credit ratings; and 

procedures to withdraw, or suspend the 

maintenance of, a credit rating. 

For purposes of this exhibit: 

Unsolicited credit rating means a credit 

rating that the credit rating agency 

determines without being requested to 

do so by the issuer or underwriter of the 

rated securities or money market 

instruments or the rated obligor. 

Exhibit 3. This exhibit must include 

policies or procedures established, 

maintained, and enforced by the credit 

rating agency to prevent the misuse of 

material, nonpublic information as 

required by Section 15E(g) of the 

Exchange Act and 17 CFR 240.17g–4. 

Exhibit 4. This exhibit must include 

a description of the organizational 

structure of the credit rating agency, 

including, as applicable, an 

organizational chart that identifies the 

credit rating agency’s ultimate and subholding companies, subsidiaries, and 

material affiliates; an organizational 

chart showing the divisions, 

departments, and business units of the 

credit rating agency; and an 

organizational chart showing the 

managerial structure of the credit rating 

agency, including the designated 

compliance officer identified in Item 4. 

Exhibit 5. This exhibit must include 

a copy of the written code of ethics in 

effect at the credit rating agency or a 

statement of the reasons why the credit 

rating agency does not have a written 

code of ethics. 


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6430 Federal Register / Vol. 72, No. 27 / Friday, February 9, 2007 / Proposed Rules 

Exhibit 6. This exhibit must identify 

in general terms the types of conflicts of 

interest relating to the issuance of credit 

ratings by the credit rating agency 

including, as applicable: whether the 

credit rating agency receives 

compensation from rated obligors, 

issuers of rated securities or money 

market instruments, and underwriters of 

rated securities or money market 

instruments to determine or maintain a 

credit rating and for other services 

(identify the services); whether an 

affiliate of the credit rating agency owns 

securities of, or has any other form of 

ownership interest in, a rated obligor, 

issuer of rated securities or money 

market instruments, or underwriter of 

rated securities or money market 

instruments; whether the credit rating 

agency’s employees are permitted to 

own securities of a rated obligor or 

issuer of rated securities or money 

market instruments; whether the credit 

rating agency receives compensation 

from entities that use its credit ratings 

for regulatory purposes and for other 

services (identify the services); whether 

the credit rating agency, or an affiliate, 

owns securities of, or has any other form 

of ownership interest in, an entity that 

uses credit ratings for regulatory 

purposes; whether the credit rating 

agency’s employees are permitted to 

own securities of an entity that uses 

credit ratings for regulatory purposes; 

and whether the credit rating agency, its 

affiliates, or its employees have any 

other business relationship or affiliation 

with a rated obligor, issuer of rated 

securities or money market instruments, 

underwriter of rated securities or money 

market instruments, or entity that uses 

credit ratings for regulatory purposes. In 

addition, identify each entity that is an 

underwriter of rated securities or money 

market instruments or that uses credit 

ratings for regulatory purposes that is 

also a person associated with the credit 

rating agency. 

Exhibit 7. This exhibit must include 

the written policies and procedures 

established, maintained, and enforced 

by the credit rating agency pursuant to 

Section 15E(h) of the Exchange Act to 

address and manage conflicts of interest. 

Exhibit 8. This exhibit must include 

the following information regarding 

each of the credit rating agency’s credit 

analysts and each officer and employee 

of the credit rating agency responsible 

for supervising the credit rating agency’s 

credit analysts: 

• Name. 

• Title and brief description of 

responsibilities, including whether a 

supervisor. 

• Employment history. 

• Post-secondary education. 

• Whether employed by the credit 

rating agency full-time (at least 35 hours 

per week) or part-time. 

For purposes of this exhibit: Credit 

analyst means an individual associated 

with the credit rating agency who is 

responsible for determining a credit 

rating using either a quantitative model, 

a qualitative model and analysis, or a 

combination of these methods. 

Exhibit 9. This exhibit must include 

the following information about the 

credit rating agency’s designated 

compliance officer (identified in Item 4) 

and any other persons that assist the 

designated compliance officer in 

carrying out the responsibilities set forth 

in Section 15E(j) of the Exchange Act: 

• Name. 

• Title and brief description of 

responsibilities. 

• Employment history. 

• Post secondary education. 

• Whether employed by the credit 

rating agency full-time (at least 35 hours 

per week) or part-time. 

Exhibit 10. This exhibit must include 

a list of the largest customers that used 

credit rating services provided by the 

credit rating agency by the amount of 

net revenue received by the credit rating 

agency and its affiliates from the 

customer during the fiscal year ending 

immediately before the date the credit 

rating agency submits an INITIAL 

APPLICATION. In making this list, the 

credit rating agency should first 

determine the 20 largest issuer and 

subscriber customers in terms of net 

revenue received by the credit rating 

agency and its affiliates from the issuer 

or subscriber. Next, the credit rating 

agency should add to the list any obligor 

or underwriter that used credit rating 

services provided by the credit rating 

agency if the net revenue received by 

the credit rating agency and its affiliates 

from the obligor or underwriter during 

the fiscal year equaled or exceeded the 

net revenue received from the 20th 

largest issuer or subscriber. In making 

the list, rank the customers from largest 

to smallest and include the net revenue 

amount for each customer. 

For purposes of this exhibit: 

Net revenue means all fees, sales 

proceeds, commissions, and other 

revenue received by the credit rating 

agency and its affiliates for any type of 

service or product, regardless of 

whether related to credit rating services, 

and net of any fees, sales proceeds, 

rebates, and other monies paid to the 

customer by the credit rating agency and 

its affiliates; and 

Credit rating services means any of 

the following: rating an obligor 

(regardless of whether the obligor or any 

other person paid for the credit rating); 

rating an issuer’s securities or money 

market instruments (regardless of 

whether the issuer, underwriter, or any 

other person paid for the credit rating); 

and providing credit ratings to a 

subscriber. 

Exhibit 11. This exhibit must include 

financial statements of the credit rating 

agency, which must include a balance 

sheet, an income statement and 

statement of cash flows, and a statement 

of changes in owners’ equity, audited by 

an independent public accountant, for 

each of the three fiscal or calendar years 

ending immediately before the date it 

submits an INITIAL APPLICATION to 

the Commission, subject to the 

following: 

If the credit rating agency is a 

division, unit, or subsidiary of a parent 

company, the credit rating agency can 

provide audited consolidated and 

consolidating financial statements of the 

parent company. 

If the credit rating agency does not 

have audited financial statements for 

one or more of the three fiscal or 

calendar years ending immediately 

before the date it submits an INITIAL 

APPLICATION to the Commission, it 

can provide unaudited financial 

statements for the applicable year or 

years, but the credit rating agency must 

provide audited financial statements for 

the fiscal or calendar year ending 

immediately before the date it submits 

an INITIAL APPLICATION to the 

Commission. The credit rating agency 

must attach to the unaudited financial 

statements a certification by a person 

duly authorized by the credit rating 

agency to make the certification that the 

person has responsibility for the 

financial statements and that to the best 

knowledge of the person making the 

certification the financial statements 

fairly present, in all material respects, 

the financial condition, results of 

operations, and cash flows of the rating 

organization for the period presented. 

Exhibit 12. This exhibit must include 

the following information, as 

applicable, regarding the credit rating 

agency’s aggregate revenues for the 

fiscal or calendar year ending 

immediately before the date it furnishes 

an INITIAL APPLICATION to the 

Commission: 

• Revenue from determining and 

maintaining credit ratings; 

• Revenue from subscribers; 

• Revenue from granting licenses or 

rights to publish credit ratings; 

• Revenue from determining credit 

ratings that are not made readily 

accessible (private ratings); and 

• Revenue from all other services and 

products offered by the rating 


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Federal Register / Vol. 72, No. 27 / Friday, February 9, 2007 / Proposed Rules 6431 

organization (include descriptions of 

any major sources of revenue). 

Exhibit 13. This exhibit must include 

the total and median annual 

compensation of the credit rating 

agency’s credit analysts. 

F. Explanation of Terms. For purposes 

of Form NRSRO, the following 

definitions and descriptions apply: 

1. COMMISSION—The U. S. 

Securities and Exchange Commission. 

2. CREDIT RATING—An assessment 

of the creditworthiness of an obligor as 

an entity or with respect to specific 

securities or money market instruments 

[Section 3(a)(60) of the Exchange Act]. 

3. CREDIT RATING AGENCY [Section 

3(a)(61) of the Exchange Act]—Any 

person: 

• Engaged in the business of issuing 

credit ratings on the Internet or through 

another readily accessible means, for 

free or for a reasonable fee, but does not 

include a commercial credit reporting 

company; 

• Employing either a quantitative or 

qualitative model, or both to determine 

credit ratings; and 

• Receiving fees from either issuers, 

investors, and/or other market 

participants. 

4. NATIONALLY RECOGNIZED 

STATISTICAL RATING 

ORGANIZATION [Section 3(a)(62) of 

the Exchange Act]—A credit rating 

agency that: 

• Has been in business as a credit 

rating agency for at least the 3 

consecutive years immediately 

preceding the date of its application for 

registration as an NRSRO; 

• Issues credit ratings certified by 

qualified institutional buyers with 

respect to: 

Æ Financial institutions, brokers, or 

dealers; 

Æ Insurance companies; 

Æ Corporate issuers; 

Æ Issuers of asset-backed securities; 

Æ Issuers of government securities, 

municipal securities, or securities 

issued by a foreign government; or 

Æ A combination of one or more of 

the above; and 

• Is registered as an NRSRO. 

5. NON-RESIDENT RATING 

ORGANIZATION [Exchange Act Rule 

17g-4(a)]—A nationally recognized 

statistical rating organization that: 

• If a corporation, is incorporated in 

or has its principal office in, a location 

outside the United States, its territories, 

or possessions; 

• If a partnership or other 

unincorporated organization or 

association, has its principal office in a 

location outside the United States, its 

territories, or possessions. 

6. PERSON—An individual, 

partnership, corporation, trust, limited 

liability company, or other organization. 

7. PERSON ASSOCIATED WITH THE 

CREDIT RATING AGENCY—Any 

partner, officer, director, or branch 

manager of the credit rating agency (or 

any person occupying a similar status or 

performing similar functions), any 

person directly or indirectly controlling, 

controlled by, or under common control 

with a credit rating agency, or any 

employee of a credit rating agency 

[Section 3(a)(63) of the Exchange Act]. 

8. QUALIFIED INSTITUTIONAL 

BUYER—An entity listed in 17 CFR 

230.144A(a) that is not affiliated with 

the credit rating agency [Section 3(a)(64) 

of the Exchange Act]. 

Disclosure Reporting Page (NRSRO) 

This Disclosure Reporting Page (DRP) 

is to be used to report information 

related to affirmative responses to Item 

8 of Form NRSRO. 

Use a separate DRP for each event or 

proceeding. Attach additional pages as 

necessary. 

Name of credit rating agency 

lllllllllllllllllll

Date 

lllllllllllllllllll

Check Item being responded to: 

b Item 8A 

b Item 8B 

b Item 8C 

The individual(s) or entity(ies) for 

whom this DRP is being filed is (are): 

b The credit rating agency 

b The credit rating agency and one or 

more associated persons 

b One or more associated persons 

If this DRP is being filed for one or 

more associated persons, provide the 

full name of the associated person(s): 

lllllllllllllllllll

If this DRP provides information 

relating to a ‘‘Yes’’ answer to Item 8A, 

describe the act(s) that was (were) 

committed or omitted; or the order(s) or 

finding(s); or the injunction(s) (provide 

the relevant statute(s) or regulation(s)) 

and provide jurisdiction(s) and date(s): 

lllllllllllllllllll

If this DRP provides information 

relating to a ‘‘Yes’’ answer to Item 8B, 

describe the crime(s) and provide 

jurisdiction(s) and date(s): 

lllllllllllllllllll

If this DRP provides information 

relating to a ‘‘Yes’’ answer to Item 8C, 

attach the relevant Commission order(s) 

and provide date(s): 

lllllllllllllllllll

b This DRP should be removed from 

Form NRSRO because the person(s) is 

(are) no longer associated with the 

credit rating agency. 

By the Commission. 

Dated: February 2, 2007. 

Nancy M. Morris, 

Secretary. 

[FR Doc. 07–548 Filed 2–8–07; 8:45 am] 

BILLING CODE 8010–01–P 


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