[Federal Register Volume 72, Number 27 (Friday, February 9, 2007)]
[Proposed Rules]
[Pages 6378-6431]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 07-548]



[[Page 6377]]

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Part III





Securities and Exchange Commission





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17 CFR Parts 240 and 249b



Oversight of Credit Rating Agencies Registered as Nationally Recognized 
Statistical Rating Organizations; Proposed Rule

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

[[Page 6378]]


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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.

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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

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
    <bullet> Send an e-mail to <a href="/cdn-cgi/l/email-protection#3240475e571f515d5f5f575c4641724157511c555d44"><span class="__cf_email__" data-cfemail="95e7e0f9f0b8f6faf8f8f0fbe1e6d5e6f0f6bbf2fae3">[email protected]</span></a>. Please include 
File Number S7-04-07 on the subject line; or
    <bullet> Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

    <bullet> 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.
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    \1\ See 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.
    \3\ See 17 CFR 240.15c3-1(c)(2).
    \4\ See 17 CFR 240.15c3-1(c)(2)(vi).
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    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 broker-dealer 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\
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    \5\ See, e.g., 17 CFR 240.15c3-1(c)(2)(vi)(E), (F), and (H).
    \6\ See Id.
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    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.
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    \7\ See, 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).

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[[Page 6379]]

    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\
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    \8\ See 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).
    \9\ Moody'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'').
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    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 ``short-form'' 
registration statement--without the issuer satisfying a minimum public 
float test.\12\
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    \10\ See 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.
    \12\ Form S-3 (17 CFR 239.13).
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    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\
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    \13\ See, 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).
    \14\ Pub. L. No. 98-440, Sec.  101, 98 Stat. 1689 (1984).
    \15\ 15 U.S.C. 78c(a)(41).
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    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\
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    \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).
    \17\ For example, the California Insurance Code relies on NRSRO 
ratings in allowing California-incorporated insurers to invest 
excess funds in certain types of investments. See Cal. Ins. Code 
1192.10.
    \18\ See, 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.
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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\
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    \19\ Pub. L. No. 109-291 (2006).
    \20\ See Section 2 of the Act and the Senate Report.
    \21\ See Senate Report.
    \22\ Id.
    \23\ See e.g., Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 
116 Stat. 745 (2002).
    \24\ See Senate Report.
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    Over the years, the Commission has made attempts to address these 
issues \25\ and has participated in international initiatives to 
address similar issues.\26\

[[Page 6380]]

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\
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    \25\ See 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).
    \26\ See 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).
    \27\ See 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).
    \28\ See Section 2 of the Act and Senate Report.
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    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\
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    \29\ 15 U.S.C. 78c.
    \30\ 15 U.S.C. 78o-7.
    \31\ 15 U.S.C. 78q.
    \32\ See 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.
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    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, no-action 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\
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    \33\ See 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).
    \34\ Section 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.
    \35\ Section 15E(l)(2) of the Exchange Act (15 U.S.C. 78o-
7(l)(2)).
    \36\ Id.
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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\
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    \37\ Section 15E(c)(2) of the Exchange Act (15 U.S.C. 78o-
7(c)(2)).
    \38\ Id.
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    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\
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    \39\ The 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.
    \40\ Proposed Rule 17g-1.
    \41\ See 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.
    \42\ See Senate Report.
    \43\ See 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.
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    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).
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    \44\ See 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.
    \45\ Section 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.
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    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.
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    \46\ Proposed Rule 17g-2.
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    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

[[Page 6381]]

dealings with the NRSRO's largest customers.
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    \47\ Proposed Rule 17g-3.
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    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\
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    \48\ Section 15E(g) of the Exchange Act (15 U.S.C. 78o-7(g)), 
proposed Rule 17g-4.
    \49\ Section 15E(h) of the Exchange Act (15 U.S.C. 78o-7(h)), 
proposed Rule 17g-5.
    \50\ Section 15E(i) of the Exchange Act (15 U.S.C. 78o-7(i)), 
proposed Rule 17g-6.
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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:
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    \51\ 15 U.S.C. 78c.
    \52\ See Section 3 of the Act.
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    (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\
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    \53\ Section 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).
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    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\
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    \54\ Section 3(a)(61) of the Exchange Act (15 U.S.C. 
78c(a)(61)).
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    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\
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    \55\ Section 3(a)(60) of the Exchange Act (15 U.S.C. 
78c(a)(60)).
---------------------------------------------------------------------------

    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\
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    \56\ See Section 3(a)(61)(C) of the Exchange Act (15 U.S.C. 
78c(a)(61)(C)).
    \57\ See Section 3(a)(60) of the Exchange Act (15 U.S.C. 
78c(a)(60)).
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    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.
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    \58\ See Section 3(a)(61)(A) of the Exchange Act (15 U.S.C. 
78c(a)(61)(A).
---------------------------------------------------------------------------

    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

[[Page 6382]]

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\
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    \59\ 15 U.S.C. 78o-7(a)(1)(A).
    \60\ 15 U.S.C. 78o-7(a)(1)(B).
    \61\ See Section 15E(a)(1)(B)(vii) of the Exchange Act (15 
U.S.C. 78o-7(a)(1)(B)(vii)).
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    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\
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    \62\ 15 U.S.C. 78c(a)(62)(B).
    \63\ See definition of ``NRSRO'' in Section 3(a)(62) of the 
Exchange Act (15 U.S.C. 78c(a)(62)).
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    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.
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    \64\ This 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)).
    \65\ See 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).
    \68\ Under 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \69\ See 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).
---------------------------------------------------------------------------

    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.
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    \71\ The withdrawal of a granted registration is discussed 
separately below.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \72\ This 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)).
---------------------------------------------------------------------------

    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\
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    \73\ 15 U.S.C. 78o-7(a)(3).
    \74\ Section 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \75\ See discussion below with respect to Exhibits 10 through 13 
of proposed Form NRSRO.
    \76\ See 17 CFR 200.80 and 17 CFR 200.80a.
---------------------------------------------------------------------------

    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

[[Page 6383]]

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.
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    \77\ 15 U.S.C. 78o-7(a)(3).
    \78\ See 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \79\ Section 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.''
    \80\ This 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)).
    \81\ The 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).
---------------------------------------------------------------------------

    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
---------------------------------------------------------------------------

    \84\ 15 U.S.C. 78o-7(b)(1).
    \85\ Id.
    \86\ This 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \87\ 15 U.S.C. 78o-7(b)(2).
    \88\ Id.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \89\ 15 U.S.C. 78o-7(e)(1).
    \90\ 15 U.S.C. 78o-7(e)(1).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \91\ 15 U.S.C. 78o-7(b)(1).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \92\ Section 15E(c)(2) of the Exchange Act (15 U.S.C. 78o-
7(c)(2)).
---------------------------------------------------------------------------

    The Commission believes that having just one form (and one set of 
instructions) would reduce the burden on applicants, NRSROs, and

[[Page 6384]]

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 non-resident credit rating agency would 
need to attach the undertaking required under proposed Rule 17g-2 
(discussed below).
---------------------------------------------------------------------------

    \93\ As 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)).
---------------------------------------------------------------------------

    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\
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    \94\ See 15 U.S.C. 78c(a)(61) and 15 U.S.C. 78c(a)(62).
    \95\ See Section 15E(a)(2)(C) of the Exchange Act (15 U.S.C. 
78o-7(a)(2)(C)).
    \96\ See Section 15E(a)(2)(C)(ii)(I) of the Exchange Act (15 
U.S.C. 78o-7(a)(2)(C)(ii)(I)).
    \97\ Section 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)).
---------------------------------------------------------------------------

    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\
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    \98\ As discussed below, Exhibit 2 would elicit the 
methodologies used by the credit rating agency to determine credit 
ratings.
    \99\ Section 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)).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \100\ See 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)).
    \101\ As 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.
    \102\ As discussed below, Exhibit 3 requires policies and 
procedures implemented by the NRSRO to prevent the misuse of 
material non-public information.
---------------------------------------------------------------------------

    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\
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    \103\ 15 U.S.C. 78o-7(b)(2).
    \104\ Section 15E(b)(2)(A) of the Exchange Act (15 U.S.C. 78o-
7(b)(2)(A)).
    \105\ Section 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).
---------------------------------------------------------------------------

    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\
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    \107\ See Section 15E(b)(2)(A) of the Exchange Act (15 U.S.C. 
78o-7(b)(2)(A)).
    \108\ See Section 15E(b)(2)(B) of the Exchange Act (15 U.S.C. 
78o-7(b)(2)(B)).
---------------------------------------------------------------------------

2. Items on the Form
    Checkboxes indicating nature of submission. The first entry an 
applicant or NRSRO would make on Form NRSRO

[[Page 6385]]

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.
---------------------------------------------------------------------------

    \109\ 15 U.S.C. 78a et seq.
    \110\ This would include the records required to be retained in 
proposed Rule 17g-2.
---------------------------------------------------------------------------

    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.
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    \111\ 15 U.S.C. 78o-7(j).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \112\ 15 U.S.C. 78o-7(a)(3). Paragraph (d) of proposed Rule 17g-
1 (discussed above) would implement this rulemaking authority.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \113\ 15 U.S.C. 78o-7(a)(1)(D).
---------------------------------------------------------------------------

    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.
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    \114\ 15 U.S.C. 78o-7(a)(1)(B)(vii).
---------------------------------------------------------------------------

    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\
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    \115\ As 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)).
---------------------------------------------------------------------------

    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''

[[Page 6386]]

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.
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    \116\ Section 3(a)(61)(A) of the Exchange Act (15 U.S.C. 
78c(a)(61)(A)).
    \117\ Id.
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    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\
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    \118\ 15 U.S.C. 78o-7(a)(1)(B)(ix).
    \119\ See 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).
    \122\ The 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.''
---------------------------------------------------------------------------

    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.
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    \123\ 15 U.S.C. 78o-7(a)(1)(C)(i)(I).
    \124\ Instructions to Item 6D of proposed Form NRSRO.
    \125\ Id.
---------------------------------------------------------------------------

    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\
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    \126\ 15 U.S.C. 78o-7(a)(1)(D).
---------------------------------------------------------------------------

    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\
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    \127\ Because 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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,

[[Page 6387]]

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\
---------------------------------------------------------------------------

    \134\ 15 U.S.C. 78o-7(d).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \137\ See 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).
    \138\ See 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.
    \139\ See Sections 15E(a)(2)(C) and (d) of the Exchange Act (15 
U.S.C. 78o-7(a)(2)(C) and (d)).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \140\ 15 U.S.C. 78o-7(b)(1).
    \141\ 15 U.S.C. 78o-7(a)(1)(B)(i) and (ix).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \142\ 15 U.S.C. 78o-7(a)(1)(B)(i).
    \143\ The 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \144\ Section 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)).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \145\ 17 CFR 240.15c3-1(c)(2)(vi)(F).
    \146\ Id.
---------------------------------------------------------------------------

    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

[[Page 6388]]

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\
---------------------------------------------------------------------------

    \147\ 15 U.S.C. 78o-7(a)(1)(B)(ii).
    \148\ See 15 U.S.C. 78a et seq.
    \149\ See particularly, Section 3(a)(61)(B) of the Exchange Act 
(15 U.S.C. 78c(a)(61)(B)).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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

    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.
---------------------------------------------------------------------------

    \151\ See Section 3(a)(61) of the Exchange Act defining the term 
``credit rating agency'' (15 U.S.C. 78c(a)(61)).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \152\ See Sections 15E(a)(2)(C) and 15E(d) of the Exchange Act 
(15 U.S.C. 78o-7(a)(2)(C) and (d)).
---------------------------------------------------------------------------

    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

[[Page 6389]]

under Section 15E(g) of the Exchange Act \155\ and proposed Rule 17g-4.
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    \153\ 15 U.S.C. 78o-7(a)(1)(B)(iii).
    \154\ 15 U.S.C. 78a et seq.
    \155\ 15 U.S.C. 78o-7(g).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \160\ 15 U.S.C. 78o-7(a)(1)(B)(iv).
    \161\ Id, see also, 15 U.S.C. 78a et seq.
---------------------------------------------------------------------------

    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 sub-holding 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\
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    \162\ See Sections 15E(a)(2)(C) and 15E(d) of the Exchange Act 
(15 U.S.C. 78o-7(a)(2)(C) and (d)).
---------------------------------------------------------------------------

    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.
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    \163\ See Sections 15E(a)(2)(C) and 15E(d) of the Exchange Act 
(15 U.S.C. 78o-7(a)(2)(C) and (d)).
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    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.
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    \164\ 15 U.S.C. 78o-7(j).
    \165\ See 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).
    \167\ Section 15E(j) of the Exchange Act (15 U.S.C. 78o-7(j)).
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    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.
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    \168\ Id.
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    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\
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    \169\ 15 U.S.C. 78o-7.
---------------------------------------------------------------------------

    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

[[Page 6390]]

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.
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    \170\ 15 U.S.C. 78o-7(a)(1)(B)(v).
    \171\ Id.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \172\ 15 U.S.C. 78o-7(a)(1)(B)(vi).
---------------------------------------------------------------------------

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

    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.
---------------------------------------------------------------------------

    \174\ The 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).
    \177\ See Section 15E(a)(2)(C) Exchange Act (15 U.S.C. 78o-
7(a)(2)(C)).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \178\ As 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.
    \179\ See Section 15E(a)(1)(B)(x) of the Exchange Act (15 U.S.C. 
78o-7(a)(1)(B)(x)).
---------------------------------------------------------------------------

    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

[[Page 6391]]

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.
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    \180\ 15 U.S.C. 78o-7(h).
    \181\ See 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).
---------------------------------------------------------------------------

    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\
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    \183\ See Section 15E(a)(1)(B)(x) of the Exchange Act (15 U.S.C. 
78o-7(a)(1)(B)(x)).
    \184\ See Sections 15E(a)(2)(C) and (d) of the Exchange Act (15 
U.S.C. 78o-7(a)(2)(C) and (d)).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \185\ 15 U.S.C. 78o-7(j).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \186\ See Sections 15E(a)(2)(C) and (d) of the Exchange Act (15 
U.S.C. 78o-7(a)(2)(C) and (d)).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \187\ 15 U.S.C. 78o-7(a)(1)(B)(viii).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \188\ Id.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \189\ 15 U.S.C. 78o-7(a)(1)(B)(x).
---------------------------------------------------------------------------

    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

[[Page 6392]]

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.
---------------------------------------------------------------------------

    \190\ See 15 U.S.C. 78o-7(a)(1)(B)(viii).
    \191\ 15 U.S.C. 78a et seq.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \195\ See 15 U.S.C. 78o-7(a)(2)(C).
    \196\ See 15 U.S.C. 78o-7(a)(2)(C)(ii)(I).
    \197\ See Section 3(a)(62)(A) of the Exchange Act (15 U.S.C. 
78c(a)(62)(A)).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \198\ Id.
---------------------------------------------------------------------------

    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

[[Page 6393]]

the Commission under proposed Rule 17g-3.
    As described in the instructions for proposed Form NRSRO, the 
specific revenue items would be, as applicable:
    <bullet> Revenue from determining and maintaining credit ratings.
    <bullet> Revenue from subscribers.
    <bullet> Revenue from granting licenses or rights to publish credit 
ratings.
    <bullet> Revenue from determining credit ratings that are not made 
readily accessible (private ratings).
    <bullet> 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.
---------------------------------------------------------------------------

    \199\ See 15 U.S.C. 78o-7(a)(2)(C).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \200\ See 1 U.S.C. 78o-7(a)(2)(C).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \201\ See Section 5 of the Act and 15 U.S.C. 78q(a)(1).
    \202\ See 15 U.S.C. 78q(b)(1).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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

    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.
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    \204\ See 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 broker-dealers' 
'') (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.
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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

[[Page 6394]]

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.
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    \206\ See 15 U.S.C. 78q(a)(1).
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    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).
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    \207\ See 15 U.S.C. 78o-7(b)(1).
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    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\
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    \208\ 15 U.S.C. 78o-7.
    \209\ See 15 U.S.C 78q(a)(1).
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    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

[[Page 6395]]

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.
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    \210\ 15 U.S.C. 78o-7(f).
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    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\
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    \211\ See 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).
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    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\
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    \212\ See 15 U.S.C 78q(a)(1).
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    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

[[Page 6396]]

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 third-party 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.
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    \213\ See 15 U.S.C 78q(b).
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    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\
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    \214\ See e.g., 17 CFR 240.17a-7 and 17 CFR 275.0 -2.
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    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\
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    \215\ 15 U.S.C. 78o-7(k).
    \216\ Id.
    \217\ See 15 U.S.C. 78o-7(k).
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    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\
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    \218\ 15 U.S.C. 78o-7(d).
    \219\ Id.
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    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

[[Page 6397]]

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.
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    \220\ 15 U.S.C. 78o-7(b)(1).
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    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.
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    \221\ 17 CFR 210.1-01 et seq.
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    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\
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    \222\ 15 U.S.C. 78o-7(d).
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    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\
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    \223\ See Final Rule: Strengthening the Commission's Rules 
Regarding Auditor Independence, Securities Act Release No. 8183 
(January 28, 2003), 68 FR 6005 (February 5, 2003).
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    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\
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    \224\ 17 CFR 240.17a-5(e)(2).
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    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 
Non-Public 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\

[[Page 6398]]

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.
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    \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).
    \228\ 15 U.S.C. 78o-7(g)(1).
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    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 non-public 
information by issuers, contains an exception that permits issuers to 
intentionally disclose material non-public 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\
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    \229\ See Proposed Rule: Definition of Nationally Recognized 
Statistical Rating Organization, Securities Act Release No. 8570 
(April 22, 2005), 70 FR 21306 (April 25, 2005).
    \230\ See Id.
    \231\ See 17 CFR 243.100.
    \232\ 17 CFR 243.100(b)(2)(iii).
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    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, non-public 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\
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    \233\ See 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.
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    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 pre-approval 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.
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    \235\ See 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).
---------------------------------------------------------------------------

    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

[[Page 6399]]

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.
---------------------------------------------------------------------------

    \236\ 15 U.S.C. 78o-7(h)(1).
    \237\ 15 U.S.C. 78o-7(h)(2).
---------------------------------------------------------------------------

    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.
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    \238\ 15 U.S.C. 78o-7(a)(1)(B)(vi).
    \239\ Id.
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    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\
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    \240\ Paragraph (b)(1) of proposed Rule 17g-5. See 15 U.S.C. 
78o-7(h)(2)(A).
    \241\ See 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.
    \242\ Form S-3 (17 CFR Sec.  239.13).
---------------------------------------------------------------------------

    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.
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    \243\ Paragraph (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.
    \244\ Several 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.
    \245\ Cf. 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).
---------------------------------------------------------------------------

    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.
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    \246\ Paragraph (b)(3) of proposed Rule 17g-5.
    \247\ See, 17 CFR 240.15c3-1(c)(2)(vi)(E), (F), and (H).
---------------------------------------------------------------------------

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

    The fifth type of conflict identified in paragraph (b) of proposed 
rule 17g-5 involves having a business or personal

[[Page 6400]]

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.
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    \249\ Paragraph (b)(5) of proposed Rule 17g-5.
    \250\ See 15 U.S.C. 78o-7(h)(2)(C).
    \251\ See 15 U.S.C. 78o-7(h)(2)(D).
---------------------------------------------------------------------------

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

    \253\ 15 U.S.C. 78o-7(a)(1)(B)(vi).
    \254\ See 15 U.S.C. 78o-7(h)(2)(E).
---------------------------------------------------------------------------

    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\
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    \255\ Paragraph (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.
    \256\ As 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.
    \257\ As 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.
---------------------------------------------------------------------------

    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\
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    \258\ Paragraph (c)(2) of proposed Rule 17g-5.
    \259\ The 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

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

    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.
---------------------------------------------------------------------------

    \261\ Paragraph (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.
---------------------------------------------------------------------------

    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

[[Page 6401]]

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\
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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).
    \266\ See 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.
---------------------------------------------------------------------------

    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 pre-credit rating 
assessment products of the nationally recognized statistical rating 
organization or any person associated with such nationally 
recognized statistical rating organization[.] \267\
---------------------------------------------------------------------------

    \267\ 15 U.S.C. 78o-7(i)(1)(A).

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 pre-credit rating 
assessment products.\268\
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    \268\ See 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \269\ See 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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \270\ 15 U.S.C. 78o-7(i)(1)(C).

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\
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    \271\ Paragraph (a)(2) of proposed Rule 17g-6.
    \272\ Presumably, 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.
---------------------------------------------------------------------------

    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

[[Page 6402]]

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.
---------------------------------------------------------------------------

    \273\ See 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.
---------------------------------------------------------------------------

    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\
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    \274\ The 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)).
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    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\
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    \275\ 15 U.S.C. 78o-7(i)(1)(A).

    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\
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    \276\ See 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.''
    \277\ The 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.
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    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.

[[Page 6403]]

    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\
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    \278\ Anecdotally, 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.
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    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.
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    \279\ 15 U.S.C. 78o-7(i)(1).
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    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.
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    \280\ As 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 ``strong-
arm'' 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.
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    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:
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    \281\ 44 U.S.C. 3501 et seq. 5 CFR 1320.11.
---------------------------------------------------------------------------

    (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\
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    \282\ Pub. L. No. 109-291 (2006).
    \283\ See Section 15E of the Exchange Act (15 U.S.C. 78o-7)).
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    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

[[Page 6404]]

by the Commission; \286\ (4) make the current Form NRSRO, including 
non-confidential 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\
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    \284\ Section 15E(a)(1) of the Exchange Act (15 U.S.C. 78o-
7(a)(1)) and proposed Rule 17g-1(a).
    \285\ Proposed Rule 17g-1(c); see also Section 15E(a)(1) of the 
Exchange Act (15 U.S.C. 78o-7(a)(1)).
    \286\ Proposed Rule 17g-1(b)(2); see also Section 15E(a)(1) of 
the Exchange Act (15 U.S.C. 78o-7(a)(1)).
    \287\ Section 15E(a)(3) of the Exchange Act (15 U.S.C. 78o-
7(a)(3)) and proposed Rule 17g-1(d).
    \288\ Proposed Rule 17g-1(e).
    \289\ Section 15E(b)(1) of the Exchange Act (15 U.S.C. 78o-
7(b)(1)) and proposed Rule 17g-1(f).
    \290\ Section 15E(b)(2) of the Exchange Act (15 U.S.C. 78o-
7(b)(2)) and proposed Rule 17g-1(g).
    \291\ Section 15E(e)(1) of the Exchange Act (15 U.S.C. 78o-
7(e)(1)) and proposed Rule 17g-1(h).
    \292\ Proposed Rule 17g-2 under authority in Section 17(a)(1) of 
the Exchange Act (15 U.S.C. 78q(a)(1)).
    \293\ Proposed Rule 17g-2(e) under authority in Section 17(a)(1) 
of the Exchange Act (15 U.S.C. 78q(a)(1)).
    \294\ Proposed Rule 17g-2(f) under authority in Section 17(a)(1) 
of the Exchange Act (15 U.S.C. 78q(a)(1)).
    \295\ Section 15E(k) of the Exchange Act (15 U.S.C. 78o-7(k)) 
and Proposed Rule 17g-3.
    \296\ Section 15E(g) of the Exchange Act (15 U.S.C. 78o-7(g)) 
and proposed Rule 17g-4.
    \297\ See Proposed Rule 17g-6(b)(2) under authority in Section 
17(a)(1) of the Exchange Act (15 U.S.C. 78q(a)(1)).
    \298\ See 15 U.S.C. 78o-7.
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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, non-
public 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\
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    \299\ 15 U.S.C. 78o-7.
    \300\ See Report of the Senate Committee on Banking, Housing, 
and Urban Affairs to Accompany S. 3850, Credit Rating Agency Reform 
Act of 2006, S. Report No. 109-326, 109th Cong., 2d Sess. (Sept. 6, 
2006) (``Senate Report'').
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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\
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    \301\ 15 U.S.C. 78c.
    \302\ See Section 3 of the Act.
    \303\ Section 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).
---------------------------------------------------------------------------

    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\
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    \304\ Section 3(a)(61) of the Exchange Act (15 U.S.C. 
78c(a)(61)).
    \305\ Section 3(a)(61)(A) of the Exchange Act (15 U.S.C. 
78c(a)(61)(A)).
    \306\ Section 3(a)(60) of the Exchange Act (15 U.S.C. 
78c(a)(60)).
---------------------------------------------------------------------------

    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

[[Page 6405]]

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\
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    \307\ The 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/.
    \308\ Credit 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.
    \311\ Id.
    \312\ See http://www.defaultrisk.com (``DefaultRisk.com'').
    \313\ Id.
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    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.
---------------------------------------------------------------------------

    \314\ 15 U.S.C. 78o-7(a)(1).
    \315\ 15 U.S.C. 78o-7.
---------------------------------------------------------------------------

    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\
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    \316\ 15 U.S.C. 78o-7.
---------------------------------------------------------------------------

    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.
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    \316a\ This 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.
    \316b\ This 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.
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    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\
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    \317\ 15 U.S.C. 78o-7(a)(1)(B).
    \318\ 15 U.S.C. 78o-7.
    \319\ Id.
---------------------------------------------------------------------------

    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

[[Page 6406]]

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\
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    \320\ 15 U.S.C. 78a-7(a)(1).
    \321\ 15 U.S.C. 78o-7.
    \322\ As 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 x 30 entities = 9,000 hours.
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    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 $16,000\324\ and the 
one-time cost to the industry would be $480,000.\325\
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    \324\ $400 per hour x 40 hours = $16,000.
    \325\ $16,000 x 30 NRSROs = $480,000.
---------------------------------------------------------------------------

    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\
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    \326\ See Exchange Act Release No. 49830 (June 8, 2004), at note 
89; see also 17 CFR 240.17a-11.
    \327\ (1 hour x 1 entity) = 1 hour.
---------------------------------------------------------------------------

    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\
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    \328\ See proposed Rule 17g-1(e).
    \329\ As 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).
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    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.
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    \330\ Section 3(a)(62)(B) of the Exchange Act (15 U.S.C. 
78c(a)(62)(B)).
    \331\ Section 3(a)(62)(B)(v) of the Exchange Act (15 U.S.C. 
78c(a)(62)(B)(v)).
    \332\ Section 3(a)(62)(B)(iv) of the Exchange Act (15 U.S.C. 
78c(a)(62)(B)(iv)).
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    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\
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    \333\ 25 hours x 5 NRSROs = 125 hours.
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    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

[[Page 6407]]

would be approximately 1,500 hours each year.\336\
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    \334\ 15 U.S.C. 78o-7(b)(1).
    \335\ This 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.
    \336\ 25 hours per amendment x 2 amendments x 30 NRSROs = 1,500 
hours.
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    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 broker-dealers 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\
---------------------------------------------------------------------------

    \337\ 15 U.S.C. 78o-7(b)(2).
    \338\ See proposed Rule 17g-1(g).
    \339\ See 17 CFR 240.17h-1T and 2T.
    \340\ 10 hour x 30 NRSROs = 300 hours.
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    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\
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    \341\ 15 U.S.C. 78o-7(a)(3).
    \342\ See proposed Rule 17g-1(d).
    \343\ 30 hours x 30 NRSROs.
    \344\ 10 hours x 30 NRSROs.
---------------------------------------------------------------------------

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\
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    \345\ See Section 5 of the Act.
    \346\ See Section 5 of the Act and 15 U.S.C. 78q(a)(1).
    \347\ 15 U.S.C. 78o-7.
    \348\ See 17 CFR 15c3-1g.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \349\ See 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 x 30 NRSROs = 9,000 hours.
    \351\ 254 hours x 30 NRSROs = 7,620 hours.
---------------------------------------------------------------------------

    Proposed Rule 17g-2 also would require that an NRSRO that uses a 
third-party 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\
---------------------------------------------------------------------------

    \352\ The estimated 10 hours includes drafting, legal review and 
receiving corporate authorization to file the undertaking with the 
Commission.
    \353\ (10 hours x 5 NRSROs) + (10 hours x 5 NRSROs) = 100 hours.
---------------------------------------------------------------------------

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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    \354\ 15 U.S.C. 78o-7(k).
    \355\ Id.

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[[Page 6408]]

    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\
---------------------------------------------------------------------------

    \356\ See proposed Rule 17g-3.
    \357\ See 17 CFR 240.15c3-1g and 17i-5.
    \358\ 200 hours x 30 NRSROs = 6,000 hours.
---------------------------------------------------------------------------

    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 broker-dealer 
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\
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    \359\ $15,000 x30 NRSROs = $450,000.
---------------------------------------------------------------------------

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\
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    \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).
    \364\ See proposed Rule 17g-4.
---------------------------------------------------------------------------

    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 one-time burden of 1,500 hours.\366\
---------------------------------------------------------------------------

    \365\ For example, the IOSCO Code requires credit rating 
agencies to develop such procedures.
    \366\ 50 hours x 30 NRSROs = 1,500 hours.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \367\ (2 hours x 5 refusals) x 30 NRSROs = 300 hours.
---------------------------------------------------------------------------

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 \
---------------------------------------------------------------------------

    \368\ 15 U.S.C. 78o-7(k).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \369\ See proposed Rule 17g-2(c).
---------------------------------------------------------------------------

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

[[Page 6409]]

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.
---------------------------------------------------------------------------

    \370\ For 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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \372\ Pub. L. No. 109-291 (2006).
    \373\ See Report of the Senate Committee on Banking, Housing, 
and Urban Affairs to Accompany S. 3850, Credit Rating Agency Reform 
Act of 2006, S. Report No. 109-326, 109th Cong., 2d Sess. (Sept. 6, 
2006) (``Senate Report'').
    \374\ Id.
---------------------------------------------------------------------------

    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\
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    \375\ Section 15E of the Exchange Act (15 U.S.C. 78o-7).
    \376\ Sections 15E(a)(1) and (b)(1) of the Exchange Act (15 
U.S.C. 78o-7(a)(1) and (b)(1)).
    \377\ Section 15E(k) of the Exchange Act (15 U.S.C. 78o-7(k)).
    \378\ Sections 15E(g) and (h) of the Exchange Act (15 U.S.C. 
78o-7(g) and (h)).
    \379\ Section 15E(i) of the Exchange Act (15 U.S.C. 78o-7(i)).
---------------------------------------------------------------------------

    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 no-action 
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.
---------------------------------------------------------------------------

    \380\ See Report of the Senate Committee on Banking, Housing, 
and Urban Affairs to Accompany S. 3850, Credit Rating Agency Reform 
Act of 2006, S. Report No. 109-326, 109th Cong., 2d Sess. (Sept. 6, 
2006) (``Senate Report'').
---------------------------------------------------------------------------

    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 non-public 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

[[Page 6410]]

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.
---------------------------------------------------------------------------

    \381\ Section 3(a)(61) of the Exchange Act (15 U.S.C. 
78c(a)(61)).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \382\ 15 U.S.C. 78o-7.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \383\ See proposed Rule 17g-1.
    \384\ See 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).
    \385\ See 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).
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    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.
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    \388\ 15 U.S.C. 78q(a)(1).
    \389\ See proposed Rule 17g-2.
---------------------------------------------------------------------------

    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\
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    \390\ 15 U.S.C. 78o-7(k).
    \391\ Id.
    \392\ See proposed Rule 17g-3.
    \393\ 15 U.S.C. 78o-7(d).
    \394\ See 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.
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    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.
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    \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).
    \399\ See proposed Rule 17g-4.
    \400\ 15 U.S.C. 78o-7(g).
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    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\
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    \401\ 15 U.S.C. 78o-7(h)(2).
    \402\ See proposed Rule 17g-5.
    \403\ 15 U.S.C. 78o-7(a)(1)(B)(vi) and (h).
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    Proposed Rule 17g-6 would prohibit an NRSRO from engaging in 
certain unfair, abusive, or coercive acts or practices, including 
practices with

[[Page 6411]]

respect to unsolicited ratings.\404\ These proposed prohibitions are 
designed to enhance the integrity of NRSROs, promote competition and 
fulfill a statutory mandate.
---------------------------------------------------------------------------

    \404\ See proposed Rule 17g-6.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \405\ 15 U.S.C. 78o-7(c)(2).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
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    \410\ This 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.
    \411\ This 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.
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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\
---------------------------------------------------------------------------

    \412\ 15 U.S.C. 78o-7(a)(1).
    \413\ 15 U.S.C. 78o-7.
---------------------------------------------------------------------------

    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\
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    \414\ There is no filing fee for a Form NRSRO.
    \415\ The 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) x ($223 per/hour)].
    \416\ 30 NRSROs x $66,900 = $2,007,000.
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    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\
---------------------------------------------------------------------------

    \417\ $400 per hour x 40 hours = $16,000.
    \418\ $16,000 x 30 NRSROs = $480,000.
---------------------------------------------------------------------------

    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

[[Page 6412]]

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\
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    \419\ 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 average cost 
to an NRSRO would be $5,125 [(25 hours for one year) x ($205)].
    \420\ 5 NRSROs x $5,125 = $25,625.
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    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\
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    \421\ $1,000 x 30 NRSROs = $30,000.
---------------------------------------------------------------------------

    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\
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    \422\ 15 U.S.C. 78o-7(b)(1).
    \423\ Based on the PRA estimates, an NRSRO would spend 
approximately 50 hours each year updating its application on Form 
NRSRO (25 hours per amendment x 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) x ($205 per hour)].
    \424\ $10,250 x 30 NRSROs = $307,500.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \425\ 15 U.S.C. 78o-7(b)(2).
    \426\ See proposed Rule 17g-1(g).
    \427\ 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 average annual 
cost would be $2,050 [(10 hours per year) x ($205 per hour)].
    \428\ $2,050 x 30 NRSROs = $61,500.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \429\ 15 U.S.C. 78o-7(a)(3).
    \430\ See proposed Rule 17g-1(d).
    \431\ The 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) x ($268 per hour)] and the average annual cost 
would be $2,680 [(10 hours per year) x ($268 per hour)].
    \432\ $8,040 x 30 NRSROs = $241,200.
    \433\ $2,680 x 30 NRSROs = $80,400.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \434\ See Section 5 of the Act.
    \435\ See Section 5 of the Act and 15 U.S.C 78q(a)(1).
---------------------------------------------------------------------------

    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 one-time 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\
---------------------------------------------------------------------------

    \436\ The 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) x ($205 per hour)] and the average 
annual cost would be $52,070 [(254 hours per year) x ($205 per 
hour)].
    \437\ $61,500 x 30 NRSROs = $1,845,000.
    \438\ $52,070 x 30 NRSROs = $1,562,100.
---------------------------------------------------------------------------

    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

[[Page 6413]]

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\
---------------------------------------------------------------------------

    \439\ 15 U.S.C. 78o-7(k).
    \440\ Id.
---------------------------------------------------------------------------

    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\
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    \441\ See proposed Rule 17g-3.
    \442\ The 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) x ($249 per hour)].
    \443\ $49,800 x 30 NRSROs = $1,494,000.
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    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 broker-dealer 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\
---------------------------------------------------------------------------

    \444\ $15,000 x 30 NRSROs = $450,000.
---------------------------------------------------------------------------

    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\
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    \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).
    \449\ See proposed Rule 17g-4.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \450\ 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 average one-
time cost to an NRSRO would be $10,250 [(50 hours) x ($205)].
    \451\ 30 NRSROs x $10,250 = $307,500.
---------------------------------------------------------------------------

    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

[[Page 6414]]

would result in any significant incremental costs.
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    \452\ Paragraph (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.
---------------------------------------------------------------------------

    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.
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    \453\ 15 U.S.C. 78c(f).
    \454\ 15 U.S.C. 78w(a)(2).
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    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 no-
action 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.
---------------------------------------------------------------------------

    \455\ Pub. L. No. 109-291 (2006).
    \456\ See Report of the Senate Committee on Banking, Housing, 
and Urban Affairs to Accompany S. 3850, Credit Rating Agency Reform 
Act of 2006, S. Report No. 109-326, 109th Cong., 2d Sess. (Sept. 6, 
2006) (``Senate Report'').
---------------------------------------------------------------------------

    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 non-public 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.
---------------------------------------------------------------------------

    \457\ Section 3(a)(61) of the Exchange Act (15 U.S.C. 
78c(a)(61)).
---------------------------------------------------------------------------

    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:
---------------------------------------------------------------------------

    \458\ Pub. 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).
---------------------------------------------------------------------------

    <bullet> An annual effect on the economy of $100 million or more
    <bullet> A major increase in costs or prices for consumers or 
individual industries; or
    <bullet> 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.

[[Page 6415]]

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.
---------------------------------------------------------------------------

    \459\ 5 U.S.C. 603.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \460\ Pub. L. No. 109-291 (2006).
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \461\ See Report of the Senate Committee on Banking, Housing, 
and Urban Affairs to Accompany S. 3850, Credit Rating Agency Reform 
Act of 2006, S. Report No. 109-326, 109th Cong., 2d Sess. (Sept. 6, 
2006) (``Senate Report'').
---------------------------------------------------------------------------

C. Legal Basis

    Pursuant to the Exchange Act \462\ and, particularly, Section 15E 
of the Exchange Act.\463\
---------------------------------------------------------------------------

    \462\ 15 U.S.C. 78a et seq.
    \463\ 15 U.S.C. 78o-7.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \464\ 17 CFR 240.0-10(a).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \465\ See 17 CFR 240.0-10(a).
    \466\ Id.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \467\ Proposed Rule 17g-1.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \468\ Id.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \469\ Proposed Rule 17g-2.
---------------------------------------------------------------------------

    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

[[Page 6416]]

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.
---------------------------------------------------------------------------

    \470\ Proposed Rule 17g-3.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \471\ Proposed Rule 17g-4.
    \472\ Proposed Rule 17g-6.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

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

    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.
---------------------------------------------------------------------------

    \474\ 5 U.S.C. 603.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

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

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.


Sec.  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 (Sec.  
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

[[Page 6417]]

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.


Sec.  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 Sec.  240.17g-3.
    (2) Internal records, including non-public 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 Sec.  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 third-party 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

[[Page 6418]]

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 non-resident 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 ``Non-Resident 
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 non-resident 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.


Sec.  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 (Sec.  210.1-01--Sec.  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 Sec.  
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 Sec.  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

[[Page 6419]]

that such exemption is necessary or appropriate in the public interest, 
and is consistent with the protection of investors.


Sec.  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.


Sec.  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 Sec.  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.


Sec.  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 mortgage-backed 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 mortgage-backed 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

[[Page 6420]]

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 mortgage-backed 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:


Sec.  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 Sec.  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 Sec.  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:

[[Page 6428]]

    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.

----------------------------------------------------------------

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 non-resident 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 no-action 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

[[Page 6429]]

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.

----------------------------------------------------------------

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 sub-holding 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.

[[Page 6430]]

    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:
    <bullet> Name.
    <bullet> Title and brief description of responsibilities, including 
whether a supervisor.
    <bullet> Employment history.
    <bullet> Post-secondary education.
    <bullet> 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:
    <bullet> Name.
    <bullet> Title and brief description of responsibilities.
    <bullet> Employment history.
    <bullet> Post secondary education.
    <bullet> 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:
    <bullet> Revenue from determining and maintaining credit ratings;
    <bullet> Revenue from subscribers;
    <bullet> Revenue from granting licenses or rights to publish credit 
ratings;
    <bullet> Revenue from determining credit ratings that are not made 
readily accessible (private ratings); and
    <bullet> Revenue from all other services and products offered by 
the rating

[[Page 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:
    <bullet> 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;
    <bullet> Employing either a quantitative or qualitative model, or 
both to determine credit ratings; and
    <bullet> 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:
    <bullet> 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;
    <bullet> Issues credit ratings certified by qualified institutional 
buyers with respect to:
    [cir] Financial institutions, brokers, or dealers;
    [cir] Insurance companies;
    [cir] Corporate issuers;
    [cir] Issuers of asset-backed securities;
    [cir] Issuers of government securities, municipal securities, or 
securities issued by a foreign government; or
    [cir] A combination of one or more of the above; and
    <bullet> Is registered as an NRSRO.
    5. NON-RESIDENT RATING ORGANIZATION [Exchange Act Rule 17g-4(a)]--A 
nationally recognized statistical rating organization that:
    <bullet> If a corporation, is incorporated in or has its principal 
office in, a location outside the United States, its territories, or 
possessions;
    <bullet> 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

----------------------------------------------------------------
Date

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    Check Item being responded to:

[ballot] Item 8A
[ballot] Item 8B
[ballot] Item 8C

    The individual(s) or entity(ies) for whom this DRP is being filed 
is (are):

[ballot] The credit rating agency
[ballot] The credit rating agency and one or more associated persons
[ballot] 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):

----------------------------------------------------------------

    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):

----------------------------------------------------------------

    If this DRP provides information relating to a ``Yes'' answer to 
Item 8B, describe the crime(s) and provide jurisdiction(s) and date(s):

----------------------------------------------------------------

    If this DRP provides information relating to a ``Yes'' answer to 
Item 8C, attach the relevant Commission order(s) and provide date(s):

----------------------------------------------------------------

[ballot] 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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