6456 Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Rules and Regulations 

1Proposed Rules for Nationally Recognized 

Statistical Rating Organizations, Exchange Act 

Release No. 57967 (June 16, 2008), 73 FR 36212 

(June 25, 2008) (‘‘June 16, 2008 Proposing 

Release’’). The existing NRSRO rules were adopted 

by the Commission in 2007. See Oversight of Credit 

Rating Agencies Registered as Nationally 

Recognized Statistical Rating Organizations, 

Exchange Act Release No. 55857 (June 5, 2007), 72 

FR 33564 (June 18, 2007) (‘‘June 5, 2007 Adopting 

Release’’). The second action taken by the 

Commission (also on June 16, 2008) was to propose 

a new rule that would require NRSROs to 

distinguish their ratings for structured finance 

products from other classes of credit ratings by 

publishing a report with the rating or using a 

different rating symbol. See June 16, 2008 

Proposing Release. The third action taken by the 

Commission was to propose a series of amendments 

to rules under the Exchange Act, Securities Act of 

1933 (‘‘Securities Act’’), and Investment Company 

Act of 1940 (‘‘Investment Company Act’’) that 

would end the use of NRSRO credit ratings in the 

rules. See References to Ratings of Nationally 

Recognized Statistical Rating Organizations, 

Exchange Act Release No. 58070 (July 1, 2008), 73 

FR 40088 (July 11, 2008); Securities Ratings, 

Securities Act Release No. 8940 (July 1, 2008), 73 

FR40106 (July 11, 2008); References to Ratings of 

Nationally Recognized Statistical Rating 

Organizations, Investment Company Act Release 

No. 28327 (July 1, 2008), 73 FR 40124 (July 11, 

2008). The second and third actions are not being 

finalized in this release. 

2The term ‘‘structured finance product’’ as used 

throughout this release refers broadly to any 

security or money market instrument issued by an 

asset pool or as part of any asset-backed or 

mortgage-backed securities transaction. This broad 

category of financial instrument includes, but is not 

limited to, asset-backed securities such as 

residential mortgage-backed securities (‘‘RMBS’’) 

and to other types of structured debt instruments 

such as collateralized debt obligations (‘‘CDOs’’), 

including synthetic and hybrid CDOs. 

3The June 16, 2008 Proposing Release included 

amendments to paragraphs (a) and (b) of Rule 17g– 

5 that are not being adopted today. Instead, in part, 

in response to the many comments received on 

these proposed amendments identifying substantial 

issues as to how they would operate in practice, the 

Commission today is re-proposing these 

amendments in a separate release. In addition, the 

Commission is also proposing potential additional 

requirements to the final amendment to paragraph 

(d) of Rule 17g–2 being adopted today. 

4See June 16, 2008 Proposing Release, 73 FR at 

36213; Summary Report of Issues Identified in the 

Staff’s Examinations of Select Credit Rating 

Agencies (July 2008). The report can be accessed at 

http://www.sec.gov/news/studies/2008/ 

craexamination070808.pdf. 

5The June 16, 2008 Proposing Release contains a 

detailed discussion of concerns the final rules are 

intended to address, particularly with respect to the 

NRSROs’ role in the credit market turmoil. See June 

16, 2008 Proposing Release, 73 FR at 36213–36218. 

6Letter dated June 10, 2008 from Deborah A. 

Cunningham and Boyce I. Greer, Co-Chairs 

Company, Co-Chairs, SIFMA Credit Rating Agency 

Task Force (‘‘First SIFMA Letter’’); letter dated June 

12, 2008 from G. Brooks Euler (‘‘Euler Letter’’); 

letter dated June 19, 2008 from Rupert Schoder, 

Financial Engineer, Socit Gnrale, France (‘‘SGF 

Letter’’); letter dated July 8, 2008 from William 

Morris, Principal, The Morris Group (‘‘Morris 

Letter’’); letter dated July 8, 2008 from Elaine 

Wieche (‘‘Wieche Letter’’); letter dated July 13, 2008 

from Walter C. Hamscher, Member, XBRL 

International Board of Directors (‘‘Hamscher 

Letter’’); letter dated July 14, 2008 from Robert 

Dobilas, President, CEO, Realpoint LLC (‘‘Realpoint 

Letter’’); letter dated July 21, 2008 from Dottie 

Cunningham, Chief Executive Officer, Commercial 

Mortgage Securities Association (‘‘CMSA Letter’’); 

letter dated July 21, 2008 from Bruce Goldstein, 

SunTrust Robinson Humphrey (‘‘STRH Letter’’); 

letter dated July 21, 2008 from Raymond E. 

Petersen, President, Inland Mortgage Capital 

Corporation (‘‘Inland Letter’’); letter dated July 21, 

2008 from Leonard W. Cotton, Vice Chairman, 

Centerline Capital Group (‘‘Centerline Letter’’); 

letter dated July 21, 2008 from Gregg Rademacher, 

Chief Executive Officer, Los Angeles County 

Employees Retirement Association (‘‘LACERA 

Letter’’); letter dated July 22, 2008 from Kevin 

Kohler, VP—Levered Finance, Capmark 

Investments LP (‘‘Capmark Letter’’); letter dated 

July 22, 2008 from Richard Metcalf, Director, 

Corporate Affairs Department, Laborers’ 

International Union of North America (‘‘LIUNA 

Letter’’); letter dated July 22, 2008 from Mary A. 

Downing, Director—Surveillance and Due 

Diligence, Hillenbrand Partners (‘‘Hillenbrand 

Letter’’); letter dated July 23, 2008 from Kent 

Wideman, Group Managing Director, Policy & 

Rating Committee and Mary Keogh, Managing 

Director, Policy & Regulatory Affairs, DBRS (‘‘DBRS 

Letter’’); letter dated July 24, 2008 from Takefumi 

Emori, Managing Director, Japan Credit Rating 

Agency, Ltd. (‘‘JCR Letter’’); letter dated July 24, 

2008 from J. Douglas Adamson, Executive Vice 

President, Technical Services, American Bankers 

Association (‘‘ABA Letter’’); letter dated July 24, 

2008 from Amy Borrus, Deputy Director, Council of 

Institutional Investors (‘‘Council Letter’’); letter 

dated July 24, 2008 from Joseph A. Hall and 

Michael Kaplan, Davis Polk, and Wardwell (‘‘DPW 

Letter’’); letter dated July 24, 2008 from Vickie A. 

Tillman, Executive Vice President, Standard & 

Poor’s Ratings Services (‘‘S&P Letter’’); letter dated 

July 24, 2008 from Deborah A. Cunningham and 

Boyce I. Greer, Co-Chairs Company, Co-Chairs, 

SIFMA Credit Rating Agency Task Force (‘‘Second 

SIFMA Letter’’); letter dated July 24, 2008 from 

Alex J. Pollock, Resident Fellow, American 

Enterprise Institute (‘‘Pollock Letter’’); letter dated 

July 25, 2008 from Sally Scutt, Managing Director, 

and Pierre de Lauzun, Chairman, Financial Markets 

Working Group, International Banking Federation 

(‘‘IBFED Letter’’); letter dated July 25, 2008 from 

Eric Sanitas, President, Association federative 

internationale des porteurs d’emprunts russe 

(‘‘AFIPER Letter’’); letter dated July 25, 2008 from 

Denise L. Nappier, Treasurer, State of Connecticut 

(‘‘Nappier Letter’’); letter dated July 25, 2008 from 

Suzanne C. Hutchinson, Mortgage Insurance 

Companies of America (‘‘MICA Letter’’); letter dated 

July 25, 2008 from Kieran P. Quinn, Chairman, 

Mortgage Bankers Association (‘‘MBA Letter’’); 

letter dated July 25, 2008 from Sean J. Egan, 

President, Egan-Jones Ratings Co. (‘‘Egan-Jones 

Letter’’); letter dated July 25, 2008 from Frank Chin, 

Chairman, Municipal Securities Rulemaking Board 

(‘‘MSRB Letter’’); letter dated July 25, 2008 from 

Charles D. Brown, General Counsel, Fitch Ratings 

(‘‘Fitch Letter’’); letter dated July 25, 2008 from Bill 

Lockyer, State Treasurer, California (‘‘Lockyer 

Letter’’); letter dated July 25, 2008 from Jeremy 

Reifsnyder and Richard Johns, Co-Chairs, American 

Securitization Forum Credit Rating Agency Task 

Force (‘‘ASF Letter’’); letter dated July 25, 2008 

from Annemarie G. DiCola, Chief Executive Officer, 

Trepp, LLC (‘‘Trepp Letter’’); letter dated July 25, 

2008 from Francisco Paez, Metropolitan Life 

Insurance Company (‘‘MetLife Letter’’); letter dated 

July 25, 2008 from Cate Long, Multiple-Markets 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 240 and 249b 

[Release No. 34–59342; File No. S7–13–08] 

RIN 3235–AK14 

Amendments to Rules for Nationally 

Recognized Statistical Rating 

Organizations 

AGENCY: Securities and Exchange 

Commission (‘‘Commission’’). 

ACTION: Final rule. 

SUMMARY: The Commission is adopting 

rule amendments that impose additional 

requirements on nationally recognized 

statistical rating organizations 

(‘‘NRSROs’’) in order to address 

concerns about the integrity of their 

credit rating procedures and 

methodologies. 

DATES: Effective Date: April 10, 2009. 

Compliance Date: April 10, 2009, 

except that the compliance date for the 

amendment to § 240.17g–2(d) is August 

10, 2009. 

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; Joseph I. 

Levinson, Special Counsel, at (202) 551– 

5598; Carrie A. O’Brien, Special 

Counsel, at (202) 551–5640; Sheila D. 

Swartz, Special Counsel, at (202) 551– 

5545; Rose Russo Wells, Special 

Counsel, at (202) 551–5527; Division of 

Trading and Markets, Securities and 

Exchange Commission, 100 F Street, 

NE., Washington, DC 20549–6628 

SUPPLEMENTARY INFORMATION: 

I. Background 

On June 16, 2008, the Commission, in 

the first of three related actions, 

proposed a series of amendments to its 

existing rules governing the conduct of 

NRSROs.1 The proposed amendments 

were designed to address concerns 

about the integrity of the process by 

which NRSROs rate structured finance 

products, particularly mortgage related 

securities.2 Today, the Commission is 

adopting, with revisions, a majority of 

the rule amendments proposed in the 

first action.3 These new requirements 

are designed to address practices 

identified, in part, by the Commission 

staff during its examination of the three 

largest NRSROs.4 In particular, the 

requirements are intended to increase 

the transparency of the NRSROs’ rating 

methodologies, strengthen the NRSROs’ 

disclosure of ratings performance, 

prohibit the NRSROs from engaging in 

certain practices that create conflicts of 

interest, and enhance the NRSROs’ 

recordkeeping and reporting obligations 

to assist the Commission in performing 

its regulatory and oversight functions.5

The Commission received 61 comment 

letters on the amendments as proposed.6


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Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Rules and Regulations 6457 

(‘‘Multiple-Markets Letter’’); letter dated July 25, 

2008 from Kurt N. Schacht, Executive Director and 

Linda L. Rittenhouse, Senior Policy Analyst, CFA 

Institute Centre for Financial Market Integrity 

(‘‘CFA Institute Letter’’); letter dated July 25, 2008 

from Lawrence J. White, Professor of Economics, 

Stern School of Business, New York University 

(‘‘White Letter’’); letter dated July 25, 2008 from 

Jack Davis, Head of Fixed Income Research, 

Schroder Investment Management North America 

Inc. (‘‘Schroders Letter’’); letter dated July 25, 2008 

from Karrie McMillan, General Counsel, Investment 

Company Institute (‘‘ICI Letter’’); letter dated July 

25, 2008 from Michael Decker, Co-Chief Executive 

Officer and Mike Nicholas, Co-Chief Executive 

Officer, Regional Bond Dealers Association (‘‘RBDA 

Letter’’); letter dated July 25, 2008 from Richard M. 

Whiting, Executive Director and General Counsel, 

Financial Services Roundtable (‘‘Roundtable 

Letter’’); letter dated July 25, 2008 from James H. 

Gellert, Chairman and CEO and Dr. Patrick J. 

Caragata, Founder and Executive Vice Chairman, 

Rapid Ratings International Inc. (’’Rapid Ratings 

Letter’’); letter dated July 25, 2008 from Alan P. 

Kress, Counsel, Principal Global Investors, LLC 

(‘‘Principal Global Letter’’); letter dated July 25, 

2008 from James A. Kaitz, President and CEO, 

Association for Financial Professionals (‘‘AFP 

Letter’’); letter dated July 25, 2008 from Gregory W. 

Smith, General Counsel, Colorado Public 

Employees’ Retirement Association (‘‘Colorado 

PERA Letter’’); letter dated July 25, 2008 from 

Cleary Gottlieb Steen & Hamilton LLP, ‘‘CGSH 

Letter’’); letter dated July 25, 2008 from Keith A. 

Styrcula, Chairman, Structured Products 

Association (‘‘SPA Letter’’); letter dated July 25, 

2008 from Yasuhiro Harada, Chairman and Co-CEO, 

Rating and Investment Information, Inc. (‘‘R&I 

Letter’’); letter dated July 28, 2008 from Michel 

Madelain, Chief Operating Officer, Moody’s 

Investors Service (‘‘Moody’s Letter’’); letter dated 

July 28, 2008 from Keith F. Higgins, Chair, 

Committee on Federal Regulation of Securities and 

Vicki O. Tucker, Chair, Committee on 

Securitization and Structured Finance, American 

Bar Association (‘‘ABA Business Law Committees 

Letter’’); letter dated July 28, 2008 from Morris C. 

Foutch (‘‘Foutch Letter’’); letter dated July 29, 2008 

from Glenn Reynolds, CEO and Peter Petas, 

President CreditSights, Inc. (‘‘CreditSights Letter’’); 

letter dated July 31, 2008 from Robert S. Khuzami 

Managing Director and General Counsel, Deutsche 

Bank Americas (‘‘DBA Letter’’); letter dated August 

5, 2008 from John Taylor, President and CEO, 

National Community Reinvestment Coalition 

(‘‘NCRC Letter’’); letter dated August 8, 2008 from 

Jeffrey A. Perlowitz, Managing Director and CoHead of Global Securitized Markets, and Myongsu 

Kong, Director and Counsel, Citigroup Global 

Markets Inc. (‘‘Citi Letter’’); letter dated August 12, 

2008 from John J. Niebuhr, Managing Director, 

Lehman Brothers, Inc. (‘‘Lehman Letter’’); letter 

dated August 15, 2008 from Steve Linehan, 

Executive Vice-President and Treasurer, Capital 

One Financial Corporation (‘‘Capital One Letter’’); 

letter dated August 17, 2008 from Olivier 

Raingeard, Ph.D (‘‘Raingeard Letter’’); letter dated 

August 22, 2008 from Robert Dobilas, CEO and 

President, Realpoint LLC (‘‘Second Realpoint 

Letter’’); letter dated August 27, 2008 from Larry G. 

Mayewski, Executive Vice President & Chief Rating 

Officer, A.M. Best Company (‘‘A.M. Best Letter’’). 

7See, e.g., LACERA Letter; LIUNA Letter; Council 

Letter; Second SIFMA Letter; Nappier Letter; RBDA 

Letter; Colorado PERA Letter; CGSH Letter; SPA 

Letter; R&I Letter; Moody’s Letter; CreditSights 

Letter; DBA Letter; NCRC Letter; Lehman Letter; 

Capital One Letter. 

8See, e.g., White Letter; Roundtable Letter; Rapid 

Ratings Letter; ABA Business Law Committees 

Letter; Raingeard Letter. 

9These comments are available on the 

Commission’s Internet Web site, located at http:// 

www.sec.gov/comments/s7-13-08/s71308.shtml, and 

in the Commission’s Public Reference Room in its 

Washington DC headquarters. 

10See 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’’), p. 2. 

11See amendments to Form NRSRO. 

12 17 CFR 240.17g–2. 

13See Rule 17g–2(a)(8) and (d). 

14See Rule 17g–3(a)(6). 

15 15 U.S.C. 78o–7(a)(1)(B)(i)–(x). 

16 15 U.S.C. 78o–7(a)(1)(B)(i). 

17See Second SIFMA Letter; Fitch Letter; Lockyer 

Letter; Multiple-Markets Letter; ICI Letter; AFP 

Letter; ABA Business Law Committees Letter; 

Raingeard Letter. 

18See AFP Letter. 

Many commenters expressed general 

support for the proposals and the ends 

they were designed to achieve.7 At the 

same time, commenters raised concerns 

about the practicality and costs of the 

proposals.8 The rules being adopted 

today incorporate many aspects of the 

rules as proposed, but also include 

significant revisions based on the 

comments received.9 The revisions seek 

to address practical impediments 

identified by commenters while at the 

same time continuing to promote the 

substantive goals of the proposed rules 

(increasing transparency and disclosure, 

diminishing conflicts, and strengthening 

oversight) and of the Credit Rating 

Agency Reform Act of 2006 (‘‘Rating 

Agency Act’’).10

In summary, the rule amendments 

require: (1) An NRSRO to provide 

enhanced disclosure of performance 

measurements statistics and the 

procedures and methodologies used by 

the NRSRO in determining credit ratings 

for structured finance products and 

other debt securities on Form NRSRO; 11

(2) an NRSRO to make, keep and 

preserve additional records under Rule 

17g–2; 12 (3) an NRSRO to make publicly 

available on its Internet Web site in 

XBRL format a random sample of 10% 

of the ratings histories of credit ratings 

paid for by the obligor being rated or by 

the issuer, underwriter, or sponsor of 

the security being rated (‘‘issuer-paid 

credit ratings’’) in each class of credit 

ratings for which it is registered and has 

issued 500 or more issuer-paid credit 

ratings, with each new ratings action to 

be reflected in such histories no later 

than six months after they are taken; 13

and (4) an NRSRO to furnish the 

Commission with an additional annual 

report.14

II. The Final Rule Amendments 

A. Amendments to the Instructions for 

Form NRSRO 

Form NRSRO contains 8 line items 

and requires 13 Exhibits. The line items 

elicit information about the applicant 

credit rating agency or NRSRO such as: 

its address; corporate form; credit rating 

affiliates that would be, or are, a part of 

its registration; the classes of credit 

ratings for which it is seeking, or is, 

registered as an NRSRO; the number of 

credit ratings it has issued in each class 

and the date it began issuing credit 

ratings in each class; and whether it or 

a person associated with it has 

committed or omitted any act, been 

convicted of any crime, or is subject to 

any order identified in Section 15(d) of 

the Exchange Act. The 13 Exhibits to 

Form NRSRO elicit the information 

required under Sections 15E(a)(1)(B)(i) 

through (ix) of the Exchange Act and 

additional information the Commission 

prescribed under authority in Section 

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

The Commission proposed amending 

the instructions to Form NRSRO to 

enhance the disclosures NRSROs make 

in Exhibits 1 and 2. As discussed below, 

the Commission is adopting the changes 

with certain modifications that respond, 

in part, to points raised by commenters. 

1. Enhanced Ratings Performance 

Measurement Statistics on Form NRSRO 

Exhibit 1 to Form NRSRO elicits the 

information required by Section 

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

credit ratings performance measurement 

statistics over short-term, mid-term, and 

long-term periods (as applicable) of the 

credit rating agency.16 The instructions 

for the Exhibit provide that an applicant 

and NRSRO must include in the Exhibit 

definitions of the credit ratings (i.e., an 

explanation of each category and notch) 

and explanations of the performance 

measurement statistics, including the 

metrics used to derive the statistics. 

The first proposed amendment to the 

Exhibit 1 instructions would enhance 

the disclosure by requiring separate sets 

of default and transition statistics for 

different classes of credit ratings. 

Specifically, as proposed, the 

instructions would require separate sets 

of statistics for each class of credit rating 

for which an applicant is seeking 

registration as an NRSRO or an NRSRO 

is registered as well as for any other 

broad class of credit ratings issued by 

the NRSRO. 

The Commission received eight 

comment letters on this amendment.17

One commenter noted that separating 

performance measurements by classes of 

credit ratings would help market 

participants make informed decisions.18

Commenters suggested that the 

Commission refine the classes of credit 

ratings and raised concerns about how 

to interpret the catchall phrase in the 

rule ‘‘any other broad class of credit 


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19See Fitch Letter. 

20 Id. 

21 15 U.S.C. 78c(a)(62)(B)(iv). 

22See id. 

23 15 U.S.C. 78o–7(a)(1)(B)(i). 

24See LIUNA Letter; JCR Letter; Council Letter; 

S&P Letter; Second SIFMA Letter; Fitch Letter; 

Multiple-Markets Letter; AFP Letter; Colorado 

PERA Letter; ABA Business Law Committees Letter; 

NCRC Letter; Raingeard Letter. 

25 15 U.S.C. 78o–7(a)(1)(B)(i). 

26See LIUNA Letter; AFP Letter. 

27See JCR Letter; S&P Letter. 

28See DBRS Letter; S&P Letter; Fitch Letter; 

Moody’s Letter. 

29See DBRS Letter; S&P Letter. 

30See S&P Letter; Fitch Letter. 

31See Moody’s Letter. 

rating.’’ For example, one commenter 

argued that such a category ‘‘would 

capture a variety of operational and 

qualitative scales, such as servicer and 

bank support ratings, for which default 

and/or transition studies are of limited 

or no value.’’ 19 The same commenter 

suggested that the single category 

encompassing government securities, 

municipal securities and foreign 

government securities be divided into 

three separate classes (sovereigns, 

United States public finance, and 

international public finance) to account 

for the different types of investors each 

such class of securities attracts as well 

as the potential for the much greater 

amount of data on public finance 

issuance in the United States to 

overwhelm the sovereign and 

international public finance data, thus 

making the statistics less useful to 

investors.20

In response to commenters’ concerns, 

the Commission is adopting the 

proposed amendments to the 

instructions but not adopting the 

‘‘catchall’’ requirement to which 

commenters objected. Eliminating the 

catchall will remove ambiguity in the 

rule. In addition, the Commission is 

adding language to the instructions as 

amended that divide government 

securities into three classes: sovereigns, 

United States public finance, and 

international public finance. This will 

make the performance statistics for 

these classes of credit ratings more 

meaningful, since the types of rated 

obligors and instruments in each class 

will be more similar. 

As proposed, the first amendment to 

the Exhibit 1 instructions also would 

require an NRSRO registered in the class 

of credit ratings described in Section 

3(a)(62)(B)(iv) of the Rating Agency 

Act 21 (or an applicant seeking 

registration in that class) when 

generating the performance statistics for 

that class to include credit ratings of any 

security or money market instrument 

issued by an asset pool or as part of any 

asset-backed or mortgage-backed 

securities transaction. This was 

designed to include ratings actions for 

credit ratings of structured finance 

products that do not meet the narrower 

statutory definition of ‘‘issuers of assetbacked securities (as that term is 

defined is section 1101(c) of part 229 of 

title 17, Code of Federal 

Regulations).’’ 22 The Commission 

received no comment on this aspect of 

the amendment and is adopting it as 

proposed. 

This first amendment to the Exhibit 1 

instructions, modified as described 

above, will result in the generation of 

performance statistics that will make it 

easier for users of credit ratings to 

compare the accuracy of NRSRO credit 

ratings on a class-by-class basis. For the 

reasons discussed, the Commission is 

adopting the amendment to the 

instructions with the modifications 

described above. 

As proposed, the second amendment 

to the Exhibit 1 instructions would 

require that the class-by-class 

disclosures be broken out over 1, 3 and 

10-year periods. Section 15E(a)(1)(B)(i) 

of the Exchange Act requires that the 

performance statistics be over short, 

mid, and long-term periods, which is 

also the language currently used in 

Form NRSRO.23 The purpose of this 

amendment was to prescribe periods in 

specific years so that the performance 

statistics generated by the NRSROs are 

more easily comparable. 

The Commission received 12 

comments on the amendment.24 Most of 

the commenters supported the 

amendment, including the 1, 3, and 10 

year time frames. These comments 

supported the Commission’s view that 

1, 3, and 10 year periods are reasonable 

definitions of the terms ‘‘short-term, 

mid-term, and long-term periods’’ as 

used in Section 15E(a)(1)(B)(i) of the 

Exchange Act.25 Commenters believed 

the proposed statistics would provide 

investors additional information to 

make informed investment decisions.26

Several commenters asked that the 

Commission clarify whether the default 

rates were for the most recent 1, 3, and 

10 year periods or the average over 

multiple 1, 3, and 10 year periods.27 The 

Commission intended the default 

statistics to be for the most recent 1, 3, 

and 10 year periods. The Commission is 

adopting the amendment to the 

instructions as proposed. 

As proposed, the third amendment to 

the Exhibit 1 instructions would clarify 

the type of ratings actions that are 

required to be included in these 

performance measurement statistics. 

Specifically, it would change the 

instruction requiring that the 

performance statistics show ‘‘downgrade and default rates’’ with an 

instruction that they show ‘‘ratings 

transition and default rates.’’ The switch 

to ‘‘ratings transition’’ rates from 

‘‘downgrade’’ rates was designed to 

clarify that upgrades (as well as 

downgrades) should be included when 

generating the statistics. The 

Commission did not receive any 

comments on this amendment to the 

instructions and is adopting it as 

proposed. 

Finally, the Commission proposed an 

amendment to the instructions of 

Exhibit 1 that would specify that the 

default statistics required under the 

exhibit must show defaults relative to 

the initial rating and incorporate 

defaults that occur after a credit rating 

is withdrawn. The proposed 

amendment was designed to prevent an 

NRSRO from manipulating the 

performance statistics by not including 

defaults when generating statistics for a 

category of credit ratings (e.g., AA) 

because the defaults occur after the 

rating is downgraded to a lower category 

(e.g., CC) or withdrawn. 

Commenters raised a number of 

concerns about how this proposal 

would operate in practice.28 Several 

commenters expressed concern that the 

requirement to include defaults 

occurring after a rating is withdrawn 

could obligate an NRSRO to monitor 

ratings for an indefinite period of time 

after the NRSRO stops rating such 

instruments, and that an NRSRO may 

not be able to provide such statistics 

after a rating is withdrawn.29 Two 

NRSROs noted that the ability to 

monitor ratings depends on the ability 

of the NRSRO to obtain information that 

an event of default has occurred and 

that this may be impractical given 

limited access to information once a 

rating is withdrawn.30 Another NRSRO 

believed that the proposal was 

overbroad and outside the scope of the 

Commission’s authority, asserting that it 

intrudes upon the substance of the 

NRSRO’s rating procedures.31 The 

Commission agrees that, given the 

limited information available to 

NRSROs following the withdrawal of a 

rating, requiring the inclusion in these 

statistics of defaults occurring after a 

rating is withdrawn may be problematic. 

Therefore, the Commission is not 

adopting this provision at this time. 

While the instructions to Exhibit 1 will 

continue to require default statistics that 

are relative to initial rating on a classby-class basis, for the reasons discussed 


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32 17 CFR 240.17g–3. 

33 15 U.S.C. 78o–7(a)(1)(B)(ii). 

34Specifically, the instructions require an NRSRO 

to provide descriptions of the following areas (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; the 

quantitative and qualitative models and metrics 

used to determine credit ratings; the methodologies 

by which credit ratings of other credit rating 

agencies are treated to determine credit ratings for 

securities or money market instruments issued by 

an asset pool or as part of any asset-backed or 

mortgaged-backed securities transaction; the 

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.’’ See 

Form NRSRO Instructions for Exhibit 2. 

35See NCRC Letter; Second SIFMA Letter; MICA 

Letter; ASF Letter. 

36See Second SIFMA Letter; ASF Letter. 

37See ASF Letter; Multiple-Markets Letter; NCRC 

Letter. 

above, the amendment as adopted does 

not require the inclusion of defaults that 

occur after a credit rating is withdrawn 

in those statistics. As an alternative 

means of achieving the Commission’s 

goals in proposing this amendment, the 

Commission notes that, as discussed 

below, ratings withdrawals must be 

included among the ratings actions to be 

disclosed under the Commission’s 

amendment to Rule 17g–3,32 which 

requires an annual report of all ratings 

actions taken during the year within a 

class of credit ratings. This information 

will be useful in determining whether 

the number of ratings actions in a given 

class is unusually large and, if so, the 

need for a review of the causes of any 

significant changes to that number— 

including, potentially, a 

disproportionate amount of ratings 

withdrawals. 

2. Enhanced Disclosure of Ratings 

Methodologies 

Exhibit 2 to Form NRSRO elicits the 

information required by Section 

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

information regarding the procedures 

and methodologies used by the credit 

rating agency to determine credit 

ratings.33 The instructions for the 

Exhibit require a description of the 

procedures and methodologies (not the 

submission and disclosure of each 

actual procedure and methodology). The 

instructions further provide that the 

description must be sufficiently detailed 

to provide users of credit ratings with an 

understanding of the processes the 

applicant or NRSRO employs to 

determine credit ratings. The 

instructions also identify a number of 

areas that must be addressed in the 

description to the extent they are 

applicable.34

The Commission proposed amending 

the instructions to Exhibit 2 to add three 

additional areas that an applicant and a 

registered NRSRO would need to 

address in the descriptions of its 

procedures and methodologies in 

Exhibit 2 to the extent they are 

applicable. The three proposed areas 

that would need to be addressed by an 

applicant and NRSRO were: 

• Whether and, if so, how 

information about verification 

performed on assets underlying or 

referenced by a security or money 

market instrument issued by an asset 

pool or as part of any asset-backed or 

mortgage-backed securities transaction 

is relied on in determining credit 

ratings; 

• Whether and, if so, how 

assessments of the quality of originators 

of assets underlying or referenced by a 

security or money market instrument 

issued by an asset pool or as part of any 

asset-backed or mortgage-backed 

securities transaction play a part in the 

determination of credit ratings; and 

• How frequently credit ratings are 

reviewed, whether different models or 

criteria are used for ratings surveillance 

than for determining initial ratings, 

whether changes made to models and 

criteria for determining initial ratings 

are applied retroactively to existing 

ratings, and whether changes made to 

models and criteria for performing 

ratings surveillance are incorporated 

into the models and criteria for 

determining initial ratings. 

The comments submitted on the first 

proposed amendment to the instructions 

to Exhibit 2 were supportive of the 

proposal.35 Commenters generally 

supported the second proposed 

amendment as well.36 Likewise, 

commenters were supportive of the 

third proposed amendment. They stated 

that it would be particularly helpful to 

retail investors and that all investors 

would benefit from knowing what 

ratings have undergone surveillance by 

the NRSRO.37

The Commission is adopting the first 

amendment to the instructions to 

Exhibit 2 as proposed. This amendment 

requires an NRSRO to disclose whether 

and, if so, how information about 

verification performed on the assets is 

relied on in determining credit ratings 

for structured finance products. The 

Commission believes this disclosure 

will benefit users of credit ratings by 

providing information about the 

potential accuracy of an NRSRO’s credit 

ratings. NRSROs determine credit 

ratings for structured finance products 

based on assumptions in their models as 

to how the assets underlying the 

instruments will perform under varying 

levels of stress. These assumptions are 

based on the characteristics of the assets 

(e.g., value of the property, income of 

the borrower) as reported by the 

arranger of the structured finance 

product. If this information is 

inaccurate, the capacity of the model to 

predict the potential future performance 

of the assets may be significantly 

impaired. Consequently, information 

about whether an NRSRO requires that 

some level of verification be performed 

or takes other steps to account for the 

lack of verification or a low level of 

verification will be useful to users of 

credit ratings in assessing the potential 

for an NRSRO’s credit ratings to be 

adversely impacted by inaccurate 

information about the assets underlying 

a rated structured finance product. 

The Commission is adopting the 

second amendment to the instructions 

to Exhibit 2 as proposed. This 

amendment requires an NRSRO to 

disclose whether it considers qualitative 

assessments of the originator of assets 

underlying a structured finance product 

in the rating process for such products. 

The Commission believes that certain 

qualities of an asset originator, such as 

its experience and underwriting 

standards, may impact the quality of the 

loans it originates and the accuracy of 

the associated loan documentation. 

This, in turn, could influence how the 

assets ultimately perform and the ability 

of the NRSRO’s models to predict their 

performance. Consequently, the failure 

to perform any assessment of the loan 

originators could increase the risk that 

an NRSRO’s credit ratings may not be 

accurate. Therefore, disclosures as to 

whether the NRSRO performs any 

qualitative assessments of the 

originators would be useful in 

comparing the efficacy of the NRSROs’ 

procedures and methodologies. 

The Commission is adopting the third 

amendment to the instructions to 

Exhibit 2 as proposed. This amendment 

requires an NRSRO to disclose the 

frequency of its surveillance efforts and 

how changes to its quantitative and 

qualitative ratings models are 

incorporated into the surveillance 

process. The Commission believes that 

users of credit ratings will find 

information about these matters useful 

in comparing the ratings methodologies 

of different NRSROs. For example, how 

often and with what models an NRSRO 

monitors its credit ratings would be 


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6460 Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Rules and Regulations 

38See Section 15E(a)(1)(B)(x) of the Exchange Act 

(15 U.S.C. 78o–7(a)(1)(B)(x)). 39See 17 CFR 240.17g–2. 

40See Re-proposed Rules for Nationally 

Recognized Statistical Rating Organizations, 

Exchange Act Release No. 59343 (February 2, 2009) 

(‘‘Companion Proposing Release’’). 

relevant to assessing the accuracy of the 

ratings inasmuch as ratings based on 

stale information and outdated models 

may not be as accurate as ratings of like 

products using newer data and models. 

Moreover, with respect to new types of 

rated obligors and debt securities, the 

NRSROs refine their models as more 

information about the performance of 

these obligors and debt securities is 

observed and incorporated into their 

assumptions. Consequently, as the 

models evolve based on more robust 

performance data, credit ratings of 

obligors or debt securities determined 

using older models may be at greater 

risk for being inaccurate than the newer 

ratings. Therefore, whether the NRSRO 

verifies the older ratings using the 

newer methodologies would be useful to 

users of credit ratings in assessing the 

accuracy of the credit ratings. 

The Commission notes that, unlike 

the prior two changes, this new 

instruction applies to all classes of 

credit ratings for which the NRSRO 

determines credit ratings (not solely to 

structured products). For the reasons 

noted above, the Commission is 

adopting this amendment as proposed. 

The Commission is adopting these 

amendments to the instructions to 

Exhibit 2 to Form NRSRO, in part, 

under authority to require such 

additional information in the 

application as it finds necessary or 

appropriate in the public interest or for 

the protection of investors.38 The 

Commission believes the new disclosure 

requirements are necessary and 

appropriate and in the public interest or 

for the protection of investors. 

Specifically, they are designed to 

provide greater clarity around three 

areas of the NRSROs’ rating processes 

where questions have been raised, 

particularly for structured finance 

products, in the context of the credit 

market turmoil: Namely, the verification 

performed on information provided in 

loan documents; the quality of loan 

originators; and the surveillance of 

existing ratings and how changes to 

models are applied to existing ratings. 

The amendments are designed to 

enhance the disclosures NRSROs make 

in these areas and, thereby, allow users 

of credit ratings to better evaluate the 

quality of their ratings processes. 

B. Amendments to Rule 17g–2 

Rule 17g–2 requires an NRSRO to 

make and retain certain records relating 

to its business and to retain certain 

other business records made in the 

normal course of business operations.39

The rule also prescribes the time 

periods and manner in which these 

records are required to be retained. The 

Commission is adopting amendments to 

Rule 17g–2 to require NRSROs to make 

and retain certain additional records 

and to require that a portion of these 

new records be made publicly available. 

1. A Record of Rating Actions and the 

Requirement That They Be Made 

Publicly Available 

The Commission proposed an 

amendment that would require an 

NRSRO to make and retain a record of 

the ratings history of each outstanding 

credit rating as well as an amendment 

that would require the NRSRO to make 

the ratings histories contained in the 

record publicly available on its 

corporate Web site in eXtensible 

Business Reporting Language (‘‘XBRL’’) 

electronic format, with each new ratings 

action to be made public no later than 

six months after the date of the rating 

action. The Commission is adopting the 

amendment with substantial changes in 

part to address concerns raised by 

commenters. 

As adopted, paragraph (a)(8) to Rule 

17g–2 requires an NRSRO to make and 

retain a record for each outstanding 

credit rating it maintains showing all 

rating actions (initial rating, upgrades, 

downgrades, placements on watch for 

upgrade or downgrade, and 

withdrawals) and the date of such 

actions identified by the name of the 

security or obligor rated and, if 

applicable, the CUSIP for the rated 

security or the Central Index Key (CIK) 

number for the rated obligor. This full 

record of credit rating histories will be 

maintained by the NRSRO as part of its 

internal records that are available to 

Commission staff. 

In addition, paragraph (d) to Rule 

17g–2, as amended, requires that an 

NRSRO make publicly available, on a 

six-month delayed basis, a random 

sample of 10% of the issuer-paid credit 

ratings and their histories documented 

pursuant to paragraph (a)(8) for each 

class of credit rating for which the 

NRSRO is registered and has issued 500 

or more ratings paid for by the obligor 

being rated or by the issuer, 

underwriter, or sponsor of the security 

being rated. Consequently, the final rule 

only requires the disclosure of ratings 

histories for a limited number of 

outstanding credit ratings and only if 

they are issuer-paid credit ratings. 

Generally, NRSROs make their issuerpaid credit ratings publicly available for 

free. 

NRSROs also obtain revenues by 

selling subscriptions to their credit 

ratings. Certain NRSROs derive their 

credit rating revenues solely or 

predominantly from selling 

subscriptions to their credit ratings. 

These NRSROs determine credit ratings 

that are not paid for by the obligor being 

rated or by the issuer, underwriter, or 

sponsor of the security being rated 

(‘‘subscriber-paid credit ratings’’). 

Generally, NRSROs do not make their 

subscriber-paid credit ratings publicly 

available for free. 

The Commission believes it is 

appropriate at this time to adopt a rule 

that will accomplish much of what the 

Commission sought to achieve in the 

proposal, mindful of the many 

comments about the proposal’s potential 

impact. In addition, in a companion 

release,40 the Commission is proposing 

additional means of accomplishing even 

more of the Commission’s objective of 

providing information to the 

marketplace in order to gauge the 

accuracy of ratings over time. Both the 

rule adopted today and the re-proposal 

are designed to foster accountability and 

comparability—and hence, 

competition—among NRSROs. 

As noted above, NRSROs generally 

make their issuer-paid credit ratings 

publicly available for free. Currently, 

while these rating actions are made 

public free of charge, it may be difficult 

to compile the actions and compare 

them across NRSROs. Therefore, the 

Commission expects that making this 

information more accessible will 

advance the Commission’s goal of 

fostering accountability and 

comparability among NRSROs with 

respect to their issuer-paid credit 

ratings. Furthermore, the Commission 

notes that issuer-paid credit ratings 

account for over 98% of the outstanding 

credit ratings issued by NRSROs, 

according to information furnished by 

NRSROs in Form NRSRO. Moreover, 

seven of the ten registered NRSROs 

currently maintain 500 or more issuerpaid credit ratings in at least one class 

of credit ratings for which they are 

registered. Consequently, applying this 

rule to issuer-paid ratings should result 

in a substantial amount of new 

information for users of credit ratings. It 

also will allow market observers to 

begin analyzing the information and 

developing performance metrics based 

on it. 

The Commission is mindful of the 

potential impact on NRSROs that 


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41See Realpoint Letter; Rapid Ratings Letter. 

42See S&P Letter. 

43The Commission notes that the ability of 

NRSROs to comply with the amended rule depends 

on the availability of the List of XBRL Tags for 

NRSROs on the Commission’s Web page. If the 

publication of those materials is delayed, the 

Commission will consider delaying compliance 

with the rule. 

44See Section 17(a)(1) of the Exchange Act (15 

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

45See Nappier Letter; ICI Letter; RBDA Letter; R&I 

Letter; Moody’s Letter; ABA Business Law 

Committee Letter; Realpoint Letter; CMSA Letter; 

DBRS Letter; ABA Letter; Council Letter; S&P 

Letter; Second SIFMA Letter; Pollock Letter; IBFED 

Letter; Egan Jones Letter; Fitch Letter; ASF Letter; 

Multiple-Markets Letter; CFA Institute Letter; Rapid 

Ratings Letter; AFP Letter; Colorado PERA Letter; 

R&I Letter; DBA Letter; NCRC Letter; Citi Letter; 

Raingeard Letter. 

46See, e.g., AFP Letter; Colorado PERA Letter. 

47See Second SIFMA Letter. 

48See Multiple-Markets Letter; CFA Institute 

Letter; ICI Letter; RBDA Letter; NCRC Letter. 

49See Realpoint Letter; S&P Letter; Pollock Letter; 

Multiple-Markets Letter. 

50See DBRS Letter. 

51See R&I Letter; ABA Business Law Committee 

Letter; DBRS Letter; S&P Letter; Fitch Letter; ASF 

Letter; Multiple-Markets Letter; AFP Letter; 

Moody’s Letter. 

determine issuer-paid credit ratings. 

Therefore, the Commission has taken a 

number of steps to minimize the impact 

on NRSROs and enable them to be able 

to continue to sell downloads and data 

feeds of their current credit ratings. For 

example, an NRSRO subject to the 

disclosure requirement would not be 

required to disclose a rating action taken 

with respect to an outstanding credit 

rating until six months after the action 

occurs. 

In addition, by requiring NRSROs to 

publicly disclose ratings action histories 

for a limited percentage of their 

outstanding issuer-paid credit ratings, 

market participants, academics and 

others should still be able to use the 

information to perform analysis 

comparing how the NRSROs subject to 

the disclosure rule perform in the 

classes of credit ratings for which they 

are registered. This process will be 

facilitated by the requirement that the 

ratings actions data be provided in 

XBRL format, which will provide a 

uniform standard format for presenting 

the information and allow users to 

dynamically search and analyze the 

information. This should facilitate the 

processing of the information and 

enhance the ability of users to compare 

information across different NRSROs 

subject to the disclosure by ratings 

classes. The Commission believes the 

random 10% of ratings histories and 500 

ratings per class thresholds will result 

in the disclosure of a sample suitable for 

performing statistical analyses of 

NRSRO performance generally with 

respect to issuer-paid credit ratings. 

NRSROs that sell subscriber-paid 

credit ratings have suggested that 

requiring all the histories of these 

ratings to be publicly disclosed could 

reduce competition by putting them out 

of business or adversely impacting their 

business.41 They stated that this would 

be the case even with a substantial time 

lag between the date a rating action is 

taken and the date the action must be 

publicly disclosed. An NRSRO that 

determines issuer-paid credit ratings 

stated that ratings history data has 

substantial commercial value even after 

6 months.42 The Commission wants 

further input on this issue before 

deciding on whether the rule should 

also apply to subscriber-paid credit 

ratings. As noted above, the 

Commission, in a separate release, is 

seeking comment on whether to impose 

additional means of increasing the 

amount of information publicly 

available with respect to the ratings 

histories of subscriber-paid credit 

ratings. The Commission wants to 

carefully balance the commercial and 

competitive concerns expressed by 

NRSROs that determine subscriber-paid 

credit ratings with the Commission’s 

objective of fostering accountability and 

comparability among all NRSROs. 

Therefore, in that release, the 

Commission asks detailed questions 

about the potential impact of applying 

the rule to subscriber-paid credit 

ratings. The responses to those 

questions will inform the Commission’s 

deliberations as to whether this rule 

ultimately should be expanded to cover 

subscriber-paid credit ratings. 

The amended rule further provides 

that the information must be made 

public on the NRSRO’s corporate 

Internet Web site in XBRL format. The 

rule provides that in preparing the 

XBRL disclosure, an NRSRO must use 

the List of XBRL Tags for NRSROs as 

specified on the Commission’s Web site. 

In order to allow NRSROs subject to this 

requirement sufficient time to 

implement this new disclosure 

requirement and the Commission time 

to develop the List of XBRL Tags for 

NRSROs, the compliance date of the 

amendment to paragraph (d) is delayed 

until 180 days after publication in the 

Federal Register.43

The Commission is adopting these 

amendments, in part, under authority to 

require NRSROs to make and keep for 

specified periods such records as the 

Commission prescribes as necessary or 

appropriate in the public interest, for 

the protection of investors, or otherwise 

in furtherance of the purposes of the 

Exchange Act.44 The Commission 

believes the new recordkeeping and 

disclosure requirements are necessary 

and appropriate in the public interest 

and for the protection of investors, or 

otherwise in furtherance of the purposes 

of the Exchange Act. The internal record 

of the complete ratings histories of each 

outstanding credit rating required under 

new paragraph (a)(8) of Rule 17g–2 will 

be useful to the Commission in 

performing its examination and 

oversight functions. The data could be 

analyzed to determine if NRSROs are 

following their own methodologies in 

their ratings actions and whether 

additional disclosure is necessary. This 

could provide valuable information that 

could be indicative of problems in the 

ratings process unrelated to the 

analytical process, such as conflicts of 

interest. The Commission notes that this 

recordkeeping requirement applies to all 

credit ratings regardless of whether they 

are issuer-paid or subscriber-paid. The 

disclosure requirements will assist users 

of credit ratings to compare the relative 

performance of NRSROs that determine 

issuer-paid credit ratings. This could 

enhance competition by making it easier 

for smaller NRSROs to develop proven 

track records of determining accurate 

credit ratings. 

The Commission received numerous 

comments on the proposed amendments 

to paragraphs (a)(8) and (d) to Rule 17g– 

2 as proposed.45 Many commenters 

expressed support for the proposal, 

stating that the proposed rule would be 

a meaningful step in furthering 

competition in the credit rating industry 

and could benefit the investor 

community.46 One commenter 

suggested that the proposed rule should 

require the sorting of records by classes 

of credit ratings and that the six month 

time lag should be reduced.47 Other 

commenters suggested either reducing 48

or lengthening 49 the proposed six 

month time lag. 

One NRSRO supported the proposal 

but believed the record of ratings 

histories should be limited to 10 years.50

The Commission notes that in order to 

make the information more meaningful, 

users seeking to analyze NRSRO 

performance should be able to review 

the entire history of a given rating. 

Imposing a time limit—and therefore 

eliminating the ability to compare a 

current rating against the initial rating— 

would curtail the usefulness of this 

information. 

A number of commenters raised 

substantial concerns with the 

proposal.51 For example, NRSROs and 

others noted that NRSROs that 

determine subscriber-paid credit ratings 


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6462 Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Rules and Regulations 

52See ABA Business Law Committee Letter; 

Realpoint Letter; Pollock Letter; Egan-Jones Letter; 

Multiple-Markets Letter; Rapid Ratings Letter; AFP 

Letter; R&I Letter; Moody’s Letter. 

53See S&P Letter; Moody’s Letter. 

54See S&P Letter; Egan-Jones Letter; Fitch Letter; 

R&I Letter; 

55See, e.g., DBRS Letter, Moody’s Letter. 

56See Fitch Letter; DBRS Letter; Multiple-Markers 

Letter; CFA Institute Letter; ICI Letter; R&I Letter; 

Moody’s Letter. 

make the ratings available for a fee.52

These commenters argued that requiring 

them to make all the ratings publicly 

available for free—even with a six 

month time lag—could cause them to 

lose subscribers. 

Commenters also raised concerns that 

requiring an NRSRO that determines 

issuer-paid credit ratings to make all 

ratings actions available free of charge 

in a machine readable format would 

cause them to lose revenues they derive 

from selling downloadable packages of 

their credit ratings.53 These commenters 

also questioned whether the 

requirement would be permitted under 

the U.S. Constitution, arguing that it 

could be considered a taking of private 

property without compensation.54

The Commission is adopting 

paragraph (a)(8) to Rule 17g–2, the 

recordkeeping provision, substantially 

as proposed, but, as noted above, has 

made substantial changes to paragraph 

(d), the public disclosure provision. 

Specifically, rather than disclose the 

ratings history for each outstanding 

credit rating, an NRSRO must disclose, 

in XBRL format and on a six-month 

delay, ratings action histories for a 

randomly selected sample of 10% of the 

outstanding credit ratings for each rating 

class for which the NRSRO has issued 

500 or more ratings paid for by the 

obligor being rated or by the issuer, 

underwriter, or sponsor of the security 

being rated. 

The Commission believes that by 

limiting the ratings actions histories that 

need to be disclosed to a random 

selection of 10% of outstanding credit 

ratings, applying the requirement to 

issuer-paid credit ratings only, and 

allowing for a six-month delay before a 

ratings action is required to be 

disclosed, the amendment as adopted 

addresses the concerns among 

commenters that the rule would cause 

them to lose revenue. With respect to 

NRSROs that earn revenues from issuerpaid credit ratings but sell access to 

packages of the ratings as well, the 

Commission believes that customers 

that are willing to pay for full and 

immediate access to downloadable 

information for all of an NRSRO’s 

ratings actions are unlikely to 

reconsider their purchase of that 

product due to the ability to access 

ratings histories for 10% of the NRSRO’s 

outstanding issuer-paid credit ratings 

selected on a random basis and 

disclosed with a six-month time lag. 

The 500 ratings threshold and random 

selection are designed to provide a 

sufficient sample of data upon which to 

draw reasonable inferences about the 

quality of ratings generally issued by 

NRSROs. The random 10% sample of 

issuer-paid credit ratings and six month 

time lag are designed to make it less 

likely that current purchasers of data 

about issuer-paid credit ratings could 

reliably find the information they want, 

and so NRSROs could continue to sell 

downloads and data feeds of the credit 

ratings. As such, the Commission 

believes that the changes made to the 

amendment address the commenters’ 

concerns while still facilitating greater 

accountability for issuer-paid NRSROs, 

enhanced third-party development of 

performance measurement statistics for 

issuer-paid credit ratings, and increased 

competition among all NRSROs. 

The Commission has decided not to 

impose the same disclosure obligation 

on subscriber-paid credit ratings at this 

time out of competitive concerns raised, 

but is still considering how to make 

more information publicly available and 

accessible about the performance of 

these ratings. The Commission believes 

that the rule as adopted will address the 

concerns expressed by commenters and 

at the same time foster greater 

accountability of NRSROs with respect 

to their issuer-paid credit ratings as well 

as increase competition among NRSROs 

by making it easier for persons to 

analyze the actual performance of their 

credit ratings. 

The amendment as adopted also will 

require that the data be made available 

in XBRL format, using the List of XBRL 

Tags for NRSROs as specified on the 

Commission’s Web site. Several 

NRSROs provided information arguing 

that an XBRL format could be 

particularly costly and that the burden 

on smaller NRSROs could be 

particularly acute.55 They suggested that 

if the Commission adopted the rule as 

proposed, that the Commission allow 

NRSROs sufficient time to develop the 

necessary systems to implement the 

XBRL format or, in the alternative, to 

implement this required disclosure as a 

pilot program.56

The Commission believes, however, 

that the XBRL format will benefit 

market participants seeking to develop 

their own performance statistics using 

the ratings history data to be made 

public by the NRSROs. Requiring 

NRSROs to make histories of ratings 

actions for issuer-paid credit ratings 

publicly available using the interactive 

data format rather than using other 

machine readable format will enable 

market participants, academics and 

others to analyze this information more 

quickly, more accurately, and at a lower 

cost. The Commission believes that this 

will enhance the ability of end-users to 

compare the rating performance of 

different NRSROs, which will foster 

NRSRO competition. 

For purposes of the internal records 

required by new paragraph (a)(8), the 

NRSRO will be required to keep its 

records up to date to reflect the 

complete ratings history of each 

outstanding credit rating (including the 

current rating). However, for purposes 

of the requirement to make publicly 

available ratings action histories for a 

random sample of 10% of outstanding 

issuer-paid credit ratings in each class 

of credit rating for which the NRSRO is 

registered and has 500 or more such 

credit ratings outstanding, the NRSRO 

will be permitted to delay disclosure of 

a rating action for six months. As noted 

above, this limited disclosure and the 

six month time lag is expected to 

mitigate the concerns regarding the loss 

of revenues that NRSROs derive from 

selling data feeds and downloadable 

packages of their current outstanding 

issuer-paid credit ratings and histories 

of the ratings. 

Because NRSROs withdraw ratings 

and rated instruments mature, the 

number of ratings made public in a 

particular class may fall below the 10% 

threshold. In order to continue to make 

a large sample of information publicly 

available, the Commission is requiring 

NRSROs to replenish the sample when 

it falls below 10%. Consequently, 

paragraph (d) of Rule 17g–2 provides 

that the NRSRO must replace a rating 

that rolls off for these reasons with a 

new randomly selected rating from the 

impacted class of credit ratings. In order 

to protect against the possibility of 

‘‘cherry picking’’ ratings that may make 

the performance of the NRSRO more 

favorable, the Commission believes it is 

important that both the initial selection 

and any replenishment of ratings be 

randomly selected. The Commission is 

not specifying how the NRSROs must 

randomly select the initial ratings 

disclosed under paragraph (d) of Rule 

17g–2 or how they must randomly select 

ratings going forward to maintain the 

10% sample. The Commission believes 

the NRSROs should develop a selection 

process that they can demonstrate to be 

random. 

Finally, the Commission is adopting 

amendments to the instructions to 

Exhibit 1 of Form NRSRO to require that 


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57See Section 17(a)(1) of the Exchange Act (15 

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

58 June 5, 2007 Adopting Release, 72 FR at 33582. 59 17 CFR 240.17g–6. Rule 17g–6 prohibits an 

NRSRO from engaging in certain unfair, abusive or 

coercive practices such as issuing a credit rating 

that is not determined in accordance with the 

NRSRO’s established procedures and 

methodologies for determining credit ratings based 

on whether the rated person will purchase the 

credit rating. See 17 CRF 240.17g–6(a)(2). 

60See CMSA Letter; DBRS Letter; Council Letter; 

S&P Letter; Second SIFMA Letter; Fitch Letter; 

Lockyer Letter; ASF Letter; Multiple-Markets Letter; 

CFA Institute Letter; Rapid Ratings Letter; AFP 

Letter; Colorado PERA Letter; R&I Letter; Moody’s 

Letter; ABA Business Law Committee Letter; DBA 

Letter; NCRC Letter. 

61See Council Letter; Second SIFMA Letter; CFA 

Institute Letter; AFP Letter; Colorado PERA Letter; 

DBA Letter NCRC Letter. 

62See DBRS Letter; S&P Letter; Rapid Ratings 

Letter; R&I Letter; Moody’s Letter; ABA Business 

Law Committee Letter. 

63See, e.g., DBRS Letter. 

64See Moody’s Letter. 

65See CMSA Letter. 

66For example, the Commission believes the 

expected loss and cash flow models used by the 

NRSROs to rate RMBS and CDOs are substantial 

components of the rating process. 

NRSROs subject to the new 

requirements of Rule 17g–2(d) as 

amended disclose the Web address 

where the XBRL Interactive Data File 

with the required information can be 

accessed. The Commission did not 

receive any comments on this aspect of 

the proposal and is adopting the 

requirement with modifications to 

reflect the modifications to the final rule 

discussed above. This rule amendment 

is designed to inform persons who use 

credit ratings where the sample of 

ratings histories for each class of issuerpaid credit ratings for which the NRSRO 

is registered can be obtained. 

2. A Record of Material Deviation From 

Model Output 

The Commission proposed amending 

paragraph (a)(2) of Rule 17g–2 to require 

NRSROs to make a record documenting 

the rationale when a final credit rating 

materially deviates from the rating 

implied by a quantitative model used in 

the rating process if the model was a 

substantial component of the rating 

process. Under this paragraph, as 

amended, if a quantitative model was a 

substantial component in the process of 

determining the credit rating of a 

security or money market instrument 

issued by an asset pool or as part of any 

asset-backed or mortgage-backed 

securities transaction, the NRSRO is 

required to make a record of the 

rationale for any material difference 

between the credit rating implied by the 

model and the final credit rating issued. 

The purpose of this rule is to enhance 

the recordkeeping process in order to 

enable Commission staff, as well as an 

NRSRO’s internal auditors, to 

understand the methodologies through 

which analysts developed the credit 

rating issued by the NRSRO. 

The Commission is adopting this 

amendment, in part, under authority to 

require NRSROs to make and keep for 

prescribed periods such records as the 

Commission prescribes as necessary or 

appropriate in the public interest, for 

the protection of investors, or otherwise 

in furtherance of the purposes of the 

Exchange Act.57 The Commission 

believes this new recordkeeping 

requirement is necessary and 

appropriate in the public interest and 

for the protection of investors, or 

otherwise in furtherance of the purposes 

of the Exchange Act. 

Specifically, the Commission believes 

that maintaining records identifying the 

rationale for material divergences from 

the ratings implied by qualitative 

models used as a substantial component 

in the ratings process will assist the 

Commission in evaluating whether an 

NRSRO is adhering to its disclosed 

procedures for determining ratings. As 

the Commission has noted, ‘‘books and 

records rules have proven integral to the 

Commission’s investor protection 

function because the preserved records 

are the primary means of monitoring 

compliance with applicable securities 

laws.’’ 58 In the absence of such a 

recordkeeping requirement, there may 

be no way to determine whether an 

NRSRO adhered to its stated 

methodologies for obtaining a certain 

category of credit rating (e.g. AAA) as 

indicated by the model results, that is, 

whether adjustments to the result 

implied by the model were made by 

applying appropriate qualitative factors 

permitted under the NRSRO’s 

documented procedures or because of 

undue influence from the person 

seeking the credit rating or other 

inappropriate reasons such as those 

prohibited by Rule 17g–6, including the 

prohibition on issuing or modifying 

credit ratings for unfair, abusive or 

coercive reasons. The new 

recordkeeping requirement will allow 

Commission staff to review whether an 

NRSRO is adhering to its disclosed 

procedures for determining structured 

finance ratings and complying with 

Rule 17g–6.59

The Commission received 18 

comments addressing this proposal.60

Many commenters strongly supported 

the proposal.61 NRSROs and others, 

however, expressed concern over the 

possibility that the rule could lead to 

the regulation of the substance of ratings 

and the overemphasis of quantitative 

models at the expense of applying 

qualitative factors.62 These commenters 

argued that the model is just one tool in 

the rating process and that the proposal 

may lead to generalizations of models in 

order to avoid material differences.63

One commenter noted that this record 

may cause examiners to ignore the role 

qualitative factors play in developing 

ratings.64 Another commenter noted 

that models are not as integral to the 

process of rating commercial mortgagebacked securities.65

In part in response to these 

comments, the Commission has 

narrowed the application of the rule to 

ratings of structured finance products. 

This will lessen the recordkeeping 

burden on an NRSRO and address 

commenters’ concerns that the 

requirement could have negative effects 

on the ratings process for other classes 

of credit ratings where qualitative 

analysis is predominant and models 

have a more marginal role. 

Further, the Commission does not 

believe that the requirement will cause 

NRSROs to abandon qualitative analysis 

when determining credit ratings for 

structured finance products. The 

Commission does not believe that the 

record-making required by the 

amendment will be extensive. For 

example, if the NRSRO’s methodologies 

permit an analyst to adjust required 

credit enhancement levels up or down 

for the various tranches of a structured 

finance issuer based on certain 

qualitative factors, the NRSRO could 

document the rationale for any material 

difference between the credit rating 

implied by the model and the final 

rating by describing the qualitative 

factor or factors that were relied on. In 

addition to benefiting the Commission’s 

regulatory and oversight functions, this 

requirement may serve to assist analysts 

in ensuring that their use of qualitative 

factors follows the procedures 

documented in the NRSRO’s 

methodologies. 

The Commission also notes that the 

NRSROs will be responsible for making 

the determination of when a model 

constitutes a ‘‘substantial component’’ 

of the rating process as well as when a 

difference between the rating issued and 

the rating implied by the model is 

‘‘material.’’ NRSROs should document 

in their ratings methodologies the 

models they deem to be substantial 

components of a ratings process for 

structured finance products and the 

magnitude of deviation from the rating 

implied by the model and rating issued 

that they deem material.66

For the foregoing reasons, the 

Commission is adopting the rule with 

the modification discussed above. 


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6464 Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Rules and Regulations 

67See Section 17(a)(1) of the Exchange Act (15 

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

68See Council Letter; S&P Letter; MBA Letter; 

Fitch Letter; CFA Institute Letter; Rapid Ratings 

Letter; AFP Letter; Colorado PERA Letter; Moody’s 

Letter. 

69See Moody’s Letter; S&P Letter. 

70See S&P Letter. 71 17 CFR 240.17g–2(b)(7). 72See S&P Letter; Multiple-Markets Letter; CFA 

Institute Letter; Rapid Ratings Letter; Moody’s 

Letter. 

73 June 16, 2008 Proposing Release, 73 FR at 

36234. 

74See S&P Letter; Fitch Letter; Multiple-Markets 

Letter; ICI Letter; Rapid Ratings Letter; AFP Letter; 

Moody’s Letter; ABA Business Law Committee 

Letter; NCRC Letter; Raingeard Letter. 

75See Fitch Letter. 

76 15 U.S.C. 78c(a)(62)(B)(iv). 

77See Moody’s Letter. 

3. Records Concerning Third-Party 

Analyst Complaints 

The Commission proposed adding a 

new paragraph (b)(8) to Rule 17g–2 

requiring NRSROs to retain records of 

any complaints about the performance 

of a credit analyst. The Commission is 

adopting this amendment with the 

modifications discussed below. Under 

this paragraph, an NRSRO is required to 

retain any written communications 

received from persons not associated 

with the NRSRO that contain 

complaints about the performance of a 

credit analyst in initiating, determining, 

maintaining, monitoring, changing, or 

withdrawing a credit rating. The 

purpose of this rule is to allow 

Commission examiners the opportunity 

to review external complaints and how 

the NRSRO addressed them. 

The Commission is adopting this 

amendment, in part, under authority to 

require NRSROs to make and keep for 

prescribed periods such records as the 

Commission prescribes as necessary or 

appropriate in the public interest, for 

the protection of investors, or otherwise 

in the furtherance of the Exchange 

Act.67 The Commission believes this 

requirement is necessary and 

appropriate in the public interest and 

for the protection of investors, or 

otherwise in furtherance of the 

Exchange Act, because it will assist 

Commission examiners in reviewing 

how NRSROs handle the conflicts 

inherent in the issuer-pay and 

subscriber-pay models: Namely, that 

clients have an economic interest in the 

ratings issued by the NRSRO and may 

seek to influence the rating process by 

complaining about an analyst who does 

not issue ratings favorable to that 

interest. Commission examiners will be 

able to review the complaint file and 

follow-up with the relevant persons 

within the NRSRO as to how a 

particular complaint was handled. The 

potential for such a review by 

Commission examiners could reduce 

the willingness of an NRSRO to reassign or terminate a credit analyst to 

placate a client that desires a different 

rating. 

Commenters generally supported the 

proposal.68 Some commenters requested 

clarification that rule does not require 

the retention of oral communications.69

The Commission did not intend the rule 

to apply to oral communications. 

Consequently, the rule text has been 

modified to clarify that it only applies 

to ‘‘written’’ communications. One 

NRSRO expressed concern that privacy 

and labor laws in some non-U.S. 

jurisdictions would prevent monitoring 

of an employee’s electronic 

communications.70 The Commission 

intended the rule to apply to 

communications received by the 

NRSRO from outside parties such as 

subscribers or persons who pay to 

obtain credit ratings. The amendment 

was not intended to require the 

retention of complaints sent internally 

between, for example, employees of the 

NRSRO. The Commission has clarified 

the rule’s scope in this regard by 

specifying that it only applies to 

complaints from persons not associated 

with the NRSRO. 

For the foregoing reasons, the 

Commission is adopting the proposed 

rule with the modifications discussed 

above. 

4. Clarifying Amendment to Rule 17g– 

2(b)(7) 

Paragraph (b)(7) of Rule 17g–2 

currently requires an NRSRO to retain 

all internal and external 

communications that relate to 

‘‘initiating, determining, maintaining, 

changing, or withdrawing a credit 

rating.’’ 71 The Commission proposed to 

add the word ‘‘monitoring’’ to this list. 

The intent was to clarify that NRSRO 

recordkeeping rules extend to all 

aspects of the credit rating surveillance 

process as well as the initial rating 

process. This was the intent when the 

Commission originally adopted the rule 

as indicated by the use of the term 

‘‘maintaining.’’ The Commission 

believes that adding the term 

‘‘monitoring’’—a term of art in the credit 

rating industry—will better clarify this 

requirement. The Commission received 

5 comments on this proposed 

amendment, all of which were 

supportive of the change.72 The 

Commission is adopting this 

amendment as proposed. 

C. Amendment to Rule 17g–3 (Report of 

Credit Rating Actions) 

Rule 17g–3 requires an NRSRO to 

furnish the Commission on an annual 

basis the following reports: Audited 

financial statements; unaudited 

consolidated financial statements of the 

parent of the NRSRO, if applicable; an 

unaudited report concerning revenue 

categories of the NRSRO; an unaudited 

report concerning compensation of the 

NRSRO’s credit analysts; and an 

unaudited report listing the largest 

customers of the NRSRO. The rule 

further requires an NRSRO to furnish 

the Commission these reports within 90 

days of the end of its fiscal year. The 

Commission proposed amending the 

rule to require a report showing the 

number of rating actions taken by the 

NRSRO during the fiscal year in each 

class of credit rating for which the 

NRSRO is registered. In the June 16, 

2008 Proposing Release, the 

Commission indicated that a ‘‘credit 

rating action’’ includes upgrades, 

downgrades, or placements of the rating 

on watch for an upgrade or 

downgrade.73

The Commission received 10 

comments on this proposal.74

Commenters were generally supportive 

of the proposal. One commenter 

recommended that the final rule should 

make clear what is meant by ‘‘class of 

credit rating’’ and establish a 

measurement period.75 The Commission 

notes that the rule requires the report to 

cover each of the classes of credit rating 

identified in Section 3(a)(62)(B)(iv) of 

the Rating Agency Act 76 for which the 

NRSRO is applying for registration or is 

registered. Further, as discussed below, 

the note to the paragraph clarifies that 

for the purposes of this requirement, the 

asset-backed securities class must 

include all structured finance products. 

The Commission further notes that the 

measurement period is on a fiscal year 

basis. 

One commenter believed that the 

proposal is unclear or overbroad 

regarding the scope of a report on 

‘‘credit rating actions.’’ This commenter 

also noted its belief that the proposed 

rule was inappropriate because ratings 

changes are not financial statements, 

and stated that the proposed 

requirement should be relocated to Rule 

17g–2.77 In response, the Commission 

notes that it is adopting this 

requirement, in part, under authority to 

require an NRSRO to ‘‘make and 

disseminate such reports as the 

Commission, by rule, prescribes as 

necessary or appropriate in the public 

interest, for the protection of investors, 


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Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Rules and Regulations 6465 

78See Section 17(a)(1) of the Exchange Act (15 

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

79 15 U.S.C. 78c(a)(62)(B)(iv). 

80See June 16, 2008 Proposing Release, 73 FR at 

36234. 81 17 CFR 240.17g–3; see also, June 5, 2007 

Adopting Release, 72 FR at 33592. 82See June 16, 2008 Proposing Release, 73 FR at 

36235. 

83 Id, 73 FR at 36226–36228. The Commission 

also proposed amendments to paragraphs (a) and (b) 

of Rule 17g–5 that would require an NRSRO to 

manage the conflict of being repeatedly paid by 

arrangers of structured finance products by 

prohibiting the NRSRO from rating such a product 

unless, among other things, information about the 

underlying assets was disseminated to persons not 

involved in the rating process. Id, 73 FR at 36219– 

36226. The Commission received many thoughtful 

comments on the proposal that identified 

substantial issues as to how the proposed 

amendments would operate in practice. The 

Commission is re-proposing the amendments in a 

separate release. See Companion Proposing Release. 

84See MICA Letter; ICI Letter; Rapid Ratings 

Letter; ABA Business Law Committees Letter; NCRC 

Letter; Nappier Letter; Egan-Jones Letter; Lockyer 

Letter; RBDA Letter; Moody’s Letter; A.M. Best 

Letter; Euler Letter; Realpoint Letter; CMSA Letter; 

LIUNA Letter; DBRS Letter; Council Letter; DPW 

Letter; S&P Letter; Second SIFMA Letter; IBFED 

Letter; MBA Letter; Fitch Letter; ASF Letter; Trepp 

Letter; CFA Institute Letter; Roundtable Letter; 

Colorado PERA Letter; CGSH Letter; SPA Letter; 

R&I Letter; CreditSights Letter; DBA Letter; Citi 

Letter; Lehman Letter; Raingeard Letter; JCR Letter; 

Second Realpoint Letter. 

or otherwise in furtherance of the 

purposes of [the Exchange Act].’’ 78

The Commission is adopting this 

amendment by adding paragraph (a)(6) 

to Rule 17g–3. Paragraph (a)(6) requires 

an NRSRO to provide the Commission 

with an unaudited report of the number 

of credit rating actions (upgrades, 

downgrades, placements on credit 

watch, and withdrawals) during the 

fiscal year in each class of credit rating 

for which the NRSRO is registered with 

the Commission. As proposed, the 

Commission did not identify the types 

of credit rating actions that should be 

used to generate the report. Instead, it 

identified them in the preamble as being 

upgrades of credit ratings, downgrades 

of credit ratings, placements of credit 

ratings on watch for an upgrade or 

downgrade. The final rule text identifies 

the types of ratings actions that should 

be included in order to provide greater 

clarity. In addition, the Commission is 

adding ‘‘withdrawals’’ to the types of 

credit rating actions that must be 

included in the ‘‘credit ratings actions’’ 

reported by the NRSRO. The 

Commission views a withdrawal as a 

‘‘credit rating action’’ since ceasing to 

monitor a credit rating is a significant 

change to the rating and, as such, is 

comparable to a downgrade, upgrade 

and placement on watch in terms of the 

potential impact on the rated obligor or 

security. Moreover, the inclusion of 

withdrawals in the report addresses the 

concerns that led the Commission to 

propose requiring that withdrawals be 

included in the default statistics 

generated for Exhibit 1 to Form NRSRO. 

As discussed above, NRSROs raised 

substantial compliance concerns with 

the proposal to require withdrawals in 

the performance statistics. This change 

is intended to address their concerns 

regarding that proposed amendment 

while at the same time ensuring that any 

disproportionate amount of ratings 

withdrawals in a class of ratings will be 

captured in the ratings action 

information provided to the 

Commission for examination and 

oversight purposes. 

The new rule includes a note to 

paragraph (a)(6) clarifying that for the 

purposes of reporting credit rating 

actions in the asset-backed security 

class of credit ratings described in 

Section 3(a)(62)(B)(iv) of the Rating 

Agency Act 79 an NRSRO must include 

credit rating actions on any security or 

money market instrument issued by an 

asset pool or as part of any asset-backed 

or mortgage-backed securities 

transaction. As discussed in the June 16, 

2008 Proposing Release, this note is 

designed to ensure the inclusion of 

information about ratings actions for 

credit ratings of structured finance 

products that do not meet the narrower 

statutory definition of ‘‘issuers of assetbacked securities (as that term is 

defined is section 1101(c) of part 229 of 

title 17, Code of Federal 

Regulations).’’ 80 The Commission also 

notes that the report required under 

paragraph (a)(6) to Rule 17g–3 will be 

furnished to the Commission on a 

confidential basis, to the extent 

permitted by law, consistent with the 

other reports furnished to the 

Commission under Rule 17g–3.81

The Commission believes this 

amendment is necessary and 

appropriate in the public interest, for 

the protection of investors, or otherwise 

in furtherance of the purposes of the 

Exchange Act because it will assist the 

Commission in its examination function 

of NRSROs. Large spikes in ratings 

actions within a class of credit ratings 

could indicate the processes for 

determining the ratings may be 

compromised by inappropriate factors. 

For example, a substantial increase in 

the number of downgrades in a 

particular class of credit rating may be 

indicative of the fact that the initial 

ratings were higher than the NRSRO’s 

procedures and methodologies would 

have implied because the NRSRO 

sought to gain favor with issuers and 

underwriters by issuing higher ratings. 

A substantial increase in upgrades also 

could be the result of the NRSRO 

attempting to gain favor with issuers 

and underwriters. 

As discussed in the June 16, 2008 

Proposing Release, the Commission 

recognizes that an increase in the 

number of ratings actions in a particular 

class of credit rating may be the result 

of macroeconomic factors broadly 

impacting the rated obligors or 

securities.82 In this case, the ratings 

actions are presumably the result of 

appropriate credit analysis and not 

inappropriate extraneous factors. On the 

other hand, large numbers of actions 

could be a signal that the process for 

rating and monitoring ratings in the 

impacted class has been compromised 

by improper practices such as failing to 

adhere to disclosed and internally 

documented ratings procedures and 

methodologies, having prohibited 

conflicts, failing to establish reasonable 

procedures to manage conflicts, or 

engaging in unfair, coercive, or abusive 

conduct. Consequently, the Commission 

expects that the report will be a valuable 

tool to improve the focus of examination 

resources. For these reasons, the 

Commission is adopting the amendment 

with the modifications described above. 

D. Amendments to Rule 17g–5 

Rule 17g–5 identifies a series of 

conflicts arising from the business of 

determining credit ratings. Under the 

rule, some of these conflicts must be 

disclosed and managed, while others are 

prohibited outright. In the June 16, 2008 

Proposing Release, the Commission 

identified three additional conflicts that 

would be prohibited under paragraph 

(c) of the rule.83 The Commission 

received a number of comments on the 

proposed amendments.84 As discussed 

below, the Commission is adopting the 

amendments but with revisions 

designed in part to address concerns 

raised by commenters. 

1. Rule 17g–5 Prohibition on Conflict of 

Interest Related to Rating an Obligor or 

Debt Security Where the Obligor or 

Issuer Received Ratings 

Recommendations From the NRSRO or 

Person Associated With the NRSRO 

The Commission proposed adding a 

new paragraph (c)(5) to Rule 17g–5 

prohibiting the conflict that arises when 

an NRSRO or its affiliate makes 

recommendations on how to achieve a 

desired rating and then rates the obligor 

or debt instrument that was the subject 

of the recommendations. The final rule 

being adopted adds this new paragraph 

to Rule 17g–5. Under this paragraph, an 

NRSRO is prohibited from issuing or 

maintaining a credit rating with respect 


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6466 Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Rules and Regulations 

85 15 U.S.C. 78o–7(h)(2). 

86 Id. 

87See e.g., Testimony of Professor John C. Coffee, 

Jr., Adolf A. Berle Professor of Law, Columbia 

University Law School, before the U.S. Senate 

Committee on Banking, Housing, and Urban Affairs 

(September 26, 2007), pp. 2–3. 

88See Realpoint Letter; CMSA Letter; LIUNA 

Letter; DBRS Letter; JCR Letter; Council Letter; DPW 

Letter; S&P Letter; Second SIFMA Letter; IBFED 

Letter; Nappier Letter; MBA Letter; Fitch Letter; 

Lockyer Letter; ASF Letter; Multiple-Markets Letter; 

CFA Institute Letter; ICI Letter; RBDA Letter; 

Roundtable Letter; Rapid Ratings Letter; AFP Letter; 

Colorado PERA Letter; CGSH Letter; SPA Letter; 

R&I Letter; Moody’s Letter; ABA Business Law 

Committees Letter; DBA Letter; NCRC Letter; 

Raingeard Letter; A.M. Best Letter. 

89See, e.g., CMSA Letter; LIUNA Letter; DBRS 

Letter; JCR Letter; Second SIFMA Letter; IBFED 

Letter; MBA Letter; Fitch Letter; Roundtable Letter; 

AFP Letter. 

90 June 16, 2008 Proposing Release, 73 FR at 

36226. 91See, e.g., Fitch Letter, JCR Letter. 

to an obligor or security where the 

NRSRO or a person associated with the 

NRSRO made recommendations to the 

obligor or the issuer, underwriter, or 

sponsor of the security about the 

corporate or legal structure, assets, 

liabilities, or activities of the obligor or 

issuer of the security. The purpose of 

this rule is to address the potential lack 

of impartiality that could arise when an 

NRSRO determines a credit rating based 

on a corporate structure that was 

developed after consultations with the 

NRSRO or its affiliate on how to achieve 

a desired credit rating. In simple terms, 

the rule prohibits an NRSRO from rating 

its own work or the work of an affiliate. 

The Commission is adopting this 

amendment to Rule 17g–5, in part, 

pursuant to the authority in Section 

15E(h)(2) of the Exchange Act.85 This 

section of the statute provides the 

Commission with authority to prohibit, 

or require the management and 

disclosure of, any potential conflict of 

interest relating to the issuance of credit 

ratings by an NRSRO.86 The 

Commission believes this amendment is 

necessary and appropriate in the public 

interest and for the protection of 

investors because it addresses a practice 

that could impair the objectivity, and, 

correspondingly, the quality, of a credit 

rating. It has been suggested that during 

the process of rating structured finance 

products the NRSROs have 

recommended to arrangers how to 

structure a trust or complete an asset 

pool to receive a desired credit rating 

and then rated the securities issued by 

the trust—in effect, rating their own 

work.87 This amendment will prohibit 

this conduct based on the Commission’s 

belief that it creates a conflict that 

cannot be effectively managed 

insomuch as it would be very difficult 

for an NRSRO to remain objective when 

assessing the creditworthiness of an 

obligor or debt security where the 

NRSRO or person associated with the 

NRSRO made recommendations about 

steps the obligor or issuer of the security 

could take to obtain a desired credit 

rating. 

The Commission received 33 

comments addressing this proposal.88

Most of the comments supported the 

proposal, although some commenters 

expressed concern that the provision 

may limit appropriate dialogue between 

an NRSRO and a person seeking a credit 

rating or subject to an existing rating.89

Several commenters asked that the 

Commission clarify the type of 

communications that would be 

acceptable feedback during the ratings 

process. As stated in the June 16, 2008 

Proposing Release, it is not the 

Commission’s intent to prohibit the flow 

of information between an NRSRO and 

the obligor, issuer, underwriter, or 

sponsor during the rating process.90 For 

example, the Commission does not view 

an explanation by an NRSRO of the 

assumptions and rationales it uses to 

arrive at ratings decisions and how they 

apply to a given rating transaction as a 

recommendation. Consequently, in the 

case of a residential mortgage-backed 

security, an NRSRO, after putting the 

underlying assets through an expected 

loss model run, may communicate the 

results to the sponsor and discuss how 

loan characteristics such as FICO scores, 

geographic concentrations, or loan-tovalue ratios may have driven the results. 

The Commission recognizes that 

providing this type of information 

during the rating process allows the 

person seeking the rating to make 

adjustments in response to the 

information provided by the NRSRO. 

However, the free flow of information 

between the NRSRO and the person 

increases the transparency of the rating 

process. Moreover, NRSROs generally 

make their models available to persons 

seeking ratings. Sponsors of structured 

finance securities can run potential 

asset pools through the models before 

bringing the transactions to the NRSRO 

to be rated. This gives them an 

understanding of the rating that the 

NRSRO likely will determine, 

particularly with respect to more 

standardized structured finance 

products. The Commission believes this 

level of transparency before and during 

the rating process benefits the credit 

markets by allowing participants to gain 

an understanding and, ultimately, to 

assess the methodologies used by the 

NRSROs. The alternative—restricting 

the flow of information—would make 

the rating process more opaque. 

The Commission notes, however, that 

if the feedback process turns into 

recommendations by the NRSRO about 

changes to the structure, assets, 

liabilities or activities of the obligor or 

security that the person seeking the 

rating potentially could make to obtain 

a desired credit rating, the NRSRO 

would be in violation of the new rule. 

For example, in the case of a residential 

mortgage-backed security, the NRSRO 

would not be prohibited from informing 

the sponsor that the expected loss 

model indicated that the underlying 

loan pool was too concentrated in a 

certain geographic region to receive the 

desired rating given the level of credit 

enhancement proposed. On the other 

hand, if an analyst recommends how to 

change the composition of the loans in 

the pool to achieve the desired rating, 

the NRSRO would be making a 

recommendation about the assets of the 

issuer and, consequently violate the 

rule. The sponsor must take the model 

results from the NRSRO and decide 

independently how to adjust the asset 

pool to achieve the desired rating. If 

changes are made, the NRSRO will run 

the new pool through the model as if it 

were a new transaction and report the 

results to the sponsor. 

Some argue that even this process of 

providing sponsors with information 

they can use to make adjustments 

during the rating process should be 

prohibited. The Commission disagrees 

because locking down the structure 

prior to the rating process could have 

serious adverse consequences. Investors 

seek securities with specific credit 

ratings. If sponsors cannot make 

adjustments to obtain those ratings, then 

the securities ultimately issued and 

rated may not be marketable. 

The Commission understands that 

NRSROs are concerned about how to 

draw the line between permissible and 

unlawful communication of 

information.91 In response, the 

Commission notes that NRSROs who 

provide the greatest clarity to the 

marketplace about their ratings 

methodologies will need to provide less 

explanation during the ratings process. 

Thus, NRSROs can mitigate the risk that 

communications during the rating 

process will violate the rule by 

enhancing their disclosures about their 

ratings methodologies, including about 

the qualitative factors they consider and 

the quantitative models and the 

assumptions underlying those models 

they employ. For these reasons, the 

Commission believes the new 

prohibition creates a strong incentive for 

NRSROs to improve their disclosures, 


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Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Rules and Regulations 6467 

92See, e.g., Realpoint Letter; DPW Letter; S&P 

Letter; ICI Letter; Colorado PERA Letter; R&I Letter; 

Moody’s Letter. 

93See, e.g., Fitch Letter; Moody’s Letter. 

94See June 16, 2008 Proposing Release, 73 FR at 

36226. 

95See, e.g., Lockyer Letter, RBDA Letter, A.M. 

Best Letter. 

96 17 CFR 240.17g–5. 

97 June 16, 2008 Proposing Release, 73 FR at 

36226–36228. 

98 15 U.S.C. 78o–7(h)(2). 

99 Id. 

100See Realpoint Letter; CMSA Letter; LIUNA 

Letter; DBRS Letter; S&P Letter; Nappier Letter; 

Fitch Letter; ASF Letter; Multiple-Markets Letter; 

CFA Institute Letter; ICI Letter; Rapid Ratings 

Letter; AFP Letter; Colorado PERA Letter; Moody’s 

Letter; ABA Business Law Committees Letter; NCRC 

Letter; Raingeard Letter; A.M. Best Letter. 

101See, e.g., S&P Letter; Fitch Letter; A.M Best 

Letter. A copy of the IOSCO code is available at 

http://www.iosco.org. 

which, in turn, will benefit the users of 

credit ratings and, by extension, the 

credit markets. 

Some commenters stated that this 

conflict should not be prohibited but, 

instead, included among the conflicts 

that must be disclosed and managed.92

Several commenters also suggested that 

the conflict should not be prohibited 

when the affiliate (as opposed to the 

NRSRO) makes the recommendation. 

The commenters suggested that 

measures such as information barriers 

could address the conflict adequately 

without the need to prohibit it 

outright.93 The Commission believes 

that an NRSRO cannot remain objective 

when rating its own work or that of an 

affiliate. As stated in the June 16, 2008 

Proposing Release, the Commission 

believes it would be difficult for the 

NRSRO to remain objective if an affiliate 

were providing advice to obligors, 

issuers and sponsors about how to 

obtain desired credit ratings because the 

financial success of the affiliate would 

depend on issuers getting the ratings 

they sought after taking steps 

recommended by the affiliate.94 This 

may create undue pressure on the 

NRSRO’s credit analysts to determine 

credit ratings that favored the affiliate. 

The Commission believes this pressure 

may undermine protective measures 

such as information barriers between 

the NRSRO and the affiliate as they both 

would be under the common control of 

a group that benefited from the 

affiliate’s financial success. 

Finally, several commenters requested 

that the Commission clarify whether 

this conflict applies only to structured 

finance ratings or whether it applies to 

all ratings classes.95 The Commission 

intends that this prohibited conflict 

would apply across all ratings classes. 

For the reasons discussed above, the 

Commission is adopting the amendment 

as proposed. 

2. Rule 17g–5 Prohibition on Conflict of 

Interest Related to the Participation of 

Certain Personnel in Fee Discussions 

The Commission proposed 

prohibiting the conflict that arises when 

persons within an NRSRO responsible 

for determining credit ratings or 

developing methodologies for 

determining credit ratings participate in 

fee discussions. The final rule being 

adopted adds a new paragraph (c)(6) to 

Rule 17g–5.96 Under this paragraph, an 

NRSRO is prohibited from issuing or 

maintaining a credit rating where the fee 

paid for the rating was negotiated, 

discussed, or arranged by a person 

within the NRSRO who has 

responsibility for participating in 

determining or approving credit ratings 

or for developing or approving 

procedures or methodologies used for 

determining credit ratings, including 

qualitative and quantitative models. The 

purpose of this rule is to remove the 

persons most directly involved in 

making the judgments that credit ratings 

are based on from fee negotiations and, 

thereby, insulate them from a process 

that could make them more or less 

favorably disposed toward a client or 

class of clients. 

As proposed, the rule did not 

explicitly mention persons involved in 

approving credit ratings, although it 

implicitly included them by including 

persons involved in ‘‘determining’’ 

credit ratings.97 The Commission notes 

that both determiners and approvers 

engage in analysis that results in a final 

rating, and the Commission intends 

them both to be covered by prohibitions 

aimed at protecting the integrity of this 

process. Therefore, the Commission is 

clarifying today that for the purposes of 

Rule 17g–5, the terms ‘‘determine,’’ 

‘‘determined,’’ and ‘‘determining’’ 

include both persons who develop 

credit ratings and persons who approve 

credit ratings. This clarification reflects 

the Commission’s intent when it 

proposed the rule and is designed to 

remove any potential ambiguity that 

could arise if some of the Rule 17g–5 

prohibitions cover persons who 

determine and approve credit ratings 

and others only cover persons who 

determine credit ratings. 

The Commission is adopting this 

amendment to Rule 17g–5, in part, 

pursuant to the authority in Section 

15E(h)(2) of the Exchange Act.98 This 

section of the statute provides the 

Commission with authority to prohibit, 

or require the management and 

disclosure of, any potential conflict of 

interest relating to the issuance of credit 

ratings by an NRSRO.99 The 

Commission believes this amendment is 

necessary and appropriate in the public 

interest or for the protection of investors 

because it addresses a potential practice 

that could impair the objectivity, and, 

correspondingly, the quality, of a credit 

rating. This amendment is designed to 

effectuate the separation within the 

NRSRO of persons involved in fee 

discussions from persons involved in 

the credit rating analytical process. 

While the incentives of the persons 

discussing fees could be based primarily 

on generating revenues for the NRSRO; 

the incentives of the persons involved 

in the analytical process should be 

based on determining accurate credit 

ratings. There is a significant potential 

for these distinct incentive structures to 

conflict with one another when persons 

within the NRSRO are engaged in both 

activities. 

The potential consequences are that a 

credit analyst or person responsible for 

approving credit ratings or credit rating 

methodologies could, in the context of 

negotiating fees, let business 

considerations undermine the 

objectivity of rating process. For 

example, an individual involved in a fee 

negotiation with an issuer might not be 

impartial when it comes to rating the 

issuer’s securities. In addition, persons 

involved in approving the 

methodologies and processes used to 

determine credit ratings could be 

reluctant to adjust a model to make it 

more conservative if doing so would 

make it more difficult to negotiate fees 

with issuers. For these reasons, the 

Commission believes that this conflict 

should be prohibited. 

The Commission received 19 

comments addressing this proposal, 

most of which supported its goal.100

NRSROs, while agreeing in principle 

with the rule, raised a number of 

questions. First, several NRSROs 

suggested that the Commission revise 

the language of the amendment to 

conform to the International 

Organization of Securities Commissions’ 

‘‘Code of Conduct Fundamentals for 

Credit Rating Agencies’’ (the ‘‘IOSCO 

Code’’).101 The IOSCO Code provides 

that credit rating agencies ‘‘should not 

have employees who are directly 

involved in the rating process initiate, 

or participate in, discussions regarding 

fees or payments with any entity they 

rate.’’ The Commission believes, 

however, that the IOSCO Code 

provision would be insufficient to 

accomplish the goal of fully effectuating 

the separation within NRSROs of 

persons involved in fee discussions 


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102See, e.g., S&P Letter; Fitch Letter; A.M. Best 

Letter. 

103See, e.g., DBRS Letter; ASF Letter; MultipleMarkets Letter; Moody’s Letter. 

104See, e.g., DBRS Letter; Multiple-Markets 

Letter; CFA Institute Letter; Colorado PERA Letter; 

ABA Business Law Committees Letter. 

105See, e.g., Fitch Letter; Rapid Ratings Letter; 

Moody’s Letter. 

106See Order Granting Temporary Exemption of 

LACE Financial Corp. from the Conflict of Interest 

Prohibition in Rule 17a–5(c)(1) of the Securities 

Exchange Act of 1934, Exchange Act Release No. 

57301 (February 11, 2008); Order Granting 

Temporary Exemption of Realpoint LLC from the 

Conflict of Interest Prohibition in Rule 17a–5(c)(1) 

under the Securities Exchange Act of 1934, 

Exchange Act Release No. 58001 (June 23, 2008). 

107 17 CFR 240.17g–5. 

108See June 16, 2008 Proposing Release, 73 FR at 

36227–36228. 

109 15 U.S.C. 78o–7(h)(2). 

110 Id. 

111See S&P Letter; Nappier Letter; Lockyer Letter; 

ASF Letter; Multiple-Markets Letter; CFA Institute 

Letter; ICI Letter; Roundtable Letter; Rapid Ratings 

Letter; AFP Letter; R&I Letter; Moody’s Letter; ABA 

Business Law Committees Letter; Foutch Letter; 

DBA Letter; NCRC Letter; Raingeard Letter; A.M. 

Best Letter. 

112See Moody’s Letter. 

113See, e.g., S&P Letter, Moody’s Letter. 

114See, e.g., S&P Letter; Roundtable Letter; R&I 

Letter; Moody’s Letter. 

from persons involved in the credit 

rating analytical process. In particular, 

the IOSCO Code’s language would allow 

persons involved in approving the 

methodologies and processes used to 

determine credit ratings to negotiate 

ratings fees, which could make them 

reluctant to adjust a model to make it 

more conservative if doing so would 

make it more difficult to negotiate fees 

with issuers. 

In addition, other commenters, 

including the NRSROs, asked that the 

Commission clarify that the prohibition 

does not apply to internal 

communications.102 They stated that 

senior managers (some of whom may be 

covered by the prohibition) participate 

in internal discussions relating to fees to 

ensure that a fee charged is in 

proportion to the work performed by the 

NRSRO. The Commission recognizes 

that credit analysts may need to provide 

information on expected staffing and 

resource requirements to the persons 

involved in fee discussions so the latter 

can factor such information into the fees 

charged. 

Some commenters stated that this 

conflict should be subject to the 

requirement to disclose and manage, as 

opposed to being prohibited.103 The 

Commission disagrees for several 

reasons. There does not appear to be a 

compelling reason for credit analysts 

and model developers to participate in 

fee discussions. Furthermore, their 

involvement in that process creates 

greater risk that they will develop a 

favorable or negative view of the client 

or a class of clients based on how the 

negotiations proceed. This could 

influence the judgment they exercise in 

determining credit ratings or developing 

credit rating methodologies. 

Several commenters noted that small 

NRSROs may need to have some 

analysts or model developers participate 

in fee discussions given their staffing 

levels.104 These commenters suggested 

that the rule should include an 

exemption for such NRSROs.105 The 

Commission agrees that the rule could 

potentially raise difficulties in certain 

circumstances for an NRSRO with a 

small staff. Consequently, the 

Commission will review requests by 

small NRSROs for exemptions from the 

rule under Section 36 of the Exchange 

Act based on their specific 

circumstances. The Commission notes 

that it has provided two small NRSROs 

with temporary exemptive relief from 

the prohibition in Rule 17g–5 against 

receiving 10% or more of their net 

revenues from a single client.106

For the reasons discussed, the 

Commission is adopting the amendment 

as proposed and clarifies, as noted 

above, that persons responsible for 

‘‘approving’’ credit ratings are covered 

by the prohibition as well as the 

provisions of Rule 17g–5 as a whole. 

3. Rule 17g–5 Prohibition of Conflict of 

Interest Related to Receipt of Gifts 

The Commission proposed adding a 

new paragraph (c)(7) to Rule 17g–5 107

prohibiting the conflict that arises when 

persons responsible for determining or 

approving credit ratings receive gifts 

from the persons being rated or the 

sponsors of the persons being rated.108

The final rule being adopted includes 

this new paragraph. Under this 

paragraph, an NRSRO is prohibited from 

issuing or maintaining a credit rating 

where a credit analyst who participated 

in determining or monitoring the credit 

rating, or a person responsible for 

approving the credit rating received 

gifts, including entertainment, from the 

obligor being rated, or from the issuer, 

underwriter, or sponsor of the securities 

being rated, other than items provided 

in the context of normal business 

activities such as meetings that have an 

aggregate value of no more than $25. 

The purpose of this rule is to eliminate 

the potential undue influence that gifts 

can have on those responsible for 

determining credit ratings. 

The Commission is adopting this 

amendment to Rule 17g–5, in part, 

pursuant to the authority in Section 

15E(h)(2) of the Exchange Act.109 This 

section of the statute provides the 

Commission with authority to prohibit, 

or require the management and 

disclosure of, any potential conflict of 

interest relating to the issuance of credit 

ratings by an NRSRO as the Commission 

deems necessary or appropriate in the 

public interest or for the protection of 

investors.110 The Commission believes 

the amendment is necessary and 

appropriate in the public interest or for 

the protection of investors because it 

addresses a potential practice that could 

impair the objectivity, and, 

correspondingly, the quality, of a credit 

rating. 

The Commission received 18 

comments on the proposed amendment, 

most of which agreed in principle with 

the proposal.111 One commenter 

suggested that this conflict should be 

disclosed and managed instead of 

prohibited.112 The Commission 

disagrees because other than in the most 

obvious cases it would be very difficult 

to determine whether an analyst was 

swayed by gifts to adjust a rating. 

Persons seeking credit ratings for an 

obligor or debt security could use gifts 

in an attempt to gain favor with the 

analyst. In the case of a substantial gift, 

the potential to impact the analyst’s 

objectivity could be immediate. With 

smaller gifts, the danger is that over 

time the cumulative effect of repeated 

gifts can impact the analyst’s objectivity. 

In either case, there is little ability to 

‘‘manage’’ the analyst’s motivations. 

Therefore, the Commission believes that 

an absolute prohibition on gifts, with 

the exception of minor incidentals such 

as those provided in business meetings, 

is appropriate. 

Several NRSROs noted the potential 

for cultural misunderstandings over the 

proposed gift limit, noting that issuers 

from other countries may be 

embarrassed or offended by the 

prohibition. One NRSRO suggested in 

response that the Commission include 

an exemption or higher dollar threshold 

for gifts from foreign issuers, while 

another cited such potential 

misunderstandings in support of its 

suggestion that the conflict be disclosed 

and managed instead of prohibited.113

The Commission recognizes that a 

prohibition may pose initial difficulties 

with certain foreign issuers but believes 

that over time, and given the uniformity 

of the rule across NRSROs, such issuers 

will come to understand and accept the 

prohibition. 

Several commenters asked that the 

Commission clarify how the $25 limit 

would operate 114 and some suggested a 


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115See, e.g., S&P Letter; CFA Institute Letter; 

Roundtable Letter; ABA Business Law Committees 

Letter; A.M. Best Letter. 

116See, e.g., Lockyer Letter. 

117 44 U.S.C. 3501 et seq.; 5 CFR 1320.11. 

118See June 16, 2008 Proposing Release, 73 FR at 

36236–36241. 

119See Section 15E of the Exchange Act (15 

U.S.C. 78o–7). 

120See amendments to Form NRSRO. 

121 17 CFR 240.17g–2. 

122See Rule 17g–2(a)(8) and (d). 

123See Rule 17g–3(a)(6). 

124See 17 CFR 17g–1 through 17g–6, and Form 

NRSRO. 

125 15 U.S.C. 78o–7. 

126See Senate Report, p. 8. 

127See June 5, 2007 Adopting Release, 72 FR at 

33607. 

128A.M. Best Company, Inc.; DBRS Ltd.; Fitch.; 

Japan Credit Rating Agency, Ltd.; Moody’s; Rating 

and Investment Information, Inc.; S&P; LACE 

Financial Corp.; Egan-Jones Rating Company; and 

Realpoint LLC. 

higher limit such as $50 or $100.115 The 

$25 limit is not designed to be an 

exception to the prohibition on giving 

gifts. Rather, it is intended to permit the 

exchange of items that are incidental to 

routine business interactions such as 

meetings. For example, if an analyst 

meets with an issuer to discuss a credit 

rating, the issuer could provide the 

analyst with note pads, pens and light 

refreshments, provided they did not 

have an aggregate value exceeding $25. 

The Commission notes that the rule is 

not intended to allow an analyst to 

accept a gift, regardless of its value, that 

has no use in conducting the meeting. 

In addition, the Commission wishes to 

clarify that the $25 limit is per analyst 

and per interaction and not a one-time 

or annual limit. 

The Commission also intends that the 

rule be prospective. Therefore, the fact 

that an analyst received a gift from a 

person seeking a credit rating prior to 

the rule’s effective date will not 

preclude the NRSRO from issuing a 

credit rating determined by the analyst. 

Finally, a few commenters asked the 

Commission to clarify whether this 

amendment applied only to structured 

finance ratings or whether it applied to 

all ratings classes.116 The Commission 

believes that there is no reason to limit 

this prohibition to structured finance 

ratings: any person seeking a credit 

rating could attempt to gain favor with 

an analyst responsible for determining 

the credit rating by using gifts. 

Therefore, this prohibition applies 

across all classes of credit ratings. 

For the reasons discussed, the 

Commission is adopting the amendment 

as proposed. 

III. Paperwork Reduction Act 

Certain provisions of the rule 

amendments contain a ‘‘collection of 

information’’ within the meaning of the 

Paperwork Reduction Act of 1995 

(‘‘PRA’’).117 The Commission published 

a notice requesting comment on the 

collection of information requirements 

in the June 16, 2008 Proposing Release 

and submitted the proposed 

amendments to the Office of 

Management and Budget (‘‘OMB’’) for 

review in accordance with the PRA.118

An agency may not conduct or sponsor, 

and a person is not required to comply 

with, a collection of information unless 

it displays a currently valid control 

number. The titles for the collections of 

information are: 

(1) Rule 17g–1, Application for 

registration as a nationally recognized 

statistical rating agency; Form NRSRO 

and the Instructions for Form NRSRO 

(OMB Control Number 3235–0625); 

(2) Rule 17g–2, Records to be made 

and retained by national recognized 

statistical rating organizations (OMB 

Control Number 3235–0628); and 

(3) Rule 17g–3, Annual reports to be 

furnished by nationally recognized 

statistical rating organizations (OMB 

Control Number 3235–0626). 

A. Collections of Information Under the 

Amended Rules 

The Commission is adopting rule 

amendments to prescribe additional 

requirements for NRSROs to address 

concerns that have arisen with respect 

to their role in the credit market 

turmoil. These amendments modify 

rules the Commission adopted in 2007 

to implement registration, 

recordkeeping, financial reporting, and 

oversight rules under the Rating Agency 

Act. Certain of the amendments contain 

recordkeeping and disclosure 

requirements that will be subject to the 

PRA. The collection of information 

obligations imposed by the amendments 

is mandatory. The amendments, 

however, will apply only to credit rating 

agencies that are registered with the 

Commission as NRSROs. Such 

registration is voluntary.119

In summary, the rule amendments 

require: (1) An NRSRO to provide 

enhanced disclosure of performance 

measurements statistics and the 

procedures and methodologies used by 

the NRSRO in determining credit ratings 

for structured finance products and 

other debt securities on Form 

NRSRO; 120 (2) an NRSRO to make, keep 

and preserve additional records under 

Rule 17g–2; 121 (3) an NRSRO to make 

publicly available on its Internet Web 

site in XBRL format a random sample of 

10% of the ratings histories in each 

ratings class for which it is registered 

and has issued 500 or more ratings paid 

for by the obligor being rated or by the 

issuer, underwriter, or sponsor of the 

security being rated, with each new 

ratings action to be reflected in such 

histories no later than six months after 

they are taken; 122 and (4) an NRSRO to 

furnish the Commission with an 

additional annual report.123

B. Proposed Use of Information 

The amendments enhance the 

framework for Commission oversight of 

NRSROs, in part in response to the 

recent credit market turmoil.124 The 

collections of information in the rule 

amendments are designed to further 

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 125 and the rules thereunder. In 

addition, these rule amendments are 

designed to further assist users of credit 

ratings by requiring the disclosure of 

additional information with respect to 

an NRSRO that could be used to 

compare the credit ratings quality of 

different NRSROs, particularly with 

respect to structured finance products. 

The Commission believes that the 

information that NRSROs will be 

required to make public as a result of 

the amendments will advance one of the 

primary objectives of the Rating Agency 

Act, as noted in the accompanying 

Senate Report, to ‘‘facilitate informed 

decisions by giving investors the 

opportunity to compare ratings quality 

of different firms.’’ 126

C. Respondents 

In adopting the final rules under the 

Rating Agency Act, the Commission 

estimated that approximately 30 credit 

rating agencies would be registered as 

NRSROs.127 The Commission believes 

that this estimate continues to be 

appropriate for identifying the number 

of respondents for purposes of the 

amendments. Since the initial set of 

rules under the Rating Agency Act 

became effective in June 2007, ten credit 

rating agencies have registered with the 

Commission as NRSROs.128 The 

registration program has been in effect 

for over a year; consequently, the 

Commission expects additional entities 

will register. While 20 more entities 

may not ultimately register, the 

Commission believes the estimate is 

within reasonable bounds and 

appropriate given that it adds an 

element of conservatism to its 

paperwork burden estimates as well as 

cost estimates. 


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129This total is derived from the total annual 

hours set forth in the order that the totals appear 

in the text: 750 + 70 + 1000 = 1,820. 

130This total is derived from the total one-time 

hours set forth in the order that the totals appear 

in the text: 3,000 + 1,350 + 210 = 4,560. 

131 17 CFR 240.17g–1 and Form NRSRO. 

132 June 16, 2008 Proposing Release, 73 FR at 

36237–36238. 

133 Id. 

134 Id. 

135See Moody’s Letter. 

136 Id. 

137 Id. 

138 Id. 

139These additional areas are: Whether and, if so, 

how information about verification performed on 

assets underlying or referenced by a security or 

money market instrument issued by an asset pool 

or as part of any asset-backed or mortgage-backed 

securities transaction is relied on in determining 

credit ratings; whether and, if so, how assessments 

of the quality of originators of assets underlying or 

referenced by a security or money market 

instrument issued by an asset pool or as part of any 

asset-backed or mortgage-backed securities 

transaction play a part in the determination of 

credit ratings; and how frequently credit ratings are 

reviewed, whether different models or criteria are 

used for ratings surveillance than for determining 

initial ratings, whether changes made to models and 

criteria for determining initial ratings are applied 

retroactively to existing ratings, and whether 

changes made to models and criteria for performing 

ratings surveillance are incorporated into the 

models and criteria for determining initial ratings. 140The instructions further provide that the 

description must be sufficiently detailed to provide 

users of credit ratings with an understanding of the 

processes the applicant or NRSRO employs to 

determine credit ratings. 141 100 hours × 30 NRSROs = 3,000 hours. 

The Commission requested comment 

on all aspects of the proposed estimate 

for the number of respondents. The 

Commission did not receive any 

comments in response to the proposed 

estimate. As discussed above, the 

Commission continues to estimate, for 

purposes of this PRA, that 

approximately 30 credit rating agencies 

will be registered as NRSROs and thus 

will be required to comply. 

D. Total Annual Recordkeeping and 

Reporting Burden 

As discussed in further detail below, 

the Commission estimates the total 

recordkeeping burden resulting from the 

amendments will be approximately 820 

hours on an annual basis 129 and 4,560 

hours on a one-time basis.130

The total annual and one-time hour 

burden estimates described below are 

averages across all types of NRSROs 

expected to be impacted by the rule 

amendments. The size and complexity 

of NRSROs range from small entities to 

entities that are part of complex global 

organizations employing thousands of 

credit analysts. Consequently, the 

burden hour estimates represent the 

average time across all NRSROs. The 

Commission further notes that, given 

the significant variance in size between 

the largest NRSROs and the smallest 

NRSROs, the burden estimates, as 

averages across all NRSROs, are skewed 

higher because the largest firms 

currently predominate in the industry. 

1. Amendments to Form NRSRO 

The amendments to Form NRSRO 

change the instructions for the Form to 

require that NRSROs provide more 

detailed credit ratings performance 

statistics in Exhibit 1 and disclose with 

greater specificity information about the 

procedures and methodologies used to 

determine structured finance and other 

credit ratings in Exhibit 2.131 The total 

annual burden hours currently 

approved by OMB is 2,100, and the total 

one-time burden hours is 10,000. In the 

June 16, 2008 Proposing Release, the 

Commission stated that it expected that 

the proposed amendments would not 

have a material effect on the 

respondents’ hour burden because the 

additional disclosures would be 

included within the overall preparation 

of the initial Form NRSRO for new 

applicants.132 Additionally, in that 

release, the Commission stated it 

believed that the NRSROs currently 

registered would be required to prepare 

and furnish an amended Form NRSRO 

to update their registration applications 

as a result of the adoption of the 

proposed amendments (i.e., as of today 

that would be ten amended Form 

NRSROs).133 However, the Commission 

stated that it believed these potential 

furnishings of Form NRSRO were 

accounted for in the currently approved 

PRA collection for Rule 17g–1, which 

includes an estimate that each NRSRO 

would file two amendments to Form 

NRSRO per year. 

The Commission requested comment 

on all aspects of the burden estimates 

for Rule 17g–1 and Form NRSRO, as 

amended.134 One commenter disagreed 

with the Commission that there would 

be no additional one-time or ongoing 

collection of information burdens for 

NRSROs to provide the additional 

information required in Exhibit 2 to 

Form NRSRO.135 The commenter stated 

that it would need to conduct a survey 

of its practices, synthesize and 

summarize the results of the survey, and 

incorporate the results into Exhibit 2 of 

Form NRSRO.136 The commenter 

estimated that it would take at least 100 

hours to complete a global survey, 

involving compliance personnel, as well 

as senior analysts and their supervisors. 

In addition, the commenter estimated 

that it would take at least 24 hours per 

year on average to collect information 

and another 12 hours per year to 

incorporate descriptions of changes into 

Form NRSRO, as well as an additional 

24 hours per year conducting 

compliance assessments.137 The 

commenter noted, however, that it did 

not consider such one-time and ongoing 

compliance burdens to be excessive.138

As adopted, the amendments to the 

instructions to Exhibit 2 to Form 

NRSRO add three additional areas that 

an applicant and a registered NRSRO 

must address in the descriptions of its 

procedures and methodologies in 

Exhibit 2 to the extent they are 

applicable.139 Because the additional 

requirements, as adopted, require only a 

description of the procedures and 

methodologies, the Commission 

believes that there may have been some 

misinterpretation with respect to the 

actual requirements regarding the 

amendments to Exhibit 2. As stated 

above, the Commission notes that the 

instructions for Exhibit 2 to Form 

NRSRO require only a description of the 

procedures and methodologies that the 

NRSRO actually employs and it does 

not require an NRSRO to adopt specific 

procedures. In addition, it only requires 

a description of the NRSRO’s general 

ratings procedures and methodologies 

as opposed to the submission and 

disclosure of the actual procedures and 

methodologies used to determine credit 

ratings.140

Based on clarifications discussed 

above, the Commission believes that the 

actual time expenditures of NRSROs in 

complying with the rules will be less 

than the commenter’s estimates. 

Nonetheless, the Commission is revising 

the one-time hourly burden estimate 

upward in response to the comment. 

The Commission, based on the comment 

received and staff experience, estimates 

that the average time necessary for an 

applicant or NRSRO to gather the 

information on a one-time basis in order 

to complete the additional disclosures 

required by the amendments to Exhibit 

2 to Form NRSRO will be 100 hours per 

NRSRO, which would be a one-time 

hour burden to the industry of 3,000 

hours.141 The Commission is not 

revising its annual burden because it 

believes that once an NRSRO has 

updated Exhibit 2 to Form NRSRO to 

include descriptions of these aspects of 

its methodologies, any further updates 

would be incremental and the time 

burdens associated with completing the 

updates are reflected in the current 

annual burdens discussed above. 

2. Amendments to Rule 17g–2 

Rule 17g–2 requires an NRSRO to 

make and keep current certain records 


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142 17 CFR 240.17g–2. 143Paragraph (a)(2)(iii) of Rule 17g–2. 144Paragraph (a)(8) of Rule 17g–2. 145Amendment to Rule 17g–2(d). 146Paragraph (b)(8) of Rule 17g–2. 

147See June 16, 2008 Proposing Release, 73 FR at 

36238–36239. 

148See Moody’s Letter. 

149 Id. 

150 Id. 

151 Id. 152 Id. 

relating to its business and requires an 

NRSRO to preserve those and other 

records for certain prescribed time 

periods.142 The amendments to Rule 

17g–2 require an NRSRO to make and 

retain two additional records and to 

retain a third type of record. The records 

to be made and retained are: (1) A 

record of the rationale for any material 

difference between the credit rating 

implied by the model and the final 

credit rating issued, if a quantitative 

model is a substantial component in the 

process of determining a credit rating of 

a security or money market instrument 

issued by an asset pool or as part of any 

asset-backed or mortgage-backed 

securities transaction; 143 and (2) a 

record showing the history and dates of 

all previous rating actions with respect 

to each outstanding credit rating.144 The 

amendments to Rule 17g–2 also require 

an NRSRO to make public, in XBRL 

format and with a six-month grace 

period, the ratings action information 

required under new paragraph (a)(8) for 

a random sample of 10% of the issuer 

paid credit ratings for each ratings class 

for which it has issued 500 or more 

issuer-paid credit ratings.145 In addition, 

the amendments require an NRSRO to 

retain communications from persons not 

associated with the NRSRO that contain 

any complaints by an obligor, issuer, 

underwriter, or sponsor about the 

performance of a credit analyst.146

The Commission requested comment 

in the June 16, 2008 Proposing Release 

on the burdens that would result from 

the proposed amendments to Rule 17g– 

2.147 The Commission received one 

comment regarding the PRA estimate for 

Rule 17g–2.148 This commenter, a large 

NRSRO, stated that the Commission has 

significantly underestimated the initial 

and ongoing recordkeeping burdens 

associated with its proposed changes to 

NRSROs’ recordkeeping 

requirements.149

The same large NRSRO submitted 

comments specific to the proposed 

amendment to Rule 17g–2(d) which 

would have required disclosure of the 

histories of rating actions for 

outstanding credit ratings in an XBRL 

format. The commenter stated that 

developing and agreeing upon the 

taxonomy and tags for an XBRL data file 

would take at least several hundred 

hours over several months or even 

longer and that ongoing maintenance of 

the database could easily exceed two 

months per year.150 The Commission 

notes that the amendment as adopted 

specifies that in making the required 

information available on its Web site, an 

NRSRO will use the List of XBRL Tags 

for NRSROs as specified on the 

Commission’s Web site, thus 

eliminating the need for an NRSRO to 

develop its own taxonomy and tags. In 

addition, as adopted, the amendment to 

Rule 17g–2(d) limits the requirement to 

the disclosure of a random sample of 

10% of the issuer-paid credit rating 

histories for each ratings class for which 

an NRSRO has issued 500 or more 

issuer-paid credit ratings. This is a 

substantial reduction from the amount 

of information that would have been 

required by the amendment as 

proposed. Consequently, the amount of 

time required to comply with the 

amendment to Rule 17g–2(d), as 

adopted, will be significantly reduced 

for what would have been required 

under the proposal. Finally, the 

Commission notes that, in order to 

allow NRSROs sufficient time to 

implement the new disclosure 

requirement of Rule 17g–2(d), as 

amended, the compliance date for that 

amendment will be 180 days after 

publication in the Federal Register. 

In addition to its comments on the 

XBRL portion of the proposed 

amendments to Rule 17g–2, the same 

large NRSRO submitted comments on 

the proposed amendment to Rule 17g– 

2 regarding records of material deviation 

from model output and the recording of 

complaints relating to analysts. With 

respect to the record of material 

deviation from model output, the 

commenter stated it would take 

analysts, supervisors, and senior 

management more than 150 hours to 

determine which quantitative models 

were a ‘‘substantial component’’ in 

determining ratings; 200 hours for 

compliance, legal and IT staff to develop 

policies, amend schedules and modify 

systems to comply with the rule; and 

1,500 hours to develop compliance 

procedures and training materials. On 

an ongoing basis, the commenter 

estimated that it would take 

approximately 60–90 minutes to create, 

approve and file each record related to 

this amendment. Finally, the 

commenter estimated that, on an annual 

basis, it would spend 40 to 80 hours per 

year on compliance reviews and 200 

hours per year on training.151 In 

response to comments on the proposed 

rule language, the Commission 

narrowed the application of Rule 17g– 

2(a)(2)(iii) to ratings of structured 

finance products only. This will lessen 

the recordkeeping burden on an NRSRO 

and be responsive to commenters’ 

concerns that the requirement could 

have negative effects on the ratings 

process for other classes of credit ratings 

where qualitative analysis is 

predominant and models have a more 

marginal role. 

Finally, the same NRSRO commenter 

estimated that with respect to the 

records of complaints about analysts 

under Rule 17g–2(b)(8), it would take 

approximately 100 hours to implement 

the proposed rule, draft a policy, and 

change its systems to capture the 

required records, as well as 1,500 hours 

to develop compliance procedures and 

a training module. On an ongoing basis, 

the commenter estimated it would take 

approximately 10 to 100 hours to 

follow-up and document each 

complaint. Finally, on an annual basis, 

the commenter estimated it would 

spend approximately 40 to 80 hours per 

year on compliance reviews and 150 

hours per year on training.152 With 

respect to this requirement, the 

Commission notes that it intends the 

rule to apply only to communications 

received by the NRSRO from outside 

parties such as subscribers or entities 

that pay to obtain credit ratings. The 

amendment was not intended to require 

the retention of complaints sent 

internally between, for example, 

employees of the NRSRO. Further, the 

Commission has clarified that the rule 

does not apply to oral communications. 

Based on the modifications and 

clarifications discussed above, the 

Commission believes that the actual 

time expenditures of NRSROs in 

complying with the rules will be less 

than the commenter’s estimates. 

Nonetheless, the Commission is revising 

its hourly burden estimates upward in 

response to the comment. 

With respect to the amendments to 

Rule 17g–2, the Commission estimates, 

based on staff information gained from 

the NRSRO examination process and in 

response to comments received, that the 

total one-time and annual recordkeeping 

burdens will increase approximately 

15% and 10%, respectively. The 

Commission believes that the one-time 

burden to set up and/or modify a 

recordkeeping system to comply with 

the amendments would be greater than 

the ongoing annual burden. Once an 

NRSRO has set up or modified its 

recordkeeping system to comply with 

the amendments, its annual hour 

burden would be increased only to the 


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6472 Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Rules and Regulations 

153See June 16, 2008 Proposing Release, 73 FR at 

36238–36239. 154 300 hours × 1.15 = 345 hours. This will result 

in an increase of approximately 45 hours per 

NRSRO for the one-time hour burden. 155 345 hours × 30 respondents = 10,350 hours. 156 10,350 hours ¥ 9,000 hours = 1,350 hours. 157 254 hours × 1.10 = 279 hours. The 

amendments would result in an increase of 

approximately 25 annual burden hours per NRSRO 

for Rule 17g–2. 

158 279 hours × 30 respondents = 8,370 hours. 

159 8,370 hours ¥ 7,620 hours = 750 hours. 

160See amendment to Rule 17g–2(d). 

161The Commission also bases this estimate on 

the current one-time and annual burden hours for 

an NRSRO to publicly disclose its Form NRSRO. No 

alternatives to these estimates as proposed were 

suggested by commenters. See June 5, 2007 

Adopting Release, 72 FR at 33609. 

162 30 hours × 7 NRSROs = 210 hours. 

163 10 hours × 7 NRSROs = 70 hours. 

164See June 5, 2007 Adopting Release, 72 FR at 

33609, 33610. 

165 Id. 

166See Interactive Data for Mutual Fund Risk/ 

Return Summary, Securities Act Release No. 8929 

(June 10, 2008), 73 FR 35442 (June 23, 2008). 

167 Id. 

168 17 CFR 240.17g–3. 

169See Rule 17g–3(a)(6). 

170 200 hours × 30 NRSROs = 6,000 hours. See 

June 5, 2007 Adopting Release, 72 FR at 33610. 

171Rule 17g–3 currently requires six reports. Only 

the first report—financial statements—need be 

audited. 

172 $15,000 × 30 NRSROs = $450,000. See June 5, 

2007 Adopting Release, 72 FR at 33610. 

extent it would be required to make and 

retain additional records. In the June 16, 

2008 Proposing Release, the 

Commission estimated that the total 

one-time and annual recordkeeping 

burdens would increase approximately 

10% and 5%, respectively.153 Thus, the 

Commission estimates that the one-time 

burden that each NRSRO will spend 

implementing a recordkeeping system to 

comply with Rule 17g–2, as amended, 

will be approximately 345 hours,154 for 

a total one-time burden of 10,350 hours 

for 30 NRSROs,155 which represents an 

increase in the currently approved PRA 

burden under Rule 17g–2 of 1,350 total 

one-time burden hours.156 The 

Commission estimates that an NRSRO 

would spend an average of 279 hours 

per year 157 to make and retain records 

under Rule 17g–2 as amended, for a 

total annual hour burden under Rule 

17g–2 of 8,370 hours.158 This estimate 

will result in an increase in the 

currently approved PRA burden under 

Rule 17g–2 of 750 annual burden 

hours.159 As discussed above, the 

increase in annual burden hours will 

result from the increase in the number 

of records an NRSRO will be required to 

make and retain under the amendments 

to Rule 17g–2. The Commission notes 

that the PRA estimates for Rule 17g–2 

are averages across all types of NRSROs 

expected to be affected by the rule 

amendments. The size and complexity 

of NRSROs range from small entities to 

entities that are part of complex global 

organizations employing thousands of 

credit analysts. Consequently, the 

burden hour estimates for Rule 17g–2 

represent the average time across all 

NRSROs. 

In addition, the amendments to Rule 

17g–2 require an NRSRO to make 

publicly available on its Web site in 

XBRL format ratings action histories for 

a random sample of 10% of its 

outstanding issuer-paid credit ratings in 

each class of credit rating for which it 

is registered and has determined 500 or 

more issuer-paid credit ratings.160 Based 

on information furnished on Form 

NRSRO, seven of the ten currently 

registered NRSROs issue 500 or more 

issuer-paid credit ratings in at least one 

of the classes of credit ratings for which 

they are registered. The Commission 

believes that even as the number of 

registered NRSROs expands to the 30 

ultimately expected to register, this 

number will remain relatively constant, 

as new entrants are likely to 

predominantly determine subscriberpaid credit ratings, at least in the near 

future. In addition, the Commission 

believes that each of the NRSROs 

affected by this new requirement 

already has, or will have, an Internet 

Web site. As noted above, the 

amendment as adopted specifies that in 

making the required information 

available on its Web site, an NRSRO 

will use the List of XBRL Tags for 

NRSROs as specified on the 

Commission’s Web site, thus 

eliminating the need for an NRSRO to 

develop its own taxonomy and tags and 

significantly reducing the amount of 

time required to comply with the 

amendment. 

Therefore, based on staff experience, 

the Commission estimates that, on 

average, an NRSRO subject to the 

requirement will spend approximately 

30 hours to publicly disclose the 

required information in an XBRL format 

and, thereafter, 10 hours per year to 

update this information.161 Accordingly, 

the total aggregate one-time burden to 

the industry to make the history of 

rating actions publicly available in an 

XBRL format will be 210 hours,162 and 

the total aggregate annual burden hours 

will be 70 hours.163

Under the currently approved PRA 

collection for Rule 17g–2, the 

Commission estimated that an NRSRO 

may need to purchase recordkeeping 

system software to establish a 

recordkeeping system in conformance 

with Rule 17g–2.164 The Commission 

estimated that the cost of the software 

would vary based on the size and 

complexity of the NRSRO. Also, the 

Commission estimated that some 

NRSROs 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 estimated that the average 

cost for recordkeeping software across 

all NRSROs would be approximately 

$1,000 per firm, with an aggregate onetime cost to the industry of $30,000.165

In response to comments discussed 

above, the Commission estimates that 

the amendments to Rule 17g–2 would 

alter this per firm estimate upward by 

approximately $800.166 For example, in 

the PRA for the proposed rules requiring 

the submission of risk/return summary 

information using interactive data, the 

Commission estimated that software and 

consulting services would be used by 

mutual funds for an increase of 

approximately $803 per mutual fund.167

The Commission believes that the 

requirement to publicly disclose certain 

ratings action histories in an XBRL 

format would result in a similar cost. 

3. Amendment to Rule 17g–3 

Rule 17g–3 requires an NRSRO to 

furnish certain financial reports to the 

Commission on an annual basis, 

including audited financial statements 

as well as other financial reports.168 The 

Commission is amending Rule 17g–3 to 

require an NRSRO to furnish the 

Commission with an additional report: 

An unaudited report of the number of 

credit ratings actions (upgrades, 

downgrades, placements on credit 

watch, and withdrawals) taken during 

the fiscal year in each class of credit 

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

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

which the NRSRO is registered with the 

Commission.169

The total annual burden currently 

approved by OMB for Rule 17g–3 is 

6,000 hours, based on the fact that it 

will take an NRSRO, on average, 

approximately 200 hours to prepare for 

and file the annual reports.170 In 

addition, the total annual cost burden 

currently approved by OMB is $450,000 

to engage the services of an independent 

public accountant to conduct the annual 

audit as part of the preparation of the 

first report required by Rule 17g–3.171

This estimate is based on 30 NRSROs 

hiring an independent public 

accountant on an annual basis for an 

average of $15,000.172

The Commission requested comment 

in the June 16, 2008 Proposing Release 

on the burdens that would result from 

the proposed amendments to Rule 17g– 


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Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Rules and Regulations 6473 

173See June 16, 2008 Proposing Release, 73 FR at 

36239. 

174See S&P Letter. 

175 Id. 

176 100 hours × 30 NRSROs = 3,000 hours. 

177Amendment to Rule 17g–2(d). 

178 15 U.S.C. 78o–7(k). 

179For the purposes of this cost/benefit analysis, 

the Commission is using salary data from the 

Securities Industry and Financial Markets 

Association (‘‘SIFMA’’) Report on Management and 

Professional Earnings in the Securities Industry 

2007, which provides base salary and bonus 

information for middle-management and 

professional positions within the securities 

industry. 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. Finally, the salary costs 

derived from the report 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. The Commission used comparable 

assumptions in adopting the final rules 

implementing the Rating Agency Act in 2007, 

requested comments on such assumptions, and 

received no comments in response to its request. 

See June 5, 2007 Adopting Release, 72 FR at 33611, 

note 576. Hereinafter, references to data derived 

from the report as modified in the manner 

described above will be cited as ‘‘SIFMA 2007 

Report as Modified.’’ 

180Senate Report, p. 2. 

181 Id, p. 7. 

182See June 16, 2008 Proposing Release, 73 FR at 

36241–36243. 

183 Id. 

184See June 5, 2007 Adopting Release. 

3.173 One commenter, a large NRSRO, 

estimated that it would cost $300,000 to 

build and test a system to comply with 

this amendment and that its ongoing 

costs would be $70,000 per year.174 The 

commenter did not provide specific data 

and analysis to support the estimates.175

The Commission believes that most 

NRSROs already will have the 

information that it needs in order to 

comply with the amendment to Rule 

17g–3 with respect to each class of 

credit ratings for which it is registered. 

In addition, the Commission 

emphasizes that this amendment does 

not prescribe a specific format for the 

report. Consequently, the Commission 

believes that the actual time 

expenditures of NRSROs in complying 

with the rule amendment will be less 

than the commenter’s estimates. 

Nonetheless, the Commission is revising 

its PRA estimate for Rule 17g–3 upward 

in response to the comment. 

The Commission, based on the 

comment received and staff experience, 

estimates that the average time 

necessary for an applicant or NRSRO to 

establish an internal process to conform 

its systems to generate a report in 

compliance with the amendment will be 

100 hours per NRSRO, for a total onetime hour burden to the industry of 

3,000 hours.176 The Commission 

believes that once an NRSRO complies 

with the amendment to Rule 17g–3 in 

the first year, that preparation of the 

new annual report will become routine. 

To account for this one-time burden of 

3,000 hours and the possibility that new 

credit rating agencies will register as 

NRSROs, the Commission is averaging 

this burden estimate over the three year 

approval period. Consequently, the 

Commission is increasing the annual 

burden estimate by 1,000 hours for a 

total annual burden estimate for Rule 

17g–3 of 7,000 hours. 

E. Collection of Information Is 

Mandatory 

The recordkeeping requirements for 

the rule amendments are mandatory. 

F. Confidentiality 

The disclosures required under the 

amendments to Rule 17g–1 and Form 

NRSRO will be made publicly available 

on Form NRSRO. The books and records 

information to be collected under the 

amendments to Rule 17g–2 will be 

stored by the NRSRO and made 

available to the Commission and its 

representatives as required in 

connection with examinations, 

investigations, and enforcement 

proceedings. However, an NRSRO will 

be required to make public, in XBRL 

format and with a six-month grace 

period, the ratings action histories for a 

random sample of 10% of the issuerpaid credit ratings for each ratings class 

for which it has issued 500 or more 

issuer-paid credit ratings.177 The 

information collected under the 

amendment to Rule 17g–3 will be 

generated from the internal records of 

the NRSRO and will be furnished to the 

Commission on a confidential basis, to 

the extent permitted by law.178

IV. Costs and Benefits of the Amended 

Rules 

The Commission is sensitive to the 

costs and benefits that result from its 

rules. The Commission identified 

certain costs and benefits arising from 

these amendments and requested 

comment on all aspects of the costbenefit analysis contained therein, 

including identification and assessment 

of any costs and benefits not discussed 

in the analysis.179 The Commission 

sought comment and data on the value 

of the benefits identified. The 

Commission also requested comment on 

the accuracy of the cost estimates in 

each section of the cost-benefit analysis, 

and requested those commenters to 

provide data so the Commission could 

improve the cost estimates, including 

identification of statistics relied on by 

commenters to reach conclusions on 

cost estimates. Finally, the Commission 

requested estimates and views regarding 

the costs and benefits for particular 

types of market participants, as well as 

any other costs or benefits that might 

result from the adoption of the rule 

amendments. 

A. Benefits 

The purposes of the Rating Agency 

Act, as stated in the accompanying 

Senate Report, 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.180 As the Senate Report states, 

the Rating Agency Act establishes 

‘‘fundamental reform and improvement 

of the designation process’’ to further 

the belief that ‘‘eliminating the artificial 

barrier to entry will enhance 

competition and provide investors with 

more choices, higher quality ratings, 

and lower costs.’’ 181

The Commission requested comment 

on all aspects of the benefits of the 

amendments as proposed.182 In 

addition, the Commission requested 

specific 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.183 The Commission did 

not receive any comments in response 

to this request. 

The amendments are designed to 

further the goals of the Rating Agency 

Act, including fostering transparency in 

the credit rating agency industry. Since 

the adoption of the final rules 

implementing the Rating Agency Act in 

2007,184 the Commission has identified 

a number of areas where it is 

appropriate to enhance the current 

regulatory program for NRSROs. 

Consequently, the Commission is 

adopting amendments that enhance the 

disclosure of credit ratings performance 

measurement statistics; increase the 

disclosure of information about the 

assets underlying structured finance 

products; require more information 

about the procedures and methodologies 

used to determine structured finance 

ratings; and address conflicts of interest 

arising from the structured finance 

rating process. As discussed below, the 

Commission believes that these 

amendments will further the purpose of 

the Rating Agency Act to improve the 

quality of credit ratings by fostering 

accountability, transparency, and 

competition in the credit rating 

industry, particularly with respect to 


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6474 Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Rules and Regulations 

185See Senate Report, p. 2. 

186See Rule 17g–1. 

187See Section 15E(a)(1)(B) of the Exchange Act. 

15 U.S.C. 78o–7(a)(1)(B). 

188 17 CFR 240.17g–1 and Form NRSRO. 

189Paragraph (a)(2)(iii) of Rule 17g–2. 

190Paragraph (a)(8) of Rule 17g–2. 

191Paragraph (b)(8) of Rule 17g–2. 192See Rule 17g–3(a)(6). 

credit ratings for structured finance 

products.185

Rule 17g–1 prescribes a process for a 

credit rating agency to register with the 

Commission as an NRSRO using Form 

NRSRO,186 and requires that a credit 

rating agency provide information 

required under Section 15E(a)(1)(B) of 

the Exchange Act and certain additional 

information.187 Form NRSRO is also the 

means by which NRSROs update the 

information they must publicly disclose. 

The amendments to the instructions to 

Exhibit 1 to Form NRSRO will require 

NRSROs to provide more detailed 

performance statistics and, thereby, 

make it easier for users of credit ratings 

to compare the ratings performance of 

the NRSROs.188 In addition, these 

amendments will make it easier for an 

NRSRO to demonstrate that it has a 

superior ratings methodology or 

competence and, thereby, attract clients. 

The amendments to the instructions 

to Exhibit 2 of Form NRSRO are 

designed to provide greater clarity 

around three areas of the NRSROs’ 

rating processes that have raised 

concerns in the context of the recent 

credit market turmoil: The level of 

verification performed on information 

provided in loan documents; the quality 

of loan originators; and the on-going 

surveillance of existing ratings and how 

changes made to a model used for initial 

ratings are applied to existing ratings. 

The additional information provided by 

the amendments will assist users of 

credit ratings in making more informed 

decisions about the quality of an 

NRSRO’s ratings processes, particularly 

with regard to structured finance 

products. 

The Commission believes that these 

enhanced disclosures in the Exhibits to 

Form NRSRO will make it easier for 

market participants to select the 

NRSROs that are performing well and 

have the highest quality processes for 

determining credit ratings. The 

Commission expects that providing 

market participants with enhanced 

disclosures will lead to increased 

competition and the promotion of 

capital formation through a restoration 

of confidence in credit ratings. 

The amendments to Rule 17g–2 are 

designed to provide greater 

documentation of the ratings process to 

assist Commission staff in its 

examination function as well as to 

provide greater information to users of 

issuer-paid credit ratings about the 

performance of an NRSRO’s issuer-paid 

credit ratings. The additional records 

will be: (1) A record of the rationale for 

any material difference between the 

credit rating implied by the model and 

the final credit rating issued, if a 

quantitative model is a substantial 

component in the process of 

determining a credit rating for a 

structured finance product;189 (2) a 

record showing the history and dates of 

all previous rating actions with respect 

to each outstanding credit rating; (3) a 

record, to be made publicly available, 

showing the history and dates of a 10% 

random sample of issuer-paid credit 

ratings, for each ratings class for which 

an NRSRO is registered and has issued 

500 or more issuer-paid credit ratings, of 

all previous rating actions with respect 

to each outstanding credit rating;190 and 

(4) any written complaints regarding the 

performance of a credit analyst in 

determining credit ratings.191 These 

records will assist the Commission in 

monitoring whether an NRSRO is 

complying with provisions of Section 

15E of the Exchange Act and the rules 

thereunder. The Commission will be 

better able to monitor whether an 

NRSRO 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, 

including its ratings of structured 

finance products. 

In addition, the amendment to Rule 

17g–2(d) will require an NRSRO to 

make publicly available a random 

sample of 10% of the issuer-paid credit 

ratings actions histories, in an XBRL 

format and with a six-month grace 

period, for each ratings class for which 

it has issued 500 or more issuer-paid 

credit ratings. This XBRL disclosure 

requirement will allow the marketplace 

to better compare the performance of 

different NRSROs that determine issuerpaid credit ratings, since it will shift the 

source of data formatting from end-users 

to NRSROs submitting interactive data, 

thus eliminating the need for end-users 

to make interpretive decisions on how 

to compare data fields across NRSROs’ 

reported rating histories. This additional 

disclosure also may make NRSROs more 

accountable for their issuer-paid credit 

ratings by enhancing the transparency of 

their ratings performance. The 

Commission believes the XBRL format 

will benefit market participants seeking 

to develop their own performance 

statistics using the ratings history data 

to be made public by the NRSROs 

because it will require them to present 

the information in a standard format. 

Making the information available in an 

XBRL format will facilitate the process 

of creating better and more useful means 

to analyze how a given NRSRO 

performed in a certain class of issuerpaid credit ratings and compare that 

broader performance across NRSROs 

subject to the public disclosure rule, 

increasing the transparency of the 

results of their rating processes and 

encouraging competition within the 

industry by making it easier for users of 

issuer-paid credit ratings to judge the 

output of such NRSROs. As noted 

above, the Commission believes that the 

XBRL format will increase access to 

information in the financial marketplace 

and transform the manner in which 

individual investors, financial 

intermediaries, analysts, the financial 

media, and others access, use, and 

ultimately understand the wealth of 

available data. Requiring NRSROs to 

provide this disclosure in a single 

industry standard format will offer 

market participants the benefits of 

simplification, increased transparency, 

and ease of comparisons. 

The amendment to Rule 17g–3 will 

require an NRSRO to furnish an 

additional annual report to the 

Commission: an unaudited report of the 

number of credit ratings actions 

(upgrades, downgrades, placements on 

credit watch, and withdrawals) taken 

during the fiscal year in each class of 

credit ratings identified in section 

3(a)(62)(B) of the Act (15 U.S.C. 

78c(a)(62)(B)) for which the NRSRO is 

registered with the Commission.192 The 

new report is designed to enhance the 

Commission’s oversight of NRSROs by 

providing the Commission with 

additional information to assist in the 

monitoring of NRSROs for compliance 

with their stated policies and 

procedures. For example, the proposed 

new report will allow examiners to 

target potential problem areas in an 

NRSRO’s rating processes by 

highlighting spikes in rating actions 

within a particular class of credit rating. 

The amendments to Rule 17g–5 will 

prohibit an NRSRO from issuing or 

maintaining a credit rating where the 

NRSRO or an affiliate provided 

recommendations on the structure of the 

transaction being rated; a credit analyst 

or person involved in the ratings 

process participated in fee negotiations; 

or a credit analyst or a person 

responsible for approving a credit rating 

received gifts from the obligor being 

rated, or from the issuer, underwriter, or 


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Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Rules and Regulations 6475 

193See Rule 17 CFR 240.17g–5(c)(5)–(7). 

194See 15 U.S.C. 78o–7(a)(1)(B)(vi) and (h). 

195See June 16, 2008 Proposing Release, 73 FR at 

36243–36247. 

196See S&P Letter. 

sponsor of the securities being rated, 

other than items provided in the context 

of normal business activities such as 

meetings that have an aggregate value of 

no more than $25.193 The Commission 

believes that the amendments to Rule 

17g–5 will promote the disclosure and 

management of conflicts of interest and 

mitigate potential undue influences on 

an NRSRO’s credit rating process, 

particularly with respect to credit 

ratings for structured finance 

products.194 These amendments will, in 

turn, increase confidence in the 

integrity of NRSRO ratings and, thereby, 

promote capital formation. 

B. Costs 

The cost of compliance to a given 

NRSRO will depend on its size and the 

complexity of its business activities. 

The size and complexity of the ten 

NRSROs vary significantly. For 

example, the three largest NRSROs 

account for approximately 98% of all 

outstanding credit ratings as reported on 

their most recent Form NRSROs. In 

addition, these three NRSROs also 

employ approximately 92% of the credit 

analysts among the ten registered 

NRSROs. In the June 16, 2008 Proposing 

Release, the Commission provided 

estimates of the average cost per NRSRO 

as a result of the proposed amendments, 

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 amendments.195

The Commission also sought 

comment on its cost estimates and the 

assumptions behind the estimates. One 

of the largest NRSROs provided cost 

data for the proposed rules but, 

significantly, only in summary form.196

That is, the NRSRO provided estimates 

for the total one-time and on-going costs 

to comply with each proposed rule but 

did not identify the particular 

components of each total cost estimate. 

For example, the NRSRO did not 

identify the amount of each cost 

estimate that would be due to internal 

costs such as employee salaries and 

internal systems developments; nor the 

amount of each cost that would be due 

to external costs such as the need to 

purchase software to comply with a 

recordkeeping requirement in a rule. 

Nonetheless, the Commission believes 

that the summary form cost estimates 

provided by the NRSRO do provide 

some basis for revising the 

Commission’s earlier cost estimates 

because they reflect the experience of a 

large highly complex NRSRO that has 

been subject to existing Commission 

rules. However, the Commission does 

note that, because the cost estimates 

were provided in summary form, the 

Commission cannot identify specific 

components of the cost estimates that 

are linked to a recordkeeping 

requirement and, therefore, subject to 

the PRA. Consequently, the Commission 

continued to analyze the PRA burden 

estimates separately from these 

summary cost estimates. 

For the reasons discussed above, the 

cost estimates below are calculated for 

two categories of NRSROs. The first 

category is comprised of the three 

largest NRSROs in terms of the number 

of credit ratings outstanding. As noted 

above, these three firms account for 

98% of the credit ratings outstanding. 

The second category is comprised of the 

seven smaller NRSROs currently 

registered with the Commission. These 

NRSROs account for the remaining 2% 

of credit ratings outstanding. The theory 

behind this analysis is that the total cost 

to the NRSRO industry resulting from 

an amendment will be incurred by each 

NRSRO in approximate proportion to 

the percentage of the total credit ratings 

it issues. As discussed below, the 

Commission is determining a total cost 

to the industry using the summary cost 

figures provided by the large NRSRO by 

estimating that, since this firm accounts 

for 47% of the credit ratings 

outstanding, its summary cost estimate 

is 47% of the total cost to the industry. 

Having derived a total cost to the 

industry using this NRSRO’s summary 

cost estimates, the Commission allocates 

a percentage of that total cost to the two 

different categories of NRSROs: 98% for 

the first category and 2% for the second 

category. Further, the Commission 

estimates an average cost per NRSRO by 

dividing the amount of the total cost 

allocated to the first category by the 

three NRSROs in that category and the 

amount of the total cost allocated to the 

second category of NRSROs by the 

seven NRSROs in that category. 

The Commission continues to 

estimate that 30 NRSROs ultimately 

may register. However, because the 

Commission assumes the total number 

of ratings extant would remain stable, 

the total cost to the industry likely 

would remain stable and be reallocated 

among new entrants. Therefore, for the 

purposes of cost estimates derived using 

this analysis, the Commission is not 

including the potential 20 new entrants 

in either the first or second categories of 

NRSROs for the purposes of 

determining the cost per NRSRO. 

Additionally, the Commission notes 

that ten credit rating agencies are 

currently registered with the 

Commission as NRSROs and subject to 

the statutory and regulatory 

requirements for NRSROs. The cost of 

compliance to these firms will vary 

depending on which classes of credit 

ratings an NRSRO issues. For example, 

NRSROs that issue credit ratings for 

structured finance products—the focus 

of many of these new requirements— 

will incur higher compliance costs than 

NRSROs that do not issue credit ratings 

or that issue relatively few credit ratings 

in that class. The Commission notes that 

the bulk of the structured finance credit 

ratings outstanding are issued by 

NRSROs in the first category. 

This method of calculating costs also 

differs from the one used in the June 16, 

2008 Proposing Release in that it is not 

derived by multiplying the number of 

burden hours estimated for purposes of 

the PRA by hourly costs of personnel 

expected to undertake the 

responsibilities for complying with the 

amendment. As noted above, the 

Commission received summary cost 

data from the NRSRO in its comments 

that did not separate internal costs from 

external costs or paperwork burdens 

from other economic impacts. 

Nonetheless, the Commission believes 

that using the summary cost information 

provided by the NRSRO allows for a 

more robust method of estimating the 

total economic impact of the 

amendments. The Commission believes 

that for purposes of the cost-benefit 

analysis this methodology provides a 

more conservative method for 

estimating costs because it is based on 

the experience of an NRSRO that has 

been subject to existing Commission 

rules and it accounts for the substantial 

variance in size and complexity of the 

10 registered NRSROs. For example, the 

methodology provides a basis for 

assessing the different cost impacts the 

rules will have on the largest NRSROs, 

which skew the total costs to the 

industry. 

1. Amendments to Form NRSRO 

The Commission is amending the 

instructions to Exhibit 1 to Form 

NRSRO to require the disclosure of 

more detailed performance statistics. 

Currently, the instructions require the 

disclosure of performance measurement 

statistics of the credit ratings of the 

‘‘Applicant/NRSRO over the short-term, 

mid-term and long-term periods (as 

applicable) through the most recent 

calendar year end.’’ The new 

amendments refine these instructions to 


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6476 Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Rules and Regulations 

197See instructions to Exhibit 1, Form NRSRO. 

198See June 16, 2008 Proposing Release, 73 FR at 

36244. 

199 Id. 

200The Commission estimated that a Compliance 

Attorney (40 hours) and a Programmer Analyst (10 

hours) would perform these responsibilities. The 

SIFMA 2007 Report as Modified indicates that the 

average hourly rates for a Compliance Attorney and 

a Programmer Analyst are $270 and $194 per hour, 

respectively. Therefore, the average one-time cost to 

an NRSRO would be $12,740 [(40 hours × $270) + 

(10 hours × $194)]. 

201 $12,740 × 9 NRSROs = $114,660. 

202See S&P Letter. 

203 Id. 

204 $6,710,000 × 100 = $671,000,000; 

$671,000,000/47 = $14,276,600. 

205 $1,860,000 × 100 = $186,000,000; 

$186,000,000/47 = $3,957,400. 

206 $14,276,600 × .98 = $13,991,100. 

207 $3,957,400 × .98 = $3,878,300. 

208 $13,991,100/3 = $4,663,700. 

209 $3,878,300/3 = $1,292,800. 

210 $14,276,600 × .02 = $285,500. 

211 $3,957,400 × .02 = $79,100. 

212 $285,500/7 = $40,790. 

213 $79,100/7 = $11,300. 

214 17 CFR 240.17g–2. 

215Paragraph (a)(2)(iii) of Rule 17g–2. 

216Paragraph (a)(8) of Rule 17g–2. 

217Paragraph (d) of Rule 17g–2. 

218Paragraph (b)(8) of Rule 17g–2. 

219See June 16, 2008 Proposing Release, 73 FR at 

36244–36245. 

220 Id. 

require the disclosure of separate sets of 

default and transition statistics for each 

class of credit ratings. In addition, the 

class-by-class disclosures need to be 

broken out over 1, 3 and 10 year 

periods.197

The Commission also is amending the 

instructions to Exhibit 2 to Form 

NRSRO to require enhanced disclosures 

about the procedures and methodologies 

an NRSRO uses to determine credit 

ratings, including whether and, if so, 

how information about verification 

performed on assets underlying a 

structured finance transaction is relied 

on in determining credit ratings; 

whether and, if so, how assessments of 

the quality of originators of assets 

underlying a structured finance 

transaction factor into the determination 

of credit ratings; and how frequently 

credit ratings are reviewed, whether 

different models are used for ratings 

surveillance than for determining credit 

ratings, and whether changes made to 

models and criteria for determining 

initial ratings are applied retroactively 

to existing ratings. 

In the June 16, 2008 Proposing 

Release, the Commission preliminarily 

stated that it believed NRSROs may 

incur a cost of compliance in updating 

their performance metric statistics to 

conform to the new requirements set 

forth in the proposed rule 

amendments.198 Specifically, the 

Commission estimated that it would 

take each NRSRO currently registered 

with the Commission approximately 50 

hours to review its performance 

measurement statistics and to develop 

and implement any changes necessary 

to comply with the proposed 

amendment.199 For these reasons, the 

Commission originally estimated that 

the average one-time cost to an NRSRO 

would be $12,740 200 and the total 

aggregate cost to the currently registered 

NRSROs would be $114,660.201

The Commission received one 

comment on these proposed costs. The 

commenter, a large NRSRO, estimated 

that it would have to build systems to 

comply with each new amendment to 

Form NRSRO, resulting in a one-time 

cost to the NRSRO of $6,710,000.202 The 

commenter further estimated that its 

costs on an annual basis would be 

$1,860,000.203 The commenter did not 

break down these cost estimates or 

provide supporting data. Although the 

Commission believes existing systems 

could be adjusted instead of rebuilt to 

comply with the new Exhibit 

instructions, the Commission is taking 

into account the comment received 

regarding the cost and, therefore, is 

revising its cost estimates. 

The Commission believes the costs 

incurred by the NRSROs will be in 

approximate proportion to the number 

of credit ratings they issue. The 

commenter that provided cost estimates 

for this rule amendment is the largest 

NRSRO in terms of credit ratings 

outstanding. As such, it accounts for 

approximately 47% of the total 

outstanding credit ratings reported by 

all registered NRSROs on their most 

recent Form NRSROs. The Commission 

estimates that this NRSRO will incur 

47% of the total costs to the NRSROs 

from this amendment. Consequently, 

the total one time cost to the industry 

will be approximately $14,276,600 204

and the total annual cost to the industry 

will be $3,957,400.205 Furthermore, the 

three largest NRSROs constituting the 

first category account for approximately 

98% of the total credit ratings 

outstanding among all NRSROs and, 

therefore, the Commission estimates 

they will incur approximately 

$13,991,100 206 of the total one-time cost 

to the industry and approximately 

$3,878,300 207 of the total annual cost to 

the industry. Consequently, the 

Commission estimates that they will 

incur approximately $4,663,700 208 per 

firm in one time costs and 

approximately $1,292,800 209 per firm in 

annual costs. The seven remaining 

NRSROs account for 2% of the credit 

ratings outstanding among all NRSROs 

and, therefore, the Commission 

estimates they will incur approximately 

$285,500 210 of the total one time costs 

to the industry and approximately 

$79,100 211 of the total annual costs to 

the industry. Consequently, the 

Commission estimates that they will 

incur approximately $40,790 212 per 

firm in one time costs and $11,300 213

per firm in annual costs. The 

Commission further estimates that the 

cost per NRSRO within each category 

will vary based on their relative sizes. 

Finally, the Commission has made 

changes to the final amendments to 

Form NRSRO that will minimize the 

burdens. Therefore, the Commission 

anticipates that the costs could be lower 

than those estimated here for NRSROs 

in both the first and second categories. 

2. Amendments to Rule 17g–2 

Rule 17g–2 requires an NRSRO to 

make and preserve specified records 

related to its credit rating business as 

well as to make a portion of those 

records available publicly.214 The 

amendments to Rule 17g–2 will require 

an NRSRO to make and retain two 

additional records and retain a third 

type of record. The records to be made 

and retained are: (1) A record of the 

rationale for any material difference 

between the credit rating implied by the 

model and the final credit rating issued, 

if a quantitative model is a substantial 

component in the process of 

determining a credit rating; 215 and (2) a 

record showing the history and dates of 

all previous rating actions with respect 

to each outstanding credit rating.216 In 

addition, the amendments will require 

an NRSRO to make publicly available a 

random sample of 10% of the issuerpaid credit ratings actions histories, in 

an XBRL format and with a six-month 

grace period, for each ratings class for 

which it has issued 500 or more ratings 

under the issuer-pay model.217 Finally, 

the amendments will require an NRSRO 

to retain written communications that 

contain any complaints by an obligor, 

issuer, underwriter, or sponsor about 

the performance of a credit analyst.218

The Commission requested comment 

in the June 16, 2008 Proposing Release 

on the costs that would result from the 

proposed amendments to Rule 17g–2.219

In addition, the Commission requested 

specific comment on whether the 

proposals imposed 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.220


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221 Id. 

222See Moody’s Letter; S&P Letter. 

223See Moody’s Letter. 

224See S&P Letter. 

225To address commenter concerns, the 

Commission has employed a different methodology 

for these cost estimates than that used in the June 

16, 2008 Proposing Release. For a discussion of the 

Commission’s original cost estimates, see June 16, 

2008 Proposing Release, 73 FR at 36244–36245. 

226 $10,660,000 × 100 = $1,066,000,000; 

$1,066,000,000/47 = $22,680,900. 

227 $3,260,000 × 100 = $326,000,000; 

$326,000,000/47 = $6,936,200. 

228 $22,680,900 × .98 = $22,227,300. 

229 $6,936,200 × .98 = $6,797,500. 

230 $22,227,300/3 = $7,409,100. 

231 $6,797,500/3 = $2,265,800. 

232 $22,680,900 × .02 = $453,600. 

233 $6,936,200 × .02 = $138,700. 

234 $453,600/7 = $64,800. 

235 $138,700/7 = $19,810. 

236See Rule 17g–2(a)(8). The Central Index Key 

(CIK) is used on the Commission’s computer 

systems to identify corporations and individual 

people who have filed disclosure with the 

Commission. Anyone may search http:// 

www.edgarcompany.sec.gov for a company, fund, or 

individual CIK. There is no fee for this service. 

CUSIP stands for Committee on Uniform Securities 

Identification Procedures. A CUSIP number 

identifies most securities, including: Stocks of all 

registered U.S. and Canadian companies, U.S. 

government and municipal bonds, as well as 

structured finance issuances. The CUSIP systemowned by the American Bankers Association and 

operated by Standard & Poor’s-facilitates the 

clearing and settlement process of securities. The 

CUSIP number consists of nine characters 

(including letters and numbers) that uniquely 

identify a company or issuer and the type of 

security. 

237See June 16, 2008 Proposing Release, 73 FR at 

36245. 

238See https://www.cusip.com/static/html/ 

webpage/service_fees.html#lic_fees. 

239See June 16, 2008 Proposing Release, 73 FR at 

36245. 

240 $100,000 × 30 NRSROs = $3,000,000. 

241 Interactive Data for Mutual Fund Risk/Return 

Summary, Securities Act Release No. 8929 (June 10, 

2008), 73 FR 35442 (June 23, 2008). 

The Commission asked that commenters 

provide specific data and analysis to 

support any comments they submit with 

respect to the burden estimates.221 The 

Commission received two comments on 

the proposed amendments.222 The first 

commenter, a large NRSRO, stated that 

the comment period did not provide 

time to fully assess the costs and 

benefits of the proposed rule.223 The 

second commenter, also a large NRSRO, 

stated that its one-time cost would be 

$10,660,000 and its annual cost would 

be $3,260,000.224 The commenter did 

not provide any data or analysis to 

support this view. 

The Commission is sensitive to the 

costs of the new amendments to 

NRSROs. The Commission is therefore 

revising its cost estimates based on the 

comments received.225 The Commission 

believes the costs incurred by the 

NRSROs will be in approximate 

proportion to the number of credit 

ratings they issue. The commenter that 

provided cost estimates for this rule 

amendment is the largest NRSRO in 

terms of credit ratings outstanding, 

accounting for approximately 47% of 

the total outstanding credit ratings 

reported by all registered NRSROs on 

their most recent Form NRSROs. The 

Commission estimates that this NRSRO 

will incur 47% of the total costs to the 

NRSROs from this amendment. 

Consequently, the total one time cost to 

the industry will be approximately 

$22,680,900 226 and the total annual cost 

to the industry will be $6,936,200.227

Furthermore, the three largest NRSROs 

constituting the first category account 

for approximately 98% of the total 

credit ratings outstanding among all 

NRSROs and, therefore, the Commission 

estimates they will incur approximately 

$22,227,300 228 of the total one-time cost 

to the industry and approximately 

$6,797,500 229 of the total annual cost to 

the industry. Consequently, the 

Commission estimates that they will 

incur approximately $7,409,100 230 per 

firm in one time costs and 

$2,265,800 231 per firm in annual costs. 

The seven remaining NRSROs 

account for 2% of the credit ratings 

outstanding among all NRSROs and, 

therefore, the Commission estimates 

they will incur approximately 

$453,600 232 of the total one time costs 

to the industry and approximately 

$138,700 233 of the total annual costs to 

the industry. Consequently, the 

Commission estimates that they will 

incur approximately $64,800 234 per 

firm in one time costs and $19,810 235

per firm in annual costs. The 

Commission further estimates that the 

cost per NRSRO within each category 

will vary based on their relative sizes. 

New paragraph (a)(8) to Rule 17g–2 

requires an NRSRO to create and 

maintain a record showing all rating 

actions and the date of such actions 

from the initial rating to the current 

rating identified by the name or rated 

security or obligor, and, if applicable, 

the CUSIP of the rated security or the 

Central Index Key (CIK) number of the 

rated obligor.236 In the June 16, 2008 

Proposing Release, the Commission 

estimated that an NRSRO may choose to 

purchase a license from the CUSIP 

Service Bureau in order to access CUSIP 

numbers for the securities it rates.237

The CUSIP Service Bureau’s operations 

are covered by fees paid by issuers and 

licensees of the CUSIP Service Bureau’s 

data. Issuers pay a one-time fee for each 

new CUSIP assigned, and licensees pay 

a renewable subscription or a license fee 

for access and use of the CUSIP Service 

Bureau’s various database services. The 

CUSIP Service Bureau’s license fees 

vary based on usage, i.e., how many 

securities or by type of security or 

business line.238 In the June 16, 2008 

Proposing Release, the Commission 

estimated that the license fees incurred 

by an NRSRO that chose to purchase a 

license would vary depending on the 

size of the NRSRO and the number of 

credit ratings it issues.239 For purposes 

of this cost estimate, the Commission 

estimates that an NRSRO opting to 

purchase a license would incur a fee of 

$100,000 to obtain access to the CUSIP 

numbers for the securities it rates. 

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

$3,000,000.240 The Commission believes 

that this estimate continues to be valid 

for the purposes of new paragraph (a)(8) 

to Rule 17g–2. 

Under paragraph (d) of Rule 17g–2, as 

amended, NRSROs are required to 

publicly provide the histories of 10% of 

their issuer-paid credit ratings, in each 

class of ratings for which they have 

issued 500 or more such ratings, in 

XBRL format and with a six month grace 

period. The main cost of mandated use 

of the XBRL format likely will be the 

incremental cost of developing the 

systems to make the information 

available on the NRSROs’ Web sites in 

interactive format rather than machine 

readable format. The Commission 

recognizes that new systems will have 

to be developed regardless of the 

reporting format. The Commission 

expects that the incremental cost of 

reporting credit rating information in 

XBRL format relative to other machine 

readable format will not be large. The 

Commission bases this assessment on 

the responses collected through 

voluntary program questionnaires on 

the direct costs of submitting interactive 

data-formatted risk/return summary 

information by mutual funds and 

interactive data-formatted financial 

statements by reporting companies. 

Participating mutual funds indicated 

that the estimated direct costs of Web 

posting of their risk/return summary in 

interactive data are $23,450 for the first 

submission and $3,350 for each 

subsequent submission.241 Reporting 

companies, which participated in the 

voluntary program questionnaire, 

estimated their direct reporting costs at 

$40,509 for the first submission and 

$13,452 for each subsequent 


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6478 Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Rules and Regulations 

242 Interactive Data to Improve Financial 

Reporting, Securities Act Release No. 8924 (May 30, 

2008), 73 FR 35442 (June 10, 2008). 

243See S&P Letter. 

244 17 CFR 240.17g–3. 

245See June 16, 2008 Proposing Release, 73 FR at 

36245–36246. 

246 Id. 

247 Id. 

248 Id. 

249 Id. 

250 Id. 

251See S&P Letter. 

252 Id. 

253 $300,000 × 100 = $30,000,000; $30,000,000/47 

= $638,300. 

254 $70,000 × 100 = $7,000,000; $7,000,000/47 = 

$148,900. 

255 $638,300 × 0.98 = $625,500. 

256 $148,900 × 0.98 = $145,900. 

257 $625,500/3 = $208,500. 

258 $145,900/3 = $48,600. 

submission.242 The Commission expects 

that the costs to NRSROs will be closer 

to those for mutual funds’ risk/return 

summary reporting, since the reporting 

complexity (and therefore tagging) of 

credit rating actions is closer to that of 

risk/return summaries than to quarterly 

financial reports. The Commission 

believes the incremental costs allocable 

to the XBRL requirement are accounted 

for in the per-firm one-time and annual 

costs described above for the two 

categories of NRSROs. 

The Commission anticipates that the 

changes made to the final amendments 

to Rule 17g–2 will result, for NRSROs in 

both the first and second categories, in 

lower costs overall than those estimated 

in the June 16, 2008 Proposing Release. 

For example, the Commission is instead 

requiring that NRSROs provide a 10% 

sample of their issuer-paid credit ratings 

histories for each ratings class for which 

they have issued 500 or more ratings 

under the issuer-pay model instead of 

the history for all outstanding credit 

ratings. In addition, the Commission is 

specifying that this data be provided in 

XBRL format using the List of XBRL 

Tags for NRSROs as specified on the 

Commission’s Web site, thus 

eliminating the need for an NRSRO to 

develop its own taxonomy and tags for 

the data. Finally, the Commission is 

only requiring that the record of the 

rationale for any material difference 

between the credit rating implied by the 

model and the final credit rating be kept 

for structured finance products only, 

rather than for all classes of ratings. 

These changes to the amendments to 

Rule 17g–2 were designed in part to 

reduce the costs associated with 

implementing the new amendments. 

Finally, one commenter, an NRSRO, 

suggested that the requirement to post 

their ratings histories would destroy a 

revenue stream at the company.243

Currently, the company charges 

subscribers a fee to access historical 

data and information on ratings actions. 

The Commission believes that the 

changes to the amendments to Rule 

17g–2(d) from those that were proposed 

address this concern. The amendment 

now requires NRSROs provide a random 

10% sample of their issuer-paid credit 

ratings histories for each ratings class 

for which they have issued 500 or more 

ratings paid for by the obligor being 

rated or by the issuer, underwriter, or 

sponsor of the security being rated with 

a six-month grace period for posting 

new ratings actions. The Commission 

believes the disclosure of 10% of the 

issuer-paid credit ratings, selected 

randomly and disclosed with a sixmonth time lag, will not cause persons 

who pay for ratings downloads to cease 

purchasing this service, as customers 

that are willing to pay for full and 

immediate access to all of an NRSRO’s 

ratings actions are unlikely to 

reconsider their purchase of that 

product due to the ability to access 10% 

of the ratings on a six-month delayed 

basis free of charge. In addition, the 

Commission has decided not to impose 

the same disclosure obligation on 

subscriber-paid credit ratings at this 

time out of competitive concerns raised, 

but is still considering how to make 

more information publicly available and 

accessible about the performance of 

these ratings. The Commission believes 

that the rule as adopted will address the 

concerns expressed by commenters and 

at the same time foster greater 

accountability of NRSROs with respect 

to their issuer-paid credit ratings as well 

as increase competition among NRSROs 

by making it easier for persons to 

analyze the actual performance of their 

credit ratings. 

3. Amendment to Rule 17g–3 

Rule 17g–3 requires an NRSRO to 

furnish audited annual financial 

statements to the Commission, 

including certain specified 

schedules.244 The amendment to Rule 

17g–3 will require an NRSRO to furnish 

the Commission with an additional 

annual report: An unaudited report of 

the number of credit ratings that were 

changed during the fiscal year in each 

class of credit ratings for which the 

NRSRO is registered with the 

Commission. As stated in the June 16, 

2008 Proposing Release, the 

Commission believed that the annual 

costs to NRSROs to comply with the 

proposed amendment to Rule 17g–3 

would be de minimis.245 The 

Commission preliminarily believed that 

an NRSRO already would have this 

information with respect to each class of 

credit ratings for which it is 

registered.246 In addition, the 

amendment does not prescribe a format 

for the report. Consequently, the 

Commission estimated that proposed 

Rule 17g–3(a)(6) would not have a 

significant effect on the total average 

annual cost burden currently estimated 

for Rule 17g–3.247

The Commission requested comment 

in the June 16, 2008 Proposing Release 

on the costs that would result from the 

proposed amendments to Rule 17g–3.248

In addition, the Commission requested 

specific comment on whether this 

proposal imposed 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.249 The 

Commission asked that commenters 

provide specific data and analysis to 

support any comments they submit with 

respect to these burden estimates. The 

Commission received one comment on 

this cost estimate.250 The commenter, a 

large NRSRO, estimated that it would 

cost $300,000 to build and test a system 

to comply with this amendment and 

that its ongoing costs would be $70,000 

per year.251 The commenter did not 

provide specific data and analysis to 

support the estimates.252

The Commission is revising its cost 

estimates based on the specific costs 

included in the comments received. The 

commenter that provided cost estimates 

for this rule amendment is the largest 

NRSRO in terms of credit ratings 

outstanding. As such, it accounts for 

approximately 47% of the total 

outstanding credit ratings reported by 

all registered NRSROs on their most 

recent Form NRSROs. The Commission 

estimates that this NRSRO will incur 

47% of the total costs to the NRSROs 

from this amendment. Consequently, 

the total one time cost to the industry 

will be approximately $638,300 253 and 

the total annual cost to the industry will 

be $148,900.254 Furthermore, the three 

largest NRSROs in the first category 

account for approximately 98% of the 

total credit ratings issued by the 

NRSROs and, therefore, the Commission 

estimates they will incur approximately 

$625,500 255 of the total one-time cost to 

the industry and approximately 

$145,900 256 of the total annual cost to 

the industry. Consequently, the 

Commission estimates that they will 

incur approximately $208,500 257 per 

firm in one time costs and $48,600 258

per firm in annual costs. 


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259 $638,300 × .02 = $12,800. 

260 $148,900 × .02 = $3,000. 

261 $12,800/7 = $1,830. 

262 $3,000/7 = $430. 

263 17 CFR 240.17g–5. 

264See Rule 17g–5(c)(5)–(7). 

265See June 16, 2008 Proposing Release, 73 FR at 

36246–36247. 

266 Id. 

267 Id. 

268 Id. 

269 Id. 

270 Id. 

271See Moody’s Letter; S&P Letter. 

272See Moody’s Letter. 

273 Id. 

274 Id. 

275See S&P Letter. 

276See id. 

277 $7,830,000 × 100 = $783,000,000; 

$783,000,000/47 = $16,659,600. 

278 $2,250,000 × 100 = $225,000,000; 

$225,000,000/47 = $4,787,200. 

279 $16,659,600 × 0.98 = $16,326,400. 

280 $4,787,200 × 0.98 = $4,691,500. 

281 $16,326,400/3 = $5,442,100. 

282 $4,691,500/3 = $1,563,800. 

283 $16,659,600 × .02 = $333,200. 

284 $4,787,200 × .02 = $95,700. 

285 $333,200/7 = $47,600. 

286 $95,700/7 = $13,671 = $13,670. 

287 $57,255,400 (total one-time costs) + 

$15,829,700 (total annual costs) = $73,085,100. 

288 15 U.S.C. 78c(f). 

289 15 U.S.C. 78w(a)(2). 

The seven remaining NRSROs 

account for 2% of the credit ratings 

outstanding and, therefore, the 

Commission estimates they will incur 

approximately $12,800 259 of the total 

one time costs to the industry and 

approximately $3,000 260 of the total 

annual costs to the industry. 

Consequently, the Commission 

estimates that they will incur 

approximately $1,830 261 per firm in one 

time costs and $430 262 per firm in 

annual costs. The Commission further 

estimates that the cost per NRSRO 

within each category will vary based on 

their relative sizes. 

4. Amendments to Rule 17g–5 

Rule 17g–5 requires an NRSRO to 

manage and disclose certain conflicts of 

interest and prohibits other conflicts 

outright.263 The Commission is 

amending paragraph (c) to Rule 17g–5 to 

add three additional prohibited conflicts 

of interest.264 In the June 16, 2008 

Proposing Release, the Commission 

estimated that the amendments to 

paragraph (c) to Rule 17g–5 generally 

would impose de minimis costs on an 

NRSRO.265 However, the Commission 

recognized that an NRSRO may incur 

costs related to training employees 

about the new requirements.266 The 

Commission also recognized that it was 

possible that the proposed amendments 

could require some NRSROs to 

restructure their business models or 

activities, in particular with respect to 

their consulting services.267

The Commission requested comment 

in the June 16, 2008 Proposing Release 

on the costs that would result from the 

proposed amendments to Rule 17g–5.268

In addition, the Commission requested 

specific comment on whether the 

proposed amendments to paragraph (c) 

of Rule 17g–5 would impose training 

and restructuring costs, would impose 

personnel costs, or would impose any 

additional costs on an NRSRO that is 

part of a large conglomerate related to 

monitoring the business activities of 

persons associated with the NRSRO, 

such as affiliates located in other 

countries.269 The Commission asked 

that commenters provide specific data 

and analysis to support any comments 

they submit with respect to these cost 

estimates.270 The Commission received 

two comments on the proposed 

amendment, both from large 

NRSROs.271

One commenter said that paragraph 

(c)(6) would cause the NRSRO to create 

a number of new positions for senior 

chief credit officers so that drafting, 

approving and implementing 

methodologies could be handled 

exclusively by individuals with no 

involvement in the business of running 

an NRSRO.272 The commenter also 

stated that it would be necessary for the 

NRSRO to create additional, senior 

positions in its issuer and intermediary 

relations team for individuals, such as 

former analysts, who were deeply 

familiar with the NRSRO’s 

methodologies and procedures and 

could assist with fee negotiations.273

The NRSRO further stated that it would 

have to transfer former credit analysts to 

this team regularly and on an ongoing 

basis so that this team retained 

sufficient and current technical 

knowledge to handle fees.274 The 

NRSRO did not provide specific cost 

estimates. Another commenter stated 

that it would cost $7,830,000 for 

personnel time, system modifications, 

and training to implement the new 

amendments.275 In addition, the NRSRO 

estimated that its annual, ongoing costs 

would be $2,250,000.276 The NRSRO 

did not provide a breakdown of costs 

with its estimate. 

The Commission is revising its cost 

estimates based on the specific 

comments received. The Commission 

believes the costs incurred by the 

NRSROs will be in approximate 

proportion to the number of credit 

ratings they issue. The commenter that 

provided cost estimates for this rule 

amendment is the largest NRSRO in 

terms of credit ratings outstanding. As 

such, it accounts for approximately 47% 

of the total outstanding credit ratings 

reported by all registered NRSROs on 

their most recent Form NRSROs. The 

Commission estimates that this NRSRO 

will incur 47% of the total costs to the 

NRSROs from this amendment. 

Consequently, the total one time cost to 

the industry will be approximately 

$16,659,600 277 and the total annual cost 

to the industry will be $4,787,200.278

Furthermore, the three largest NRSROs 

in the first category account for 

approximately 98% of the total credit 

ratings issued by the NRSROs and, 

therefore, the Commission estimates 

they will incur approximately 

$16,326,400 279 of the total one-time cost 

to the industry and approximately 

$4,691,500 280 of the total annual cost to 

the industry. Consequently, the 

Commission estimates that they will 

incur approximately $5,442,100 281 per 

firm in one time costs and 

$1,563,800 282 per firm in annual costs. 

The seven remaining NRSROs 

account for 2% of the credit ratings 

outstanding and, therefore, the 

Commission estimates they will incur 

approximately $333,200 283 of the total 

one time costs to the industry and 

approximately $95,700 284 of the total 

annual costs to the industry. 

Consequently, the Commission 

estimates that they will incur 

approximately $47,600 285 per firm in 

one time costs and $13,760 286 per firm 

in annual costs. The Commission 

further estimates that the cost per 

NRSRO within each category will vary 

based on their relative sizes. 

C. Total Estimated Costs of This 

Rulemaking 

Based on the figures discussed above, 

the Commission estimates that the first 

year quantifiable costs related to this 

proposed rulemaking will be 

approximately $73,085,100.287

V. Consideration of Burden on 

Competition and Promotion of 

Efficiency, Competition, and Capital 

Formation 

Under Section 3(f) of the Exchange 

Act,288 the Commission shall, 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 289

requires the Commission to consider the 

anticompetitive effects of any rules the 


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290See Rapid Ratings Letter. 

291 Id. 

292See June 16, 2008 Proposing Release, 73 FR at 

36248–36250. 293 5 U.S.C. 603. 294Public Law No. 109–291 (2006); see also June 

5, 2007 Adopting Release. 

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. As discussed below, the 

Commission believes that the 

amendments will promote efficiency, 

competition, and capital formation. 

The amendments to the Instructions 

to Exhibit 1 to Form NRSRO will require 

NRSROs to make more comparable 

disclosures about the performance of 

their credit ratings. These disclosures 

will provide more information to users 

of credit ratings about the relative 

performance of the NRSROs and, 

thereby, promote competition. In 

addition, the amendments to the 

instructions to Exhibit 2 are designed to 

enhance the disclosures NRSROs make 

with respect to their methodologies for 

determining credit ratings. The 

Commission believes these enhanced 

disclosures will make it easier for users 

of credit ratings to compare the quality 

of the NRSRO’s procedures and 

methodologies for determining credit 

ratings. The greater transparency that 

will result from all these enhanced 

disclosures will make it easier for 

market participants to select the 

NRSROs that have the highest quality 

processes for determining credit ratings. 

This transparency is designed to 

increase competition and promote 

capital formation by restoring 

confidence in the credit ratings, which 

are an integral part of the capital 

formation process. 

The amendments to Rule 17g–2 are 

designed to enhance the Commission’s 

oversight of NRSROs and, with respect 

to the public disclosure of a percentage 

of the histories of their issuer-paid 

credit ratings, provide the marketplace 

with information for comparing the 

ratings performance of NRSROs subject 

to the requirement. Enhancing the 

Commission’s oversight will help 

enhance confidence in credit ratings 

and, thereby, promote capital formation. 

Increased disclosure of the histories of 

issuer-paid credit ratings could make 

the ratings performance of the NRSROs 

subject to this requirement more 

transparent to the marketplace and, 

thereby, highlight those firms that 

analyze credit risk better. The 

Commission believes that this enhanced 

disclosure will benefit smaller NRSROs 

to the extent they have performed better 

in determining issuer-paid credit ratings 

than other NRSROs by alerting the 

market to their superior performance. 

The amendment to Rule 17g–3 is 

designed to enhance the Commission’s 

oversight of NRSROs. Enhancing the 

Commission’s oversight will help 

enhance confidence in credit ratings 

and, thereby, promote capital formation. 

The amendments to Rule 17g–5 will 

prohibit NRSROs from determining 

credit ratings where they or their 

affiliate provided recommendations 

about the corporate or legal structure, 

assets, liabilities, or activities of the 

obligor being rated or the issuer of the 

security being rated, prohibit analysts 

from participating in fee negotiations, 

and prohibit credit analysts or persons 

responsible for approving a credit rating 

from receiving gifts from the obligor 

being rated, or from the issuer, 

underwriter, or sponsor of the securities 

being rated, other than items provided 

in the context of normal business 

activities such as meetings that have an 

aggregate value of no more than $25. 

These proposals are designed to 

increase confidence in the integrity of 

NRSROs and the credit ratings they 

issue and, thereby, enhance confidence 

in credit ratings and, by extension, 

promote capital formation. 

The Commission received one 

comment specifically on the 

Commission’s analysis of the whether 

the amendments would promote 

efficiency, competition, and capital 

formation.290 The commenter argued 

that the requirement to publish all 

ratings histories free of charge would be 

a ‘‘new barrier to entry’’ and would 

create ‘‘a significant disincentive to 

apply for the NRSRO designation’’ 

thereby reducing competition among 

NRSROs.291 The commenter stated that 

if these amendments were passed, the 

estimate that there would be 30 NRSROs 

would need to be revised. 

As discussed more fully in section 

II.B.1, in response to this comment and 

similar concerns raised by other 

commenters, the Commission has 

balanced the many competitive 

concerns expressed by commenters. The 

rule is designed to foster competition, 

by making ratings histories more 

accessible. However, the Commission 

has taken a number of steps to minimize 

the potential competitive effects. First, 

the amendments do not apply to 

subscriber-paid credit ratings. Second, 

with respect to issuer-paid credit 

ratings, the Commission notes that 

NRSROs generally make these ratings 

public. This publicly available, 

historical information currently is 

difficult to access and compare. The 

Commission expects that making this 

information more accessible will 

advance the Commission’s goal of 

fostering accountability and 

comparability among NRSROs. The 

Commission does not, however, expect 

that requiring NRSROs to make publicly 

available ratings action histories for a 

random sample of 10% of their 

outstanding issuer-paid credit ratings in 

a more accessible form six months after 

the rating action has been taken will 

have a material effect on their business. 

Because the Commission is requiring 

only a small portion of the ratings 

histories to be made available in a more 

accessible format, the Commission 

expects NRSROs will still be able to 

realize economic value from the 

information. 

The Commission has decided not to 

impose the same disclosure obligation 

on subscriber-paid credit ratings at this 

time out of competitive concerns raised, 

but is still considering how to make 

more information publicly available and 

accessible about the performance of 

these ratings. The Commission believes 

that the rule as adopted will address the 

concerns expressed by commenters and 

at the same time foster greater 

accountability of NRSROs with respect 

to their issuer-paid credit ratings as well 

as increase competition among NRSROs 

by making it easier for persons to 

analyze the actual performance of their 

credit ratings. 

VI. Final Regulatory Flexibility 

Analysis 

The Commission proposed 

amendments to Form NRSRO, Rule 17g– 

2, Rule 17g–3, and Rule 17g–5 under the 

Exchange Act. An Initial Regulatory 

Flexibility Analysis (‘‘IRFA’’) was 

published in the June 16, 2008 

Proposing Release.292 The Commission 

has prepared the following Final 

Regulatory Flexibility Analysis 

(‘‘FRFA’’), in accordance with the 

provisions of the Regulatory Flexibility 

Act,293 regarding amendments to Form 

NRSRO, Rule 17g–2, Rule 17g–3, and 

Rule 17g–5 under the Exchange Act. 

A. Need for and Objective of the 

Amendments 

The amendments will prescribe 

additional requirements for NRSROs to 

address concerns raised about the role 

of credit rating agencies in the recent 

credit market turmoil. The amendments 

are designed to enhance and strengthen 

the rules the Commission adopted in 

2007 to implement specific provisions 

of the Rating Agency Act.294 The 

objectives of the Rating Agency Act are 

‘‘to improve ratings quality for the 


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295See Senate Report. 

296See June 16, 2008 Proposing Release, 73 FR 

36250. 

297 Id. 

298See Rapid Ratings Letter. 

299See, e.g., DBRS Letter; Multiple-Markets 

Letter; CFA Institute Letter; Colorado PERA Letter; 

ABA Business Law Committees Letter. 

300 17 CFR 240.0–10(a). 

301 June 5, 2007 Adopting Release, 72 FR at 

33618. 

302See 17 CFR 240.0–10(a). 

303See amendments to Form NRSRO. 

304See amendments to Form NRSRO. 

305See amendments to Rule 17g–2. 

306Paragraph (a)(2)(iii) of Rule 17g–2. 

307Paragraph (a)(8) of Rule 17g–2. 

308See amendments to Rule 17g–3. 

309See amendments to Rule 17g–5. 

310 5 U.S.C. 603(c). 

protection of investors and in the public 

interest by fostering accountability, 

transparency, and competition in the 

credit rating industry.’’ 295 The 

amendments are designed to further 

achieve these objectives and further 

assist the Commission in monitoring 

whether an NRSRO complies with the 

statutes and regulations applicable to 

NRSROs. 

B. Significant Issues Raised by 

Commenters 

The Commission sought comment 

with respect to every aspect of the IRFA, 

including comments with respect to the 

number of small entities that may be 

affected by the proposed 

amendments.296 Commenters were 

asked to specify the costs of compliance 

with the proposed rules and suggest 

alternatives that would accomplish the 

goals of the rules.297 The Commission 

did not receive any comments on the 

IRFA. The Commission did, however, 

receive a limited number of comments 

that discussed the effect the rules might 

have on smaller credit rating agencies, 

although these commenters did not 

address whether their comments 

pertained to entities that would be small 

businesses for purposes of Regulatory 

Flexibility Act analysis. For example, a 

commenter stated that the proposed 

amendments, if adopted, would create a 

barrier to entry for new NRSROs.298 In 

addition, several commenters suggested 

that small NRSROs would not be able to 

comply with Rule 17g–5(c)(6), which 

prohibits persons within an NRSRO that 

are responsible for determining or 

approving credit ratings or developing 

the methodologies for determining 

credit ratings from participating in fee 

discussions.299 In response to these 

comments, the Commission will review 

requests by small NRSROs for 

exemptions from the rule under Section 

36 of the Exchange Act based on their 

specific circumstances. 

C. 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.’’ 300 The Commission believes 

that an NRSRO with total assets of $5 

million or less would qualify as a 

‘‘small’’ entity for purposes of the 

Regulatory Flexibility Act. 

As noted in the June 5, 2007 Adopting 

Release, the Commission believes that 

approximately 30 credit rating agencies 

ultimately may register as an NRSRO.301

Of the approximately 30 credit rating 

agencies that may register with the 

Commission, the Commission estimates 

that approximately 20 may be ‘‘small’’ 

entities for purposes of the Regulatory 

Flexibility Act.302

D. Reporting, Recordkeeping, and Other 

Compliance Requirements 

The amendments will revise Form 

NRSRO to elicit certain additional 

information regarding the performance 

data for the credit ratings and the 

methods used by an NRSRO for issuing 

credit ratings.303

The amendments will revise Rule 

17g–2 to establish additional 

recordkeeping requirements for 

NRSROs.304 The amendments will 

require an NRSRO to make and retain 

two additional records and retain a third 

type of record. The records would be: 

(1) A record of the rationale for any 

material difference between the credit 

rating implied by the model and the 

final credit rating issued, if a 

quantitative model is a substantial 

component in the process of 

determining a credit rating; 305 and (2) a 

record showing the history and dates of 

all previous rating actions with respect 

to each outstanding credit rating. An 

NRSRO also will be required to publicly 

disclose, in XBRL format and on a six 

month delay, a record showing the 

history and dates of all previous rating 

actions with respect to a random sample 

of 10% of the issuer-paid credit ratings 

for each ratings class for which an 

NRSRO is registered and has issued 500 

or more ratings paid for by the obligor 

being rated or by the issuer, 

underwriter, or sponsor of the security 

being rated.306 In addition, the NRSRO 

will be required to retain any 

complaints about the performance of a 

credit analyst.307 These records will 

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 Rating Agency Act) 

and whether the NRSRO was complying 

with the provisions of the Exchange Act 

including the provisions of the Rating 

Agency Act, the rules adopted 

thereunder, and the NRSRO’s disclosed 

policies and procedures. 

The amendments will revise Rule 

17g–3 to require an NRSRO to furnish 

the Commission with an additional 

annual report: The number of ratings 

actions in each class of credit rating for 

which it is registered.308 This 

requirement is designed to further assist 

the Commission in its examination 

function. 

The amendments will revise Rule 

17g–5 to prohibit NRSROs and their 

affiliates from providing consulting or 

advisory services, prohibit analysts from 

participating in fee negotiations, and 

prohibit credit analysts or persons 

responsible for approving a credit rating 

from receiving gifts from the obligor 

being rated, or from the issuer, 

underwriter, or sponsor of the securities 

being rated, other than items provided 

in the context of normal business 

activities such as meetings that have an 

aggregate value of no more than $25.309

E. Significant Alternatives 

Pursuant to Section 3(a) of the 

RFA,310 the Commission must consider 

certain types of alternatives, including: 

(1) The establishment of differing 

compliance or reporting requirements or 

timetables that take into account the 

resources available to small entities; (2) 

the clarification, consolidation, or 

simplification of compliance and 

reporting requirements under the rule 

for small entities; (3) the use of 

performance rather than design 

standards; and (4) an exemption from 

coverage of the rule, or any part of the 

rule, for small entities. 

The Commission is not establishing 

different compliance or reporting 

requirements or timetables. The 

Commission believes that obtaining 

comparable information from NRSROs 

regardless of size is important. 

Moreover, because the rules are 

relatively straightforward, the 

Commission does not believe it 

necessary to clarify, consolidate, or 

simplify compliance and reporting 

requirements under the rule for small 

entities at this time. Because the 

amendments are designed to improve 

the overall quality of ratings and 

enhance the Commission’s oversight, 


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6482 Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Rules and Regulations 

311 15 U.S.C. 78c(b), 78o–7, 78q, 78w, and 78mm. 

the Commission is not proposing to 

exempt any specific small entities from 

coverage of the rule, or any part of the 

rule. However, the Commission would 

be willing to consider requests for 

exemptive relief from smaller NRSROs 

for which the prohibition on 

participating in fee discussions may be 

more difficult to comply with than for 

larger NRSROs. The other prohibited 

conflicts do not appear to impose any 

disproportionate impact on smaller 

NRSROs. The amendments are designed 

to allow NRSROs the flexibility to 

develop procedures tailored to their 

specific organizational structure and 

business models. 

VII. Statutory Authority 

The Commission is adopting 

amendments to Form NRSRO and Rules 

17g–2, 17g–3, and 17g–5 pursuant to the 

authority conferred by the Exchange 

Act, including Sections 3(b), 15E, 17, 

23(a) and 36.311

Text of the Amendments 

List of Subjects in 17 CFR Parts 240 and 

249b 

Brokers, Reporting and recordkeeping 

requirements, Securities. 

■ In accordance with the foregoing, the 

Commission amends Title 17, Chapter II 

of the Code of Federal Regulations as 

follows. 

PART 240—GENERAL RULES AND 

REGULATIONS, SECURITIES 

EXCHANGE ACT OF 1934 

■ 1. The authority citation 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–1, 78k, 78k–1, 78l, 78m, 78n, 78o, 78p, 

78q, 78s, 78u5, 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. Section 240.17g-2 is amended by: 

■ a. Removing paragraph (a)(2)(iv); 

■ b. Redesignating paragraph (a)(2)(iii) 

as paragraph (a)(2)(iv); 

■ c. In newly redesignated paragraph 

(a)(2)(iv), removing ‘‘; and’’ and in its 

place adding a period; 

■ d. Adding new paragraph (a)(2)(iii); 

■ e. Adding paragraph (a)(8); 

■ f. In paragraph (b)(7), removing the 

phrase ‘‘maintaining, changing,’’ and in 

its place adding ‘‘maintaining, 

monitoring, changing,’’; 

■ g. Redesignating paragraphs (b)(8), 

(b)(9), and (b)(10) as paragraphs (b)(9), 

(b)(10), and (b)(11), respectively; 

■ h. Adding new paragraph (b)(8); and 

■ i. In paragraph (d), adding four 

sentences to the end of the paragraph. 

The additions read as follows: 

§ 240.17g–2 Records to be made and 

retained by nationally recognized statistical 

rating organizations. 

(a) * * * 

(2) * * * 

(iii) If a quantitative model was a 

substantial component in the process of 

determining the credit rating of a 

security or money market instrument 

issued by an asset pool or as part of any 

asset-backed or mortgage-backed 

securities transaction, a record of the 

rationale for any material difference 

between the credit rating implied by the 

model and the final credit rating issued; 

and 

* * * * * 

(8) For each outstanding credit rating, 

a record showing all rating actions and 

the date of such actions from the initial 

credit rating to the current credit rating 

identified by the name of the rated 

security or obligor and, if applicable, the 

CUSIP of the rated security or the 

Central Index Key (CIK) number of the 

rated obligor. 

(b) * * * 

(8) Any written communications 

received from persons not associated 

with the nationally recognized 

statistical rating organization that 

contain complaints about the 

performance of a credit analyst in 

initiating, determining, maintaining, 

monitoring, changing, or withdrawing a 

credit rating. 

* * * * * 

(d) * * * In addition, a nationally 

recognized statistical rating organization 

must make and keep publicly available 

on its corporate Internet Web site in an 

XBRL (eXtensible Business Reporting 

Language) format the ratings action 

information for ten percent of the 

outstanding credit ratings required to be 

retained pursuant to paragraph (a)(8) of 

this section and which were paid for by 

the obligor being rated or by the issuer, 

underwriter, or sponsor of the security 

being rated, selected on a random basis, 

for each class of credit rating for which 

it is registered and for which it has 

issued 500 or more outstanding credit 

ratings paid for by the obligor being 

rated or by the issuer, underwriter, or 

sponsor of the security being rated. Any 

ratings action required to be disclosed 

pursuant to this paragraph (d) need not 

be made public less than six months 

from the date such ratings action is 

taken. If a credit rating made public 

pursuant to this paragraph (d) is 

withdrawn or the instrument rated 

matures, the nationally recognized 

statistical rating organization must 

randomly select a new outstanding 

credit rating from that class of credit 

ratings in order to maintain the 10 

percent disclosure threshold. In making 

the information available on its 

corporate Internet Web site, the 

nationally recognized statistical rating 

organization shall use the List of XBRL 

Tags for NRSROs as specified on the 

Commission’s Internet Web site. 

* * * * * 

■ 3. Section 240.17g–3 is amended by: 

■ a. Adding paragraph (a)(6); and 

■ b. Revising paragraph (b). 

The addition and revision read as 

follows: 

§ 240.17g–3 Annual financial reports to be 

furnished by nationally recognized 

statistical rating organizations. 

(a) * * * 

(6) An unaudited report of the number 

of credit ratings actions (upgrades, 

downgrades, placements on credit 

watch, and withdrawals) taken during 

the fiscal year in each class of credit 

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

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

which the nationally recognized 

statistical rating organization is 

registered with the Commission. 

Note to paragraph (a)(6): A nationally 

recognized statistical rating organization 

registered in the class of credit ratings 

described in section 3(a)(62)(B)(iv) of the Act 

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

credit ratings actions taken on credit ratings 

of any security or money market instrument 

issued by an asset pool or as part of any 

asset-backed or mortgage-backed securities 

transaction for purposes of reporting the 

number of credit ratings actions in this class. 

(b) The nationally recognized 

statistical rating organization must 

attach to the financial reports furnished 

pursuant to paragraphs (a)(1) through 

(a)(6) of this section a signed statement 

by a duly authorized person associated 

with the nationally recognized 

statistical rating organization stating 

that the person has responsibility for the 

financial reports and, to the best 

knowledge of the person, the financial 

reports fairly present, in all material 

respects, the financial condition, results 

of operations, cash flows, revenues, 

analyst compensation, and credit rating 

actions of the nationally recognized 

statistical rating organization for the 

period presented. 

* * * * * 

■ 4. Section 240.17g–5 is amended by: 

■ a. Removing the word ‘‘or’’ at the end 

of paragraph (c)(3); 

■ b. Removing the period at the end of 

paragraph (c)(4) and in its place adding 

a semi-colon; and 


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Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Rules and Regulations 6483 

■ c. Adding paragraphs (c)(5), (c)(6), and 

(c)(7). 

The additions read as follows: 

§ 240.17g–5 Conflicts of interest. 

* * * * * 

(c) * * * 

(5) The nationally recognized 

statistical rating organization issues or 

maintains a credit rating with respect to 

an obligor or security where the 

nationally recognized statistical rating 

organization or a person associated with 

the nationally recognized statistical 

rating organization made 

recommendations to the obligor or the 

issuer, underwriter, or sponsor of the 

security about the corporate or legal 

structure, assets, liabilities, or activities 

of the obligor or issuer of the security; 

(6) The nationally recognized 

statistical rating organization issues or 

maintains a credit rating where the fee 

paid for the rating was negotiated, 

discussed, or arranged by a person 

within the nationally recognized 

statistical rating organization who has 

responsibility for participating in 

determining credit ratings or for 

developing or approving procedures or 

methodologies used for determining 

credit ratings, including qualitative and 

quantitative models; or 

(7) The nationally recognized 

statistical rating organization issues or 

maintains a credit rating where a credit 

analyst who participated in determining 

or monitoring the credit rating, or a 

person responsible for approving the 

credit rating received gifts, including 

entertainment, from the obligor being 

rated, or from the issuer, underwriter, or 

sponsor of the securities being rated, 

other than items provided in the context 

of normal business activities such as 

meetings that have an aggregate value of 

no more than $25. 

* * * * * 

PART 249b—FURTHER FORMS, 

SECURITIES EXCHANGE ACT OF 1934 

■ 6. The authority citation for part 249b 

continues to read in part as follows: 

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

otherwise noted; 

* * * * * 

■ 7. Form NRSRO (referenced in 

§ 249b.300) is amended by revising 

Exhibits 1 and 2 in section H, Item 9 of 

the Form NRSRO Instructions to read as 

follows: 

Note: The text of Form NRSRO and this 

amendment does not appear in the Code of 

Federal Regulations. 

Form NRSRO 

* * * * * 

Form NRSRO Instructions 

* * * * * 

H. INSTRUCTIONS FOR SPECIFIC LINE 

ITEMS 

* * * * * 

Item 9. Exhibits. * * * 

Exhibit 1. Provide in this Exhibit 

performance measurement statistics of 

the credit ratings of the Applicant/ 

NRSRO, including performance 

measurement statistics of the credit 

ratings separately for each class of credit 

rating for which the Applicant/NRSRO 

is seeking registration or is registered (as 

indicated in Item 6 and/or 7 of Form 

NRSRO). For the purposes of this 

Exhibit, an Applicant/NRSRO registered 

in the class of credit ratings described 

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

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

credit ratings of any security or money 

market instrument issued by an asset 

pool or as part of any asset-backed or 

mortgage-backed securities transaction 

for purposes of reporting the 

performance measurement statistics for 

this class. In addition, the class of 

government securities should be 

separated into three additional classes: 

Sovereigns, United States public 

finance, and international public 

finance. The performance measurement 

statistics must at a minimum show the 

performance of credit ratings in each 

class over 1 year, 3 year, and 10 year 

periods (as applicable) through the most 

recent calendar year-end, including, as 

applicable: Historical ratings transition 

and default rates within each of the 

credit rating categories, notches, grades, 

or rankings used by the Applicant/ 

NRSRO as an indicator of the 

assessment of the creditworthiness of an 

obligor, security, or money market 

instrument in each class of credit rating. 

The default statistics must include 

defaults relative to the initial rating. As 

part of this Exhibit, define the credit 

rating categories, notches, grades, and 

rankings used by the Applicant/NRSRO 

and explain the performance 

measurement statistics, including the 

inputs, time horizons, and metrics used 

to determine the statistics. If the 

Applicant/NRSRO is required to make 

and keep publicly available on its 

corporate Internet Web site in an XBRL 

(eXtensible Business Reporting 

Language) format a sample of ratings 

action information pursuant to the 

requirements of 17 CFR 240.17g–2(d), 

provide in this Exhibit the Web site 

address where this information is, or 

will be, made publicly available. 

Exhibit 2. Provide in this Exhibit a 

general description of the procedures 

and methodologies used by the 

Applicant/NRSRO to determine credit 

ratings, including unsolicited credit 

ratings within the classes of credit 

ratings for which the Applicant/NRSRO 

is seeking registration or is registered. 

The description must be sufficiently 

detailed to provide users of credit 

ratings with an understanding of the 

processes employed by the Applicant/ 

NRSRO in determining credit ratings, 

including, as applicable, descriptions of: 

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; whether and, if so, how 

information about verification 

performed on assets underlying or 

referenced by a security or money 

market instrument issued by an asset 

pool or as part of any asset-backed or 

mortgage-backed securities transaction 

is relied on in determining credit 

ratings; the quantitative and qualitative 

models and metrics used to determine 

credit ratings, including whether and, if 

so, how assessments of the quality of 

originators of assets underlying or 

referenced by a security or money 

market instrument issued by an asset 

pool or as part of any asset-backed or 

mortgage-backed securities transaction 

factor into the determination of credit 

ratings; the methodologies by which 

credit ratings of other credit rating 

agencies are treated to determine credit 

ratings for securities or money market 

instruments issued by an asset pool or 

as part of any asset-backed or 

mortgaged-backed securities transaction; 

the 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, including 

how frequently credit ratings are 

reviewed, whether different models or 

criteria are used for ratings surveillance 

than for determining initial ratings, 

whether changes made to models and 

criteria for determining initial ratings 

are applied retroactively to existing 

ratings, and whether changes made to 

models and criteria for performing 

ratings surveillance are incorporated 

into the models and criteria for 

determining initial ratings; and 

procedures to withdraw, or suspend the 


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6484 Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Rules and Regulations 

maintenance of, a credit rating. An 

Applicant/NRSRO may provide in 

Exhibit 2 the location on its Web site 

where additional information about the 

procedures and methodologies is 

located. 

* * * * * 

Dated: February 2, 2009. 

By the Commission. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. E9–2513 Filed 2–6–09; 8:45 am] 

BILLING CODE 8011–01–P 


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