Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Proposed Rules 6485 

1Exchange Act Release No. 57967 (June 16, 2008), 

73 FR 36212 (June 25, 2008) (‘‘June 16, 2008 

Proposing Release’’). The Commission adopted the 

existing NRSRO rules in June 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 

FR 40106 (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). 

2See Amendments to Rules for Nationally 

Recognized Statistical Rating Organizations, 

Exchange Act Release No. 59342 (February 2, 2009) 

(‘‘Companion Adopting Release’’). 

3See Companion Adopting Release. 

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Parts 240 and 243 

[Release No. 34–59343; File No. S7–04–09] 

RIN 3235–AK14 

Re-Proposed Rules for Nationally 

Recognized Statistical Rating 

Organizations 

AGENCY: Securities and Exchange 

Commission (‘‘Commission’’). 

ACTION: Proposed rules. 

SUMMARY: In conjunction with the 

publication today, in a separate release, 

of the Commission’s final rule 

amendments to its existing rules 

governing the conduct of nationally 

recognized statistical rating 

organizations (‘‘NRSROs’’), the 

Commission is proposing amendments 

which would require the public 

disclosure of credit rating histories for 

all outstanding credit ratings issued by 

an NRSRO on or after June 26, 2007 

paid for by the obligor being rated or by 

the issuer, underwriter, or sponsor of 

the security being rated. The 

Commission also is soliciting detailed 

information about the issues 

surrounding the application of a 

disclosure requirement on subscriberpaid credit ratings. The Commission is 

re-proposing for comment an 

amendment to its conflict or interest 

rule that would prohibit an NRSRO 

from issuing a rating for a structured 

finance product paid for by the 

product’s issuer, sponsor, or 

underwriter unless the information 

about the product provided to the 

NRSRO to determine the rating and, 

thereafter, to monitor the rating is made 

available to other persons. The 

Commission is proposing these rules to 

address concerns about the integrity of 

the credit rating procedures and 

methodologies at NRSROs. 

DATES: Comments should be received on 

or before March 26, 2009. 

ADDRESSES: Comments may be 

submitted by any of the following 

methods: 

Electronic Comments 

• Use the Commission’s Internet 

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

rules/proposed.shtml); or 

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

Number S7–04–09 on the subject line; 

or 

• Use the Federal eRulemaking Portal 

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

instructions for submitting comments. 

Paper Comments 

• Send paper comments in triplicate 

to Secretary, Securities and Exchange 

Commission, 100 F Street, NE., 

Washington, DC 20549–1090. 

All submissions should refer to File 

Number S7–04–09. This file number 

should be included on the subject line 

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

review your comments more efficiently, 

please use only one method. The 

Commission will post all comments on 

the Commission’s Internet Web site 

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

proposed.shtml). Comments are also 

available for public inspection and 

copying in the Commission’s Public 

Reference Room, 100 F Street, NE., 

Washington, DC 20549, on official 

business days between the hours of 10 

a.m. and 3 p.m. All comments received 

will be posted without change; we do 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make publicly available. 

FOR FURTHER INFORMATION CONTACT: 

Michael A. Macchiaroli, Associate 

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

McGowan, Assistant Director, at (202) 

551–5521; Randall W. Roy, Branch 

Chief, at (202) 551–5522; 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 under the Credit Rating 

Agency Reform Act of 2006 (‘‘Rating 

Agency Act’’).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. Today, in a 

separate release, the Commission is 

adopting, with revisions, a majority of 

the proposed rule amendments.2 In 

addition, in this release, the 

Commission is proposing additional 

amendments to paragraph (d) of Rule 

17g–2 and re-proposing with substantial 

modifications amendments to 

paragraphs (a) and (b) of Rule 17g–5. 

The proposed amendments to 

paragraph (d) of Rule 17g–2 would add 

public disclosure requirements to those 

that are being adopted today. 

Specifically, the amendments being 

adopted require an NRSRO to disclose, 

in eXtensible Business Reporting 

Language (‘‘XBRL’’) format and on a sixmonth delay, ratings action histories for 

a randomly selected 10% of the ratings 

paid for by the obligor being rated or by 

the issuer, underwriter, or sponsor being 

rated (‘‘issuer-paid credit ratings’’) for 

each rating class for which it has issued 

500 or more issuer-paid credit ratings.3

In this release, the Commission is 

proposing to further amend paragraph 

(d) of Rule 17g–2 to require NRSROs to 

disclose ratings actions histories for all 

credit ratings issued on or after June 26, 

2007 at the request of the obligor being 

rated or of the issuer, underwriter, or 

sponsor of the security being rated. The 

proposed amendment would allow an 

NRSRO to delay for up to 12 months 

publicly disclosing a rating action. 

The amendments to paragraphs (a) 

and (b) of Rule 17g–5 would 

substantially modify the previous 

proposal. As originally proposed, the 

amendments would have prohibited an 

NRSRO from issuing or maintaining a 

credit rating for a structured finance 

product paid for by the product’s issuer, 

sponsor or underwriter unless the 

information provided to the NRSRO by 

the issuer, sponsor, or underwriter to 

determine the rating is disseminated to 

other persons. The intent behind the 

proposal was to provide the opportunity 


cprice-sewell on PRODPC61 with PROPOSALS2
6486 Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Proposed Rules 

4Letter dated June 12, 2008 from G. Brooks Euler 

(‘‘Euler 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 22, 2008 from 

Richard Metcalf, Director, Corporate Affairs 

Department, Laborers’ International Union of North 

America (‘‘LIUNA 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 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 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 

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 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 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 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 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 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 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’’). These 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. 

5See, e.g., LIUNA Letter; Nappier Letter; ICI 

Letter; RBDA Letter; NCRC Letter. 

6See, e.g., ASF Letter; CFA Institute Letter; 

Roundtable Letter; ABA Business Law Committees 

Letter; Citi Letter; Lehman Letter; Moody’s Letter; 

S&P Letter; DPW Letter; CGSH Letter; DBA Letter; 

A.M. Best Letter; Realpoint Letter; CMSA Letter; 

DBRS Letter; Second SIFMA Letter; MBA Letter; 

Fitch Letter; SPA Letter; R&I Letter; JCR Letter. 

7See Section 5 of the Rating Agency Act and 15 

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

8 17 CFR 240.17g–2(a)(2)(i). 

9 17 CFR 240.17g–2(b). 

10 17 CFR 240.17g–2(c). 11 17 CFR 240.17g–2(d). 12 Id. 13See June 16, 2008 Proposing Release, 73 FR at 

36228–36230. 14See id. 

for other persons such as credit rating 

agencies and academics to perform 

independent analysis on the securities 

or money market instruments at the 

same time the hired NRSRO determines 

its rating. The goal was to increase 

competition among NRSROs for rating 

structured finance products by 

providing new entrants access to the 

information necessary to determine 

credit ratings for these products. 

The Commission received 38 

comment letters that addressed the Rule 

17g–5 proposal on June 16, 2008.4

While some commenters expressed 

support for it,5 the majority of 

commenters raised significant legal and 

practical issues with the proposal.6 The 

Commission is re-proposing the 

amendment, with substantial 

modifications, to solicit further 

comment. 

II. Proposed Amendments to Rule 

17g–2 

A. Rule 17g–2 

The Commission adopted Rule 17g–2, 

in part, pursuant to authority in Section 

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

NRSROs to make and keep such records, 

and make and disseminate such reports, 

as the Commission prescribes by rule as 

necessary or appropriate in the public 

interest, for the protection of investors, 

or otherwise in furtherance of the 

Exchange Act.7 Paragraph (a) of Rule 

17g–2 requires an NRSRO to make and 

retain certain records relating to its 

business. For example, paragraph (a)(2) 

requires an NRSRO to make a number 

of different records with respect to each 

current credit rating such as the identity 

of any analyst that participated in 

determining the credit rating.8

Paragraph (b) of Rule 17g–2 requires an 

NRSRO to retain certain other business 

records made in the normal course of 

business operations such as non-public 

information and work papers used to 

form the basis of credit rating.9

Paragraph (c) of Rule 17g–2 requires that 

the records identified in paragraphs (a) 

and (b) be retained for three years.10

Paragraph (d) of Rule 17g–2 prescribes 

the manner in which the records must 

be maintained by the NRSRO.11 For 

example, it provides that the records 

must be maintained in a manner that 

makes the records easily accessible to 

the main office of the NRSRO.12

B. The Amendments to Rule 17g–2(a) 

and (d) Adopted Today 

In the June 16, 2008 Proposing 

Release, the Commission proposed 

amendments to Rule 17g–2 which 

would create a new paragraph (a)(8) and 

amend paragraph (d). The new 

paragraph (a)(8) would require an 

NRSRO to make and retain a record of 

the ratings history of 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 would 

be maintained by the NRSRO as part of 

its internal records that are available to 

Commission staff. In addition, the 

proposed amendments to paragraph (d) 

of Rule 17g–2 would require an NRSRO 

to make that record publicly available 

on its corporate Web site in XBRL 

format six months after the date of the 

current rating action.13 Finally, the 

proposed amendments also would 

amend the instructions to Exhibit 1 to 

Form NRSRO to require the disclosure 

of the Web address where the XBRL 

Interactive Data File could be accessed 

in order to inform persons who use 

credit ratings where the ratings histories 

can be obtained.14


cprice-sewell on PRODPC61 with PROPOSALS2
Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Proposed Rules 6487 

15See id. 

16See Companion Adopting Release. 

17See 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. 

18See S&P Letter; Moody’s Letter. 

19See S&P Letter; Egan-Jones Letter; Fitch Letter; 

R&I Letter; 

20See Companion Adopting Release. 

21See June 5, 2007 Adopting Release. As 

originally adopted, paragraph (d) provided that 

‘‘[a]n original, or a true and complete copy of the 

original, of each record required to be retained 

pursuant to paragraphs (a) and (b) of [Rule 17g–2] 

must be maintained in a manner that, for the 

applicable retention period specified in paragraph 

(c) of [Rule 17g–2], makes the original record or 

copy easily accessible to the principal office of the 

[NRSRO] and to any other office that conducted 

activities causing the record to be made or 

received.’’ See June 5, 2007 Adopting Release, 72 

FR at 33622. 

The Commission noted in the June 16, 

2008 Proposing Release that the purpose 

of this disclosure would be to provide 

users of credit ratings, investors, and 

other market participants and observers 

the raw data with which to compare 

how the NRSROs initially rated an 

obligor or security and, subsequently, 

adjusted those ratings, including the 

timing of the adjustments.15 In order to 

expedite the establishment of a pool of 

data sufficient to provide a useful basis 

of comparison, the proposal would have 

applied this requirement to all 

outstanding credit ratings of securities 

and obligors as well as to all future 

credit ratings. 

As discussed in more detail in the 

Companion Adopting Release,16 several 

NRSROs offered comments to the 

proposed amendments to paragraph (d) 

of Rule 17g–2, raising two significant 

concerns. First, NRSROs that issue 

unsolicited ratings accessible only to 

subscribers (‘‘subscriber-paid credit 

ratings’’) and others stated that publicly 

disclosing all their ratings histories, 

even with a time delay of six months, 

would adversely impact their business 

and, therefore, could prove to be anticompetitive.17 Second, NRSROs that 

issue ratings paid for by the obligor 

being rated or the issuer, underwriter or 

sponsor of the security being rated 

(‘‘issuer-paid credit ratings’’) stated that 

a requirement 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.18 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 just compensation.19

In the Companion Adopting Release, 

the Commission is adopting new 

paragraph (a)(8) as proposed but 

significantly modifying the proposed 

amendments to paragraph (d).20

Specifically, the amendments to 

paragraph (d) as adopted will require an 

NRSRO to make publicly available, in 

an XBRL format and on a six-month 

delay, ratings action histories for 10% of 

the outstanding issuer-paid credit 

ratings required to be retained pursuant 

to paragraph (a)(8) for each class of 

credit rating for which it is registered 

and for which it has issued 500 or more 

issuer-paid credit ratings. Consequently, 

the public disclosure requirement only 

will apply to issuer-paid credit ratings. 

As explained in the Companion 

Adopting Release, the Commission 

believes it is appropriate at this time to 

limit the rule’s application to issuerpaid credit ratings. NRSROs that sell 

subscriber-paid credit ratings have 

suggested that requiring the histories of 

all these ratings to be publicly disclosed 

could seriously impact their businesses. 

This could reduce competition by 

causing NRSROs to withdraw 

registrations or discourage credit rating 

agencies from seeking registration. 

Accordingly, the Commission wants to 

gather more data on this issue before 

deciding on whether the rule should 

apply to subscriber-paid credit ratings. 

At the same time, the Commission does 

not want to delay adopting a final rule, 

particularly if it could begin providing 

meaningful information to users of 

credit ratings. In this regard, the 

Commission notes that issuer-paid 

credit ratings account for over 98% of 

the current 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 

credit ratings in at least one class of 

credit ratings for which they are 

registered. Consequently, applying this 

rule to issuer-paid credit 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 

determine issuer-paid credit ratings and, 

therefore, the amendments being 

adopted contain modifications 

discussed above. 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 sixmonth 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 issuer-paid 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. As 

indicated below, the Commission is 

seeking detailed comment on how a 

ratings history public disclosure 

requirement can be tailored to address 

concerns that disclosing this 

information would adversely impact the 

businesses of NRSROs that primarily 

determine subscriber-paid credit ratings. 

In this release, the Commission is 

seeking comment on whether the 

requirement to publicly disclose ratings 

action histories should be applied to 

subscriber-paid credit ratings. As 

indicated in questions below, the 

Commission is soliciting detailed 

information 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. 

C. The Proposed Amendments 

As discussed above, the Commission 

believes that the amendments to 

paragraph (d) of Rule 17g–2 being 

adopted today will provide users of 

credit ratings with information to begin 

assessing the performance of NRSROs 

subject to the rule. At the same time, the 

Commission continues to believe that its 

original proposal to require public 

disclosure of ratings action histories for 

all current credit ratings could provide 

substantial benefits to users of credit 

ratings. The Commission, therefore, is 

proposing to amend paragraph (d) of 

Rule 17g–2. Specifically, the 

Commission would add subparagraphs 

(1), (2) and (3) to paragraph (d). 

Paragraph (d)(1) would contain the 

record retention requirements of 

paragraph (d) as it was originally 

adopted by the Commission on June 5, 

2007.21 Paragraph (d)(2) would contain 

the ratings history disclosure 

requirements being adopted by the 


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6488 Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Proposed Rules 

22See Companion Adopting Release. These 

amendments provide: ‘‘[An NRSRO] 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 [Rule 17g–2] 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 is withdrawn or the 

instrument rated matures, the [NRSRO] 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 [NRSRO] shall use the List of XBRL Tags 

for NRSROs as specified on the Commission’s 

Internet Web site.’’ 

23See Section 17(a)(1) of the Exchange Act (15 

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

Commission in the Companion 

Adopting Release.22

Paragraph (d)(3) would contain the 

disclosure requirements the 

Commission is proposing in this release. 

These proposed amendments would 

require that NRSROs disclose ratings 

history information for 100% of their 

current issuer-paid credit ratings in an 

XBRL format. Further, they only would 

apply to issuer-paid credit ratings 

determined on or after June 26, 2007 

(the effective date of the Rating Agency 

Act). Therefore, under new paragraph 

(d)(3), an NRSRO would not need to 

disclose ratings action histories for 

issuer-paid credit ratings that were 

determined prior to that date (though 

NRSROs would continue to be required 

to publicly disclose ratings action 

histories provided for the randomly 

selected 10% of outstanding issuer-paid 

credit ratings in each registration class 

where there are 500 or more outstanding 

credit ratings). The prospective nature 

of the proposed rule is designed to ease 

the burden of compliance. In addition, 

to mitigate concerns regarding the loss 

of revenues NRSROs derive from selling 

downloads and data feeds to their 

current outstanding issuer-paid credit 

ratings, a credit rating action would not 

need to be disclosed until 12 months 

after the action is taken. 

The purpose of this proposed 

amendment is to provide users of credit 

ratings, investors, and other market 

participants and observers with the 

maximum amount of raw data with 

which to compare how NRSROs subject 

to the rule initially rated an obligor or 

security and, subsequently, adjusted 

those ratings, including the timing of 

the adjustments. The Commission 

believes that requiring the disclosure of 

the ratings action history of each issuerpaid credit rating would create the 

opportunity for market participants to 

use the information to develop 

performance measurement statistics that 

would supplement those required to be 

published by the NRSROs themselves in 

Exhibit 1 to Form NRSRO. The intent is 

to tap into the expertise and flexibility 

of credit market observers and 

participants to create better and more 

useful means to compare issuer-paid 

credit ratings. In addition, the 

Commission believes that the proposed 

amendment would foster greater 

accountability for NRSROs that 

determine issuer-paid credit ratings as 

well as competition among such 

NRSROs by making it easier for persons 

to analyze the actual performance of 

credit ratings in terms of accuracy in 

assessing creditworthiness. This could 

make NRSROs subject to the rule more 

accountable for their ratings by 

enhancing the transparency of the 

results of their rating processes for 

particular securities and obligors and 

classes of securities and obligors and 

encourage competition within the 

industry by making it easier for users of 

credit ratings to judge the output of such 

NRSROs. 

The Commission recognizes that 

releasing information on all ratings 

actions could cause financial loss for 

some firms. For that reason, the 

proposed amendment would provide 

that a ratings action need not be made 

publicly available until twelve months 

after the date of the rating action. 

The Commission is proposing these 

amendments, 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.23 The Commission 

preliminarily believes the proposed new 

public 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. 

Specifically, the proposed amendments 

would allow market participants to 

compare credit rating histories for 

issuer-paid credit ratings on an obligorby-obligor or instrument-by-instrument 

basis. Users of credit ratings would be 

able to compare side-by-side how two or 

more NRSROs subject to the rule 

initially rated a particular obligor or 

security, when the NRSROs took actions 

to adjust the rating upward or 

downward, and the degree of those 

adjustments. Furthermore, users of 

credit ratings, academics and 

information venders could use the raw 

data to perform analyses comparing how 

the NRSROs subject to the rule differ in 

initially determining issuer-paid credit 

ratings and in their monitoring of these 

ratings. This could identify an NRSRO 

that is an outlier because it determines 

particularly high or low issuer-paid 

credit ratings or is slow or quick to readjust outstanding ratings. It also could 

help identify which NRSROs subject to 

the rule tend to be more accurate in 

their issuer-paid credit ratings. This 

information also may identify NRSROs 

subject to the rule whose objectivity 

may be impaired because of the 

conflicts of interest surrounding issuerpaid credit ratings. 

The Commission generally requests 

comment on all aspects of this proposed 

amendment. In addition, the 

Commission requests comment on the 

following questions related to the 

proposal. 

• Is the proposed application of the 

rule to prospective credit ratings, i.e., 

credit ratings that are initially 

determined on or after June 26, 2007, 

appropriate and do commenters believe 

it would provide meaningful 

information if the rule was limited to 

credit ratings made on or after that date? 

Should the Commission adopt a final 

rule that uses another date such as the 

date the Rating Agency Act was 

enacted? If June 26, 2007 is the 

appropriate date, how long would it 

take for NRSROs to build up ratings 

history information to permit 

meaningful comparisons between 

NRSROs? What are the advantages and 

disadvantages of applying a disclosure 

rule on a prospective basis? 

• Should the Commission adopt a 

final rule that applies retrospectively to 

all outstanding credit ratings? 

Commenters should explain the benefits 

of retrospective application and how 

they would justify the costs. 

• Is the twelve-month delay before 

publicly disclosing a rating action 

sufficiently long to address concerns 

regarding the revenues NRSROs derive 

from selling downloads of, and data 

feeds to, their current issuer-paid credit 

ratings? Should the delay be for a longer 

period such as 18 months, 24 months, 

30 months or 36 months or longer? 

Alternatively, should the Commission 

adopt a final rule that has a shorter time 

lag such as three months or six months 

or no time lag in place? 

• In addition to revenues derived 

from selling data feeds to current issuerpaid credit ratings, do NRSROs derive 

revenues from selling access to their 


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Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Proposed Rules 6489 

ratings histories? If so, how material are 

these revenues when compared to 

revenues earned by NRSROs from 

selling downloads of, and data feeds to, 

current issuer-paid credit ratings and 

revenues earned from fees paid by 

obligors, issuers, underwriters and 

sponsors to determine and monitor 

credit ratings? Commenters providing 

information should quantify and 

breakout the amount of revenues earned 

by NRSROs issuer-paid credit ratings in 

dollars and/or percentages for each of 

the following categories: (1) Revenues 

from fees for determining and 

monitoring issuer-paid credit ratings; (2) 

revenues from selling access (by 

download, data feed or other method) to 

all current issuer-paid credit ratings; 

and (3) revenues from selling 

information about ratings actions 

histories of issuer-paid credit ratings. 

• Should the proposed amendments 

apply equally to issuer-paid and 

subscriber-paid credit ratings? For 

example, in what ways and to what 

extent might the objectivity of NRSROs 

in determining subscriber-paid credit 

ratings be impaired because of conflicts 

of interest? What would be the benefits 

for applying the rule’s requirements to 

subscriber-paid credit ratings? What 

would be the costs of applying the rule’s 

requirements to subscriber-paid credit 

ratings? 

• Are the goals of the rule—greater 

accountability of NRSROs and 

promotion of competition—achievable if 

subscriber-paid credit ratings are not 

subject to the rule’s requirements? How 

would these goals be enhanced if 

subscriber-paid credit ratings were 

subject to the rule’s requirements? 

• Do NRSROs derive revenues from 

selling information about ratings action 

histories for subscriber-paid credit 

ratings? If so, are those revenues 

material as compared to revenues they 

receive from selling subscriptions to 

current subscriber-paid credit ratings? 

Commenters providing information 

should quantify and breakout the 

amount of revenues earned by NRSROs 

in dollars and/or percentages for each of 

the following: (1) Selling subscriptions 

to all current subscriber-paid credit 

ratings; and (2) selling information 

about ratings actions histories of 

subscriber-paid credit ratings. 

• Similarly, do subscribers value 

ratings action histories for subscriberpaid credit ratings? Do subscribers value 

the in-depth analysis that is delivered 

with a rating action? How material is the 

value that subscribers place on the 

historical rating action itself as 

compared to the value they place on the 

in-depth analysis or materials that are 

delivered along with the rating action? 

Do commenters believe that the 

business of an NRSRO that determines 

subscriber-paid credit ratings would be 

materially compromised if the ratings 

action histories for the ratings were 

required to be publicly disclosed (but 

not the in-depth analysis or other 

materials)? 

• Do persons who subscribe to 

NRSROs’ subscriber-paid credit ratings 

value the current ratings only? 

Alternatively, do they subscribe to the 

ratings because subscriber-paid credit 

ratings identify trends sooner than 

issuer-paid credit ratings as some 

suggest? For example, do commenters 

believe the fact that the determination 

and monitoring of subscriber-paid credit 

ratings are funded by subscribers mean 

the NRSROs act more quickly to adjust 

the credit ratings? If so, would 

disclosing a rating action one year after 

it occurred reveal information that a 

subscriber otherwise would pay for in 

order to make a credit assessment or has 

the rating action become sufficiently 

stale that its value, if any, is limited to 

it being an item of historical 

information. If a credit rating action 

with respect to a subscriber-paid credit 

rating has intrinsic value beyond 

providing historical perspective, would 

this intrinsic value still exist two years 

after the rating action? If so, what length 

of delay would be sufficient to address 

NRSROs’ concerns regarding the loss of 

revenues from subscribers for access to 

their subscriber-paid credit ratings, 

while also achieving the Commission’s 

goals, among others, of increasing 

accountability and promoting 

competition among NRSROs? What 

effect would subjecting subscriber-paid 

credit ratings to the rule’s requirements 

have on competition? Would it 

compromise the viability of NRSROs 

that determine subscriber-paid credit 

ratings? For example, to what extent, if 

any, would subjecting subscriber-paid 

credit ratings to the rule’s requirements 

undercut competition by erecting 

barriers to entry or otherwise 

compromise the viability of NRSROs 

that determine subscriber-paid credit 

ratings? 

• If there is a length of time greater 

than one year that would better address 

concerns regarding the revenues 

NRSROs derive from subscriber-paid 

credit ratings (e.g., 18 months, 24 

months, 30 months, 36 months or 

longer), should that time lag only apply 

to subscriber-paid credit ratings or 

should it apply to both issuer-paid and 

subscriber-paid credit ratings? 

• As an alternative to adopting a final 

rule that applies to subscriber-paid 

credit ratings (along with issuer-paid 

credit ratings), should the Commission 

adopt a final rule amending paragraph 

(d) of Rule 17g–2 to require that an 

NRSRO publicly disclose credit rating 

actions for a random sample of 10% of 

the current subscriber-paid credit 

ratings for each class of credit rating for 

which they are registered and have 

issued 500 or more ratings? If the 

Commission were to adopt such an 

amendment, would the time lag of six 

months in the rule being adopted today 

be sufficient to address concerns 

regarding the revenues NRSROs earn 

from selling subscriptions to their 

subscriber-paid credit ratings. If not, 

should the Commission adopt an 

amendment to paragraph (d) of Rule 

17g–2 that extends the time lag to a 

longer period of time for subscriber-paid 

credit ratings (e.g., 12 months, 18 

months, 24 months, 30 months, or 36 

months or longer)? Are there other ways 

that the Commission could adjust the 

requirements of the proposed rule to 

apply a public disclosure requirement to 

ratings action histories of subscriberpaid credit ratings? Commenters should 

provide reasons and/or data for why a 

certain time lag is appropriate. 

• Similarly, if commenters believe 

that some form of public disclosure 

requirement should be applied to the 

histories of both issuer-paid and 

subscriber-paid credit ratings, what 

percentage of the histories should each 

type of credit rating be required to be 

disclosed and what time lag should be 

granted? For example, should both types 

of credit ratings be subject to the 

requirement that ratings action histories 

be publicly disclosed for a random 

sample of 10% of the outstanding credit 

ratings in each class of credit ratings 

with a six month time lag? 

Alternatively, should ratings action 

histories of issuer-paid credit ratings be 

disclosed at a higher percentage with a 

longer time lag, e.g., 20%, 50% or 100% 

of the outstanding credit ratings and a 

12, 16, or 24 month time lag? Should 

ratings action histories for subscriberpaid credit ratings be disclosed at a 

different percentage than issuer-paid 

credit ratings, e.g., 10%, 20%, or 50%? 

Commenters should provide reasons 

and/or data in their responses. 

• What diligence do potential 

subscribers to subscriber-paid credit 

ratings perform in deciding whether to 

subscribe to such ratings of a particular 

NRSRO? To what extent do NRSROs 

make ratings histories of subscriber-paid 

credit ratings available to potential 

subscribers? To what extent and in what 

ways are NRSROs that determine 

subscriber-paid credit ratings subject to 

competitive pressures? To what extent 

does the interest in developing a 

reputation for accuracy discipline the 


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6490 Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Proposed Rules 

24 15 U.S.C. 78o–7(h)(1). 

25 15 U.S.C. 78o–7(h)(2). 

26See 15 U.S.C. 78o–7(h)(2)(A)–(D). 

27See 15 U.S.C. 78o–7(h)(2)(E). 

28See 17 CFR 240.17g–5. 

29 17 CFR 240.17g–5(a). 

30 15 U.S.C. 78o–7(h)(1). 

31 17 CFR 240.17g–5(b)(1). 

32 17 CFR 240.17g–5(b)(2). 

33 17 CFR 240.17g–5(b)(3). 

34 17 CFR 240.17g–5(b)(4). 

35 17 CFR 240.17g–5(b)(5). 

36 17 CFR 240.17g–5(b)(6). 

37 17 CFR 240.17g–5(b)(7). 

38 17 CFR 240.17g–5(b)(8). 

39 17 CFR 240.17g–5(b)(9). 

accuracy of an NRSRO that determines 

subscriber-paid credit ratings? 

• Do NRSROs issue unsolicited credit 

ratings that are not paid for by selling 

subscriptions to access the ratings? For 

example, do NRSROs that primarily 

determine issuer-paid credit ratings for 

most, but not all, securities issued by 

companies in a particular industry 

group determine unsolicited ratings for 

securities issued by the remaining 

companies to round out coverage of the 

industry? Do NRSROs issue such 

unsolicited ratings to establish a track 

record for rating particular types of 

obligors or securities? 

• If NRSROs issue unsolicited (and 

not subscriber-paid for) credit ratings, to 

what extent are these ratings issued 

relative issuer-paid or subscriber-paid 

credit ratings? For example, what 

percentage of an NRSRO’s outstanding 

credit ratings are comprised of 

unsolicited (and not subscriber paid for) 

credit ratings? 

• Do NRSROs that issue unsolicited 

(and not subscriber-paid for) credit 

ratings make the ratings publicly 

available for free? 

• What types of conflicts arise from 

determining unsolicited (and not 

subscriber-paid for) credit ratings? For 

example, is there the potential that an 

NRSRO would issue a lower than 

warranted credit rating in order to 

pressure an obligor or issuer to pay the 

NRSRO for the rating? Would the public 

disclosure of ratings histories for 

unsolicited (but not subscriber-paid for) 

credit ratings help to mitigate this 

conflict? 

• Should the Commission adopt a 

final rule that requires the disclosure of 

the ratings histories of unsolicited (and 

not subscriber-paid for) credit ratings 

along with the issuer-paid for credit 

ratings? What would be the benefits and 

costs of requiring the disclosure of such 

credit ratings? 

• Should the Commission adopt a 

final rule that requires unsolicited (and 

not subscriber-paid for) credit ratings to 

be included for the purposes of 

determining whether an NRSRO has 

issued 500 or more credit ratings in a 

particular class of credit rating under 

Rule 17g–2(d) adopted today? What 

would be the benefits and costs of such 

a requirement? 

• Should the Commission adopt a 

final rule that requires unsolicited (and 

not subscriber paid for) credit ratings to 

be included in the publicly disclosed 

ratings histories for a random sample of 

10% of the credit ratings in a particular 

class of credit ratings under Rule 17g– 

2(d) adopted today? What would be the 

benefits and costs of such a 

requirement? 

• Should the Commission adopt a 

final rule that requires a sample of 

unsolicited (and not subscriber paid for) 

credit ratings to be separately disclosed 

from issuer-paid credit ratings? If so, 

what should be the number of credit 

ratings in a particular class of credit 

ratings triggering that public disclosure? 

What percentage of unsolicited rating 

should be disclosed? What, if any, time 

delay should apply to the disclosure of 

a random sample of unsolicited ratings? 

III. Re-Proposed Amendments to Rule 

17g–5 

A. Rule 17g–5 

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

requires an NRSRO to establish, 

maintain, and enforce policies and 

procedures reasonably designed, taking 

into consideration the nature of its 

business, to address and manage 

conflicts of interest.24 Section 15E(h)(2) 

of the Exchange Act requires the 

Commission to adopt rules to prohibit 

or require the management and 

disclosure of conflicts of interest 

relating to the issuance of credit 

ratings.25 The statute also identifies 

certain types of conflicts relating to the 

issuance of credit ratings that the 

Commission may include in its rules.26

Furthermore, it contains a catchall 

provision for any other potential 

conflict of interest that the Commission 

deems is necessary or appropriate in the 

public interest or for the protection of 

investors to include in its rules.27 The 

Commission implemented these 

statutory provisions through the 

adoption of Rule 17g–5, which prohibits 

the conflicts identified in the statute 

and certain additional conflicts either 

outright or if the NRSRO has not 

disclosed them and established policies 

and procedures to manage them.28

Paragraph (a) of Rule 17g–5 29

prohibits a person within an NRSRO 

from having a conflict of interest 

relating to the issuance of a credit rating 

that is identified in paragraph (b) of the 

rule unless the NRSRO has disclosed the 

type of conflict of interest in its 

application for registrations with the 

Commission in compliance with Rule 

17g–1 (i.e., on Form NRSRO) and has 

implemented policies and procedures to 

address and manage the type of conflict 

of interest in accordance with Section 

15E(h)(1) of the Exchange Act.30

Paragraph (b) of Rule 17g–5 currently 

identifies nine types of conflicts that are 

subject to the provisions of paragraph 

(a): 

• Being paid by issuers or 

underwriters to determine credit ratings 

with respect to securities or money 

market instruments they issue or 

underwrite; 31

• Being paid by obligors to determine 

credit ratings with respect to the 

obligors; 32

• Being paid for services in addition 

to determining credit ratings by issuers, 

underwriters, or obligors that have paid 

the NRSRO to determine a credit 

rating; 33

• Being paid by persons for 

subscriptions to receive or access the 

credit ratings of the NRSRO and/or for 

other services offered by the NRSRO 

where such persons may use the credit 

ratings of the NRSRO to comply with, 

and obtain benefits or relief under, 

statutes and regulations using the term 

‘‘NRSRO;’’ 34

• Being paid by persons for 

subscriptions to receive or access the 

credit ratings of the NRSRO and/or for 

other services offered by the NRSRO 

where such persons also may own 

investments or have entered into 

transactions that could be favorably or 

adversely impacted by a credit rating 

issued by the NRSRO; 35

• Allowing persons within the 

NRSRO to directly own securities or 

money market instruments of, or having 

other direct ownership interests in, 

issuers or obligors subject to a credit 

rating determined by the NRSRO; 36

• Allowing persons within the 

NRSRO to have a business relationship 

that is more than an arms length 

ordinary course of business relationship 

with issuers or obligors subject to a 

credit rating determined by the 

NRSRO; 37

• Having a person associated with the 

NRSRO that is a broker or dealer 

engaged in the business of underwriting 

securities or money market 

instruments; 38 and 

• Any other type of conflict of 

interest relating to the issuance of credit 

ratings by the NRSRO that is material to 

the NRSRO and that is identified by the 

NRSRO in Exhibit 6 to Form NRSRO in 

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

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

and Rule 17g–1.39


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40 17 CFR 240.17g–5(c)(1)–(4). 

41 17 CFR 240.17g–5(c)(1). 

42 17 CFR 240.17g–5(c)(2). In the June 5, 2007 

Adopting Release, the Commission stated that the 

prohibition applied to ‘‘direct’’ ownership of 

securities and, therefore, would not apply to 

indirect ownership interests, for example, through 

mutual funds or blind trusts. See, June 5, 2007 

Adopting Release, 72 FR at 33598. 

43 17 CFR 240.17g–5(c)(3). 

44 17 CFR 240.17g–5. 

45 June 16, 2008 Proposing Release, 73 FR at 

36219–36226, 36251. 

46 17 CFR 240.17g–5(b)(1). As the Commission 

noted when adopting Rule 17g–5, the concern with 

conflict identified in paragraph (b)(1) ‘‘is that an 

NRSRO may be influenced to issue a more favorable 

credit rating than warranted in order to obtain or 

retain the business of the issuer or underwriter.’’ 

June 5, 2007 Adopting Release, 72 FR at 33595. 

47 June 16, 2008 Proposing Release, 73 FR at 

36251. 

48 June 16, 2008 Proposing Release, 73 FR at 

36219–36226, 36251. 

49See id. This proposed requirement would have 

been in addition to the current requirements of 

paragraph (a) that an NRSRO disclose the type of 

conflict of interest in Exhibit 6 to Form NRSRO; and 

establish, maintain and enforce written policies and 

procedures to address and manage the conflict of 

interest. 17 CFR 240 17g–5(a)(1) and (2). 

50See June 16, 2008 Proposing Release, 73 FR at 

36222–36226. 

51 Id. 

52See id. 

53See A.M. Best Letter; Raingeard Letter; Citi 

Letter; DBA Letter; ABA Business Law Committees 

Letter; SPA Letter; CHSG Letter. 

54See, e.g., CGSH Letter; Citi Letter; DBA Letter; 

Egan-Jones Letter; LIUNA Letter; Realpoint Letter. 

55Trepp Letter. 

56See CMSA Letter; IBFED Letter; MICA Letter; 

MBA Letter; ASF Letter; Roundtable Letter; SPA 

Letter; Citi Letter; Lehman Letter. 

57See, e.g. Citi Letter; DBA Letter; Lehman Letter; 

Moody’s Letter; ASF Letter. 

Paragraph (c) of Rule 17g–5 

specifically prohibits outright four types 

of conflicts of interest.40 Consequently, 

an NRSRO would violate the rule 

regardless of whether it had disclosed 

them and established procedures 

reasonably designed to address them. 

The four prohibited conflicts are: 

• The NRSRO issues or maintains a 

credit rating solicited by a person that, 

in the most recently ended fiscal year, 

provided the NRSRO with net revenue 

(as reported under Rule 17g–3) equaling 

or exceeding 10% of the total net 

revenue of the NRSRO for the fiscal 

year; 41

• The NRSRO issues or maintains a 

credit rating with respect to a person 

(excluding a sovereign nation or an 

agency of a sovereign nation) where the 

NRSRO, a credit analyst that 

participated in determining the credit 

rating, or a person responsible for 

approving the credit rating, directly 

owns securities of, or has any other 

direct ownership interest in, the person 

that is subject to the credit rating; 42

• The NRSRO issues or maintains a 

credit rating with respect to a person 

associated with the NRSRO; 43 or 

• The NRSRO issues or maintains a 

credit rating where a credit analyst who 

participated in determining the credit 

rating, or a person responsible for 

approving the credit rating is an officer 

or director of the person that is subject 

to the credit rating. 

B. The Amendments to Paragraphs (a) 

and (b) of Rule 17g–5 Proposed in the 

June 16, 2008 Release 

In the June 16, 2008 Proposing 

Release, the Commission proposed to 

amend paragraph (b) of Rule 17g–5 44 to 

add to the list of conflicts that must be 

disclosed and managed the additional 

conflict of repeatedly being paid by 

certain issuers, sponsors, or 

underwriters (hereinafter collectively 

‘‘arrangers’’) to rate structured finance 

products.45 This conflict is a subset of 

the broader conflict of interest already 

identified in paragraph (b)(1) of Rule 

17g–5; namely, ‘‘being paid by issuers 

and underwriters to determine credit 

ratings with respect to securities or 

money market instruments they issue or 

underwrite.’’ 46 Specifically, the 

proposed amendment would have redesignated paragraph (b)(9) of Rule 17g– 

5 as paragraph (b)(10) and in new 

paragraph (b)(9) identified the following 

conflict: Issuing or maintaining a credit 

rating for a security or money market 

instrument issued by an asset pool or as 

part of any asset-backed or mortgagebacked securities transaction that was 

paid for by the issuer, sponsor, or 

underwriter of the security or money 

market instrument.47

Furthermore, the Commission 

proposed amendments to paragraph (a) 

of Rule 17g–5 that would have 

established additional conditions— 

beyond disclosing the conflict and 

establishing procedures to manage it— 

that would need to be met for an 

NRSRO to issue or maintain a credit 

rating subject to this conflict.48

Specifically, the Commission proposed 

a new paragraph (a)(3) that would have 

required, as a condition to the NRSRO 

rating a structured finance product, that 

the information provided to the NRSRO 

and used by the NRSRO in determining 

an initial credit rating and, thereafter, 

performing surveillance on the credit 

rating be disclosed through a means 

designed to provide reasonably broad 

dissemination of the information.49 The 

proposed amendments did not specify 

which entity—the NRSRO or the 

arranger—would need to disclose the 

information. 

The proposed amendments would 

have required further that, for offerings 

not registered under the Securities Act, 

the information would need to be 

disclosed only to investors and credit 

rating agencies on the day the offering 

price is set and, subsequently, publicly 

disclosed on the first business day after 

the offering closes. These additional 

conditions in new paragraph (a)(3) only 

would have applied to the conflict 

identified in proposed new paragraph 

(b)(9). The conflicts currently identified 

in paragraph (b) of Rule 17g–5 would 

have continued to be subject only to the 

conditions set forth in paragraphs (a)(1) 

and (a)(2). 

The Commission also provided in the 

June 16, 2008 Proposing Release three 

proposed interpretations of how the 

information could be disclosed under 

the requirements of the proposed rule in 

a manner consistent with the provisions 

of the Securities Act.50 These 

interpretations addressed disclosure 

under the proposed amendment in the 

context of public, private, and offshore 

securities offerings.51

C. The Comments on the June 16, 2008 

Proposed Amendments 

The Commission received 38 

comment letters in response to the June 

16, 2008 Proposing Release that 

addressed these proposed amendments 

to Rule 17g–5. The majority of 

commenters opposed the amendment or 

raised substantial practical and legal 

questions about how it would operate 

when it became effective.52 Many of 

these commenters questioned whether 

the rule would achieve its goal of 

increasing competition.53 For example, 

some stated that it would not provide 

credit rating agencies the opportunity to 

determine unsolicited ratings because 

they would receive the information too 

late to issue a timely rating or that they 

would have a lesser understanding of 

the transaction and would, therefore, be 

unable to produce an accurate rating.54

One commenter stated that the 

surveillance information called for 

under the proposed amendment is 

already available to the public for a fee 

through third party vendors.55

Many commenters were concerned 

with the disclosure of proprietary 

information.56 These commenters were 

concerned that if issuers and 

underwriters were forced to disclose 

proprietary information, they would 

instead choose not to share this 

information with the NRSROs, which 

could affect the accuracy of the rating.57

Commenters also were concerned that 

disclosing the information could create 

liability issues under Sections 11 and 12 

of the Securities Act, particularly if the 

disclosing party is not the issuer or 


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6492 Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Proposed Rules 

58See ICI Letter; R&I Letter; Moody’s Letter; Fitch 

Letter; S&P Letter; DBRS Letter; ASF Letter; CGSH 

Letter; ABA Business Law Committees Letter; DBA 

Letter; Citi Letter; Lehman Letter. 

59See CGSH Letter. 

60See S&P Letter; Moody’s Letter; Fitch Letter; 

R&I Letter. 

61R&I Letter. 

62See DBRS Letter; ASF Letter; CreditSights 

Letter. 

63See DBRS Letter; ASF Letter; CreditSights 

Letter. 

64See Second SIFMA Letter; ICI Letter; Rapid 

Ratings Letter. 

65See A.M. Best Letter; DBRS Letter; Fitch Letter; 

S&P Letter; R&I Letter; Moody’s Letter. At least one 

commenter opposed a safe harbor for NRSROs. See 

Rapid Ratings Letter. 

66See Fitch Letter; ICI Letter; CreditSights Letter; 

S&P Letter. 

67See ASF Letter; CFA Institute Letter. 

68See Council Letter. 

69See RBDA Letter. 

70See e.g., Lockyer Letter; Nappier Letter; ICI 

Letter. 

71See e.g., LIUNA Letter. 

72See Egan-Jones Letter and Realpoint Letter. 

73 ICI Letter; A.M. Best Letter; S&P Letter. 

74 15 U.S.C. 78o–7(h)(2). 

75 Id. 

originator or if the information 

disclosed was not prepared for the 

purpose of being used as offering 

materials.58 At least one commenter was 

concerned that if the information was 

presented to investors outside the 

context of a disclosure document, there 

would be significant risk that investors 

might misinterpret the data.59 Other 

commenters raised concerns that 

disclosing the information could violate 

foreign law or, at the very least, put U.S. 

credit rating agencies at a disadvantage 

to compete in foreign markets where 

other credit rating agencies are not 

subject to the same disclosure 

requirements.60 One NRSRO stated that 

if it were forced to disclose information 

on offshore offerings, it would have to 

withdraw from registration as an 

NRSRO in certain classes.61 Some 

commenters suggested that instead of 

requiring the information to be 

disclosed to a range of market 

participants, it should only be disclosed 

to other NRSROs that seek to undertake 

an unsolicited rating.62 The commenters 

stated that NRSROs would be subject to 

the same confidentiality agreements that 

arrangers make with NRSROs they hire 

to rate structured finance products.63

The Commission specifically asked 

for comments on which party should be 

required to disclose the information 

given to an NRSRO. Some commenters 

believed that the NRSRO was in the best 

position to disclose this information.64

However, many of the NRSROs stated 

that requiring them to disclose the 

information would put them at risk and 

they requested that another party be 

required to make the disclosure or that 

NRSROs be given a safe harbor if they 

were required to disclose the 

information.65 Commenters also were 

split about the type of information that 

should be disclosed. Some commenters 

believed that all the information an 

NRSRO receives from an arranger 

should be required to be disclosed,66

while other commenters wanted to 

prevent a ‘‘data dump’’ and believed 

only the information the NRSRO uses to 

determine a rating should be 

disclosed.67 At least one commenter 

wanted the disclosure to include the 

methodologies and underlying 

assumptions used by the NRSRO.68

Comments supporting the proposal 

generally argued that the Commission 

should go farther to address the conflict 

by, for example, considering whether it 

should be prohibited outright,69

extending its application to other 

classes of ratings such as those for 

municipal securities,70 or requiring the 

dissemination of more information such 

as each loan pool submitted to the 

NRSRO regardless of whether it is the 

ultimate pool used in determining the 

final rating.71

Several commenters offered technical 

suggestions as to how the rule should be 

modified. For example, two commenters 

requested that the timing of the 

disclosure of information used to 

determine a credit rating be made prior 

to the pricing date—one suggested six 

weeks and the other two weeks—to 

provide sufficient time to determine an 

unsolicited rating.72 Another 

commenter suggested that the definition 

of ‘‘security or money market 

instrument issued by an asset pool or as 

part of any asset-backed or mortgage 

backed securities transaction’’ was 

overly broad and should be clarified.73

D. The Re-Proposed Amendments 

After reviewing these comments, the 

Commission has made significant 

changes to the proposed amendments 

and is re-proposing them, as modified, 

for further comment. As discussed in 

more detail below, under the reproposed amendments: (1) NRSROs that 

are hired by arrangers to perform credit 

ratings for structured finance products 

would need to disclose to other NRSROs 

(and only other NRSROs) the deals for 

which they were in the process of 

determining such credit ratings; (2) the 

arrangers would need to provide the 

NRSROs they hire to rate structured 

finance products with a representation 

that they will provide information given 

to the hired NRSRO to other NRSROs 

(and only other NRSROs); and (3) 

NRSROs seeking to access information 

maintained by the NRSROs and the 

arrangers would need to furnish the 

Commission an annual certification that 

they are accessing the information 

solely to determine credit ratings and 

will determine a minimum number of 

credit ratings using the information. 

More specifically, under the reproposed amendments, NRSROs that are 

paid by arrangers to determine credit 

ratings for structured finance products 

would be required to maintain a 

password protected Internet Web site 

that lists each deal they have been hired 

to rate. They also would be required to 

obtain representations from the arranger 

hiring the NRSRO to determine the 

rating that the arranger will post all 

information provided to the NRSRO to 

determine the rating and, thereafter, to 

monitor the rating on a password 

protected Internet Web site. NRSROs 

not hired to determine and monitor the 

ratings would be able to access the 

NRSRO Internet Web sites to learn of 

new deals being rated and then access 

the arranger Internet Web sites to obtain 

the information being provided by the 

arranger to the hired NRSRO during the 

entire initial rating process and, 

thereafter, for the purpose of 

surveillance. However, the ability of 

NRSROs to access these NRSRO and 

arranger Internet Web sites would be 

limited to NRSROs that certify to the 

Commission on an annual basis, among 

other things, that they are accessing the 

information solely for the purpose of 

determining or monitoring credit 

ratings, that they will keep the 

information confidential and treat it as 

material non-public information, and 

that they will determine credit ratings 

for at least 10% of the deals for which 

they obtain information. They also 

would be required to disclose in the 

certification the number of deals for 

which they obtained information 

through accessing the Internet Web sites 

and the number of ratings they issued 

using that information during the year 

covered by their most recent 

certification. 

The Commission is re-proposing these 

amendments to Rule 17g–5, in part, 

pursuant to the authority in Section 

15E(h)(2) of the Exchange Act.74 The 

provisions in this section of the statute 

provide 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.75 The 

Commission preliminarily believes the 

re-proposed amendments are necessary 

and appropriate in the public interest 

and for the protection of investors 

because they are designed to address 

conflicts of interest and improve the 


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Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Proposed Rules 6493 

76See June 16, 2008 Proposing Release, 73 FR at 

36251. 

77 Id. 

78 15 U.S.C. 78c(a)(62)(B)(iv). This provision—a 

component of the definition of ‘‘NRSRO’’—refers to 

issuers of asset-backed securities (as that term is 

defined in Section 1101(c) of part 229 of Title 17 

of the Code of Federal Regulations, as in effect on 

the date of enactment of this paragraph. Id. 

79 15 U.S.C. 78o–7(i)(1)(B). 

80 17 CFR 240.17g–6(a)(4). 

81See June 16, 2008 Proposing Release, 73 FR at 

36219–36226, 36251. 

quality of credit ratings for structured 

finance products by making it possible 

for more NRSROs to rate structured 

finance products. Generally, the 

information relied on by the hired 

NRSROs to rate structured finance 

products is non-public. This makes it 

difficult for other NRSROs to rate these 

securities and money market 

instruments. As a result, the products 

frequently are issued with ratings from 

only one or two NRSROs and only by 

NRSROs that are hired by the issuer, 

sponsor, or underwriter (i.e., NRSROs 

that are subject to the conflict of being 

repeatedly paid by certain arrangers to 

rate these securities and money market 

instruments). 

The goal is to increase the number of 

ratings extant for a given structured 

finance security or money market 

instrument and, in particular, promote 

the issuance of ratings by NRSROs that 

are not hired by the arranger. This 

would provide users of credit ratings 

with a broader range of views on the 

creditworthiness of the security or 

money market instrument and 

potentially expose an NRSRO that was 

unduly influenced by the ‘‘issuer-pay’’ 

conflict into issuing higher than 

warranted ratings. Furthermore, the 

proposal also is designed to make it 

more difficult for arrangers to exert 

influence over the NRSROs they hire to 

determine ratings for structured finance 

products. Specifically, by opening up 

the rating process to more NRSROs, the 

proposal could make it easier for the 

hired NRSRO to resist such pressure by 

increasing the likelihood that any steps 

taken to inappropriately favor the 

arranger could be exposed to the market 

through the ratings issued by other 

NRSROs. 

A paragraph-by-paragraph description 

of the proposed amendments follows. 

1. Proposed New Paragraph (b)(9) 

As re-proposed, new paragraph (b)(9) 

of Rule 17g–5 would be the same as 

proposed in the June 16, 2008 Proposing 

Release.76 Specifically, the amendment 

would add the following conflict to the 

types of conflicts identified in 

paragraph (b) of the rule: Issuing or 

maintaining a credit rating for a security 

or money market instrument issued by 

an asset pool or as part of any assetbacked or mortgage-backed securities 

transaction that was paid for by the 

issuer, sponsor, or underwriter of the 

security or money market instrument.77

An NRSRO having this conflict would 

be subject to the provisions in new 

paragraph (a)(3) of Rule 17g–5 (as well 

as the existing disclosure and 

management provisions in paragraphs 

(a)(1) and (a)(2)). 

Under the proposed rule text, the type 

of security or money market instrument 

subject to the conflict would be one that 

is ‘‘issued by an asset pool or as part of 

any asset-backed or mortgage-backed 

securities transaction.’’ The 

Commission’s intent is to have the 

definition be sufficiently broad to cover 

all structured finance products and, 

therefore, not limit the rule’s scope to 

structured finance products that meet 

narrower definitions such as the one in 

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

Act.78 Moreover, the Commission notes 

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

Act (adopted as part of the Rating 

Agency Act) uses identical language to 

describe a potentially unfair, coercive or 

abusive practice relating the ratings of 

securities or money market 

instruments.79 The Commission 

adopted Rule 17g–6(a)(4), in part, under 

this statutory authority.80 This 

paragraph uses the same language— 

securities or money market instruments 

‘‘issued by an asset pool or as part of 

any asset-backed or mortgage-backed 

securities transaction’’—to describe the 

prohibited practice. As used in Rule 

17g–6 and proposed in new paragraph 

(b)(9) to Rule 17g–5, the Commission 

intends this definition to cover the 

broad range of structured finance 

products, including, but not limited to, 

securities collateralized by pools of 

loans or receivables (e.g., mortgages, 

auto loans, school loans credit card 

receivables, leases), collateralized debt 

obligations, synthetic collateralized debt 

obligations that reference debt securities 

or indexes, and hybrid collateralized 

debt obligations. 

The Commission generally requests 

comment on all aspects of this proposed 

new paragraph to Rule 17g–5. In 

addition, the Commission requests 

comment on the following question 

related to the proposal. 

• Would the definition of the 

securities and money market 

instruments covered by this conflict— 

namely, ones ‘‘issued by an asset pool 

or as part of any asset-backed or 

mortgage-backed securities 

transaction’’—apply to all types of 

structured finance products? Should the 

definition be made broader or 

narrowed? 

2. Proposed New Paragraph (a)(3) 

As re-proposed, paragraph (a)(3) 

would be substantially different than 

proposed in the June 16, 2008 Proposing 

Release.81 Specifically, an NRSRO 

subject to the conflict identified in new 

paragraph (b)(9)—issuing or maintaining 

a credit rating for a security or money 

market instrument issued by an asset 

pool or as part of any asset-backed or 

mortgage-backed securities transaction 

that was paid for by the issuer, sponsor, 

or underwriter of the security or money 

market instrument—would have to take 

a number of actions described in the 

following sections. 

a. Proposed New Paragraph (a)(3)(i) 

Under proposed new paragraph 

(a)(3)(i) of Rule 17g–5, the NRSRO 

would be required to maintain on a 

password-protected Internet Web site a 

list of each structured finance security 

or money market instrument for which 

it currently is in the process of 

determining an initial credit rating in 

chronological order and identifying the 

type of security or money market 

instrument, the name of the issuer, the 

date the rating process was initiated, 

and the Internet Web site address where 

the issuer, sponsor, or underwriter of 

the security or money market 

instrument represents that the 

information described in paragraphs 

(a)(3)(iii)(C) and (D) (see below 

discussion) can be accessed. The 

NRSRO would need to post this 

information no later than when the 

arranger first transmits information to 

the NRSRO that is to be used in the 

rating process. Further, the list would 

need to be maintained in chronological 

order so NRSROs accessing the Internet 

Web site would be able to determine the 

most recently initiated rating processes. 

The text of proposed paragraph 

(a)(3)(i) only refers to transactions where 

the NRSRO is in the process of 

determining an ‘‘initial’’ credit rating. 

The Commission does not intend that 

the rule require the NRSRO to include 

on the Internet Web site information 

about securities or money market 

instruments for which the NRSRO has 

issued a final rating and now is 

monitoring the rating. The proposed 

amendment is designed to alert other 

NRSROs about new deals and direct 

them to the Internet Web site of the 

arranger where information to 

determine initial ratings and monitor 

the ratings can be accessed. 


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6494 Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Proposed Rules 

Consequently, once a final rating is 

issued, the NRSRO can remove the 

information about the security or money 

market instrument from the list it 

maintains on the Internet Web site. 

Similarly, if the arranger decides to 

terminate the rating process without 

having a final rating issued, the NRSRO 

would be permitted to remove the 

information from the list. 

Finally, the Commission intends that 

the address for the Internet Web site 

contained in the list would be the portal 

for accessing information the arranger 

would be making available for all 

securities and money market 

instruments subject to this proposed 

rule. For example, a particular arranger 

might be disclosing information about 

hundreds of different structured finance 

securities and money market 

instruments on the Internet Web site it 

maintains for the purposes of this 

proposed requirement. The NRSRO only 

would need to disclose the address of 

this Internet Web site and not the actual 

link to the information, provided an 

NRSRO using the arranger’s Internet 

Web site can navigate to the specific 

deal information it is seeking after 

entering the site. 

The Commission generally requests 

comment on all aspects of this proposed 

new paragraph to Rule 17g–5. In 

addition, the Commission requests 

comment on the following questions 

related to the proposal. 

• Would the information required to 

be maintained on the NRSRO’s Internet 

site be sufficient to alert other NRSROs 

that the rating process has commenced 

and where they can locate information 

to determine an unsolicited rating? For 

example, should the rule require the 

NRSRO to alert by e-mail all NRSROs 

that obtain a password to access the site 

when new information is posted to the 

site? Would such a requirement be 

feasible? 

• Are there specific requirements that 

the Commission could put into the rule 

text to clarify how the information 

should be presented on the NRSRO’s 

Internet Web site? 

b. Proposed New Paragraph (a)(3)(ii) 

Under proposed new paragraph 

(a)(3)(ii) of Rule 17g–5, the NRSRO 

would be required to provide free and 

unlimited access to the passwordprotected Internet Web site it maintains 

during the applicable calendar year to 

any NRSRO that provides it with a copy 

of the certification described in 

proposed new paragraph (e) of Rule 

17g–5 (see below discussion) that covers 

that calendar year. The Commission 

intends that the only prerequisite to an 

NRSRO obtaining access to the Internet 

Web site is that the NRSRO execute the 

certification described below and 

furnish it to the Commission. 

Nonetheless, it would be appropriate for 

the NRSRO maintaining the Internet 

Web site to require an NRSRO seeking 

access to the site to represent that the 

copy of the certification being submitted 

to obtain access was a true copy of the 

certification and that it was, in fact, 

furnished to the Commission. 

Proposed paragraphs (a)(3)(i) and (ii) 

are designed to create a mechanism to 

alert other NRSROs seeking to rate 

finance products that an arranger has 

initiated the rating process and to 

inform the other NRSROs where 

information being provided by the 

arranger to the hired NRSRO to 

determine the credit rating may be 

obtained. The goal is to provide the 

other NRSROs with the information 

being provided to the hired NRSRO on 

a real-time basis so they have sufficient 

time to develop initial ratings 

contemporaneously with the hired 

NRSRO. It would be incumbent on the 

other NRSROs to routinely monitor the 

Internet Web sites of the issuer-pay 

NRSROs to ascertain when new 

structured finance securities or money 

market instruments were in the process 

of being rated. 

The Commission generally requests 

comment on all aspects of this proposed 

new paragraph to Rule 17g–5. In 

addition, the Commission requests 

comment on the following question 

related to the proposal. 

• Should the NRSRO maintaining the 

Internet Web site be permitted to charge 

a fee for other NRSROs to access it? For 

example, should they be permitted a fee 

to recover some or all of their costs for 

maintaining the Internet Web site? 

c. Proposed New Paragraph (a)(3)(iii) 

Under proposed paragraph (a)(3)(iii), 

the NRSRO would be required to obtain 

from the arranger of each structured 

finance security or money market 

instrument four representations 

described below. The rule would 

provide that NRSRO could rely on the 

representations if the reliance was 

reasonable. Obtaining the 

representations would provide the 

NRSRO with a safe harbor if the 

arranger did not act in accordance with 

a representation. However, the NRSRO 

would need to demonstrate that its 

reliance on the representation was 

reasonable. For example, if the NRSRO 

became aware that an arranger breached 

prior representations a number of times, 

it would not be reasonable to rely on a 

future representation. 

The four representations are 

discussed in the sections below. 

i. Proposed New Paragraph (a)(3)(iii)(A) 

Under proposed new paragraph 

(a)(3)(iii)(A), the arranger would need to 

represent that it will maintain the 

information described in proposed 

paragraphs (a)(3)(iii)(C) and (a)(3)(iii)(D) 

of Rule 17g–5 available on an identified 

password protected Internet Web site 

that presents the information in a 

manner indicating which information 

currently should be relied on to 

determine or monitor the credit rating. 

Under this representation, the arranger 

would agree, in effect, to make the 

information it provides to the hired 

NRSRO available to any other NRSRO at 

the same time. Thus, the arranger would 

need to post the information on the 

Internet Web site at the same time the 

information is given to the hired 

NRSRO. Any time this information is 

updated or new information is given to 

the hired NRSRO, the information 

would need to be posted on the Internet 

Web site contemporaneously. 

Furthermore, the arranger must tag 

the information in a manner that 

informs NRSROs accessing the Internet 

Web site which information currently is 

operative for the purpose of determining 

the credit rating. The purpose of this 

‘‘current’’ requirement is to ensure that 

NRSROs accessing the Internet Web site 

would be using the correct information 

to determine their credit ratings. For 

example, the Commission understands 

that the composition of the pool of 

assets underlying a structured finance 

product may change during the rating 

process as some assets are removed from 

the pool and replaced with other assets. 

The Internet Web site would need to 

include each asset pool provided to the 

NRSRO hired to rate the security or 

money market instrument. If more than 

one loan tape has been provided, the 

arranger would need to identify which 

loan tape was currently being relied on 

to determine the credit rating. Moreover, 

the arranger would need to indicate 

which information is final and will be 

used by the NRSRO to determine the 

credit rating that is published. It would 

be in the interest of the arranger to 

ensure that the NRSROs developing 

credit ratings through accessing the 

Internet Web site rely on up-to-date and 

final information. Otherwise, their 

credit ratings may be based on 

erroneous information, which could 

impact the final rating. 

The Commission considered only 

requiring that the final information be 

posted on the Internet Web site. 

However, this could put the NRSROs 

developing ratings using the Internet 

Web sites at a disadvantage since they 

might be getting the information shortly 


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Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Proposed Rules 6495 

82See Items 1111, 1113 and 1114 of Regulation 

AB. 

83Securities Act Release No. 8518 (December 22, 

2004). 

84 June 16, 2008 Proposing Release, 73 FR at 

36251. 

before the hired NRSRO issues its initial 

rating. The Commission preliminarily 

believes that the inclusion of all 

iterations of the various components of 

information (e.g., loan tapes, legal 

documents) used to determine the credit 

rating would allow the NRSROs 

accessing the Internet Web site to more 

actively participate in the rating process 

as they could follow the progression of 

changes that lead to the final 

information upon which the credit 

rating should be based. This could make 

it easier for them to more quickly issue 

an initial credit rating when the loan 

pool, legal documentation and other 

relevant information is finalized. The 

goal is to have them issue credit ratings 

contemporaneously with the hired 

NRSRO so investors can have the 

benefit of these ratings before 

purchasing the securities or money 

market instruments. 

The Commission generally requests 

comment on all aspects of this proposed 

new paragraph to Rule 17g–5. In 

addition, the Commission requests 

comment on the following question 

related to the proposal. 

• Should the Commission only 

require that final information be posted 

on the Internet Web site to avoid the 

potential that an NRSRO would use 

erroneous information to determine a 

credit rating? 

ii. Proposed New Paragraph (a)(3)(iii)(B) 

Under proposed new paragraph 

(a)(3)(iii)(B), the arranger would need to 

represent that it will provide access to 

its password-protected Internet Web site 

during the applicable calendar year to 

any NRSRO that provides it with a copy 

of the certification described in 

proposed paragraph (e) of Rule 17g–5 

that covers that calendar year. The 

Commission is proposing to limit the 

access to this information to other 

NRSROs. The intent is to address 

concerns that disclosing this 

information to a broader array of entities 

would implicate disclosure 

requirements under the Securities Act. 

The Commission acknowledges that 

investors and other market participants 

may benefit from greater disclosure of 

this information. However, the 

Commission believes that the more 

appropriate mechanism to enhance such 

disclosure would be to amend rules 

under the Securities Act. The 

Commission notes in particular that 

Regulation AB, which is a principlesbased rule, requires among other things, 

disclosure of the material characteristics 

of the asset pool, the structure of the 

transaction and of any material credit 

enhancements.82 When adopting 

Regulation AB in 2004, the Commission 

noted that a determination that 

information would be provided to a 

credit rating agency should be 

considered in determining whether 

information is not material under 

Regulation AB: 

If an issuer concludes that it need not 

disclose information in response to a 

particular disclosure line item because the 

issuer determines that the information is not 

material, but agrees to provide the 

information to credit rating agencies, the 

issuer should consider its determination 

regarding materiality in the context of the 

decision to provide the information to rating 

agencies.83

The amendment, as proposed in the 

June 16, 2008 Proposing Release, would 

have allowed credit rating agencies not 

registered with the Commission to 

obtain the information about the 

structured finance products necessary to 

determine ‘‘unsolicited’’ credit 

ratings.84 The Commission 

preliminarily believes that allowing 

these entities to access the information 

could be problematic because the 

Commission has no authority to 

examine them and, thereby, review 

whether they are using the information 

solely to develop credit ratings. 

Preliminarily, the Commission believes 

that the better approach is to limit 

access to NRSROs. Furthermore, this 

could provide an incentive for credit 

rating agencies to register with the 

Commission, which would benefit users 

of credit ratings by increasing the 

number of NRSROs. 

The Commission generally requests 

comment on all aspects of this proposed 

new paragraph to Rule 17g–5. In 

addition, the Commission requests 

comment on the following question 

related to the proposal. 

• Should other entities besides 

NRSROs be permitted to access the 

arrangers’ Internet Web sites? For 

example, should credit rating agencies 

not registered with the Commission be 

permitted to access the sites? If so, how 

could the amendment be crafted to 

ensure that only entities meeting the 

definition of ‘‘credit rating agency’’ in 

Section 3(a)(61) of the Exchange Act be 

permitted to access the arrangers’ 

Internet Web sites? 

iii. Proposed New Paragraph 

(a)(3)(iii)(C) 

Under proposed new paragraph 

(a)(3)(iii)(C), the arranger would need to 

represent that it will post on its 

password-protected Internet Web site all 

information the arranger provides to the 

NRSRO for the purpose of determining 

the initial credit rating for the security 

or money market instrument, including 

information about the characteristics of 

the assets underlying or referenced by 

the security or money market 

instrument, and the legal structure of 

the security or money market 

instrument, at the same time such 

information is provided to the NRSRO. 

The Commission anticipates that the 

information that would be disclosed 

(i.e., the information provided to the 

hired NRSRO to determine the initial 

rating) generally would include the 

characteristics of the assets in the pool 

underlying or referenced by the 

structured finance product and the legal 

documentation setting forth the capital 

structure of the trust, payment priorities 

with respect to the tranche securities 

issued by the trust (the waterfall), and 

all applicable covenants regarding the 

activities of the trust. For example, for 

an initial rating for an RMBS, this 

information generally would include the 

loan tape (frequently a spreadsheet) that 

identifies each loan in the pool and its 

characteristics such as type of loan, 

principal amount, loan-to-value ratio, 

borrower’s FICO score, and geographic 

location of the property. In addition, the 

disclosed information also would 

include a description of the structure of 

the trust, the credit enhancement levels 

for the tranche securities to be issued by 

the trust, and the waterfall cash flow 

priorities. 

The Commission intends that the 

proposed amendment only apply to 

written information provided to the 

hired NRSRO. However, if the 

amendment is adopted, the Commission 

would review whether arrangers started 

providing information about the 

structured finance product orally to 

avoid having to disclose it on their 

Internet Web sites. The Commission 

believes that ultimately this would not 

benefit the arranger since the NRSROs 

developing credit ratings through using 

the Internet Web sites would be basing 

their ratings without the benefit of all of 

the information. This could adversely 

impact the ratings and lead to more 

frequent rating actions during the 

surveillance process when the securities 

or money market instruments do not 

perform as anticipated. Moreover, 

because the information would be 

disclosed only to other NRSROs, 


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6496 Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Proposed Rules 

85Re-proposed paragraph (a)(3)(iii)(D) of Rule 

17g–5. 

concerns of arrangers about releasing 

proprietary information should be 

mitigated. 

The Commission generally requests 

comment on all aspects of this proposed 

new paragraph to Rule 17g–5. In 

addition, the Commission requests 

comment on the following question 

related to the proposal. 

• Should the amendment require the 

arranger to represent that it will not 

provide any information to the hired 

NRSRO that is material without also 

disclosing that information on the 

Internet Web site? 

• For the purposes of this 

amendment, should the Commission 

provide a standardized list of 

information that, at a minimum, should 

be disclosed? If so, what information 

should the list include? Do any 

commenters believe that this would 

have the effect of impermissibly 

regulating the substance of credit ratings 

and the methodologies used to 

determine credit ratings? 

iv. Proposed New Paragraph 

(a)(3)(iii)(D) 

Under proposed new paragraph 

(a)(3)(iii)(D), the arranger would need to 

represent that it will post on the 

password-protected Internet Web site all 

information the arranger provides to the 

NRSRO for the purpose of undertaking 

credit rating surveillance on the security 

or money market instrument, including 

information about the characteristics 

and performance of the assets 

underlying or referenced by the security 

or money market instrument at the same 

time such information is provided to the 

NRSRO. This would be the information, 

if any, that the arranger provides to the 

hired NRSRO to perform any ratings 

surveillance.85 The Commission 

anticipates that generally this 

information would consist of reports 

from the trustee describing how the 

assets in the pool underlying the 

structured finance product are 

performing. For an RMBS credit rating, 

this information likely would include 

the ‘‘trustee report’’ customarily 

generated to reflect the performance of 

the loans constituting the collateral 

pool. For example, an RMBS trustee 

may generate reports describing the 

percentage of loans that are 30, 60, and 

90 days in arrears, the percentage that 

have defaulted, the recovery of principal 

from defaulted loans, and information 

regarding any modifications to the loans 

in the asset pool. 

The disclosure of this information 

would allow NRSROs that determined 

unsolicited initial ratings to monitor on 

a continuing basis the creditworthiness 

of the tranche securities issued by the 

trust. Under the representation, the 

arranger would need to provide this 

information at the time it is provided to 

the NRSRO hired to perform the rating. 

The Commission notes that the 

representation only relates to 

information provided by the arranger to 

the hired NRSRO. If the hired NRSRO 

conducts surveillance using information 

provided by third-party vendors, this 

information would not need to be 

disclosed. Instead, the NRSROs 

monitoring ‘‘unsolicited’’ ratings would 

need to contract with the third-party 

vendor to obtain the information. 

As with the initial rating information 

provided under proposed paragraph 

(a)(3)(iii)(C), the Commission does not 

intend the rule to require the disclosure 

of oral communications between the 

NRSRO and the issuer, sponsor, or 

underwriter. The information provided 

on the issuer’s Web site only would 

need to be the written information given 

to the NRSRO. 

The Commission generally requests 

comment on all aspects of this proposed 

new paragraph to Rule 17g–5. In 

addition, the Commission requests 

comment on the following question 

related to the proposal. 

• What type of information for 

monitoring ratings of structured finance 

products is typically provided by 

arrangers to NRSROs? What type of 

information is typically obtained by 

NRSROs contracting with third-party 

vendors? 

• For the purposes of this 

amendment, should the Commission 

provide a standardized list of 

information that, at a minimum, should 

be disclosed? If so, what information 

should the list include? Do any 

commenters believe that this would 

have the effect of impermissibly 

regulating the substance of credit ratings 

and the methodologies used to 

determine credit ratings? 

3. Proposed New Paragraph (e) 

An NRSRO, in order to access the 

Internet Web sites maintained by other 

NRSROs and the arrangers, would need 

to annually execute and furnish to the 

Commission the following certification: 

The undersigned hereby certifies that it will 

access the Internet Web sites described in 

§ 240.17g–5(a)(3) solely for the purpose of 

determining or monitoring credit ratings. 

Further, the undersigned certifies that it will 

keep the information it accesses pursuant to 

§ 240.17g–5(a)(3) confidential and treat it as 

material nonpublic information subject to its 

written policies and procedures established, 

maintained, and enforced pursuant to section 

15E(g)(1) of the Act (15 U.S.C. 78o–7(g)(1)) 

and § 240.17g–4. Further, the undersigned 

certifies that it will determine and maintain 

credit ratings for at least 10% of the issued 

securities and money market instruments for 

which it accesses information pursuant to 

§ 240.17g–5(a)(3)(iii), if it accesses such 

information for 10 or more issued securities 

or money market instruments in the calendar 

year covered by the certification. Further, the 

undersigned certifies one of the following as 

applicable: (1) In the most recent calendar 

year during which it accessed information 

pursuant to § 240.17g–5(a)(3), the 

undersigned accessed information for [Insert 

Number] issued securities and money market 

instruments through Internet Web sites 

described in § 240.17g–5(a)(3) and 

determined and maintained credit ratings for 

[Insert Number] of such securities and money 

market instruments; or (2) The undersigned 

previously has not accessed information 

pursuant to § 240.17g–5(a)(3) 10 or more 

times in a calendar year. 

The NRSRO would need to furnish 

this certification to the Commission 

each calendar year that the NRSRO 

seeks access to the NRSRO and arranger 

Internet Web sites. In addition, the 

NRSRO would be required to certify that 

it will determine and maintain credit 

ratings for at least 10% of the issued 

securities and money market 

instruments if it accesses information 

pursuant to the proposed rule 10 or 

more times in a calendar year. The use 

of the term ‘‘issued securities and 

money market instruments’’ is intended 

to address potential deals that are 

posted on the Internet Web sites but that 

ultimately do not result in final ratings 

because the arranger decides not to 

issue the securities or money market 

instruments. An NRSRO that accessed 

such information would not need to 

count it among the final deals that 

would be used to determine whether it 

met the 10% threshold. 

The 10% threshold is designed to 

require the NRSRO to determine a 

meaningful amount of credit ratings 

without forcing it to undertake work 

that it may not have the capacity or 

resources to perform. For example, the 

NRSRO may access information about a 

proposed deal that involves a structure 

or a type of assets that are new and that 

the NRSRO has not developed a 

methodology to incorporate into its 

ratings. It would not be appropriate or 

prudent to require the NRSRO to 

determine a credit rating in this case. At 

the same time, the Commission believes 

there should be some minimum level of 

credit ratings issued to demonstrate that 

the NRSRO is accessing the information 

for the purpose of determining credit 

ratings. 

An NRSRO that has accessed 

information under this program for one 

calendar would be required to report in 


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Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Proposed Rules 6497 

86 17 CFR 243.100, 243.101, 243.102 and 243.103. 

87See 17 CFR 243.100(a). 

88See 17 CFR 243.100(b)(2)(iii). 89 17 CFR 243.100(b)(2)(iii). 

90 15 U.S.C. 78o–7(g). 

91 17 CFR 243.100(b)(2)(iii). 

92See 15 U.S.C. 78c(a)(61). 

93 15 U.S.C. 78c(a)(61). 

its next certification the number of 

times it accessed the information for 

issued securities and money market 

instruments and the number of credit 

ratings determined using that 

information. This is designed to provide 

a level of verification that the NRSRO is, 

in fact, accessing the information for 

purposes of determining credit ratings. 

The Commission generally requests 

comment on all aspects of this proposed 

new paragraph to Rule 17g–5. In 

addition, the Commission requests 

comment on the following questions 

related to the proposal. 

• Should the minimum requirement 

for the number of credit ratings that 

must be determined using the 

information posted on arranger Internet 

Web sites be higher than 10% of the 

deals reviewed? For example, should it 

be 15%, 20%, 50% or a larger 

percentage? Alternatively, should the 

requirement be less than 10%? For 

example, should it be 5% or 2%? 

• If an NRSRO accesses information 

10 or more times in a calendar year and 

does not determine credit ratings for 

10% or more of the deals reviewed, 

should the NRSRO be prohibited from 

accessing the NRSRO and sponsor 

information in the future? If so, should 

the NRSRO be prohibited from 

accessing the information for a 

prescribed period of time (e.g., 6 

months, 12 months, 18 months, 24 

months or some longer period)? 

E. Proposed Amendment to 

Regulation FD 

The Commission is proposing to 

amend Regulation FD 86 to 

accommodate the information 

disclosure program that would be 

established under the re-proposed 

amendments to paragraphs (a) and (b) of 

Rule 17g–5. Regulation FD requires that 

an issuer or any person acting on an 

issuer’s behalf publicly disclose 

material non-public information if the 

information is disclosed to certain 

persons.87 Under Rule 100(b)(2)(iii) of 

Regulation FD, the issuer or person 

acting on the issuer’s behalf need not 

make the public disclosure if the 

disclosure of material non-public 

information is made to an entity whose 

primary business is the issuance of 

credit ratings, provided the information 

is disclosed solely for the purpose of 

developing a credit rating and the 

entity’s ratings are publicly available.88

Thus, under this provision, the 

information can be disclosed to a credit 

rating agency if: (1) It is being disclosed 

for the purpose of developing a credit 

rating; and (2) the credit rating agency 

makes the rating publicly available. The 

Commission is proposing to amend Rule 

100(b)(2)(iii) of Regulation FD to permit 

the disclosure of material non-public 

information to NRSROs irrespective of 

whether they make their ratings 

publicly available. This would 

accommodate subscriber-based NRSROs 

that do not make their ratings publicly 

available for free and it would 

accommodate NRSROs that access the 

information under the proposed Rule 

17g–5 disclosure program but ultimately 

do not issue a credit rating using the 

information. 

Under the re-proposed amendments 

to paragraphs (a) and (b) of Rule 17g–5, 

arrangers would agree to disclose 

information to any credit rating agency 

registered with the Commission as an 

NRSRO. The information disclosed 

likely would include material nonpublic information and, consequently, 

the arranger would need to rely on the 

exclusions to Regulation FD in order to 

disclose it to NRSROs without 

simultaneously making a public 

disclosure of the information. Currently, 

the exclusions in Regulation FD include 

disclosing material non-public 

information ‘‘to an entity whose primary 

business is the issuance of credit 

ratings, provided the information is 

disclosed solely for the purpose of 

developing a credit rating and the 

entity’s ratings are publicly 

available.’’ 89 NRSROs that operate 

under the issuer-pays model make their 

ratings available to the public for free 

because they typically are compensated 

by the issuer or arranger whose security 

is being rating. Subscriber-based 

NRSROs are not compensated by the 

issuer or arrangers but, rather, by 

subscribers who pay for access to their 

ratings. Consequently, their credit 

ratings are not disclosed to the public 

free of charge but, instead, only to those 

persons who agree to pay them for 

access to the credit ratings. 

The Commission preliminarily 

believes that credit rating agencies that 

are registered with the Commission as 

NRSROs should be able to receive 

material non-public information from 

arrangers for the purpose of developing 

unsolicited credit ratings for structured 

finance products. The Commission 

recognizes that their credit ratings are 

not as broadly disseminated as the 

credit ratings of the issuer-pays credit 

rating agencies. However, because the 

proposed amendment would limit the 

exclusion to NRSROs, the entities 

receiving the material non-public 

information would be subject to Section 

15E(g) of the Exchange Act and Rule 

17g–4 thereunder.90 These statutory and 

regulatory provisions require NRSROs 

to establish, maintain and enforce 

policies and procedures reasonably 

designed to prevent the misuse of 

material non-public information. 

Furthermore, the Commission has 

examination authority with respect to 

NRSROs. Moreover, the proposed 

disclosure program for Rule 17g–5 

would be triggered only when an issuerpay NRSRO is hired to perform a credit 

rating. Therefore, a publicly disclosed 

credit rating for the structured finance 

product likely would be issued along 

with any unsolicited ratings from 

subscriber-based NRSROs. For these 

reasons, the Commission preliminarily 

believes it would be appropriate to 

eliminate the requirement in Regulation 

FD to make the ratings public for credit 

rating agencies that are registered with 

the Commission as NRSROs and who 

receive the information under the 

proposed disclosure program under 

Rule 17g–5. 

Finally, the Commission also is 

proposing to amend the current text in 

Rule 100(b)(2)(iii) of Regulation FD that 

identifies credit rating agencies as ‘‘an 

entity whose primary business is the 

issuance of credit ratings.’’ 91 Since the 

adoption of Regulation FD, Congress, 

through the Rating Agency Act, enacted 

a statutory definition of ‘‘credit rating 

agency.’’ 92 The definition is in Section 

3(a)(61) of the Exchange Act.93 The 

Commission, therefore, proposes to use 

the statutory definition of ‘‘credit rating 

agency’’ in Rule 100(b)(2)(iii) of 

Regulation FD. 

The Commission generally requests 

comment on all aspects of this proposed 

new paragraph to Rule 17g–5. In 

addition, the Commission requests 

comment on the following questions 

related to the proposal. 

• Is the proposed change to 

Regulation FD necessary or appropriate? 

Would a different approach work better? 

For instance, would it be better to revise 

the exception in Regulation FD to apply 

to any information given to any NRSRO 

so long as the ratings of at least one 

NRSRO are publicly available. 

• Should the Commission broaden 

the exclusion to information that is 

provided to NRSROs beyond the 

proposed Rule 17g–5 disclosure 

program (e.g., information provided to 

develop ratings for corporate issuers)? 


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6498 Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Proposed Rules 

94See Section 15E of the Exchange Act (15 U.S.C. 

78o–7). 

95See proposed Rule 17g–2(d) and re-proposed 

Rule 17g–5(a)(3), (b)(9) and (e). 

96See June 5, 2007 Adopting Release, 72 FR at 

33607. 

97A.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. 

• Does disclosure of this information 

to all NRSROs raise any concerns that 

Regulation FD was designed to address? 

• Would the Commission’s use of the 

statutory definition of ‘‘credit rating 

agency’’ in Section 3(a)(61) of the 

Exchange Act in Rule 100(b)(2)(iii) of 

Regulation FD prevent entities that 

currently receive information under the 

exclusion from continuing to receive 

such information? Commenters that 

believe it would prevent entities from 

continuing to receive the information 

should specifically describe how the 

entities in question would not meet the 

statutory definition of ‘‘credit rating 

agency.’’ 

IV. General Request for Comment 

The Commission invites interested 

persons to submit written comments on 

any aspect of the proposed 

amendments, in addition to the specific 

requests for comments. Further, the 

Commission invites comment on other 

matters that might have an effect on the 

proposals contained in the release, 

including any competitive impact. 

V. Paperwork Reduction Act 

Certain provisions of the proposed 

amendment to Rule 17g–2 and the reproposed amendment to Rule 17g–5 

(collectively, the ‘‘Proposed Rule 

Amendments’’) contain a ‘‘collection of 

information’’ within the meaning of the 

Paperwork Reduction Act of 1995 

(‘‘PRA’’). The Commission is submitting 

these proposed amendments to the 

Office of Management and Budget 

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

the PRA. An agency may not conduct or 

sponsor, and a person is not required to 

comply with, a collection of information 

unless it displays a currently valid 

control number. The titles for the 

collections of information are: 

(1) Rule 17g–2, Records to be made 

and retained by nationally recognized 

statistical rating organizations (OMB 

Control Number 3235–0628); and 

(2) Rule 17g–5, Conflicts of interest (a 

proposed new collection of 

information). 

A. Collections of Information Under the 

Proposed Rule Amendments 

The Commission is proposing for 

comment rule amendments to prescribe 

additional requirements for NRSROs. 

The proposed amendments to Rule 17g– 

2 would require NRSROs to make 

publicly available ratings action 

histories for certain issuer-paid credit 

ratings. In addition, the re-proposed 

amendments to Rule 17g–5 would 

modify rules the Commission adopted 

in 2007 to implement conflicts of 

interest requirements under the Rating 

Agency Act. Both sets of amendments 

would contain recordkeeping and 

disclosure requirements that would be 

subject to the PRA. The collection of 

information obligations imposed by the 

Proposed Rule Amendments would be 

mandatory. The Proposed Rule 

Amendments, however, would apply 

only to credit rating agencies that are 

registered with the Commission as 

NRSROs. Such registration is 

voluntary.94

In summary, the Proposed Rule 

Amendments would require an NRSRO 

to publicly disclose certain ratings 

actions histories and would require an 

NRSRO and an issuer to disclose to 

other NRSROs certain information 

required to determine and monitor a 

credit rating for a structured finance 

security or money market instrument.95

B. Proposed Use of Information 

The collections of information in the 

Proposed Rule Amendments are 

designed to provide users of credit 

ratings with information upon which to 

evaluate the performance of NRSROs 

and to enhance the accuracy of credit 

ratings for structured finance products 

by increasing competition among 

NRSROs who rate these products. 

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.96 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.97 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. 

In addition, under the re-proposed 

amendments to Rule 17g–5, arrangers of 

structured finance products would need 

to disclose certain information to 

NRSROs. For purposes of the PRA 

estimate, based on staff information 

gained from the NRSRO examination 

process, the Commission estimates that 

there would be approximately 200 

respondents, which is the same number 

of respondents the Commission 

originally proposed would be affected 

by the amendments. The Commission 

received no comments on this estimate 

when originally proposed. 

The Commission generally requests 

comment on all aspects of these 

estimates for the number of respondents 

and the number of arrangers. In 

addition, the Commission requests 

specific comment on the following 

items related to these estimates. 

• Should the Commission use the 

number of credit rating agencies 

currently registered as NRSROs rather 

than the estimated number of 30 

ultimate registrants? Alternatively, is 

there a basis to estimate a different 

number of likely registrants? 

• Should the Commission use 

different estimates for the number of 

NRSROs that would be subject to the 

proposed amendments to Rule 17g–2 

and re-proposed amendments to Rule 

17g–5. For example, should the 

Commission develop estimates based on 

the number of NRSROs that determine 

issuer-paid credit ratings as opposed to 

subscriber-paid credit ratings? 

• Are there sources that could 

provide credible information that could 

be used to determine the number of 

issuers that would be subject to the 

proposed paperwork burdens? 

Commenters should identify any such 

sources and explain how a given source 

could be used to either support the 

Commission’s estimate or arrive at a 

different estimate. 

Commenters should provide specific 

data and analysis to support any 

comments they submit with respect to 

these burden estimates. 

D. Total Annual Recordkeeping and 

Reporting Burden 

As discussed in further detail below, 

the Commission estimates the total 

recordkeeping burden resulting from the 

Proposed Rule Amendments would be 

approximately 169,045 hours on an 


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Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Proposed Rules 6499 

98This total is derived from the total annual 

hours set forth in the order that the totals appear 

in the text: 105 + 14,880 + 4,000 + 150,000 + 60 

= 169,045. 99This total is derived from the total one-time 

hours set forth in the order that the totals appear 

in the text: 315 + 9,000 + 60,000 = 69,315. 

100 17 CFR 240.17g–2. 

101Paragraph (a)(8) of Rule 17g–2. 

102Amendment to Rule 17g–2(d). 

103The Commission also based 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 and the Commission 

adopted these hour burdens. See Companion 

Adopting Release. 

104 30 hours × 7 NRSROs = 210 hours. 

105 10 hours × 7 NRSROs = 70 hours. 

106 50% of 30 hours = 15 hours + 30 hours = 45 

hours. 

107 50% of 10 hours = 5 hours + 10 hours = 15 

hours. 

108 45 hours × 7 NRSROs = 315 hours. 

109 15 hours × 7 NRSROs = 105 hours. 

110 17 CFR 240.17g–5. 

111 17 CFR 240.17g–5(c). 

112See re-proposed Rule 17g–5(b)(9). The current 

paragraph (b)(9) would be renumbered as (b)(10). 

113See re-proposed Rule 17g–5(a)(3). 

annual basis 98 and 69,315 hours on a 

one-time basis.99

The total annual and one-time hour 

burden estimates described below are 

averages across all types of NRSROs 

expected to be affected by the Proposed 

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. Proposed Amendments to Rule 

17g–2 

Rule 17g–2 requires an NRSRO to 

make and keep current certain records 

relating to its business and requires an 

NRSRO to preserve those and other 

records for certain prescribed time 

periods.100 The version of Rule 17g–2 

adopted today (‘‘New Rule 17g–2’’) 

requires an NRSRO to make and retain 

a record showing the ratings action 

histories and with respect to each 

current credit rating.101 New Rule 17g– 

2 also requires an NRSRO to make 

public, in XBRL format and with a sixmonth grace period, the ratings action 

histories 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 ratings paid for by the obligor 

being rated or by the issuer, 

underwriter, or sponsor of the security 

being rated.102

When adopting New Rule 17g–2, the 

Commission determined that, on 

average, an NRSRO subject to the 

requirements will spend approximately 

30 hours to publicly disclose the rating 

action histories in XBRL format and, 

thereafter, 10 hours per year to update 

this information.103 Accordingly, the 

total aggregate one-time burden to the 

industry to make the rating action 

histories publicly available in XBRL 

format will be 210 hours,104 and the 

total aggregate annual burden hours will 

be 70 hours.105 The Commission based 

the total estimates on the fact that based 

on information furnished on Form 

NRSRO, seven of the ten currently 

registered NRSROs issue 500 or more 

ratings under the issuer-pay model in at 

least one of the classes of ratings for 

which they are registered. The 

Commission believed that even as the 

number of registered NRSROs expands 

to the 30 ultimately expected to register, 

this number will remain constant, as 

new entrants are likely to operate on a 

subscriber-pay basis, at least in the near 

future. In addition, the Commission 

believed that each of the NRSROs 

affected by this new requirement 

already has, or will have, an Internet 

Web site. 

The proposed amendments to Rule 

17g–2(d) would require NRSROs to 

publicly disclose ratings action histories 

of all outstanding issuer-paid credit 

ratings with up to a 12-month time lag 

before a new rating action must be 

disclosed. The Commission estimates, 

based on staff experience, that the hour 

burdens for an NRSRO to publicly 

disclose this information would 

increase 50% from the current estimates 

for disclosing ratings action histories for 

a randomly selected sample of 10% of 

the outstanding issuer-paid credit 

ratings. Therefore, the Commission 

estimates that the one-time annual hour 

burden will increase from 30 hours to 

45 hours 106 and the annual hour burden 

will increase from 10 hours to 15 

hours.107 Accordingly, the Commission 

estimates that the total aggregate onetime burden for NRSROs to comply with 

this requirement would be 

approximately 315 hours,108 and the 

total aggregate annual burden hours 

would be approximately 105 hours.109

The Commission requests comment 

on all aspects of these burden estimates 

for the proposed amendments to Rule 

17g–2(d). In addition, the Commission 

requests specific comment on the 

following items related to these 

estimates: 

• If the Commission were to adopt a 

final rule that subjected subscriber-paid 

credit ratings to the public disclosure 

requirement, would the hour burden 

estimates per firm be the same as 

estimated by the Commission above or 

would they change. Commenters should 

give specific hour estimates in their 

comments. 

• If the Commission were to adopt a 

final rule subjecting subscriber-paid 

credit ratings to the public disclosure 

requirements being adopted today (the 

random sample of 10% of issuer-paid 

credit ratings in a class of rating), would 

the hour burden estimates per firm be 

the same as estimated by the 

Commission in the Adopting Release or 

would they change. Commenters should 

give specific hour estimates in their 

comments. 

• Are there publicly available reports 

or other data sources the Commission 

should consider in arriving at these 

burden estimates? 

• Are the estimates of the one-time 

and recurring burdens of the reproposed additional disclosures 

accurate? If not, should they be higher 

or lower? 

Commenters should provide specific 

data and analysis to support any 

comments they submit with respect to 

these burden estimates. 

2. Re-Proposed Rule 17g–5 

Rule 17g–5 requires an NRSRO to 

manage and disclose certain conflicts of 

interest.110 The rule also prohibits 

specific types of conflicts of interest.111

The re-proposed amendments to Rule 

17g–5 would add an additional conflict 

to paragraph (b) of Rule 17g–5 for 

NRSROs to manage. This re-proposed 

conflict of interest would be issuing or 

maintaining a credit rating for a security 

or money market instrument issued by 

an asset pool or as part of an assetbacked or mortgage-backed securities 

transaction that was paid for by the 

issuer, sponsor, or underwriter of the 

security or money market instrument.112

Under the re-proposal, an NRSRO 

would be prohibited from issuing a 

credit rating for a structured finance 

product, unless certain information 

about the transaction and the assets 

underlying the structured finance 

product are disclosed.113

Specifically, an NRSRO rating such 

products would need to disclose to 

other NRSROs the following 

information on a password protected 

Internet Web site: 

• A list of each such security or 

money market instrument for which it is 

currently in the process of determining 


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6500 Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Proposed Rules 

114See re-proposed Rule 17g–5(a)(3)(i). 

115See June 5, 2007 Adopting Release, 72 FR at 

33609. 

116 300 hours × 30 NRSROs = 9,000 hours. 

117 (4,000 ratings × .97) × 3 = 11,640. 

118 (4,000 ratings × .03) × 27 = 3,240. 

119 (3,880 × 3) + (120 × 27) = 14,880 transactions. 

120 14,880 ratings × 1 hour = 14,880 hours. 

121See re-proposed Rule 17g–5(a)(3)(iii). 

122See June 5, 2007 Adopting Release, 72 FR at 

33609. 

123 300 hours × 200 respondents = 60,000 hours. 

an initial credit rating in chronological 

order and identifying the type of 

security or money market instrument, 

the name of the issuer, the date the 

rating process was initiated, and the 

Internet Web site address where the 

issuer, sponsor, or underwriter of the 

security or money market instrument 

represents that the information 

described in paragraphs (a)(3)(iii)(C) and 

(D) of re-proposed Rule 17g–5 can be 

accessed.114

For purposes of this PRA, the 

Commission estimates that it would take 

an NRSRO approximately 300 hours to 

develop a system, as well as policies 

and procedures, for the disclosures 

required by the re-proposed rule. This 

estimate is based on the Commission’s 

experience with, and burden estimates 

for, the recordkeeping requirements for 

NRSROs.115 Accordingly, the 

Commission believes, based on staff 

experience, an NRSRO would take 

approximately 300 hours on a one-time 

basis to implement a disclosure system 

to comply with the proposal in that a 

respondent would need a set of policies 

and procedures for disclosing the 

information, as well as a system for 

making the information publicly 

available. This would result in a total 

one-time hour burden of 9,000 hours for 

30 NRSROs.116

In addition to the one-time hour 

burden, the re-proposed amendments 

would result in an annual hour burden 

to the NRSRO arising from the 

requirement to make disclosures for 

each deal being rated. In the June 18 

Proposing Release, the Commission 

estimated that a large NRSRO would 

have rated approximately 2,000 new 

RMBS and CDO transactions in a given 

year. The Commission based this 

estimate on the number of new RMBS 

and CDO deals rated in 2006 by two of 

the largest NRSROs which rated 

structured finance transactions. The 

Commission adjusted this number to 

4,000 transactions in order to account 

for other types of structured finance 

products, including commercial real 

estate MBS and other consumer assets. 

Accordingly, the Commission estimated 

that a large NRSRO would rate 

approximately 4,000 new structured 

finance transactions during a calendar 

year. The Commission did not receive 

any comments with respect to that 

estimate. The Commission recognizes 

that the number of new structured 

finance transactions has dropped 

precipitously since 2006 because of the 

credit market turmoil. Nonetheless, the 

Commission preliminarily is retaining 

the estimate of 4,000 new deals per year 

as an element of conservatism and to 

account for future market developments. 

Based on the number of outstanding 

structured finance ratings submitted by 

the ten registered NRSROs on their 

Form NRSROs, the Commission 

estimates that the three largest NRSROs 

account for 97% of the market for 

structured finance ratings. Therefore, 

the Commission estimates that each of 

the NRSROs in this category would be 

hired to rate 97% of the 4,000 new deals 

per year for a total of 11,640 ratings.117

The Commission further estimates that 

the NRSROs that are not in this category 

would each rate 3% of the 4,000 new 

deals for a total of 3,240 ratings.118

Thus, the Commission estimates that the 

total structured finance ratings issued 

by all NRSROs in a given year would be 

14,880.119 Based on staff experience, the 

Commission estimates that it would take 

approximately 1 hour per transaction for 

the NRSRO to update the lists 

maintained on the NRSROs’ password 

protected Internet Web sites. Therefore, 

the Commission estimates for purposes 

of the PRA that the total annual hour 

burden for the industry would be 14,880 

hours.120

The re-proposed amendments also 

would require that the arranger disclose 

the following information: 

• All information the issuer, sponsor, 

or underwriter provides to the 

nationally recognized statistical rating 

organization for the purpose of 

determining the initial credit rating for 

the security or money market 

instrument, including information about 

the characteristics of the assets 

underlying or referenced by the security 

or money market instrument, and the 

legal structure of the security or money 

market instrument, at the same time 

such information is provided to the 

nationally recognized statistical rating 

organization; and 

• All information the issuer, sponsor, 

or underwriter provides to the 

nationally recognized statistical rating 

organization for the purpose of 

undertaking credit rating surveillance 

on the security or money market 

instrument, including information about 

the characteristics and performance of 

the assets underlying or referenced by 

the security or money market 

instrument at the same time such 

information is provided to the 

nationally recognized statistical rating 

organization.121

The Commission estimates that there 

would be approximately 200 such 

respondents. For purposes of this PRA, 

the Commission estimates that it would 

take a respondent approximately 300 

hours to develop a system, as well as 

policies and procedures, for the 

disclosures required by the re-proposed 

rule. This estimate is based on the 

Commission’s experience with, and 

burden estimates for, the recordkeeping 

requirements for NRSROs.122

Accordingly, the Commission believes, 

based on staff experience, an arranger 

would take approximately 300 hours on 

a one-time basis to implement a 

disclosure system to comply with the 

proposal, which includes the estimate 

that a respondent would need a set of 

policies and procedures for disclosing 

the information, as well as a system for 

making the information publicly 

available. This would result in a total 

one-time hour burden of 60,000 hours 

for 200 respondents.123 The 

Commission received no comments on 

an identical burden estimate in the 

original proposing release. 

In addition to the one-time hour 

burden, the re-proposed amendments 

would result in an annual hour burden 

for arrangers. Specifically, the reproposed amendments would require 

disclosure of information on a 

transaction-by-transaction basis when 

an initial rating process is commenced. 

Based on staff experience, the 

Commission estimates that each 

respondent would disclose information 

for approximately 20 new transactions 

per year and that it would take 

approximately 1 hour per transaction to 

post the information to the password 

protected Internet Web sites. The 

Commission estimates that a large 

NRSRO would have rated 

approximately 2,000 new RMBS and 

CDO transactions in a given year. The 

Commission is basing this estimate on 

the number of new RMBS and CDO 

deals rated in 2006 by two of the largest 

NRSROs that rated structured finance 

transactions. The Commission is 

adjusting this number to 4,000 

transactions in order to include other 

types of structured finance products, 

including commercial MBS and other 

consumer assets. Therefore, the 

Commission estimates for purposes of 

the PRA that each respondent would 

arrange approximately 20 new 


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124 4,000 new transactions/200 issuers = 20 new 

transactions. 125 20 transactions × 1 hour = 20 hours. 126 20 hours × 200 respondents = 4,000 hours. 127 125 transactions × 30 minutes × 12 months = 

45,000 minutes/60 minutes = 750 hours. 

128 750 hours × 200 respondents = 150,000 hours. 

129 17 CFR 240.17g–1(f). 

130See June 5, 2007 Adopting Release, 72 FR at 

33609. 

131 20% of 10 hours = 2 hours. 

132 2 hours × 30 NRSROs = 60 hours. 

transactions per year.124 The 

Commission notes that the number of 

new transactions per year would vary by 

the size of issuer and that this estimate 

would be an average across all 

respondents. Larger respondents may 

arrange in excess of 20 new deals per 

year, while a smaller arranger may only 

initiate one or two new deals on an 

annual basis. Based on this analysis, the 

Commission estimates that it would take 

a respondent approximately 20 hours 125

to disclose this information under the 

re-proposed rule, on an annual basis, for 

a total aggregate annual hour burden of 

4,000 hours.126 The Commission 

received no comments on an identical 

burden estimate in the original 

proposing release. 

In addition, re-proposed Rule 17g– 

5(a)(3)(iii)(D) would require disclosure 

of information provided to an NRSRO to 

be used for credit rating surveillance on 

a security or money market instrument. 

Because surveillance would cover more 

than just initial ratings, the 

Commission, in the original proposing 

release, estimated based on staff 

information gained from the NRSRO 

examination process that monthly 

disclosure would be required with 

respect to approximately 125 

transactions on an ongoing basis. Also 

based on staff information gained from 

the NRSRO examination process, the 

Commission estimated that it would 

take a respondent approximately 0.5 

hours per transaction to disclose the 

information. Therefore, the Commission 

estimates that each respondent would 

spend approximately 750 hours 127 on 

an annual basis disclosing information 

under re-proposed Rule 17g–5, for a 

total aggregate annual burden hours of 

150,000 hours.128 The Commission 

received no comments on an identical 

estimate in the original proposing 

release. 

Finally, an NRSRO that wishes to 

access information on another NRSRO’s 

Web site or on an arranger’s Web site 

would need to provide the Commission 

with an annual certification described 

in proposed new paragraph (e) to Rule 

17g–5. The Commission estimates that 

this annual certification would become 

a matter of routine over time and should 

take less time than it takes an NRSRO 

to submit its annual certification under 

Rule 17g–1(f).129 The annual 

certification required under Rule 17g– 

1(f) involves the disclosure of 

substantially more information than the 

certification in proposed paragraph (e) 

of Rule 17g–5. The Commission 

estimated that it would take an NRSRO 

approximately 10 hours to complete the 

Rule 17g–1(f) annual certification.130

Given that the proposed paragraph (e) 

certification would require much less 

information, the Commission estimates, 

based on staff experience, that it would 

take an NRSRO approximately 20% of 

the time it takes to do the Rule 17g–5 

annual certification. Further, for the 

purposes of the estimate, the 

Commission is assuming that all 30 

NRSROs ultimately registered with the 

Commission would complete the 

certification. For these reasons, the 

Commission estimates it would take an 

NRSRO approximately 2 hours 131 to 

complete the proposed paragraph (e) 

certification for an aggregate annual 

hour burden to the industry of 60 

hours.132

The Commission again requests 

comment on all aspects of these burden 

estimates for the amendments to Rule 

17g–5 as re-proposed. In addition, the 

Commission requests specific comment 

on the following items related to these 

estimates: 

• Are there publicly available reports 

or other data sources the Commission 

should consider in arriving at these 

burden estimates? 

• Are the estimates of the one-time 

and recurring burdens of the reproposed additional disclosures 

accurate? If not, should they be higher 

or lower? 

Commenters should provide specific 

data and analysis to support any 

comments they submit with respect to 

these burden estimates. 

E. Collection of Information Is 

Mandatory 

The recordkeeping and notice 

requirements for the Proposed Rule 

Amendments would be mandatory. 

F. Confidentiality 

The disclosures that would be 

required under the proposed 

amendments to Rule 17g–2(d) would be 

public. The disclosures that would be 

required under the re-proposed 

amendments to Rule 17g–5 would be 

made available to other NRSROs. The 

NRSROs would need to provide 

certifications agreeing to keep the 

propose Rule 17g–5 information 

confidential. 

G. Record Retention Period 

There is no record retention period for 

the Proposed Rule Amendments. 

H. Request for Comment 

The Commission requests comment 

on the proposed collections of 

information in order to: (1) Evaluate 

whether the proposed collection of 

information is necessary for the proper 

performance of the functions of the 

Commission, including whether the 

information would have practical 

utility; (2) evaluate the accuracy of the 

Commission’s estimates of the burden of 

the proposed collections of information; 

(3) determine whether there are ways to 

enhance the quality, utility, and clarity 

of the information to be collected; (4) 

evaluate whether there are ways to 

minimize the burden of the collection of 

information on those who respond, 

including through the use of automated 

collection techniques or other forms of 

information technology; and (5) evaluate 

whether the Proposed Rule 

Amendments would have any effects on 

any other collection of information not 

previously identified in this section. 

Persons who desire to submit 

comments on the collection of 

information requirements should direct 

their comments to the OMB, Attention: 

Desk Officer for the Securities and 

Exchange Commission, Office of 

Information and Regulatory Affairs, 

Washington, DC 20503, and should also 

send a copy of their comments to 

Secretary, Securities and Exchange 

Commission, 100 F Street, NE., 

Washington, DC 20549–1090, and refer 

to File No. S7–04–09. OMB is required 

to make a decision concerning the 

collections of information between 30 

and 60 days after publication of this 

document in the Federal Register; 

therefore, comments to OMB are best 

assured of having full effect if OMB 

receives them within 30 days of this 

publication. Requests for the materials 

submitted to OMB by the Commission 

with regard to these collections of 

information should be in writing, refer 

to File No. S7–04–09, and be submitted 

to the Securities and Exchange 

Commission, Records Management 

Office, 100 F Street, NE., Washington, 

DC 20549. 

VI. Costs and Benefits of the 

Re-Proposed Rules 

The Commission is sensitive to the 

costs and benefits that result from its 

rules. The Commission has identified 

certain costs and benefits of the 

Proposed Rule Amendments and 

requests comment on all aspects of this 

cost-benefit analysis, including 


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133For 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.’’ 

134Senate Report, p. 2. 

135 Id, p. 7. 136 15 U.S.C. 78o–7(h)(2). 137 Id. 

identification and assessment of any 

costs and benefits not discussed in the 

analysis.133 The Commission seeks 

comment and data on the value of the 

benefits identified. The Commission 

also welcomes comments on the 

accuracy of its cost estimates in each 

section of this cost-benefit analysis, and 

requests those commenters to provide 

data so the Commission can improve the 

cost estimates, including identification 

of statistics relied on by commenters to 

reach conclusions on cost estimates. 

Finally, the Commission seeks estimates 

and views regarding these costs and 

benefits for particular types of market 

participants, as well as any other costs 

or benefits that may result from the 

adoption of these Proposed 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.134 As the Senate Report states, 

the Rating Agency Act establishes 

‘‘fundamental reform and improvement 

of the designation process’’ with the 

goal that ‘‘eliminating the artificial 

barrier to entry will enhance 

competition and provide investors with 

more choices, higher quality ratings, 

and lower costs.’’ 135

The Proposed Rule Amendments are 

designed to improve the transparency of 

credit ratings performance by making 

credit ratings actions publicly available 

and the accuracy of credit ratings for 

structured finance products by 

increasing competition among the 

NRSROs that rate these securities and 

money market instruments. 

The proposed amendment to Rule 

17g–2(d) would require NRSROs to 

publicly disclose all of their ratings 

actions histories for issuer-paid credit 

ratings, in XBRL format and with a oneyear grace period. This disclosure 

would allow the marketplace to better 

compare the performance of NRSROs 

determining issuer-paid credit ratings. 

The Commission preliminarily believes 

that making this information publicly 

available will provide users of credit 

ratings with innovative and potentially 

more useful metrics with which to 

compare NRSROs. 

In addition, under the re-proposed 

amendments to Rule 17g–5, NRSROs 

that are paid by arrangers to determine 

credit ratings for structured finance 

products would be required to maintain 

a password-protected Internet Web site 

that lists each deal they have been hired 

to rate. They also would be required to 

obtain representations from the arranger 

hiring the NRSRO to determine the 

rating that the arranger will post all 

information provided to the NRSRO to 

determine the rating and, thereafter, to 

monitor the rating on a passwordprotected Internet Web site. NRSROs 

not hired to determine and monitor the 

ratings would be able to access the 

NRSRO Internet Web sites to learn of 

new deals being rated and then access 

the arranger Internet Web sites to obtain 

the information being provided by the 

arranger to the hired NRSRO during the 

entire initial rating process and, 

thereafter, for the purpose of 

surveillance. However, the ability of 

NRSROs to access these NRSRO and 

arranger Internet Web sites would be 

limited to NRSROs that certify to the 

Commission on an annual basis, among 

other things, that they are accessing the 

information solely for the purpose of 

determining or monitoring credit 

ratings, that they will keep the 

information confidential and treat it as 

material non-public information, and 

that they will determine credit ratings 

for at least 10% of the deals for which 

they obtain information. They also 

would be required to disclose in the 

certification the number of deals for 

which they obtained information 

through accessing the Internet Web sites 

and the number of ratings they issued 

using that information during the year 

covered by their most recent 

certification. 

The Commission is re-proposing these 

amendments to Rule 17g–5, in part, 

pursuant to the authority in Section 

15E(h)(2) of the Exchange Act.136 The 

provisions in this section of the statute 

provide 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.137 The 

Commission preliminarily believes the 

re-proposed amendments are necessary 

and appropriate in the public interest 

and for the protection of investors 

because they are designed to address 

conflicts of interest and improve the 

quality of credit ratings for structured 

finance products by making it possible 

for more NRSROs to rate structured 

finance products. Generally, the 

information relied on by the hired 

NRSROs to rate structured finance 

products is non-public. This makes it 

difficult for other NRSROs to rate these 

securities and money market 

instruments. As a result, the products 

frequently are issued with ratings from 

only one or two NRSROs and only by 

NRSROs that are hired by the issuer, 

sponsor, or underwriter (i.e., NRSROs 

that are subject to the conflict of being 

repeatedly paid by certain arrangers to 

rate these securities and money market 

instruments). 

The goal is to increase the number of 

ratings extant for a given structured 

finance security or money market 

instrument and, in particular, promote 

the issuance of ratings by NRSROs that 

are not hired by the arranger. This 

would provide users of credit ratings 

with a broader range of views on the 

creditworthiness of the security or 

money market instrument and 

potentially expose an NRSRO that was 

unduly influenced by the ‘‘issuer-pay’’ 

conflict into issuing higher than 

warranted ratings. Furthermore, the 

proposal also is designed to make it 

more difficult for arrangers to exert 

influence over the NRSROs they hire to 

determine ratings for structured finance 

products. Specifically, by opening up 

the rating process to more NRSROs, the 

proposal could make it easier for the 

hired NRSRO to resist such pressure by 

increasing the likelihood that any steps 

taken to inappropriately favor the 

arranger could be exposed to the market 

through the ratings issued by other 

NRSROs. 

The Commission generally requests 

comment on all aspects of these 

Proposed Rule Amendment benefits. In 

addition, the Commission requests 

specific comment on the following 

items related to these benefits. 

• Are there metrics available to 

quantify these benefits and any other 

benefits the commenter may identify, 

including the identification of sources 


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138See proposed amendment to Rule 17g–2(d). 

139The Commission also bases this estimate on 

the estimated one time and annual burden hours it 

would take an NRSRO to publicly disclose its Form 

NRSRO on its Web site. No comments were 

received on these estimates in the final rule release. 

See June 5, 2007 Adopting Release, 72 FR at 33609. 

140 45 hours × 7 NRSROs = 315 hours. 

141 15 hours × 7 NRSROs = 105 hours. 

142The SIFMA 2007 Report as Modified indicates 

that the average hourly cost for a Senior 

Programmer is $289. Therefore, the average onetime cost would be $13,005 [(45 hours) × ($289 per 

hour)] and the average annual cost would be $4,335 

[(15 hours per year) × ($289 per hour)]. 

143 315 hours × $289 per hour. 

144 105 hours × $289 per hour. 

145See letter dated July 28, 2008 from Michel 

Madelain, Chief Operating Officer, Moody’s 

Investors Service. 

146 17 CFR 240.17g–5. 

147 17 CFR 240.17g–5(c). 

148See re-proposed Rule 17g–5(b)(9). The current 

paragraph (b)(9) would be renumbered as (b)(10). 

of empirical data that could be used for 

such metrics? 

Commenters should provide specific 

data and analysis to support any 

comments they submit with respect to 

these benefit estimates. 

B. Costs 

The cost of compliance with the 

Proposed Rule Amendments to a given 

NRSRO would depend on its size and 

the complexity of its business activities. 

The size and complexity of NRSROs 

vary significantly. Therefore, the cost 

could vary significantly across NRSROs. 

The Commission is providing estimates 

of the average cost per NRSRO taking 

into consideration the variance in size 

and complexity of NRSROs. The cost of 

compliance would also vary depending 

on which classes of credit ratings an 

NRSRO issues and how many 

outstanding ratings it has in each class. 

NRSROs which issue credit ratings for 

structured finance products would incur 

higher compliance costs than those 

NRSROs which do not issue such credit 

ratings or issue very few credit ratings 

in that class. For these reasons, the cost 

estimates represent the average cost 

across all NRSROs. 

1. Proposed Amendment to Rule 17g–2 

The proposed amendment to Rule 

17g–2 would require NRSROs to make 

100% of their ratings action histories for 

issuer-paid credit ratings publicly 

available in an XBRL Interactive Data 

File, with a one year grace period.138 As 

discussed with respect to the PRA, the 

Commission estimates that, on average, 

an NRSRO would spend approximately 

45 hours to publicly disclose this 

information in an XBRL Interactive Data 

File and, thereafter, 15 hours per year to 

update the information.139 Furthermore, 

as discussed in the PRA the 

Commission estimates that although 

there will be 30 NRSROs, this 

amendment only applies to seven 

NRSROs. For these reasons, the total 

aggregate one-time burden to the 

industry to make the history of its rating 

actions publicly available in an XBRL 

Interactive Data File would be 315 

hours 140 and the total aggregate annual 

burden hours would be 105 hours.141

For cost purposes, the Commission 

preliminarily believes that a senior 

programmer would perform these 

functions. Accordingly, the Commission 

estimates that an NRSRO would incur 

an average one-time cost of $13,005 and 

an average annual cost of $4,335, as a 

result of the proposed amendment.142

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

$91,035 143 and the total aggregate 

annual cost to the industry would be 

$30,345.144

In addition, the proposed rules may 

impose other costs. For example, 

making some information about ratings 

action histories available to the public 

for free may have some impact on the 

business models of NRSROs, although 

the proposed rules are designed to 

minimize any impact. Further, the rule 

may affect NRSROs with different 

business models differently, although 

the Commission seeks comment on how 

best to promote competition among 

NRSROs. The rule also may impose 

costs to purchase software to make this 

information publicly available. 

The Commission notes that in the 

Companion Adopting Release the 

Commission provided cost estimates for 

complying with all the final 

amendments to Rule 17g–2 being 

adopted. In that release, the 

Commission used a different 

methodology based on cost data 

provided by one large NRSRO.145 The 

Commission is not relying exclusively 

on cost data for the purposes of these 

amendments to Rule 17g–2 because the 

NRSRO was discussing cost estimates 

for complying with all the proposed 

amendments to Rule 17g–2 (not just the 

amendment relating to the requirement 

to publicly disclose certain ratings 

action histories in an XBRL format). 

The Commission generally requests 

comment on all aspects of these cost 

estimates for the proposed amendments 

to Rule 17g–2. In addition, the 

Commission requests specific comment 

on the following items related to these 

cost estimates: 

• What costs would result from lost 

revenues incurred because NRSROs 

subject to the rule may not be able to 

sell ratings action histories if they are 

publicly disclosed under the proposed 

rule? 

• If the Commission were to adopt a 

final rule that subjected subscriber-paid 

credit ratings to the public disclosure 

requirement, would the cost estimates 

per firm be the same as estimated by the 

Commission above or would they 

change. Commenters should give 

specific cost estimates in their 

comments. 

• If the Commission were to adopt a 

final rule subjecting subscriber-paid 

credit ratings to the public disclosure 

requirements being adopted today (the 

random sample of 10% of issuer-paid 

credit ratings in a class of credit rating), 

would the cost estimates per firm be the 

same as estimated by the Commission in 

the Adopting Release or would they 

change. Commenters should give 

specific cost estimates in their 

comments. 

• Would these proposals impose costs 

on other market participants, including 

persons who use credit ratings to make 

investment decisions or for regulatory 

purposes, and persons who purchase 

services and products from NRSROs? 

• Would there be costs in addition to 

those identified above, such as costs 

arising from systems changes and 

restructuring business practices to 

account for the new reporting 

requirement? 

• Should the Commission rely more 

on the cost data provided by the large 

NRSRO in its comments to the 

amendments to Rule 17g–2 proposed in 

the June 16, 2008 Proposing Release? If 

so, how should the Commission modify 

that cost data to reflect that the June 16, 

2008 Proposing Release proposed 

several different amendments to Rule 

17g–2? 

Commenters should provide specific 

data and analysis to support any 

comments they submit with respect to 

these burden estimates. 

2. Re-Proposed Rule 17g–5 

Rule 17g–5 requires an NRSRO to 

manage and disclose certain conflicts of 

interest.146 The rule also prohibits 

specific types of conflicts of interest.147

The re-proposed amendments to Rule 

17g–5 would add an additional conflict 

to paragraph (b) of Rule 17g–5 for 

NRSROs to manage. This re-proposed 

conflict of interest would be issuing or 

maintaining a credit rating for a security 

or money market instrument issued by 

an asset pool or as part of an assetbacked or mortgage-backed securities 

transaction that was paid for by the 

issuer, sponsor, or underwriter of the 

security or money market instrument.148

Under the re-proposal, an NRSRO 


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149See re-proposed Rule 17g–5(a)(3). 

150See re-proposed Rule 17g–5(a)(3)(i). 

151The Commission estimates an NRSRO would 

have a Compliance Manager and a Programmer 

Analyst perform these responsibilities, and that 

each would spend 50% of the estimated hours 

performing these responsibilities. The SIFMA 2007 

Report as Modified indicates that the average 

hourly cost for a Compliance Manager is $245 and 

the average hourly cost for a Programmer Analyst 

is $194. Therefore, the average one-time cost to an 

NRSRO would be ($150 hours × $245) + (150 hours 

× $194) = $65,850. 

152 $65,850 × 30 NRSROs = $1,975,500 

153 3,880 transactions × 1 hour = 3,880 hours. 

154 120 transactions × 1 hour = 120 hours. 

155 (3,880 hours × 3) + (120 hours × 27) = 14,880 

hours. 

156The Commission estimates an NRSRO would 

have a Webmaster perform these responsibilities. 

The SIFMA 2007 Report as Modified indicates that 

the average hourly cost for a Webmaster is $205. 

Therefore, the average one-time cost to a large 

NRSRO would be 3,880 hours × $205 = $795,400 

and the average one-time cost to NRSROs not in 

that category would be 120 hours × $205 = $24,600. 

157 ($795,400 × 3) + ($24,600 × 27) =$3,050,400. 

158S&P Letter. 

159See re-proposed Rule 17g–5(a)(3)(iii). 

160 300 hours × 200 respondents = 60,000 hours. 

161The Commission estimates an issuer would 

have a Compliance Manager and a Programmer 

Analyst perform these responsibilities, and that 

each would spend 50% of the estimated hours 

performing these responsibilities. The SIFMA 2007 

Report as Modified indicates that the average 

hourly cost for a Compliance Manager is $245 and 

the average hourly cost for a Programmer Analyst 

is $194. Therefore, the average one-time cost to an 

issuer would be (150 hours × $245) + (150 hours 

× $194) = $65,850. 

162 $65,580 × 200 respondents = $13,116,000. 

163This estimate assumes the respondent has 

already implemented the system and policies and 

procedures for disclosure. The Commission cannot 

estimate the number of initial transactions per year 

with certainty. The Commission believes that the 

number of deals that each respondent will disclose 

information on will vary widely based on the size 

of the entity. In addition, the Commission 

preliminarily believes that the number of assetbacked or mortgage-backed issuances being rated by 

would be prohibited from issuing a 

credit rating for a structured finance 

product, unless certain information 

about the transaction and the assets 

underlying the structured finance 

product are disclosed.149

Specifically, an NRSRO rating such 

products would need to disclose to 

other NRSROs the following 

information on a password protected 

Internet Web site: 

• A list of each such security or 

money market instrument for which it is 

currently in the process of determining 

an initial credit rating in chronological 

order and identifying the type of 

security or money market instrument, 

the name of the issuer, the date the 

rating process was initiated, and the 

Internet Web site address where the 

issuer, sponsor, or underwriter of the 

security or money market instrument 

represents that the information 

described in paragraphs (a)(3)(iii)(C) and 

(D) of re-proposed Rule 17g–5 can be 

accessed.150

The Commission estimates that the 

average one-time cost to each NRSRO to 

establish the Internet Web site would be 

$65,850 151 and the total aggregate onetime cost to all NRSROs would be 

$1,975,500.152 Further, as discussed 

with respect to the PRA, the 

Commission estimates that it would take 

a large NRSRO approximately 3,880 

hours 153 and a small NRSRO 

approximately 120 hours 154 to disclose 

the information under re-proposed Rule 

17g–5(a)(3)(i), on an annual basis, for a 

total aggregate annual hour burden of 

14,880 hours.155 For these reasons, the 

Commission estimates that the average 

annual cost to a large NRSRO would be 

$795,400, the average annual cost to 

NRSROs not in that category would be 

$24,600 156 and the total annual cost to 

the NRSROs would be $3,050,400.157

The Commission received one 

comment on the proposed costs in the 

June 16, 2008 Proposing Release.158 The 

commenter stated that if the 

amendments to Rule 17g–5(a)(3) were 

adopted, as proposed, it would cost the 

NRSRO approximately $29,750,000 to 

build, test, and deploy a system to 

comply with the June proposed 

amendments, and that the annual 

ongoing costs would be approximately 

$8,224,700. These estimates were based 

on the NRSRO being the entity that is 

required to disclose the information. 

The commenter stated it would need to 

disclose information that came to it in 

electronic, e-mail, paper, and voice 

formats, to sort through which 

information was used to determine the 

rating, and to then disclose this 

information. The re-proposed 

amendments do not require the NRSRO 

to disclose the information provided to 

it to determine initial ratings and 

subsequently monitor those ratings (the 

arranger would need to disclose this 

information). 

In addition, the proposed rule 

requiring NRSROs and arrangers to 

share information with other NRSROs 

may affect the quantity and quality of 

information they provide. Moreover, the 

requirement to disclose ratings actions 

histories for a random sample of 10% of 

certain outstanding credit ratings may 

create an incentive not to access the 

information. The Commission seeks 

comments on the possible effects and 

alternatives to mitigate them. The 

proposed rule also could require an 

NRSRO to purchase software to 

implement the public disclosure of the 

ratings action histories. 

The re-proposed amendments also 

would require that the arranger to 

disclose the following information: 

• All information the issuer, sponsor, 

or underwriter provides to the 

nationally recognized statistical rating 

organization for the purpose of 

determining the initial credit rating for 

the security or money market 

instrument, including information about 

the characteristics of the assets 

underlying or referenced by the security 

or money market instrument, and the 

legal structure of the security or money 

market instrument, at the same time 

such information is provided to the 

nationally recognized statistical rating 

organization; and 

• All information the issuer, sponsor, 

or underwriter provides to the 

nationally recognized statistical rating 

organization for the purpose of 

undertaking credit rating surveillance 

on the security or money market 

instrument, including information about 

the characteristics and performance of 

the assets underlying or referenced by 

the security or money market 

instrument at the same time such 

information is provided to the 

nationally recognized statistical rating 

organization.159

For purposes of the PRA, the 

Commission estimates that it would take 

a respondent approximately 300 hours 

to develop a system, as well as policies 

and procedures to disclose the 

information as required under the reproposed rule. This would result in a 

total one-time hour burden of 60,000 

hours for 200 respondents.160 For these 

reasons, the Commission estimates that 

the average one-time cost to each 

respondent would be $65,850 161 and 

the total aggregate one-time cost to the 

industry would be $13,116,000.162

As discussed with respect to the PRA, 

in addition to the one-time hour burden, 

respondents also would be required to 

disclose the required information under 

re-proposed Rule 17g–5(a)(3) on a 

transaction by transaction basis. Based 

on staff information gained from the 

NRSRO examination process, the 

Commission estimates that the reproposed amendments would require 

each respondent to disclose information 

with respect to approximately 20 new 

transactions per year and that it would 

take approximately 1 hour per 

transaction to make the information 

publicly available.163 Therefore, as 


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NRSROs in the next few years would be difficult 

to predict given the recent credit market turmoil. 

164 20 transactions × 1 hour = 20 hours. 

165 20 hours × 200 respondents = 4,000 hours. 

166The Commission estimates an NRSRO would 

have a Webmaster perform these responsibilities. 

The SIFMA 2007 Report as Modified indicates that 

the average hourly cost for a Webmaster is $205. 

Therefore, the average one-time cost to a respondent 

would be 20 hours × $205 = $4,100. 

167 $4,100 × 200 respondents = $820,000. 

168 125 transactions × 30 minutes × 12 months = 

45,000 minutes / 60 minutes = 750 hours. 

169 750 hours × 200 respondents = 150,000 hours. 

170The Commission estimates an NRSRO would 

have a Webmaster perform these responsibilities. 

The SIFMA 2007 Report as Modified indicates that 

the average hourly cost for a Webmaster is $205. 

Therefore, the average one-time cost to a respondent 

would be 750 hours × $205 = $153,750. 

171 $153,750 × 200 respondents = $30,750,000. 

172 20% of 10 hours = 2 hours. 

173 2 hours × 30 NRSROs = 60 hours. 

174The Commission estimates that an NRSRO 

would have a Compliance Manager prepare the 

annual certification. The 2007 SIFMA Report as 

Modified indicates that the average hourly cost for 

a Compliance Manager is $245. Therefore, the 

average annual cost to an NRSRO would be: 2 hours 

× $245 = $490. 

175 30 NRSROs × $490 = $14,700. 

176 $91,035 + $1,975,500 + $13,116,000 = 

$15,182,535. 

177 $30,345 + $3,050,400 + $820,000 + 

$30,750,000 + $14,700 = $34,665,445. 

178 15 U.S.C. 78c(f). 

179 15 U.S.C. 78w(a)(2). 

discussed with respect to the PRA, the 

Commission estimates that it would take 

a respondent approximately 20 hours 164

to disclose this information under reproposed Rule 17g–5(a)(3)(iii), on an 

annual basis, for a total aggregate annual 

hour burden of 4,000.165 For these 

reasons, the Commission estimates that 

the average annual cost to a respondent 

would be $4,100 166 and the total annual 

cost to the industry would be 

$820,000.167

Re-proposed Rule 17g–5(a)(3)(iii)(D) 

would require respondents to disclose 

information provided to an NRSRO to 

undertake credit rating surveillance on 

a structured product. Because 

surveillance would cover more than just 

initial ratings, the Commission 

estimates that a respondent would be 

required to disclose information with 

respect to approximately 125 

transactions on an ongoing basis and 

that the information would be provided 

to the NRSRO on a monthly basis. As 

discussed with respect to the PRA, the 

Commission estimates that each 

respondent would spend approximately 

750 hours 168 on an annual basis 

disclosing the information for a total 

aggregate annual burden hours of 

150,000 hours.169 For these reasons, the 

Commission estimates that the average 

annual cost to a respondent would be 

$153,750 170 and the total annual cost to 

the industry would be $30,750,000.171

Finally, an NRSRO that wishes to 

access information on another NRSRO’s 

Web site or on an arranger’s Web site 

would need to provide the Commission 

with an annual certification described 

in proposed new paragraph (e) to Rule 

17g–5. In the PRA, the Commission 

estimates it would take an NRSRO 

approximately 2 hours 172 to complete 

the proposed paragraph (e) certification 

for an aggregate annual hour burden to 

the industry of 60 hours.173 For these 

reasons, the Commission estimates it 

would cost an NRSRO approximately 

$490 dollars per year 174 and the 

industry $14,700 per year to comply 

with the proposed requirement.175

The Commission generally requests 

comment on all aspects of these cost 

estimates for the re-proposed 

amendments to Rule 17g–5. In addition, 

the Commission requests specific 

comment on the following items related 

to these cost estimates: 

• Would these proposals impose costs 

on other market participants, including 

persons who use credit ratings to make 

investment decisions or for regulatory 

purposes, and persons who purchase 

services and products from NRSROs? 

• Would there be costs in addition to 

those identified above, such as costs 

arising from systems changes and 

restructuring business practices to 

account for the new reporting 

requirement? 

Commenters should provide specific 

data and analysis to support any 

comments they submit with respect to 

these burden estimates. 

C. Total Estimated Costs of This 

Rulemaking 

Based on the figures discussed above, 

the Commission estimates that the total 

one-time costs related to this reproposed rulemaking would be 

approximately $15,182,535 176 and the 

total annual costs would be 

$34,665,445.177

VII. Consideration of Burden on 

Competition and Promotion of 

Efficiency, Competition, and Capital 

Formation 

Under Section 3(f) of the Exchange 

Act,178 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 179

requires the Commission to consider the 

anticompetitive effects of any rules the 

Commission adopts under the Exchange 

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

Commission from adopting any rule that 

would impose a burden on competition 

not necessary or appropriate in 

furtherance of the purposes of the 

Exchange Act. As discussed below, the 

Commission’s preliminary view is that 

the Proposed Rule Amendments should 

promote efficiency, competition, and 

capital formation. 

The proposed amendment to 

paragraph (d) of Rule 17g–2 is designed 

to provide the marketplace with 

additional information for comparing 

the ratings performance of NRSROs that 

determine issuer-paid credit ratings and, 

therefore, provide users of credit ratings 

with more useful metrics with which to 

compare these NRSROs. Increased 

disclosure of ratings history for issuerpaid credit ratings could make the 

performance of the NRSROs more 

transparent to the marketplace and, 

thereby, highlight those firms that do a 

better job analyzing credit risk. This 

could cause users of credit ratings to 

give greater weight to credit ratings of 

NRSROs that distinguish themselves by 

determining more accurate credit ratings 

than their peers. Moreover, to the extent 

this improves the quality of the credit 

ratings, persons that use credit ratings to 

make investment or lending decisions 

would have better information upon 

which to base their decisions. As a 

consequence, the rule could result in a 

more efficient allocation of capital and 

loans to issuers and obligors based on 

the risk appetites of the investors and 

lenders. The Commission believes that 

this enhanced disclosure would benefit 

smaller NRSROs that determine issuerpaid credit ratings to the extent they do 

a better job of assessing 

creditworthiness. 

The Commission is not proposing to 

require the public disclosure of ratings 

action histories for subscriber-paid 

credit ratings at this time out of 

competitive concerns. However, as 

indicated by the detailed solicitations of 

comment above, the Commission is 

considering how to make more 

information publicly available and 

accessible about the performance of 

these ratings. The Commission believes 

that the proposed rule would address 

concerns about the competitive impact 

of the public disclosure requirement 

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 re-proposed amendments to 

paragraphs (a) and (b) of Rule 17g–5 

could enhance competition among 

NRSROs. The goal of these proposals is 


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6506 Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Proposed Rules 

180Pub. L. No. 104–121, Title II, 110 Stat. 857 

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

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

181 5 U.S.C. 603. 

182See Senate Report. 

183 15 U.S.C. 78c(b), 78o–7, 78q(a), and 78w. 

184 17 CFR 240.0–10(a). 

185 June 5, 2007 Adopting Release, 72 FR at 

33618. 

186See 17 CFR 240.0–10(a). 

187Proposed amendment to paragraph (d) of Rule 

17g–2. 

to provide a mechanism for NRSROs to 

determine unsolicited credit ratings, 

which would provide users of credit 

ratings with more assessments of the 

creditworthiness of a structured finance 

product. This mechanism could expose 

NRSROs whose procedures and 

methodologies for determining credit 

ratings are less conservative in order to 

gain business. It also could mitigate the 

impact of rating shopping, since 

NRSROs not hired to rate a deal could 

nonetheless issue a credit rating. These 

potential impacts of the re-proposed 

amendments could help to restore 

confidence in credit ratings and, 

thereby, promote capital formation. 

They also could promote the more 

efficient allocation of capital by 

investors to the extent the quality of 

credit ratings is improved. In addition, 

by creating a mechanism for 

determining unsolicited ratings, they 

could increase competition by allowing 

smaller NRSROs to demonstrate 

proficiency in rating structured 

products. 

The Commission generally requests 

comment on all aspects of this analysis 

of the burden on competition and 

promotion of efficiency, competition, 

and capital formation. In addition, the 

Commission requests specific comment 

on the following items related to this 

analysis: 

• Would the Proposed Rule 

Amendments have an adverse effect on 

efficiency, competition, and capital 

formation that is neither necessary nor 

appropriate in furtherance of the 

purposes of the Exchange Act? 

Commenters should provide specific 

data and analysis to support any 

comments they submit with respect to 

these burden estimates. 

VIII. Consideration of Impact on the 

Economy 

For purposes of the Small Business 

Regulatory Enforcement Fairness Act of 

1996, or ‘‘SBREFA,’’ 180 the Commission 

must advise OMB whether a proposed 

regulation constitutes a major rule. 

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

has resulted in, or is likely to result in: 

• An annual effect on the economy of 

$100 million or more; 

• A major increase in costs or prices 

for consumers or individual industries; 

or 

• A significant adverse effect on 

competition, investment, or innovation. 

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

will generally be delayed for 60 days 

pending Congressional review. The 

Commission requests comment on the 

potential impact of the Proposed Rule 

Amendments on the economy on an 

annual basis. Commenters are requested 

to provide empirical data and other 

factual support for their view to the 

extent possible. 

IX. Initial Regulatory Flexibility 

Analysis 

The Commission has prepared the 

following Initial Regulatory Flexibility 

Analysis (‘‘IRFA’’), in accordance with 

the provisions of the Regulatory 

Flexibility Act,181 regarding the 

Proposed Rule Amendments to Rules 

17g–2 and 17g–5 under the Exchange 

Act. 

The Commission encourages 

comments with respect to any aspect of 

this IRFA, including comments with 

respect to the number of small entities 

that may be affected by the Proposed 

Rule Amendments. Comments should 

specify the costs of compliance with the 

Proposed Rule Amendments and 

suggest alternatives that would 

accomplish the goals of the 

amendments. Comments will be 

considered in determining whether a 

Final Regulatory Flexibility Analysis is 

required and will be placed in the same 

public file as comments on the Proposed 

Rule Amendments. Comments should 

be submitted to the Commission at the 

addresses previously indicated. 

A. Reasons for the Proposed Action 

The Proposed Rule Amendments 

would prescribe additional 

requirements for NRSROs to address 

concerns relating to the transparency of 

ratings actions and the conflicts of 

interest at NRSROs. 

B. Objectives 

The objectives of the Rating Agency 

Act are ‘‘to improve ratings quality for 

the protection of investors and in the 

public interest by fostering 

accountability, transparency, and 

competition in the credit rating 

industry.’’ 182 The Proposed Rule 

Amendments are designed to improve 

the transparency of credit ratings 

performance by making credit ratings 

actions publicly available and the 

accuracy of credit ratings for structured 

finance products by increasing 

competition among the NRSROs that 

rate these securities and money market 

instruments. 

C. Legal Basis 

Pursuant to the Sections 3(b), 15E, 

17(a), 23(a) and 36 of the Exchange 

Act.183

D. Small Entities Subject to the Rule 

Paragraph (a) of Rule 0–10 provides 

that for purposes of the Regulatory 

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

used with reference to an ‘issuer’ or a 

‘person’ other than an investment 

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

that, on the last day of its most recent 

fiscal year, had total assets of $5 million 

or less.’’ 184 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 Adopting Release,185

the Commission believes that 

approximately 30 credit rating agencies 

ultimately would be registered as an 

NRSRO. Of the approximately 30 credit 

rating agencies estimated to be 

registered with the Commission, the 

Commission estimates that 

approximately 20 may be ‘‘small’’ 

entities for purposes of the Regulatory 

Flexibility Act.186

E. Reporting, Recordkeeping, and Other 

Compliance Requirements 

The proposed amendment would 

revise paragraph (d) of Rule 17g–2 to 

require NRSROs to publicly disclose, in 

XBRL format and with a one-year delay, 

ratings action histories for all 

outstanding issuer-paid credit 

ratings.187 The disclosure of this 

information could enhance the metrics 

by which users of credit ratings evaluate 

the performance of NRSROs 

determining issuer-paid credit ratings. 

The re-proposal would amend 

paragraphs (a) and (b) of Rule 17g–5 and 

add new paragraph (e) to the rule. 

Under the re-proposed amendments, 

NRSROs that are paid by arrangers to 

determine credit ratings for structured 

finance products would be required to 

maintain a password protected Internet 

Web site that lists each deal they have 

been hired to rate. They also would be 

required to obtain representations from 

the arranger hiring the NRSRO to 

determine the rating that the arranger 

will post all information provided to the 

NRSRO to determine the rating and, 

thereafter, to monitor the rating on a 

password protected Internet Web site. 


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188 5 U.S.C. 603(c). 

189 15 U.S.C. 78c(b), 78o–7, 78q, 78w(a), and 

78mm. 

NRSROs not hired to determine and 

monitor the ratings would be able to 

access the NRSRO Internet Web sites to 

learn of new deals being rated and then 

access the arranger Internet Web sites to 

obtain the information being provided 

by the arranger to the hired NRSRO 

during the entire initial rating process 

and, thereafter, for the purpose of 

surveillance. However, the ability of 

NRSROs to access these NRSRO and 

arranger Internet Web sites would be 

limited to NRSROs that certify to the 

Commission on an annual basis, among 

other things, that they are accessing the 

information solely for the purpose of 

determining or monitoring credit 

ratings, that they will keep the 

information confidential and treat it as 

material non-public information, and 

that they will determine credit ratings 

for at least 10% of the deals for which 

they obtain information. They also 

would be required to disclose in the 

certification the number of deals for 

which they obtained information 

through accessing the Internet Web sites 

and the number of ratings they issued 

using that information during the year 

covered by their most recent 

certification. 

F. Duplicative, Overlapping, or 

Conflicting Federal Rules 

The Commission believes that there 

are no federal rules that duplicate, 

overlap, or conflict with the Proposed 

Rule Amendments. 

G. Significant Alternatives 

Pursuant to Section 3(a) of the 

Regulatory Flexibility Act,188 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 considering 

whether it is necessary or appropriate to 

establish different compliance or 

reporting requirements or timetables; or 

clarify, consolidate, or simplify 

compliance and reporting requirements 

under the rule for small entities. 

Because the Proposed Rule 

Amendments are designed to improve 

the overall quality of ratings and 

enhance the Commission’s oversight, 

the Commission preliminarily believes 

that small entities should be covered by 

the rule. 

H. Request for Comments 

The Commission encourages the 

submission of comments to any aspect 

of this portion of the IRFA. Comments 

should specify costs of compliance with 

the Proposed Rule Amendments and 

suggest alternatives that would 

accomplish the objective of the 

Proposed Rule Amendments. 

X. Statutory Authority 

The Commission is proposing 

amendments to Rule 17g–5 pursuant to 

the authority conferred by the Exchange 

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

23(a) and 36.189

List of Subjects in 17 CFR Parts 240 and 

243 

Brokers, Reporting and recordkeeping 

requirements, Securities. 

Text of Re-Proposed Rules 

In accordance with the foregoing, the 

Commission proposes to amend 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, as amended by 

a final rule published elsewhere in this 

issue of the Federal Register, is 

amended by revising paragraph (d) to 

read as follows: 

§ 240.17g–2 Records to be made and 

retained by nationally recognized statistical 

rating organizations. 

* * * * * 

(d)(1) Manner of retention. An 

original, or a true and complete copy of 

the original, of each record required to 

be retained pursuant to paragraphs (a) 

and (b) of this section must be 

maintained in a manner that, for the 

applicable retention period specified in 

paragraph (c) of this section, makes the 

original record or copy easily accessible 

to the principal office of the nationally 

recognized statistical rating organization 

and to any other office that conducted 

activities causing the record to be made 

or received. 

(2) 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)(2) 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)(2) 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) 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 required to be retained 

pursuant to paragraph (a)(8) of this 

section for any rating initially rated by 

the nationally recognized statistical 

rating organization on or after June 26, 

2007 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)(3) need not be 

made public less than twelve months 

from the date such ratings action is 

taken. 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–5 is amended by: 


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a. Removing the word ‘‘and’’ at the 

end of paragraph (a)(1); 

b. Removing the period at the end of 

paragraph (a)(2) and in its place adding 

‘‘; and’’; 

c. Adding paragraph (a)(3); 

d. Redesignating paragraph (b)(9) as 

paragraph (b)(10); and 

e. Adding new paragraph (b)(9) and 

paragraph (e); 

The additions read as follows: 

§ 240.17g–5 Conflicts of interest. 

(a) * * * 

(3) In the case of the conflict of 

interest identified in paragraph (b)(9) of 

this section relating to issuing or 

maintaining a credit rating for a security 

or money market instrument issued by 

an asset pool or as part of any assetbacked or mortgage-backed securities 

transaction, the nationally recognized 

statistical rating organization: 

(i) Maintains on a password-protected 

Internet Web site a list of each such 

security or money market instrument for 

which it is currently in the process of 

determining an initial credit rating in 

chronological order and identifying the 

type of security or money market 

instrument, the name of the issuer, the 

date the rating process was initiated, 

and the Internet Web site address where 

the issuer, sponsor, or underwriter of 

the security or money market 

instrument represents that the 

information described in paragraphs 

(a)(3)(iii)(C) and (D) of this section can 

be accessed; 

(ii) Provides free and unlimited access 

to such password-protected Internet 

Web site during the applicable calendar 

year to any nationally recognized 

statistical rating organization that 

provides it with a copy of the 

certification described in paragraph (e) 

of this section that covers that calendar 

year; 

(iii) Obtains from the issuer, sponsor, 

or underwriter of each such security or 

money market instrument a 

representation that can reasonably be 

relied upon that the issuer, sponsor, or 

underwriter will: 

(A) Maintain the information 

described in paragraphs (a)(3)(iii)(C) and 

(D) of this section available at an 

identified password-protected Internet 

Web site that presents the information 

in a manner indicating which 

information currently should be relied 

on to determine or monitor the credit 

rating; 

(B) Provide access to such passwordprotected Internet Web site during the 

applicable calendar year to any 

nationally recognized statistical rating 

organization that provides it with a copy 

of the certification described in 

paragraph (e) of this section that covers 

that calendar year; 

(C) Post on such password-protected 

Internet Web site all information the 

issuer, sponsor, or underwriter provides 

to the nationally recognized statistical 

rating organization for the purpose of 

determining the initial credit rating for 

the security or money market 

instrument, including information about 

the characteristics of the assets 

underlying or referenced by the security 

or money market instrument, and the 

legal structure of the security or money 

market instrument, at the same time 

such information is provided to the 

nationally recognized statistical rating 

organization; and 

(D) Post on such password-protected 

Internet Web site all information the 

issuer, sponsor, or underwriter provides 

to the nationally recognized statistical 

rating organization for the purpose of 

undertaking credit rating surveillance 

on the security or money market 

instrument, including information about 

the characteristics and performance of 

the assets underlying or referenced by 

the security or money market 

instrument at the same time such 

information is provided to the 

nationally recognized statistical rating 

organization. 

* * * * * 

(b) * * * 

(9) Issuing or maintaining a credit 

rating for a security or money market 

instrument issued by an asset pool or as 

part of any asset-backed or mortgagebacked securities transaction that was 

paid for by the issuer, sponsor, or 

underwriter of the security or money 

market instrument. 

* * * * * 

(e) Certification. In order to access a 

password-protected Internet Web site 

described in paragraph (a)(3) of this 

section, a nationally recognized 

statistical rating organization must 

furnish to the Commission, for each 

calendar year for which it is requesting 

a password, the following certification, 

signed by a person duly authorized by 

the certifying entity: 

The undersigned hereby certifies that it will 

access the Internet Web sites described in 

§ 240.17g–5(a)(3) solely for the purpose of 

determining or monitoring credit ratings. 

Further, the undersigned certifies that it will 

keep the information it accesses pursuant to 

§ 240.17g–5(a)(3) confidential and treat it as 

material nonpublic information subject to its 

written policies and procedures established, 

maintained, and enforced pursuant to section 

15E(g)(1) of the Act (15 U.S.C. 78o–7(g)(1)) 

and § 240.17g–4. Further, the undersigned 

certifies that it will determine and maintain 

credit ratings for at least 10% of the issued 

securities and money market instruments for 

which it accesses information pursuant to 

§ 240.17g–5(a)(3)(iii), if it accesses such 

information for 10 or more issued securities 

or money market instruments in the calendar 

year covered by the certification. Further, the 

undersigned certifies one of the following as 

applicable: (1) In the most recent calendar 

year during which it accessed information 

pursuant to § 240.17g–5(a)(3), the 

undersigned accessed information for [Insert 

Number] issued securities and money market 

instruments through Internet Web sites 

described in § 240.17g–5(a)(3) and 

determined and maintained credit ratings for 

[Insert Number] of such securities and money 

market instruments; or (2) The undersigned 

previously has not accessed information 

pursuant to § 240.17g–5(a)(3) 10 or more 

times in a calendar year. 

PART 243—REGULATION FD 

4. The authority citation for part 243 

continues to read as follows: 

Authority: 15 U.S.C. 78c, 78i, 78j, 78m, 

78o, 78w, 78mm, and 80a–29, unless 

otherwise noted. 

5. Section § 243.100 is amended by 

revising paragraph (b)(2)(iii) to read as 

follows: 

§ 243.100 General rule regarding selective 

disclosure. 

* * * * * 

(b) * * * 

(2) * * * 

(iii) If the information is disclosed 

solely for the purpose of developing a 

credit rating, to: 

(A) Any nationally recognized 

statistical rating organization, as that 

term is defined in Section 3(a)(62) of the 

Securities Exchange Act of 1934 (15 

U.S.C. 78c(a)(62)), pursuant to 

§ 240.17g–5(a)(3) of this chapter; or 

(B) Any credit rating agency as that 

term is defined in Section 3(a)(62) of the 

Securities Exchange Act of 1934 (15 

U.S.C. 78c(a)(62)) that makes its credit 

ratings publicly available; or 

* * * * * 

By the Commission. 

Dated: February 2, 2009. 

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. E9–2514 Filed 2–6–09; 8:45 am] 

BILLING CODE 8011–01–P 


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