Document ID: SEC-2009-1704-0001
Agency: sec
Document Type: Proposed Rule
Title: Proposed Rules for Nationally Recognized Statistical Rating Organizations
Posted Date: 2009-12-04T05:00Z

[Federal Register: December 4, 2009 (Volume 74, Number 232)]
[Proposed Rules]               
[Page 63866-63904]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04de09-43]                         

[[Page 63866]]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249b

[Release No. 34-61051; File No. S7-28-09]
RIN 3235-AK14

 
Proposed Rules for Nationally Recognized Statistical Rating 
Organizations

AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Proposed rules.

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SUMMARY: The Commission is proposing rule amendments and a new rule 
that would impose additional requirements on nationally recognized 
statistical rating organizations (``NRSROs''). The proposed amendments 
and rule would require an NRSRO: to furnish a new annual report 
describing the steps taken by the firm's designated compliance officer 
during the fiscal year with respect to compliance reviews, 
identifications of material compliance matters, remediation measures 
taken to address those matters, and identification of the persons 
within the NRSRO advised of the results of the reviews; to disclose 
additional information about sources of revenues on Form NRSRO; and to 
make publicly available a consolidated report containing information 
about revenues of the NRSRO attributable to persons paying the NRSRO 
for the issuance or maintenance of a credit rating. The Commission is 
proposing these rules, in conjunction with a separate release being 
issued today adopting certain rule amendments, to further address 
concerns about the integrity of the credit rating procedures and 
methodologies at NRSROs. Finally, at this time, the Commission is 
announcing that it is deferring consideration of action with respect to 
a proposed rule that would have required an NRSRO to include, each time 
it published a credit rating for a structured finance product, a report 
describing how the credit ratings procedures and methodologies and 
credit risk characteristics for structured finance products differ from 
those of other types of rated instruments, or, alternatively, to use 
distinct ratings symbols for structured finance products that 
differentiated them from the credit ratings for other types of 
financial instruments. The Commission is also soliciting comments 
regarding alternative measures that could be taken to differentiate 
NRSROs' structured finance credit ratings from the credit ratings they 
issue for other types of financial instruments through, for example, 
enhanced disclosures of information. The Commission also is soliciting 
comment on whether the rule amendments being adopted today in a 
separate release designed to remove impediments to determining and 
monitoring non-issuer-paid credit ratings for structured finance 
products should be extended to create a mechanism for determining non-
issuer-paid credit ratings for structured finance products that were 
issued prior to the rule becoming effective (e.g., to allow for non-
issuer-paid credit ratings for structured finance products of the 2004-
2007 vintage). The Commission strongly encourages market participants 
and all others to provide their views.

DATES: Comments should be received on or before February 2, 2010.

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 rule-comments@sec.gov. Please include 
File Number S7-28-09 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 Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-28-09. 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, Deputy Associate 
Director, at (202) 551-5521; Randall W. Roy, Assistant Director, at 
(202) 551-5522; Joseph I. Levinson, Special Counsel, at (202) 551-5598; 
Sheila Dombal Swartz, Special Counsel, at (202) 551-5545; Rose Russo 
Wells, Special Counsel, at (202) 551-5527; Rebekah E. Goshorn, 
Attorney, at (202) 551-5514; Marlon Q. Paz, Senior Counsel to the 
Director, at (202) 551-5756; Division of Trading and Markets, 
Securities and Exchange Commission, 100 F Street, NE., Washington, DC 
20549-7010.

SUPPLEMENTARY INFORMATION: 

I. Background

    On February 2, 2009, the Commission adopted amendments to its 
existing rules governing the conduct of NRSROs under the Securities 
Exchange Act of 1934 (``Exchange Act'').\1\ The Commission proposed 
these rule amendments in June 2008 to further the purposes of the 
Credit Rating Agency Reform Act of 2006 (``Rating Agency Act'') 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.\2\ The amendments also were 
designed to further address concerns about the integrity of the process 
by which NRSROs rate structured finance products, particularly mortgage 
related securities.\3\ Concurrent with the

[[Page 63867]]

adoption of those final rule amendments, the Commission proposed, in a 
separate release, additional amendments to Rule 17g-2(d) and re-
proposed amendments to paragraphs (a) and (b) of Rule 17g-5 as well as 
a new paragraph (e) to Rule 17g-5 and a conforming amendment to 
Regulation FD.\4\ In separate releases, the Commission is adopting, 
with revisions, the rule amendments proposed in the February 2009 
Proposing Release,\5\ and proposing amendments to Regulation S-K, and 
rules and forms under the Securities Act, the Exchange Act and the 
Investment Company Act to require disclosure regarding credit ratings 
that a registrant uses in connection with a registered offering.\6\ The 
Commission also is adopting amendments to remove references to NRSROs 
in certain Commission rules and forms and re-opening the comment period 
to extend the time to comment on proposals to remove references to 
NRSROs in other Commission rules.\7\
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    \1\ See Amendments to Rules for Nationally Recognized 
Statistical Rating Organizations, Exchange Act Release No. 59342 
(February 2, 2009), 74 FR 6485 (February 9, 2009) (``February 2009 
Adopting Release'').
    \2\ Exchange Act Release No. 57967 (June 16, 2008), 73 FR 36212 
(June 25, 2008) (``June 2008 Proposing Release''). The Commission 
adopted the initial set of 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 2007 Adopting 
Release''). In July 2008, the Commission also proposed 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 eliminate references to 
ratings issued by NRSROs in certain rules and forms. See References 
to Ratings of Nationally Recognized Statistical Rating 
Organizations, Exchange Act Release No. 58070 (July 1, 2008), 73 FR 
40088 (July 11, 2008); Securities Ratings, Securities Act Release 
No. 8940 (July 1, 2008), 73 FR40106 (July 11, 2008); References to 
Ratings of Nationally Recognized Statistical Rating Organizations, 
Investment Company Act Release No. 28327 (July 1, 2008), 73 FR 40124 
(July 11, 2008).
    \3\ The term ``structured finance product'' as used throughout 
this release refers broadly to any security or money market 
instrument issued by an asset pool or as part of any asset-backed or 
mortgage-backed securities transaction. This broad category of 
financial instrument includes, but is not limited to, asset-backed 
securities such as residential mortgage-backed securities (``RMBS'') 
and to other types of structured debt instruments such as 
collateralized debt obligations (``CDOs''), including synthetic and 
hybrid CDOs, or collateralized loan obligations (``CLOs'').
    \4\ See Re-proposed Rules for Nationally Recognized Statistical 
Rating Organizations, Exchange Act Release No. 59343 (February 2, 
2009), 74 FR 6456 (February 9, 2009) (``February 2009 Proposing 
Release'').
    \5\ Exchange Act Release No. 61050 (``Companion Release'').
    \6\ Securities Act No. 9070 (October 7, 2009) 74 FR 53086 
(October 15, 2009).
    \7\ See Exchange Act Release No. 60789 (October 5, 2009), 74 FR 
53258 (October 9, 2009) (adopting release to remove references to 
NRSROs); see also Securities Act Release No. 9069 (October 5, 2009) 
74 FR 53274 (October 9, 2009) (release to re-open for comment 
proposals to remove references to NRSROs).
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    In this release, the Commission is proposing amendments to Rule 
17g-3 to require an NRSRO to furnish a new unaudited annual report to 
the Commission describing the steps taken by the NRSRO's designated 
compliance officer \8\ during the fiscal year to fulfill the compliance 
officer's responsibilities as set forth in Section 15E(j) of the 
Exchange Act.\9\ That statutory provision requires an NRSRO to 
designate an individual responsible for (1) administering the policies 
and procedures that are required to be established pursuant to Sections 
15E(g) and (h) of the Exchange Act; and (2) ensuring compliance with 
securities laws and rules and regulations, including those promulgated 
by the Commission pursuant to Section 15E of the Exchange Act.\10\ 
Pursuant to the proposed amendment to Rule 17g-3, an NRSRO would be 
required to furnish a report to the Commission describing compliance 
reviews undertaken by the compliance officer during the fiscal year, 
material compliance matters identified during the reviews, measures 
implemented to remediate the material compliance issues identified, and 
persons within the NRSRO who were advised of the results of the 
reviews.
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    \8\ See 15 U.S.C. 78o-7(j). Section 15E(j) of the Exchange Act 
requires an NRSRO to ``designate an individual responsible for 
administering the policies and procedures that are required to be 
established pursuant to [Section 15E(g) and Section 15E(h) of the 
Exchange Act], and for ensuring compliance with the securities laws 
and rules and regulations thereunder, including those promulgated by 
the Commission pursuant to [Section 15E of the Exchange Act].'' 15 
U.S.C. 78o-7(j).
    \9\ See 15 U.S.C. 78o-7(j).
    \10\ Id.
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    In addition, the Commission is proposing in this release to amend 
the Instructions to Exhibit 6 to Form NRSRO to require a credit rating 
agency applying to be registered as an NRSRO or an NRSRO providing its 
annual update to Form NRSRO to publicly disclose: (1) The percentage of 
the net revenue of the applicant/NRSRO attributable to the 20 largest 
users of credit rating services of the applicant/NRSRO; and (2) the 
percentage of the revenue of the applicant/NRSRO attributable to 
services and products other than credit rating services. The Commission 
notes that the first proposed disclosure would be an aggregate in that 
it would be the sum of the amount of net revenue attributed to the 20 
largest users of credit rating services (i.e. not 20 separate net 
revenue amounts). In conjunction with this proposed amendment to the 
Instructions to Exhibit 6, the Commission is proposing to move the 
definitions of certain terms currently included in the Instructions to 
Exhibit 10 to the Explanation of Terms section of the Form NRSRO 
Instructions in order to make those definitions applicable to Form 
NRSRO as a whole.
    Finally, the Commission is proposing a new rule--Rule 17g-7--that 
would require an NRSRO, on an annual basis, to make publicly available 
on its Internet Web site a consolidated report that shows three items 
of information with respect to each person that paid the NRSRO to issue 
or maintain a credit rating. First, the NRSRO would be required to 
disclose the percent of the net revenue attributable to the person that 
were earned by the NRSRO for that fiscal year from providing services 
and products other than credit rating services. Second, the NRSRO would 
have to indicate the relative standing of the person in terms of the 
person's contribution to the revenue of the NRSRO for the fiscal year 
as compared with other persons who provided the NRSRO with revenue. 
Third, the NRSRO would be required to identify all outstanding credit 
ratings paid for by the person.
    As discussed in detail below, the proposed amendments seek to 
further advance the goals of the Commission's current oversight program 
for NRSROs, including increasing transparency and disclosure, and 
diminishing conflicts, as well as continuing to further the goals of 
the Rating Agency Act ``to improve ratings quality for the protection 
of investors and in the public interest by fostering accountability, 
transparency, and competition in the credit rating agency industry.'' 
\11\
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    \11\ See Report of the Senate Committee on Banking, Housing, and 
Urban Affairs to Accompany S. 3850, Credit Rating Agency Reform Act 
of 2006, S. Report No. 109-326, 109th Cong., 2d Sess. (Sept. 6, 
2006) (``Senate Report''), p. 2.
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    The Commission believes that the proposed amendment to Rule 17g-3 
to require NRSROs to furnish the Commission with an additional 
unaudited annual report would further improve the integrity of the 
ratings process and enhance accountability by requiring the designated 
compliance officer to annually report on actions taken to fulfill the 
officer's statutory responsibilities. While each NRSRO has a designated 
compliance officer under Section 15E(j) of the Exchange Act, the 
requirement to provide the Commission with such a report would, the 
Commission believes, help establish or further reinforce a discipline 
and rigor in the compliance officer's performance of his or her 
duties.\12\ It also is designed to strengthen the Commission's existing 
oversight of NRSROs by highlighting possible problem areas in an 
NRSRO's rating processes and by providing an additional tool for the 
Commission to determine whether the NRSRO's designated compliance 
officer is fulfilling the responsibilities prescribed in Section 15E of 
the Exchange Act.\13\ In addition, this information is designed to 
assist the Commission staff in its examination of NRSROs. The proposed 
amendments to the Exhibit 6 Instructions to Form NRSRO that would 
require additional disclosures are designed to further increase 
transparency by allowing users of credit ratings to more effectively 
evaluate the integrity of an NRSRO's credit ratings and analyze whether 
the NRSRO is effectively managing its conflicts of interests. Finally, 
the Commission believes that proposed new Rule 17g-7

[[Page 63868]]

also would further increase transparency as well as enhance disclosures 
with respect to an NRSRO's management of its conflicts of interest by 
providing users of credit ratings with information about the potential 
risk of undue influence that arises when an NRSRO is paid to determine 
a credit rating for a specific obligor, security, or money market 
instrument.
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    \12\ The Commission also notes that other areas of the 
Commission's rules and regulations also require an annual report by 
a chief compliance officer with respect to investment companies and 
investment advisers. See generally, Rule 38a-1, 17 CFR 270.38a-1, 
and Rule 206(4)-7, 17 CFR 275.206(4)-7.
    \13\ 15 U.S.C. 78o-7(j).
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    In addition to the proposed rule amendments, the Commission is 
announcing today that it is deferring the consideration of action with 
regard to the rule proposed in the June 2008 Proposing Release that 
would have required an NRSRO to include, each time it published a 
credit rating for a structured finance product, a report describing how 
the credit ratings procedures and methodologies and credit risk 
characteristics for structured finance products differ from those of 
other types of rated instruments, or, alternatively, to use distinct 
ratings symbols for structured finance products that differentiated 
them from the credit ratings for other types of financial instruments. 
Instead, the Commission is soliciting comment regarding alternative 
measures that could be taken to differentiate NRSROs' structured 
finance credit ratings from the credit ratings they issue for other 
types of financial instruments through, for example, enhanced 
disclosures of information. The Commission also is soliciting comment 
on whether the rule amendments being adopted today in the Companion 
Release designed to remove impediments to determining and monitoring 
non-issuer-paid credit ratings for structured finance products should 
be extended to create a mechanism for determining non-issuer-paid 
credit ratings for structured finance products that were issued prior 
to the rule becoming effective (e.g., to allow for non-issuer-paid 
credit ratings for structured finance products of the 2004-2007 
vintage). Specifically, the Commission is soliciting comment on whether 
the rule's goal could be furthered by applying its requirements or 
similar requirements to structured finance products that were issued 
prior to the compliance date of the rule as amended.

II. Proposed Amendment to Rule 17g-3

    The Commission adopted Rule 17g-3 pursuant to authority in Section 
15E(k) \14\ of the Exchange Act, which requires an NRSRO to furnish to 
the Commission, on a confidential basis \15\ and at intervals 
determined by the Commission, such financial statements and information 
concerning its financial condition as the Commission, by rule, may 
prescribe as necessary or appropriate in the public interest or for the 
protection of investors. The statute also provides that the Commission 
may, by rule, require that the financial statements be certified by an 
independent public accountant.\16\ In addition, Section 17(a)(1) of the 
Exchange Act \17\ requires an NRSRO 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.\18\
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    \14\ 15 U.S.C. 78o-7(k).
    \15\ An NRSRO can request that the Commission keep this 
information confidential. See Section 24 of the Exchange Act (15 
U.S.C. 78x), 17 CFR 240.24b-2, 17 CFR 200.80 and 17 CFR 200.83.
    \16\ Id.
    \17\ 15 U.S.C. 78q(a)(1).
    \18\ See Section 5 of the Rating Agency Act and 15 U.S.C. 
78q(a)(1).
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    Rule 17g-3 currently requires an NRSRO to furnish to the Commission 
on an annual basis the following reports: audited financial statements; 
unaudited consolidating financial statements of the parent of the 
NRSRO, if applicable; an unaudited report concerning revenues by 
category of revenue; an unaudited report concerning compensation of the 
NRSRO's credit analysts; an unaudited report listing the largest 
customers of the NRSRO; and an unaudited report on the number of credit 
rating actions taken during the fiscal year in each class of credit 
ratings for which the NRSRO is registered with the Commission.\19\ The 
rule further requires an NRSRO to furnish the Commission these reports 
within 90 days of the end of its fiscal year.\20\
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    \19\ 17 CFR 240.17g-3(a)(1)-(6).
    \20\ 17 CFR 240.17g-3(a).
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    The Commission's staff understands that the designated compliance 
officer of some NRSROs may, in some cases, not be fulfilling the 
compliances officer's statutorily mandated duties, as prescribed by 
Section 15E(j) of the Exchange Act.\21\ Further, during examinations in 
2008 of three of the largest NRSRO's, Commission staff also identified 
issues with respect to each NRSROs policies and procedures and 
improvements that could be made.\22\ In light of these concerns and the 
importance of an effective NRSRO compliance program, the Commission is 
proposing to amend Rule 17g-3 by adding paragraph (a)(7), which would 
require an NRSRO to furnish to the Commission an additional unaudited 
annual report. This report would be furnished to the Commission, on a 
confidential basis, consistent with the other reports required under 
Rule 17g-3.\23\
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    \21\ 15 U.S.C. 78o-7(j).
    \22\ See generally, Summary Report of Issues Identified in the 
Commission Staff's Examinations of Select Credit Rating Agencies 
(July 8, 2008). The report is available on the Commission's Internet 
Web site, located at http://www.sec.gov/news/studies/2008/
craexamination070808.pdf.
    \23\ See supra notes 14 and 15; see also June 2007 Adopting 
Release, 72 FR at 33590, footnote 300 and June 2008 Proposing 
Release, 73 FR 36234, footnote 143.
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    Proposed new paragraph (a)(7)(i) of Rule 17g-3 would provide that 
the new report must describe the steps taken by the NRSRO's designated 
compliance officer during the fiscal year to: (1) Administer the 
policies and procedures that are required to be established pursuant to 
Sections 15E(g) and (h) of the Exchange Act; and (2) ensure compliance 
with securities laws and rules and regulations, including those 
promulgated by the Commission pursuant to Section 15E of the Exchange 
Act.\24\ Proposed new paragraph (a)(7)(ii) of Rule 17g-3 would provide 
that the new report must include: (1) A description of any compliance 
reviews of the activities of the NRSRO; (2) the number of material 
compliance matters identified during each review of the activities of 
the NRSRO and a brief description of each such matter; (3) a 
description of any remediation measures implemented to address material 
compliance matters identified during the reviews of the activities of 
the NRSRO; and (4) a description of the persons within the NRSRO who 
were advised of the results of the reviews.\25\ Finally, the Commission 
is proposing to amend paragraph (b) to Rule 17g-3 to require that the 
proposed new report required under paragraph (a)(7) be accompanied by a 
statement signed by the NRSRO's designated compliance officer stating 
that the person has responsibility for the report and, to the best of 
the knowledge of the designated compliance officer, the report fairly

[[Page 63869]]

presents, in all material respects, steps taken by the designated 
compliance officer for the period presented.
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    \24\ Section 15E(g) of the Exchange Act provides, in pertinent 
part, that an NRSRO must establish, maintain, and enforce written 
policies and procedures reasonably designed, taking into 
consideration the nature of the business of such NRSRO, to prevent 
the misuse of material, nonpublic information. 15 U.S.C. 78o-7(g). 
Section 15E(h) of the Exchange Act, provides, in pertinent part, 
that an NRSRO must establish, maintain, and enforce written policies 
and procedures reasonably designed, taking into consideration the 
nature of the business of such NRSRO and affiliated persons and 
affiliated companies thereof, to address and manage any conflicts of 
interest that can arise from such business. 15 U.S.C. 78o-7(h).
    \25\ See proposed Rule 17g-3(a)(7)(ii).
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    The proposed new report would be unaudited, consistent with the 
other unaudited reports currently required under Rule 17g-3.\26\ As 
discussed below, the Commission preliminarily believes that the 
proposed amendment would improve the integrity of the credit ratings 
process by establishing a more structured discipline under which the 
NRSRO's designated compliance officer would need to report to the 
Commission the steps taken to fulfill the officer's statutory 
responsibilities. The act of reporting these steps is designed to 
promote the active engagement of the designated compliance officer in 
reviewing an NRSRO's compliance with the securities laws and its own 
internal policies and procedures. The Commission preliminarily believes 
that because the compliance officer would be required to report these 
steps, the act of reporting should, in turn, foster improved 
compliance. Furthermore, the requirement in the report to identify the 
persons within the NRSRO advised of the results of the review could 
also promote the appropriate escalation of compliance issues to the 
management of the NRSRO.
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    \26\ 17 CFR 240.17g-3(a)(2)-(6). Under Rule 17g-3, the only 
required audited report is the NRSRO's financial statements as of 
its most recent fiscal year. 17 CFR 240.17g-3(a)(1).
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    The report also is designed to further strengthen the Commission's 
oversight of NRSROs by highlighting possible problem areas in an 
NRSRO's rating processes and providing an additional tool for the 
Commission to determine whether the NRSRO's designated compliance 
officer is fulfilling the responsibilities prescribed in Section 15E of 
the Exchange Act.\27\ For example, if an NRSRO reports a large number 
of material compliance matters in a particular area, the Commission 
examination staff could focus on that particular area as part of their 
next review of the NRSRO. Alternatively, if a report indicates no 
problems, but a subsequent Commission staff examination reveals 
material compliance matters, this could be brought to the attention of 
the NRSRO's management for appropriate action.
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    \27\ 15 U.S.C. 78o-7(j).
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    The report is also designed to assist the Commission in its 
oversight of NRSROs to the extent they reveal trends across NRSROs or 
material compliance matters that could migrate from one NRSRO to other 
NRSROs because, for example, they arise from rating similar products or 
debt issued by a particular issuer that engages more than one NRSRO.
    Finally, the Commission preliminarily believes that the proposed 
report would also help facilitate the Commission's examination staff 
efforts to conduct each exam of an NRSRO in an organized and efficient 
manner and thus to allocate resources to maximize investor 
protection.\28\ The Commission notes that the proposed report would not 
be the sole factor the Commission's exam staff would use to determine 
the particular focus of an exam, but would be one of many factors used 
to make that determination.
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    \28\ The Commission also notes that other areas of the 
Commission's rules and regulations also require an annual report by 
a chief compliance officer with respect to investment companies and 
investment advisers. See generally, Rule 38a-1, 17 CFR 270.38a-1, 
and Rule 206(4)-7, 17 CFR 275.206(4)-7.
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A. Proposed New Paragraph 17g-3(a)(7)(i)

    As stated above, the proposed amendments to Rule 17g-3 would 
require an NRSRO to provide the Commission with an unaudited annual 
report describing the steps taken by the NRSRO's designated compliance 
officer during the fiscal year.\29\ Specifically, the amendments would 
add a new paragraph (a)(7)(i) to Rule 17g-3, which would require an 
NRSRO to provide the Commission with a report describing the steps 
taken by the NRSRO's designated compliance officer during the fiscal 
year to:
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    \29\ See 15 U.S.C. 78o-7(j).
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     Administer the policies and procedures that are required 
to be established pursuant to paragraphs (g) and (h) of Section 15E of 
the Exchange Act (15 U.S.C. 78o-7(g) and (h)); \30\ and
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    \30\ See proposed Rule 17g-3(a)(7)(i)(A).
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     Ensure compliance with the securities laws and rules and 
regulations thereunder, including those promulgated by the Commission 
pursuant to Section 15E of the Exchange Act.\31\
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    \31\ See proposed Rule 17g-3(a)(7)(i)(B).
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    These are the areas of responsibility for the designated compliance 
officer prescribed in Section 15E(j) of the Exchange Act.\32\ The 
report would require a description of the steps taken by the compliance 
officer during the most recently ended fiscal year to fulfill these 
responsibilities. As noted above, the purpose of the report is to 
impose a yearly discipline under which the compliance officer must 
describe the steps taken to fulfill the officer's statutory 
responsibilities. The Commission's goal in proposing this amendment is 
to further enhance the compliance function within the NRSRO by 
prescribing a process that promotes the active engagement of the 
compliance officer in reviewing the NRSRO's compliance with internal 
policies and procedures and with the securities laws and rules and 
regulations.
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    \32\ 15 U.S.C. 78o-7(j).
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    The first area of responsibility of the compliance officer under 
Section 15E(j) of the Exchange Act--to administer the policies and 
procedures that are required pursuant to Sections 15E(g) and (h) of the 
Exchange Act--is identified in proposed new paragraph (a)(7)(i)(A) of 
Rule 17g-3. Sections 15E(g) and (h) of the Exchange Act require an 
NRSRO to establish, maintain, and enforce written policies and 
procedures reasonably designed, taking into consideration the nature of 
the business of the NRSRO, to prevent the misuse of material nonpublic 
information and to address and manage any conflicts of interest, 
respectively.\33\ The Commission preliminarily believes that requiring 
the designated compliance officer to describe the steps taken during 
the fiscal year in this area of responsibility could, to the extent it 
encourages the compliance officer to undertake more rigorous compliance 
reviews, uncover compliance weaknesses with respect to the treatment of 
material nonpublic information and the management of conflicts of 
interest by the NRSRO. This would afford the NRSRO the opportunity to 
consider whether corrective action is necessary to remediate such 
weaknesses.
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    \33\ Id.
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    The second area of responsibility of the compliance officer under 
Section 15E(j) of the Exchange Act--to ensure compliance with the 
securities laws and rules and regulations thereunder, including those 
promulgated by the Commission pursuant to Section 15E of the Exchange 
Act--is identified in proposed new paragraph (a)(7)(i)(B) of Rule 17g-
3. The Commission preliminarily believes that requiring the designated 
compliance officer to describe the steps taken during the fiscal year 
to meet this responsibility could, to the extent it encourages the 
compliance officer to undertake more rigorous compliance reviews, 
assist the NRSRO in identifying areas where its activities may be in 
contravention of securities laws and regulations and, therefore, allow 
it to take appropriate action. The goal of the proposed compliance 
report is to enhance the compliance function and potentially mitigate 
compliance failures when they occur. The Commission preliminarily

[[Page 63870]]

believes that the proposed report the designated compliance officer 
would be required to furnish may serve as an incentive to further 
strengthen the NRSRO's existing compliance program.
    The Commission notes that the size and scope of an NRSRO's existing 
compliance program would vary depending on the size and complexity of 
the NRSRO. Larger NRSROs with comprehensive compliance programs may 
already periodically review portions of their compliance programs. In 
contrast, smaller NRSROs may have less extensive compliance programs 
because they have simpler organizational structures, fewer employees 
and fewer sources of revenue than larger NRSROs, which may be part of a 
complex global organization with thousands of employees. Therefore, 
while the Commission believes that the proposed report would serve as 
incentive to further strengthen each NRSRO's existing compliance 
program, the extent of the effect of the proposed report on improving 
an NRSRO's existing compliance program may vary from one NRSRO to 
another.

B. Proposed New Paragraph 17g-3(a)(7)(ii)

    The proposed amendment to Rule 17g-3 also would set forth specific 
items to be included in the proposed new report under Rule 17g-3(a)(7). 
In requiring the inclusion of certain information, the Commission does 
not intend to dictate how a designated compliance officer should 
fulfill the officer's responsibilities as set forth in the Rating 
Agency Act. The Commission expects the designated compliance officer to 
design and execute a compliance program taking into account: The 
business of the NRSRO; the procedures and methodologies used by the 
NRSRO to determine credit ratings; the NRSRO's size; the NRSRO's (and 
its affiliates') conflicts of interest; and the complexity of the 
NRSRO's operations. The Commission believes that the information that 
would be required in the report is the type of information a compliance 
program would generate regardless of the specific design of a 
particular program.
    More specifically, the amendments to Rule 17g-3 would include new 
paragraph (a)(7)(ii), which would require that the report include:
     A description of any compliance reviews of the activities 
of the NRSRO;
     The number of material compliance matters identified 
during each review of the activities of the NRSRO and a brief 
description of each such matter;
     A description of any remediation measures implemented to 
address material compliance matters identified during the reviews of 
the activities of the NRSRO; and
     A description of the persons within the NRSRO who were 
advised of the results of the reviews.
    The first item the Commission is proposing to require in the report 
is a description of any compliance reviews of the activities of the 
NRSRO.\34\ One of the functions of a typical compliance department is 
to proactively review business activities to identify potential 
regulatory, compliance, and reputational risks and to design ways to 
minimize such risks.\35\ The Commission intends that the designated 
compliance officer would describe all such reviews conducted during the 
most recently ended fiscal year. Therefore, this description would 
provide the Commission with an understanding of the scope of the 
designated compliance officer's reviews of the NRSRO's activities and 
possibly highlight any areas that were not reviewed.
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    \34\ See proposed Rule 17g-3(a)(7)(ii)(A).
    \35\ See e.g., White Paper on the Role of Compliance, Securities 
Industry Association, Compliance and Legal Division (October 2005); 
available at http://www.sifmacl.org/attachments/articles/8/
Role%20of%20Compliance.pdf.
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    The second item the Commission is proposing be included in the 
report is the number of material compliance matters identified during 
each review of the activities of the NRSRO and a brief description of 
each such matter. The Commission preliminarily intends a ``material 
compliance matter'' to mean a determination by the NRSRO or a person 
within the NRSRO that there has been a violation of the securities laws 
\36\ or the rules thereunder or a failure to adhere to the policies, 
procedures, or methodologies established, maintained and enforced by 
the NRSRO to, for example, determine credit ratings, prevent the misuse 
of material nonpublic information, manage conflicts of interest, and 
comply with the Commission's NRSRO rules.\37\ A material compliance 
matter also would include a determination that there was a weakness in 
the design or implementation of the policies and procedures of the 
NRSRO.\38\ The proposed requirement to report a material compliance 
matter would be designed to alert the Commission to issues identified 
by the designated compliance officer that may raise questions about the 
integrity of the NRSRO's activities and operations. It also could 
assist the Commission's oversight of NRSROs to the extent a reported 
material compliance matter is one that could arise in other NRSROs 
because, for example, it relates to a new type of debt instrument that 
is being rated by more than one NRSRO or involves potentially 
inappropriate interactions with an issuer that hired several NRSROs to 
rate its securities. Finally, the Commission preliminarily believes 
that requiring the proposed report to include the number of material 
compliance matters identified would provide Commission examiners with 
an additional tool to assist them in identifying possible trends and 
issues with respect to material compliance matters at an NRSRO after 
the first year of reporting. For example, numerous material compliance 
violations over a period of years could be indicative of possible lax 
compliance at an NRSRO.
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    \36\ The term ``securities laws'' is defined in Section 3(a)(47) 
of the Exchange Act.
    \37\ See e.g., 17 CFR 270.38a-1(e)(2). Rule 38a-1 prescribes 
compliance procedures and practices for investment companies 
registered with the Commission under the Investment Company Act of 
1940. Paragraph (a)(4) of Rule 38a-1 requires the investment company 
to designate an individual responsible for administering the fund's 
policies and procedures to, among other things, prevent violation of 
the Federal Securities Laws by the fund (the fund's ``chief 
compliance officer''). Paragraph (a)(4)(iii) of Rule 38a-1 requires 
the fund's chief compliance officer to provide a written report to 
the fund's board, at least annually, that addresses, among other 
things, each ``Material Compliance Matter'' that occurred since the 
last report. Paragraph (e)(2) of Rule 38a-1 defines a ``Material 
Compliance Matter'' to be, among other things, a violation of the 
Federal Securities Law by the fund or its employees, a violation of 
the policies and procedures of the fund, or a weakness in the 
implementation or design of the policies and procedures of the fund.
    \38\ Id.
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    The third item the Commission is proposing be included in the 
report is a description of any remediation measures implemented to 
address material compliance matters identified during the reviews of 
the activities of the NRSRO.\39\ The Commission preliminarily intends 
``remediation measures'' to include changes made by the NRSRO in 
response to the identification of a material compliance matter that are 
designed to prevent the re-occurrence of a similar material compliance 
matter. The reporting of these measures would assist the Commission in 
evaluating the risk of re-occurrences. It also could shed a light on 
potential ``best practices'' for mitigating the risk of future material 
compliance matters. Further, it is designed to reinforce the discipline 
of an NRSRO to review for potential material compliance matters and 
take steps to address them when they occur.
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    \39\ See proposed Rule 17g-3(a)(7)(ii)(C).
---------------------------------------------------------------------------

    The fourth item the Commission is proposing to include in the 
report is a description of the persons within the NRSRO who were 
advised of the results

[[Page 63871]]

of the reviews. The Commission intends that the description of the 
persons who were advised of the results of the reviews at the NRSRO 
would include only key personnel, i.e., those who have the authority to 
act on the results of the reviews or direct others to act. The 
Commission does not intend that the persons advised of the results of 
the reviews would be so broad in scope as to include persons such as 
administrative employees, for example, who may have typed a report 
related to a material compliance matter.
    The information with respect to those persons who were advised of 
the results of reviews is designed to provide the Commission with an 
understanding of how the NRSRO responds to material compliance matters 
and the role and structure of the compliance program within the NRSRO. 
For example, it would indicate whether the compliance officer reported 
the matters to the NRSRO's board or senior management or only to the 
business unit that underwent the compliance review. This is designed to 
promote the appropriate escalation of compliance issues to the 
management of the NRSRO. The Commission also believes that this 
proposed information would be a useful tool for examiners to focus 
examination resources on practices related to material compliance 
matters reported and assist in making risk-based decisions on whether 
to initiate an examination of a particular NRSRO. The Commission notes 
that this information would only be one of many factors the 
Commission's exam staff may use to determine the particular focus of an 
exam.

C. Proposed Amendment to Paragraph 17g-3(b)

    The Commission also is proposing to amend paragraph (b) of Rule 
17g-3 to create two subparagraphs, Rule 17g-3(b)(1) and (b)(2).\40\ 
Subparagraph (b)(1) would carry forward, unchanged, the requirement in 
current Rule 17g-3(b). The current text of Rule 17g-3(b) requires that 
an NRSRO must attach to each financial report furnished pursuant to 
paragraphs (a)(1) through (a)(6) of Rule 17g-3 a signed statement by a 
duly authorized person associated with the NRSRO stating that the 
person has responsibility for the financial report and, to the best 
knowledge of the person, the financial report fairly presents, in all 
material respects, the financial conditions, results of operations, 
cash flows, revenues, analyst compensation, and credit rating actions 
of the NRSRO for the period presented. This requirement does not 
specify who within the NRSRO should have responsibility for the reports 
and for providing the required signed statement.
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    \40\ See proposed Rule 17g-3(b)(1) and (2).
---------------------------------------------------------------------------

    Proposed subparagraph (b)(2) would establish a similar requirement 
for a signed statement to accompany the report under proposed new 
paragraph (a)(7) to Rule 17g-3, but would specify that the designated 
compliance officer is required to provide that statement. Specifically, 
proposed paragraph (b)(2) of Rule 17g-3 would require that an NRSRO 
attach to the report furnished pursuant to proposed paragraph (a)(7) of 
Rule 17g-3 a signed statement by the designated compliance officer of 
the NRSRO stating that the officer has responsibility for the report 
and, to the best knowledge of the designated compliance officer, the 
report fairly presents, in all material respects, the information in 
paragraph (a)(7)(ii) of Rule 17g-3 for the period presented. The 
Commission preliminarily believes that the designated compliance 
officer should have responsibility for providing the statement since 
the information to be submitted in the report is directly within that 
individual's statutorily mandated responsibilities under Section 15E(j) 
of the Exchange Act; namely, to administer the NRSRO's policies and 
procedures and to ensure compliance with the securities laws and 
regulations.

D. Summary of Amendments to Rule 17g-3 and Request for Comment

    The Commission is proposing these amendments to Rule 17g-3 under 
its authority to require an NRSRO to ``make and disseminate such 
reports as the Commission, by rule, may prescribe as necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of [the Exchange Act].'' \41\ 
The Commission preliminarily believes these proposed amendments are 
necessary or appropriate in the public interest, for the protection of 
investors and in furtherance of the Exchange Act because they are 
designed to further improve the quality of credit ratings and help 
protect the integrity of the credit rating process by requiring that an 
NRSRO describe the steps taken during the fiscal year by the designated 
compliance officer to administer required policies and procedures and 
to ensure compliance with the securities laws and regulations.
---------------------------------------------------------------------------

    \41\ See Section 17(a)(1) of the Exchange Act (15 U.S.C. 
78q(a)(1)).
---------------------------------------------------------------------------

    The Commission preliminarily believes that requiring the designated 
compliance officer to provide such a report would encourage a more 
rigorous compliance program and, thereby, promote the identification of 
compliance failures and weaknesses in the NRSRO's policies and 
procedures. In addition, the reporting requirements may encourage an 
NRSRO to promptly resolve compliance issues identified, and thereby 
improve the quality and integrity of the NRSRO's credit ratings and 
credit rating processes.\42\
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    \42\ The Commission notes that this information would only be 
one of many factors the Commission's exam staff may use to determine 
the particular focus of an exam.
---------------------------------------------------------------------------

    The proposed rule amendments also would further enhance the 
Commission's oversight of NRSROs by providing the Commission staff an 
additional resource with which to evaluate the performance of the 
designated compliance officers in carrying out their statutory 
responsibilities prescribed in Section 15E(j) of the Exchange Act. 
Finally, the proposed report would help identify areas within the NRSRO 
that Commission staff examiners may want to include within the scope of 
their examinations and that could be indicative of potentially broader 
issues across NRSROs.
    The Commission generally requests comment on all aspects of these 
proposed amendments. In addition, the Commission requests comment on 
the following questions related to the proposal:
     Should the proposal require that the report be furnished 
to the NRSRO's board or a body performing similar functions of a board 
or to the NRSRO's senior management in addition to requiring that it be 
furnished to the Commission or as an alternative to it being furnished 
to the Commission? Could the requirement to furnish the report to the 
Commission alter the way the compliance officer conducts compliance 
reviews or reports the results of those reviews to others within the 
NRSRO? Would the requirement that it be furnished to the Commission 
potentially impact the designated compliance officer's incentive to 
perform a comprehensive and in depth review of the NRSRO's activities, 
policies, and procedures or to identify material compliance matters? 
Would requiring the report instead be sent to the board, to a similar 
body, or to senior management result in a more or less comprehensive 
review?
     Should the Commission require other items to be included 
in the report in addition to those prescribed in proposed paragraph 
(a)(7)(ii) of Rule 17g-3? Commenters believing this

[[Page 63872]]

would be beneficial should specifically identify the additional items 
and describe how the additional information would be useful to the 
Commission or to the NRSRO.
     Should the Commission exclude any of the items currently 
identified in proposed paragraph (a)(7)(ii) of Rule 17g-3? Commenters 
believing this would be beneficial should specifically identify the 
items to be deleted and describe why they would not be useful 
information for the Commission or the NRSRO?
     Should the Commission define the term ``material 
compliance matter'' in Rule 17g-3? If so, what should the definition 
be? Alternatively, is the interpretation of the term ``material 
compliance matter'' set forth in the release sufficient and 
appropriate? Should there be limitations on what constitutes a material 
compliance matter? If so, what should these limitations be? For 
example, are there securities laws violations that do not rise to the 
level of concern that they would need to be reported? If so, should 
such violations be reported if the number of occurrences passes a 
certain threshold? How should the Commission evaluate what that 
threshold would be (e.g. taking into account the number of occurrences 
and the severity of the violation)?
     As noted above, the Commission has proposed an 
interpretation of the category of person that would trigger the 
reporting requirement if such person were apprised of the finding of 
the compliance officer. Is the proposed interpretation sufficiently 
clear to indicate when the reporting requirement applies? For example, 
should the rule specify that it is a decision maker, someone with 
authority to implement remedial measures, or some other defined 
category of person? How should that category be defined?
     Should the Commission permit or require someone other than 
the designated compliance officer certify the report? If so, which 
person(s) should it be?
     To what extent, if any, should the designated compliance 
officer be able to rely on subcertifications? What purpose would the 
subcertifications serve? In some cases, would the designated compliance 
office not have all the relevant information in order to sign the 
statement required by proposed Rule 17g-3(b)(2) without 
subcertifications? If this is true, would this in some way negate any 
of the objectives of the proposed amendments to Rule 17g-3?
     What effect would the proposed requirement to furnish the 
report to the Commission have on the designated compliance officer's 
duties? How could any adverse effects be addressed?
     Should the Commission as an alternative to the proposed 
report from the compliance officer consider proposing a requirement 
that an independent third party perform a review of the NRSRO's 
adherence to its policies and procedures and its compliance with the 
securities laws. Commenters who believe such a requirement would be 
appropriate are asked to provide data with respect to the costs and 
benefits associated with such a review.

III. Amendments to the Instructions to Form NRSRO

    The Commission is proposing to amend the instructions for Exhibit 6 
to Form NRSRO to require a credit rating agency in an application for 
registration as an NRSRO or an NRSRO providing its annual update to 
disclose: (1) The percentage of the net revenue of the applicant/NRSRO 
attributable to the 20 largest users of credit rating services of the 
applicant/NRSRO; and (2) the percentage of the net revenue of the 
applicant/NRSRO attributable to other services and products of the 
applicant/NRSRO. In conjunction with this proposed amendment to the 
instructions to Exhibit 6, the Commission is proposing to move the 
definitions of certain terms currently included in the instructions to 
Exhibit 10 to the ``Explanation of Terms'' section of the Form NRSRO 
Instructions in order to make those definitions applicable to Form 
NRSRO as a whole.
    A credit rating agency that seeks to register as an NRSRO must 
furnish an application for registration to the Commission. Section 
15E(a)(1)(A) of the Exchange Act provides that the credit rating agency 
must furnish the application in a form prescribed by Commission 
rule.\43\ After registration, the credit rating agency--now an NRSRO--
must publicly disclose most of the information in its application.\44\ 
Section 15E(b)(1) of the Exchange Act requires the NRSRO to promptly 
amend the application if, after registration, any information or 
document provided as part of the application becomes materially 
inaccurate.\45\ Section 15E(b)(2) of the Exchange Act provides that the 
information on credit ratings performance statistics required to be 
disclosed in the application pursuant to Section 15E(a)(1)(B) of the 
Exchange Act must be updated annually.\46\ In addition, Section 
15E(b)(2) of the Exchange Act requires an NRSRO to furnish the 
Commission with an amendment to its registration not later than 90 days 
after the end of each calendar year (the ``annual certification'').\47\ 
This section further provides that the NRSRO must (1) certify that the 
information and documents provided in the application for registration 
continue to be accurate and (2) list any material change to the 
information and documents during the previous calendar year.\48\
---------------------------------------------------------------------------

    \43\ 15 U.S.C. 78o-7(a)(1)(A).
    \44\ 17 CFR 240.17g-1(i).
    \45\ 15 U.S.C. 78o-7(b)(1).
    \46\ Id.
    \47\ 15 U.S.C. 78o-7(b)(2).
    \48\ Id.
---------------------------------------------------------------------------

    With respect to the contents of the application, Section 
15E(a)(1)(B) of the Exchange Act prescribes certain minimum information 
the applicant must provide in the application. Furthermore, Section 
15E(a)(1)(B)(x) of the Exchange Act provides that the Commission can 
require any other information and documents as the Commission, by rule, 
may prescribe as necessary or appropriate in the public interest or for 
the protection of investors.\49\ In the Commission's initial rulemaking 
implementing the Rating Agency Act--which established the registration 
and oversight program for NRSROs--the Commission adopted Rule 17g-1 and 
Form NRSRO and its accompanying instructions.\50\ In February 2009, the 
Commission amended Form NRSRO to require additional disclosures.\51\
---------------------------------------------------------------------------

    \49\ 15 U.S.C. 78o-7(a)(1)(B).
    \50\ See June 2007 Adopting Release, 72 FR at 33566-33582.
    \51\ See February 2009 Adopting Release, 74 FR at 6457-6460.
---------------------------------------------------------------------------

    Rule 17g-1 prescribes, among other things, how a credit rating 
agency must apply to be registered with the Commission as an NRSRO, 
keep its information up-to-date after registration, and comply with the 
statutory requirement to furnish the Commission with an annual 
certification.\52\ In particular, all of these actions must be 
accomplished by furnishing the Commission with a Form NRSRO. As 
described below, Form NRSRO requires information about the credit 
rating agency applying for registration and, after registration, about 
the NRSRO, including the information required under 15E(a)(1)(B) of the 
Exchange Act and additional information prescribed by the 
Commission.\53\
---------------------------------------------------------------------------

    \52\ See 17 CFR 240.17g-1.
    \53\ 15 U.S.C. 78o-7(a)(1)(B).
---------------------------------------------------------------------------

    Form NRSRO contains 8 line items and 13 exhibits. The line items 
require information about the applicant/NRSRO such as its address; 
corporate form; credit rating affiliates that would be, or

[[Page 63873]]

are, a part of its registration; the classes of credit ratings for 
which it is seeking to be, or is, registered as an NRSRO; the number of 
credit ratings it has issued in each class and the date it began 
issuing credit ratings in each class; and whether it or a person 
associated with it has committed or omitted any act, been convicted of 
any crime, or is subject to any order or findings identified in Section 
15(d) of the Exchange Act.\54\
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78o(d).
---------------------------------------------------------------------------

    The 13 exhibits to Form NRSRO elicit the information required under 
Sections 15E(a)(1)(B)(i) through (ix) of the Exchange Act and 
additional information prescribed by the Commission.\55\ Exhibits 1 
through 9 require certain information about the applicant/NRSRO, 
including credit rating performance statistics, its methodologies and 
procedures used to determine credit ratings, its policies and 
procedures designed to prevent the misuse of material non-public 
information, its organizational structure, its code of ethics, the 
conflicts of interest inherent in its business operations, its policies 
and procedures for managing those conflicts of interest, summary data 
about the qualifications of its credit analysts, and the identity of 
its chief compliance officer. An NRSRO must make Exhibits 1 through 9 
publicly available after it is registered.
---------------------------------------------------------------------------

    \55\ 15 U.S.C. 78o-7(a)(1)(B)(i)-(x).
---------------------------------------------------------------------------

    Exhibits 10 through 13 require financial information about the 
applicant credit rating agency that the Commission evaluates in 
deciding whether it can make the finding required under Section 
15E(a)(2)(C)(ii) of the Exchange Act \56\ that the applicant fails to 
maintain adequate financial and managerial resources to consistently 
produce credit ratings with integrity and to materially comply with the 
procedures and methodologies disclosed pursuant to Section 15E(a)(1)(B) 
of the Exchange Act \57\ and established pursuant Sections 15E(g), (h), 
(i) and (j) of the Exchange Act.\58\ These Exhibits are not required to 
be publicly disclosed by the NRSRO after the applicant is granted 
registration as an NRSRO. If registration is granted, the NRSRO is 
required to furnish financial information to the Commission in an 
annual report required by Rule 17g-3 that is similar to the information 
required in Exhibits 10 through 13.\59\ The rules do not require that 
the annual reports furnished to the Commission pursuant to Rule 17g-3 
be made publicly available by the NRSRO.\60\
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78o-7(a)(2)(C)(ii).
    \57\ 15 U.S.C. 78o-7(a)(1)(B).
    \58\ 15 U.S.C. 78o-7(g), (h), (i) and (j).
    \59\ See 17 CFR 240.17g-3 and 15 U.S.C. 78o-7(k).
    \60\ See Rule 17g-3 and 15 U.S.C. 78o-7(k); see also June 2007 
Adopting Release, 72 FR at 33590.
---------------------------------------------------------------------------

    The Commission is proposing amending the instructions for Exhibit 6 
to augment the information about conflicts of interest currently 
required to be disclosed in Form NRSRO. The Commission prescribed the 
current requirements for Exhibit 6 to implement Section 
15E(a)(1)(B)(vi) of the Exchange Act, which requires that an 
application for registration contain information regarding any conflict 
of interest relating to the issuance of credit ratings by the 
applicant/NRSRO.\61\ The Exchange Act does not define or identify the 
types of conflicts of interest that should be disclosed pursuant to 
Section 15E(a)(1)(B)(vi) of the Exchange Act.\62\ The Commission, in 
adopting Form NRSRO and its accompanying instructions, required that an 
applicant/NRSRO provide in Exhibit 6 a list of the types of conflicts 
of interest relating to its issuance of credit ratings.\63\ To assist 
the applicant/NRSRO and promote consistent disclosures, the 
instructions to the Exhibit contain a list of potential conflicts of 
interest that may apply to an applicant/NRSRO based on its business 
model and activities.\64\ The instructions further provide that the 
applicant/NRSRO can use the descriptions provided in the instructions 
to identify an applicable conflict of interest.\65\ An applicant/NRSRO 
also can choose to provide its own description of the conflict or 
provide further explanations to one of the descriptions in the 
instructions.\66\ Finally, Exhibit 6 to Form NRSRO is one of the public 
exhibits that the NRSRO is required to make readily accessible to the 
public and to keep current through furnishing updated information on 
Form NRSRO.\67\
---------------------------------------------------------------------------

    \61\ See 15 U.S.C. 78o-7(a)(1)(B)(vi); June 2007 Adopting 
Release, 72 FR at 33577.
    \62\ Id.
    \63\ See Form NRSRO Instructions for Exhibit 6.
    \64\ Id.
    \65\ Id.
    \66\ Id.
    \67\ See Form NRSRO General Instructions.
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    One purpose of the disclosure in Exhibit 6 is to alert users of 
credit ratings to the potential conflicts of interest inherent in the 
NRSRO's business model.\68\ The information also is designed to allow 
users of credit ratings to assess an NRSRO's procedures for managing 
conflicts by comparing the types of conflicts disclosed in Exhibit 6 
with its procedures for managing conflicts of interest disclosed in 
Exhibit 7.\69\
    The disclosure also is designed to assist the Commission in 
evaluating whether an NRSRO has sufficient financial and managerial 
resources to comply with the procedures for managing conflicts of 
interest required under Section 15E(h) of the Exchange Act.\70\ Being 
informed of the conflicts of interest identified by the applicant/NRSRO 
in Exhibit 6 to Form NRSRO assists the Commission in evaluating whether 
the disclosed financial and managerial resources of the NRSRO appear to 
be sufficient in light of the magnitude and extent of any 
conflicts.\71\
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    \68\ See June 2007 Adopting Release, 72 FR at 33577.
    \69\ Id.
    \70\ 15 U.S.C. 78o-7(h).
    \71\ See Section 15E(a)(2)(C) of the Exchange Act (15 U.S.C. 
780-7(a)(2)(C)); June 2007 Adopting Release, 72 FR at 33577.
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    The Commission is proposing to amend Exhibit 6 to require an 
applicant/NRSRO to disclose information regarding the revenues it 
receives from major clients as well as the revenues attributable to 
services other than determining credit ratings. The proposed new 
disclosure is designed to assist users of NRSRO credit ratings in 
assessing the conflicts of interest, including the potential magnitude 
of such conflicts, inherent in a given NRSRO's business operations. In 
particular, an NRSRO's disclosure of information about revenues 
received from major clients and revenues attributable to other services 
provided to clients would allow users of credit ratings to have more 
information about the dimensions of the conflict arising from NRSROs 
being paid to determine credit ratings as well as the conflict of 
offering other services to persons who pay for credit ratings. It would 
also provide investors and other users of credit ratings more specific 
information about the extent to which NRSRO revenues are from a 
concentrated group of clients. Users of NRSRO credit ratings could then 
use this information to evaluate the integrity of the credit ratings 
issued by the NRSRO and whether they believe the NRSRO is effectively 
managing these conflicts of interests. Also, an NRSRO's disclosure of 
this information in Exhibit 6 to Form NRSRO would allow users of credit 
ratings to ascertain the types and dimensions of a given NRSRO's 
conflicts of interest. The ready availability of this information in a 
single location would facilitate the evaluation by users of credit 
ratings of the probability that the conflicts of interest could 
adversely impact the integrity of the NRSRO's credit ratings

[[Page 63874]]

and credit rating processes. Users of credit ratings could then judge 
for themselves whether they believe that certain conflicts of interests 
are adversely impacting the integrity of an NRSRO's credit ratings and 
credit ratings processes based on their evaluation of the information 
disclosed in Exhibit 6.
    Because the proposed amendment would require that the information 
be provided as part of the application to register as an NRSRO, the 
Commission would be able to review the disclosures before they would be 
required to be made public (ten business days after the credit rating 
agency is granted registration).\72\ The information also would assist 
the Commission in evaluating whether an applicant has sufficient 
financial and managerial resources to comply \73\ with the procedures 
for managing conflicts of interest required under Section 15E(h) of the 
Exchange Act after consideration of the conflicts of interest 
identified by the applicant, including the magnitude of such 
conflicts.\74\
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    \72\ See 17 CFR 240.17g-1(i).
    \73\ 15 U.S.C. 78o-7(h).
    \74\ See Section 15E(a)(2)(C) Exchange Act (15 U.S.C. 78o-
7(a)(2)(C)).
---------------------------------------------------------------------------

    The Commission proposes dividing Exhibit 6 into a Part A and a Part 
B. Part A would require an applicant/NRSRO to provide the information 
on conflicts of interest currently required to be disclosed by Exhibit 
6. Part B would require an applicant/NRSRO to provide new disclosures 
relating to revenues from its most recently ended fiscal year. In 
particular, Part B to Exhibit 6 would require an applicant/NRSRO to 
provide the following disclosures, as applicable:
     The percentage of the applicant/NRSRO's net revenue 
attributable to the 20 largest users of credit rating services of the 
applicant/NRSRO; and
     The percentage of the applicant/NRSRO's revenue 
attributable to services and products other than credit rating services 
of the applicant/NRSRO.
    To perform the calculations to determine these disclosures, the 
applicant/NRSRO would be required to use the definitions of ``net 
revenue'' and ``credit rating services'' currently specified in Exhibit 
10 to Form NRSRO.\75\ The Commission is proposing to move these 
definitions from the instructions to Exhibit 10 to the ``Explanation of 
Terms'' section of the Form NRSRO Instructions in order to make them 
applicable to Form NRSRO as a whole, including the proposed amendment 
to Exhibit 6. The Commission does not propose otherwise altering those 
definitions. The Commission believes that it is appropriate to place 
these definitions in the Explanation of Terms section of the Form NRSRO 
Instructions because, in addition to the NRSROs being familiar with 
these definitions, the definitions are appropriate in light of the 
disclosure objectives of the proposed rule.\76\ Finally, the Commission 
notes that using the same terms throughout the Form NRSRO Instructions 
would promote consistency for comparison purposes with respect to the 
financial information the applicant/NRSRO furnishes to the Commission.
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    \75\ See Form NRSRO Instructions for Exhibit 10. The same 
definitions also are used in Rule 17g-3 for purposes of calculating 
the list of largest users of credit ratings to be furnished in an 
NRSRO's annual financial report to the Commission. See 17 CFR 
240.17g-3(a)(5) and accompanying note.
    \76\ See June 2007 Adopting Release, 72 FR at 33580-33581.
---------------------------------------------------------------------------

    As defined in the instructions to Exhibit 10 of Form NRSRO, the 
term ``net revenue'' means revenue earned by the applicant or NRSRO for 
any type of service or product, regardless of whether related to credit 
rating services, and net of any rebates and allowances paid or owed to 
the person by the applicant or NRSRO.\77\ The Commission explained in 
the June 2007 Adopting Release that this definition excludes revenues 
received by affiliates that are not part of the credit rating 
organization.\78\ Also, the intent in defining ``net revenues'' as 
payables net of any ``rebates or allowances'' was to limit the 
allowable offsets that reduce net revenue to items that directly reduce 
a payable on the revenue side and to exclude unrelated payables (e.g., 
payables for utility bills).\79\ Finally, by using the term ``revenue 
earned'' the Commission stated that the applicant/NRSRO must apply its 
standard accounting convention for recognizing revenue as this will 
make revenue calculations consistent across the various financial 
reports required in Form NRSRO and Rule 17g-3.\80\ As discussed above, 
the Commission is proposing to move the definition of ``net revenue'' 
from the instructions to Exhibit 10 of Form NRSRO to the ``Explanation 
of Terms'' section of the Form NRSRO Instructions, making the 
definition applicable to Form NRSRO as a whole, including the proposed 
amendments to Exhibit 6.
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    \77\ See Form NRSRO Instructions for Exhibit 10.
    \78\ See June 2007 Adopting Release, 72 FR at 33580-33581.
    \79\ Id.
    \80\ Id.
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    As defined in the instructions to Exhibit 10 of Form NRSRO, the 
term ``credit rating services'' means any of the following: rating an 
obligor (regardless of whether the obligor or any other person paid for 
the credit rating); rating an issuer's securities or money market 
instruments (regardless of whether the issuer, underwriter, or any 
other person paid for the credit rating); and providing credit ratings, 
credit ratings data, or credit ratings analysis to a subscriber.\81\ 
The Commission explained in the June 2007 Adopting Release that this 
definition includes--along with persons that pay for credit ratings and 
subscriptions--persons that are rated, or whose securities or money 
market instruments are rated, but that did not pay for the credit 
rating.\82\ Even though these persons may not have paid for the credit 
rating, they potentially could have undue influence on the credit 
rating agency if they provide substantial net revenue for other 
services or products.\83\ The Commission preliminarily believes that it 
is appropriate to include these persons within the definition to the 
proposed amendment to Exhibit 6 to Form NRSRO. By applying the same 
definitions, the proposed calculations in Exhibit 6 to Form NRSRO would 
continue to be consistent across the various financial reports required 
in Form NRSRO and Rule 17g-3. Also, as explained in the June 2007 
Adopting Release, the term ``subscribers'' in the definition of ``net 
revenue'' was intended to include persons who pay for credit ratings 
data and the analysis behind credit ratings because it may be difficult 
to separate these subscribers from other subscribers.\84\ As the 
Commission has previously noted, credit rating agencies that make their 
credit ratings publicly available for free sometimes offer 
subscriptions to receive feeds of the credit ratings or to receive 
reports detailing the analysis behind the credit ratings.\85\ The 
Commission is proposing to move the definition of ``credit rating 
services'' from the instructions to Exhibit 10 of Form NRSRO to the 
``Explanation of Terms'' section of the Form NRSRO Instructions, making 
the definition applicable to Form NRSRO as a whole, including the 
proposed amendments to Exhibit 6.
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    \81\ See Form NRSRO Instructions for Exhibit 10.
    \82\ See June 2007 Adopting Release, 72 FR at 33580-33581.
    \83\ Id.
    \84\ Id.
    \85\ Id.
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    As noted above, under proposed amendments to the Instructions to 
Exhibit 6, the applicant/NRSRO would need to make two new types of 
disclosures. The first proposed new disclosure in Exhibit 6 would 
require

[[Page 63875]]

that an applicant/NRSRO disclose the percentage of net revenue 
attributable to the 20 largest users of credit rating services of the 
applicant/NRSRO. The proposed instructions further provide that the 
applicant/NRSRO would be required to calculate this ratio by dividing 
the amount of net revenue earned by the applicant/NRSRO attributable 
the 20 largest users of credit rating services by the total amount of 
the four classifications of revenue of the applicant as reported in 
Exhibit 12 to Form NRSRO or in the financial report furnished to the 
Commission under Exchange Act Rule 17g-3(a)(4).\86\ As noted above, 
Exhibit 12 and Rule 17g-3(a)(4) currently elicit information regarding: 
(1) Revenue from determining and maintaining credit ratings; (2) 
revenue from subscribers; (3) revenue from granting licenses or rights 
to publish credit ratings; and (4) revenue from all other services and 
products offered by the applicant/NRSRO.\87\ The proposed disclosures 
would be calculated annually, as of the end of the fiscal year of the 
applicant/NRSRO.
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    \86\ See Form NRSRO Instructions for Exhibit 12 and 17 CFR 
240.17g-3(a)(4).
    \87\ Id. The Commission intends that an applicant/NRSRO apply 
its standard accounting convention for recognizing revenue to make 
revenue calculations consistent across the various financial reports 
required in Form NRSRO and Rule 17g-3. The Commission notes it is 
proposing to use the terms revenue and net revenue as originally 
adopted by the Commission.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the proposed disclosure 
of the percentage of net revenue attributable to the 20 largest users 
of credit rating services of the applicant/NRSRO would provide 
investors and other users of credit rating services with useful 
disclosure, as explained below, related to a significant sample of the 
largest users of credit rating services of the applicant/NRSRO. The 
Commission preliminarily believes this proposed new disclosure would 
assist investors and other users of credit ratings by providing them 
with information concerning the degree to which revenues earned by the 
NRSRO come from a concentrated base of customers. This could be useful 
in understanding the conflicts inherent in the NRSRO's business. 
Specifically, a large percentage of revenues attributable to a 
concentrated group of clients could increase the potential risk that 
those clients' contribution to the NRSRO's revenues could influence the 
objectivity of its credit ratings. Making the degree of this 
concentration more transparent in Exhibit 6 to Form NRSRO would allow 
investors and market participants to take this potential risk into 
account when considering the reliability of the NRSRO's credit ratings. 
The proposed new disclosures also would assist users of credit ratings 
in comparing concentration of revenues across all NRSROs.
    The second proposed new disclosure in Exhibit 6 to Form NRSRO would 
require the applicant/NRSRO to disclose the percentage of revenue 
attributable to other services and products of the applicant/NRSRO. The 
proposed instructions to Exhibit 6 would provide that the applicant/
NRSRO must calculate this ratio by dividing the total amount of revenue 
earned by the applicant for ``all other services and products'' as 
reported in Exhibit 12 to Form NRSRO or as reported in the annual 
financial report furnished to the Commission under Exchange Act Rule 
17g-3(a)(4) by the total amount of the four classifications of revenue 
of the applicant as reported in Exhibit 12 or of the NRSRO as reported 
in the financial report furnished pursuant to 17g-3(a)(4). As noted 
above, Exhibit 12 and Rule 17g-3(a)(4) elicit the same information 
about revenues.\88\
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    \88\ See Form NRSRO Instructions for Exhibit 12 and 17 CFR 
240.17g-3(a)(4).
---------------------------------------------------------------------------

    The Commission preliminarily believes this information would be 
useful to investors and other users of credit ratings because it would 
provide information about the relative size of revenues an NRSRO earns 
from providing services other than credit ratings. There is the 
potential that an NRSRO that obtains substantial revenues from other 
services might be inclined to favor a client that purchases those other 
services when determining credit ratings solicited by that client. 
Consequently, creating greater transparency about the revenues 
generated from other services could provide increased information to 
assist investors and other users of credit ratings in assessing the 
potential risks to the NRSRO's objectivity.
    With respect to the two proposed new disclosures, the proposed 
amended instructions to Form NRSRO would provide that an applicant must 
provide the information for the fiscal year ending immediately before 
the date of the applicant's initial application to the Commission. The 
Commission is proposing this timeframe as it is consistent with the 
current instructions for the financial information elicited in Exhibits 
10, 12, and 13.\89\
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    \89\ Exhibit 11 requires financial statements for the three 
calendar or fiscal years ending immediately before the date of the 
application. This proposed timeframe also is consistent with the 
requirements for the reports required to be published by NRSROs in 
Rule 17g-3(a). 17 CFR 240.17g-3(a).
---------------------------------------------------------------------------

    Further, after registration, an NRSRO would be required to provide 
the proposed information as of the end of its most recent fiscal year. 
As such, the Commission is proposing amendments to the Instructions to 
Exhibit 6 to provide that after registration, an NRSRO with a fiscal 
year end of December 31 must update the information in Exhibit 6, Part 
B, as part of its annual certification. Rule 17g-1(f) requires an NRSRO 
to furnish the annual certification no later than 90 days after the 
calendar year.\90\ This also is the time frame for NRSROs with December 
31 fiscal year-ends to furnish their annual financial reports required 
pursuant to Rule 17g-3.\91\ Moreover, the information furnished in the 
annual reports would be needed to generate the proposed Exhibit 6 
disclosures.
---------------------------------------------------------------------------

    \90\ 17 CFR 240.17g-1(f).
    \91\ 17 CFR 240.17g-3.
---------------------------------------------------------------------------

    Further, the proposed instructions would require that an NRSRO with 
a fiscal year end that is not December 31 must provide this information 
with an Update of Registration no later than 90 days after the end of 
each fiscal year. These provisions would require the disclosure within 
90 days of the closing of an NRSRO's books regardless of whether the 
year-end is December 31 or some other date. This also is the time frame 
for NRSROs to furnish their annual financial reports required pursuant 
to Rule 17g-3.\92\
---------------------------------------------------------------------------

    \92\ 17 CFR 240.17g-3.
---------------------------------------------------------------------------

    The Commission is proposing these amendments to Exhibit 6 to Form 
NRSRO to further implement Section 15E(a)(1)(B)(vi) of the Exchange 
Act, which requires that an application for registration as an NRSRO 
contain information regarding any conflict of interest relating to the 
issuance of credit ratings by the applicant and NRSRO.\93\ It also is 
proposing the amendments, in part, pursuant to Section 15E(a)(1)(B)(x) 
of the Exchange Act, which provides that the Commission can require any 
other information and documents as the Commission by rule, may 
prescribe as necessary or appropriate in the public interest or for the 
protection of investors.\94\ The proposed disclosures are designed to 
increase transparency regarding sources of revenue that might create 
conflicts of interest for an NRSRO, and, thereby, allow investors and 
users of credit ratings to better assess these potential conflicts of 
interest that could influence an NRSRO's objectivity in determining 
credit ratings. Finally, the proposed amendments are designed to 
enhance

[[Page 63876]]

the disclosures already made by NRSROs in Exhibit 6 to Form NRSRO and 
to provide users of credit ratings with tools to compare concentrations 
of revenues across all NRSROs. The proposed additional disclosures 
would provide more detail about an NRSRO's conflicts of interest, and 
thereby, allow users of credit ratings to better evaluate the potential 
risk that an NRSRO's credit ratings could be compromised.
---------------------------------------------------------------------------

    \93\ 15 U.S.C. 78o-7(a)(1)(B)(vi).
    \94\ 15 U.S.C. 78o-7(a)(1)(B).
---------------------------------------------------------------------------

    The Commission generally requests comment on all aspects of these 
proposed amendments. In addition, the Commission requests comment on 
the following questions related to the proposal.
     Should the proposed disclosure of information about the 
percentage of revenues attributable to the 20 largest clients use a 
different number of clients? For example, should it be a lesser number 
such as the 5, 10, or 15 largest clients or a larger number such as the 
25, 30, or 35 largest clients?
     Are the revenues attributable to the 20 largest clients an 
appropriate proxy for an NRSRO's ``major clients?'' Might there be 
notable differences between the percentage of revenue attributable to 
the largest client and the percentage of revenue attributable to, say, 
the twentieth largest client?
     Would including revenue earned by persons directly or 
indirectly controlling, controlled by, or under common control with, 
the NRSRO (i.e., affiliates) in calculating revenues attributable to 
the 20 largest clients, be useful information for investors and other 
users of credit ratings?
     Should the proposed disclosure of information about the 
percentage of revenues derived from services other than determining 
credit ratings be expanded to include revenues earned by persons 
directly or indirectly controlling, controlled by, or under common 
control with, the NRSRO (i.e., affiliates)? If so, would it be useful 
for investors and other users of credit ratings to have this 
information?
     If the term affiliate was added to the proposed 
disclosures in Exhibit 6 to Form NRSRO, should the Commission define 
the term affiliate? For example, if an NRSRO controlled less than 51% 
of an entity, should the entity be considered an affiliate? If a 
natural person controlled or owned an NRSRO, should other entities the 
individual owns or controls be considered affiliates of the NRSRO for 
purposes of the proposed rule?
     For the purposes of calculating the percentage of net 
revenue attributable to the 20 largest users of credit rating services 
of the applicant/NRSRO in Exhibit 6 to Form NRSRO, should the 
Commission only count ``users'' to be persons who paid for the service? 
For example, if the payer of a rating is the underwriter, should the 
Commission also attribute the payment to the issuer in calculating the 
percentage of net revenue to the NRSRO for the purpose of showing how 
much of the NRSRO's revenue is being earned from rating this particular 
issuer's securities? Similarly, if the payer of the rating is an 
issuer, should the Commission also attribute the payment to the 
underwriter in the calculation for purposes of highlighting whether 
this particular underwriter is a frequent or dominant underwriter that 
is involved in many deals rated by that NRSRO?
     Would the proposed rule give investors and other users of 
credit ratings sufficient information to assess the potential risk to 
objectivity? If not, is there other information that would be useful 
for this purpose?
     Is it appropriate to use existing definitions of ``net 
revenue'' and ``credit rating services?''
     Do any other NRSRO services lend themselves more to 
potential conflicts of interest that could influence the quality of the 
rating?
     Will the proposed rule generate additional information 
that is useful to users of NRSRO credit ratings?
     Is Exhibit 6 of Form NRSRO the most practical place for an 
NRSRO to make the proposed additional disclosures? Are there 
alternative places where an NRSRO could make these proposed disclosures 
that would be more useful to an investor or other users of an NRSRO's 
credit ratings? For example, would it be more useful for investors or 
other users of credit ratings if the proposed amendments to Exhibit 6 
to Form NRSRO were disclosed along with the information required in the 
new Rule 17g-7?
     Is the most recent fiscal year an appropriate timeframe 
for the proposed disclosure? If not, what should it be? For example, 
would it be more appropriate to use the three, five or ten most 
recently ended fiscal years to provide a trend analysis?

IV. New Rule 17g-7--Credit Rating Reports on Revenues

    As discussed in detail in Section VI below, at this time the 
Commission has determined to defer consideration of action with respect 
to the proposal, set forth in the June 2008 Proposing Release, that 
would have required an NRSRO to publish a report each time the NRSRO 
published a credit rating for a structured finance product. Under that 
proposal, an NRSRO would have been required to disclose in the report 
how the credit ratings procedures and methodologies and credit risk 
characteristics for structured finance products differ from those of 
other types of rated instruments such as corporate and municipal debt 
securities. As an alternative to publishing the report, an NRSRO would 
have been allowed to use ratings symbols for structured finance 
products that differentiated them from the credit ratings for other 
types of debt securities.\95\
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    \95\ See June 2008 Proposing Release, 73 FR, at 36235. The 
Commission proposed codifying these requirements in the Code of 
Federal Regulations (``CFR'') as Rule 17g-7, which would follow 
existing Rule 17g-6. As discussed in this section, the Commission is 
today proposing that a different rule be codified as Rule 17g-7 in 
the CFR. The Commission is proposing to use the title ``Rule 17g-7'' 
for this proposed new rule in order to maintain the numerical 
sequence of the current NRSROs rules--Rules 17g-1 through 17g-6.
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    Today, the Commission is proposing a new Rule 17g-7.\96\ This new 
rule would require an NRSRO to make publicly available on its Internet 
Web site a consolidated report containing information about the 
revenues earned by the NRSRO and, if applicable, its affiliates as a 
result of providing services and products to persons that paid the 
NRSRO to issue or maintain a credit rating. This report would need to 
be updated annually.
---------------------------------------------------------------------------

    \96\ Id.
---------------------------------------------------------------------------

    Specifically, proposed Rule 17g-7 consists of three paragraphs: 
(a), (b), and (c). As described in more detail below, proposed 
paragraph (a)(1) would require the NRSRO to include in the report: (1) 
The percent of the net revenue attributable to the person that paid the 
NRSRO that were earned by the NRSRO during the most recently ended 
fiscal year from providing services and products other than credit 
rating services to the person; (2) the relative standing of the person 
in terms of the person's contribution to the NRSRO's net revenue as 
compared with other persons that contributed to the NRSRO's net 
revenues; and (3) the identity of all outstanding credit ratings issued 
by the NRSRO and paid for by the person. Paragraph (a)(2) of proposed 
Rule 17g-7 would exempt an NRSRO from publishing the reports if, as of 
the end of the fiscal year, the NRSRO had no credit ratings outstanding 
that the NRSRO issued or maintained as a result of a person paying the 
NRSRO for the issuance or maintenance of the credit ratings. Paragraph 
(b) of proposed Rule 17g-7 would provide that the NRSRO must 
prominently include a generic disclosure statement each time the NRSRO 
publishes a credit rating or credit ratings indicating where on its 
Internet Web site the consolidated

[[Page 63877]]

report required pursuant to paragraph (a) is located. Paragraph (c) of 
proposed Rule 17g-7 would contain definitions applicable to the 
section. Specifically, paragraph (c)(1) would define the term ``credit 
rating services'' and paragraph (c)(2) would define the term ``net 
revenue.''
    The purpose of this proposed rule is to provide users of credit 
ratings with information to assist them in evaluating the potential 
risk to the integrity of a credit rating that arises from the conflict 
inherent when an NRSRO is paid to determine a credit rating for a 
specific obligor, security, or money market instrument. Specifically, 
the risk that the revenue generated from the person soliciting the 
NRSRO to determine the credit rating could compromise the NRSRO's 
objectivity and cause the NRSRO to determine a higher credit rating 
than it otherwise would have determined. Under such circumstances, the 
credit rating may not accurately reflect the NRSRO's true view of the 
level of credit risk inherent in the obligor, security, or money market 
instrument being rated. Providing users of credit ratings with the 
information in this consolidated report would enable them to better 
assess the degree that a particular credit rating may be subject to 
this risk.
    The increased transparency resulting from the proposed rule also 
could have the ancillary benefit of helping to mitigate the possibility 
that a large consumer of the services and products of the NRSRO and its 
affiliates could successfully use its status to exercise undue 
influence on the NRSRO. Specifically, by making the potential conflict 
more transparent to the marketplace, the proposed rule could assist 
users of credit ratings, market participants, and others in evaluating 
how credit ratings solicited by large revenue providers are handled by 
the NRSRO.

A. Proposed Paragraph (a) of Rule 17g-7

    Paragraph (a)(1) of proposed Rule 17g-7 would provide that an NRSRO 
must annually, not later than 90 calendar days after the end of its 
fiscal year (as indicated on its current Form NRSRO) make publicly 
available on its Internet Web site a consolidated report that shows, 
with respect to each person that paid the NRSRO to issue or maintain a 
credit rating that was outstanding as of the end of the fiscal year, 
information about the person as described in proposed paragraph 
(a)(1)(i)-(a)(1)(iii) of proposed Rule 17g-7.
    Paragraph (a)(1)(i) of proposed Rule 17g-7 would require an NRSRO 
to show the percent of the net revenue attributable to the person 
earned by the NRSRO for the fiscal year from providing services and 
products other than credit rating services to the person. Paragraph 
(c)(1) of proposed Rule 17g-7 would define ``credit rating services'' 
to mean any of the following: ``Rating an obligor (regardless of 
whether the obligor or any other person paid for the credit rating); 
rating an issuer's securities or money market instruments (regardless 
of whether the issuer, underwriter, or any other person paid for the 
credit rating); and providing credit ratings, credit ratings data, or 
credit ratings analysis to a subscriber.'' This is the current 
definition of ``credit rating services'' contained in the instructions 
for Exhibit 10 to Form NRSRO.\97\
---------------------------------------------------------------------------

    \97\ See Form NRSRO Instructions for Exhibit 10.
---------------------------------------------------------------------------

    Paragraph (c)(2) of proposed Rule 17g-7 would define the term ``net 
revenue'' to mean ``revenue earned for any type of service or product 
provided to a person, regardless of whether related to credit rating 
services, and net of any rebates and allowances paid or owed to the 
person.'' This definition mirrors the definition of ``net revenue'' in 
the instructions to Exhibit 10 to Form NRSRO and in Rule 17g-3. This 
information about the person set forth in proposed Rule 17g-3(a)(1)(i) 
is required to be made publicly available in the consolidated report 
posted on the NRSRO's Internet Web site and is designed to benefit 
users of credit ratings by alerting them to the potential risk that the 
revenues earned by the NRSRO could influence the objectivity of the 
NRSRO in determining credit ratings paid for by the person.
    The method of calculating net revenue would be the same for the 
requirements in Form NRSRO (existing and proposed herein), Rule 17g-3, 
and proposed Rule 17g-7. Consequently, just as with the existing 
definitions in Form NRSRO and Rule 17g-3, the inclusion in the proposed 
Rule 17g-7 definition of revenues net of ``rebates or allowances'' is 
intended to limit offsets that reduce net revenue to items that 
directly reduce a payable on the revenue side and to exclude unrelated 
payables (e.g., payables for utility bills). In other words, the 
definition of ``net revenues'' is intended to be the same as used in 
Form NRSRO and Rule 17g-3 in all respects.
    To generate the information on revenues earned by the NRSRO from 
providing services other than credit rating services to the person that 
paid for the issuance or maintenance of a credit rating, the NRSRO 
would be required to undertake a number of steps, as described below, 
no later than 90 calendar days after the end of its fiscal year or 
prior to its registration as an NRSRO. These steps would be based on 
the NRSRO's results for the most recently ended fiscal year, consistent 
with other information disclosed on Form NRSRO or furnished to the 
Commission under Rule 17g-3. In particular, under paragraph (a)(3)(i) 
of proposed Rule 17g-7, the NRSRO would be required to take the 
following steps, respectively, within 90 days of closing its books or 
before its registration as an NRSRO:
     Calculate the net revenue attributable to the person 
earned by the NRSRO for the fiscal year from providing services and 
products other than credit rating services to the person;
     Calculate the net revenue attributable to the person 
earned by the NRSRO for the fiscal year from providing all services and 
products, including credit rating services, to the person; and
     Divide the amount calculated pursuant to paragraph 
(a)(3)(i)(A) by the amount calculated pursuant to paragraph 
(a)(3)(i)(B) and convert that quotient to a percent.
    These steps would generate the information the NRSRO would use in 
the report on the percent of revenues attributable to providing non-
credit rating services to a person that paid the NRSRO for the issuance 
or maintenance of a credit rating. The following is an example of how 
the information would be generated for purposes of the proposed report 
with respect to a hypothetical NRSRO, ABC Credit Rating Agency, and a 
consumer of ABC Credit Rating Agency's services and products, XYZ Corp. 
For the purposes of the first step, prescribed in paragraph 
(a)(3)(i)(A) of proposed Rule 17g-7, assume ABC Credit Rating Agency 
earned gross revenues of $220,000 from providing services other than 
credit rating services to XYZ Corp. Assume further that ABC Credit 
Rating Agency agreed to rebate $20,000 of that amount back to XYZ Corp. 
because it exceeded $100,000. In this case the net revenue attributable 
to providing services other than credit rating services to XYZ Corp. 
would be $200,000.
    Next, for the purposes of the second step, prescribed in paragraph 
(a)(3)(1)(B) of proposed Rule 17g-7, assume ABC Credit Rating Agency 
earned gross revenues of $1,100,000 from providing all services to XYZ 
Corp. Assume further that ABC Credit Rating Agency agreed to rebate 
$100,000 of that amount

[[Page 63878]]

back to XYZ Corp because it exceeded $100,000. In this case the net 
revenue attributable to providing all services and products to XYZ 
Corp. would be $1,000,000.
    The next step, prescribed in paragraph (a)(3)(i)(C) of proposed 
Rule 17g-7, would be for ABC Credit Rating Agency to divide $200,000 by 
$1,000,000 to calculate the percent of the total revenues earned from 
providing all services to XYZ Corp. attributable to providing services 
other than credit rating services. Under the hypothetical, this 
calculation would yield a figure of 20%. Consequently, for purposes of 
the consolidated report, the NRSRO would need to indicate that 20% of 
the net revenues earned from providing services to XYZ Corp. was for 
services other than credit rating services.
    Paragraph (a)(1)(ii) of proposed Rule 17g-7 would require an NRSRO 
to indicate in the consolidated report to be made publicly available on 
its Internet Web site the relative standing of the person that paid the 
NRSRO to issue or maintain a credit rating in terms of the amount of 
net revenue earned by the NRSRO attributable to the person as compared 
to other persons that provided the NRSRO net revenues. To compute this 
information, the NRSRO would need to take the following steps not more 
than 90 calendar days after the end of each fiscal year:
     For each person from whom the NRSRO earned net revenue 
during the fiscal year, calculate the net revenue attributable to the 
person earned by the NRSRO for the fiscal year from providing all 
services and products, including credit rating services, to the person;
     Make a list that sorts the persons subject to the 
calculation above in order from largest to smallest in terms of the 
amount of net revenue attributable to the person, as determined 
pursuant to that calculation; and
     Divide the list generated above into the following 
categories: top 10%, top 25%, top 50%, bottom 50%, and bottom 25% and 
determine which category contains the person.
    These steps would generate the information to indicate the relative 
standing of each person that paid the NRSRO to issue or maintain a 
credit rating that was outstanding as of the fiscal year end. The 
Commission preliminarily believes that the proposed categories (top 
10%, top 25%, top 50%, bottom 50%, and bottom 25%) would be helpful to 
investors or other users of credit ratings because the rankings provide 
insight into customers that--given the level of revenues they provide 
to the firm--may be able to exercise greater undue influence.
    This calculation would be performed as follows. Assume the NRSRO 
earned revenues from 1,000 clients during the most recently ended 
fiscal year. Moreover, assume that the greatest amount of net revenue 
derived from a client was $2,500,000 and that the 100th largest amount 
of net revenue derived from a client was $900,000. In this case, using 
hypothetical above, XYZ Corp.--from which the NRSRO derived $1,000,000 
in net revenue--would rank somewhere between the largest and 100th 
largest clients of the NRSRO. Consequently, because there are 1,000 
clients total, XYZ Corp. would need to be classified in the 
consolidated report as being in the top 10% of the persons that 
provided the NRSRO with net revenue in terms of the amount of net 
revenue.
    Paragraph (a)(1)(iii) of proposed Rule 17g-7 would require an NRSRO 
to identify for each person listed in the consolidated report all 
outstanding credit ratings paid for by that person, which the NRSRO 
would need to determine in accordance with proposed paragraph 
(a)(3)(iii) of Rule 17g-7. Specifically, the NRSRO would need to 
identify by name of obligor, security, or money market instrument and, 
as applicable, CIK number, CUSIP, or ISIN each outstanding credit 
rating generated as a result of the person paying the NRSRO for the 
issuance or maintenance of the credit rating and attribute the 
outstanding credit rating to the person. For example, assume XYZ Corp. 
had paid the NRSRO to issue and maintain credit ratings for three 
different classes of debt instruments issued by XYZ Corp. and there 
were credit ratings outstanding for each of these classes of debt 
instruments as of the end of the NRSRO's fiscal year. In this case, 
each of these debt instruments would need to be identified by name and 
CUSIP number and associated with XYZ Corp. on the consolidated report.
    Proposed paragraph (a)(2) of Rule 17g-7 would provide an exemption 
to the requirement to generate the consolidated report or to include 
with the publication of a credit rating the statement required by 
paragraph (b) of proposed Rule 17g-7 (discussed below) if, as of the 
end of the fiscal year, there were no credit ratings of the NRSRO 
outstanding that were issued or maintained as a result of a person 
paying the NRSRO for the issuance or maintenance of the credit rating. 
For example, a subscriber-paid NRSRO may be exempt from the 
requirements of the proposed rule if it is not paid by obligors, 
issuers, underwriters or investors to issue or maintain specific credit 
ratings. This would mean that a subscriber-paid NRSRO would not need to 
generate the report or make the generic statement, provided it only was 
paid by subscribers to access its credit ratings. However, it would 
need to generate the report if it was paid, for example, by an investor 
to issue or maintain a credit rating on a specific debt instrument.

B. Proposed Paragraph (b) of Rule 17g-7

    Proposed paragraph (b) of Rule 17g-7 would provide that an NRSRO 
must prominently include a statement that identifies where on its 
Internet Web site the consolidated report required pursuant to 
paragraph (a)(1) is located each time the NRSRO publishes a credit 
rating or credit ratings in a research report, press release, 
announcement, database, Internet Web site page, compendium, or any 
other written communication that makes the credit rating publicly 
available for free or a reasonable fee. Specifically, the NRSRO would 
need to include the following statement: ``Revenue information about 
persons that paid the nationally statistical rating organization for 
the issuance or maintenance of a credit rating is available at: [Insert 
address to Internet Web site].'' The proposed statement is intended to 
be generic and, thereby, to minimize the burden of including it when a 
credit rating (or credit ratings) is published. The proposal is 
designed to simply alert users of credit ratings and others where they 
can locate the consolidated report containing information about persons 
who paid the NRSRO to issue or maintain a credit rating. This would 
allow the users of credit ratings and others accessing the consolidated 
report to research the persons who had paid the NRSRO for credit 
ratings outstanding as of the fiscal year end. The researchers could 
review the amount of net revenue earned by the NRSRO attributable to 
providing services other than credit ratings to persons who paid for 
specific credit ratings, the relative standing of the persons who paid 
for the credit ratings in terms of providing net revenue to the NRSRO, 
and the credit ratings that the persons paid the NRSRO to issue or 
maintain.

C. Conclusion

    The Commission is proposing these amendments under authority to 
require an NRSRO to ``make and disseminate such reports as the 
Commission, by rule, prescribes as necessary or appropriate in the 
public interest, for the protection of

[[Page 63879]]

investors, or otherwise in furtherance of the purposes of [the Exchange 
Act].'' The Commission preliminarily believes these proposed amendments 
are necessary and appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Exchange Act for the reasons stated above and because they are 
designed to provide investors and other users of credit ratings with 
information to assess the degree of risk that a credit rating may be 
compromised by the undue influence of the person that paid for the 
issuance or maintenance of the credit rating.

D. Request for Comment

    The Commission generally requests comment on all aspects of this 
proposed new rule. In addition, the Commission requests comment on the 
following questions related to the proposal.
     Are the classifications in terms of revenue provided to 
the NRSRO (top 10%, top 25%, top 50%, bottom 50% or bottom 25%) 
proposed in new Rule 17g-7 appropriate? How uniform are the potential 
conflicts of interest with respect to the clients within these 
categories? Should there be more or less classifications? What should 
they be? Should the classifications be defined differently, such as on 
the size of the client, the total revenue, the types of other services 
provided to the clients?
     How would investors and other users of credit rating 
ratings use this information?
     Given the potential heterogeneity among clients in a 
particular tier, how similar is the risk of a potential conflict of 
interest with regard to clients within a given tier?
     Is being in a top-tier classification likely to create an 
undue concern that suggests to investors that a rating is conflicted, 
even if it is not? To the extent a negative connotation exists when an 
issuer is in a top percentile, what risk, if any, exists that clients 
will seek out those NRSROs for which their revenue contribution is less 
significant? Does such behavior risk disproportionately impact smaller 
NRSROs? If so, how? If not, why not? What other potential behavioral 
changes might the disclosure induce?
     To what extent is the information in these reports already 
observable? Can someone look at the information on rated bonds to 
determine who an NRSRO's biggest clients are? Is there overlap between 
the biggest clients for rating services and the biggest overall clients 
of an NRSRO?
     Are there any potential unintended consequences of the 
proposed disclosures?
     Is 90 days after the end of the fiscal year sufficient 
time for an NRSRO to generate the information to be used for the next 
twelve-month period?
     Would more frequent updates of the required information 
provide more meaningful information to investors? Would the cost of 
producing more frequently updated reports greatly increase the costs to 
NRSRO?
     Should a newly-registered NRSRO be exempt from having to 
generate the consolidated report and make the generic statement until 
the end of its first fiscal year as a registered NRSRO?
     Would including revenue earned by persons directly or 
indirectly controlling, controlled by, or under common control with, 
the NRSRO (i.e., affiliates) provide a more enhanced disclosure of the 
potential conflicts of undue influence, since the organization as a 
whole may care about its revenues regardless of which part of the 
business earned the revenues? If so, would it be useful for investors 
and other users of credit ratings to have this information? Would it be 
complicated and costly to do the calculations under proposed Rule 17g-7 
if affiliates are included?
     If the term affiliate was added to the proposed 
disclosures, should the Commission define the term affiliate? For 
example, if an NRSRO controlled less than 51% of an entity, should the 
entity be considered an affiliate? If a natural person controlled or 
owned an NRSRO, should other entities the individual owns or controls 
be considered affiliates of the NRSRO for purposes of the proposed 
rule?
     How is the data to be reported currently entered and 
stored at NRSROs, and would such data be able to be published on an 
automated or nearly automated basis after a one-time systems 
adjustment?
     Would it be useful for investors or other users of credit 
ratings to require an NRSRO to calculate and disclose revenue 
information with respect to other persons in addition to persons that 
paid the NRSRO for services? For example, should the Commission 
attribute underwriter-paid ratings to the issuer? In addition, should 
the consolidated report provide for double counting of revenues earned 
by the NRSRO if the Commission attributes payment to both the 
underwriter and issuer so that users of a credit rating could more 
easily evaluate whether a large percentage of the NRSRO's revenues are 
attributable to particular issuers or underwriters or a concentrated 
group of clients?
     Would it be useful to require another disclosure item in 
the proposed consolidated report to show the issuer or underwriter who 
did not pay for the service but was a party to a deal? If so, should 
there be a particular order of disclosing this item to highlight the 
frequency of this person's involvement in deals that are rated by a 
particular NRSRO? For example, should there be a separate disclosure 
item to reveal the percentage of net revenue earned by the NRSRO in 
which the party who did not pay for the service was involved in the 
deal?

Additionally, the Commission is soliciting comment from investors, 
market participants, and others as to whether it would be appropriate 
to require that specific information be reported when a credit rating 
action is made publicly available (i.e., more than a generic statement 
of where relevant information can be located). Specifically, the 
Commission solicits comment on the following:
     Should an NRSRO be required to include the information 
proposed to be included in the consolidated report about a person that 
paid for the issuance or maintenance of a credit rating along with the 
publication of the credit rating? If such a requirement were in place, 
would it be more beneficial to users of NRSROs of credit ratings than 
the requirements of proposed Rule 17g-7 discussed above? Would such a 
requirement have higher costs than proposed Rule 17g-7?
     Should an NRSRO be required to disclose the principal 
procedures and methodologies used in determining the credit rating? 
Should this disclosure include information about key assumptions used 
and the qualitative and quantitative models, if any, employed in 
determining the credit rating? Should the level of disclosure be 
sufficient so that ``outside parties can understand how a rating was 
arrived at'' by the NRSRO? What would be the benefits and costs 
associated with such a requirement?
     If an NRSRO should disclose information about the key 
assumptions used, should an NRSRO also be required to disclose the 
degree to which the NRSRO has analyzed how sensitive a rating is to 
changes in these assumptions? What would be the benefits and costs 
associated with such a requirement?
     Should an NRSRO be required to disclose if a rating action 
is being taken as a result of a change to a procedure or methodology, 
including a change to an applicable qualitative or quantitative model? 
What would be the benefits and costs associated with such a 
requirement?
     Should an NRSRO be required to disclose that a rating 
action is being

[[Page 63880]]

taken as a result of an error identified in a procedure or methodology 
used to generate the credit rating? What would be the benefits and 
costs associated with such a requirement?
     Should an NRSRO be required to disclose information on the 
limitations of the credit rating, including information on the 
reliability, accuracy, and quality of the data relied on in determining 
the rating? What would be the benefits and costs associated with such a 
requirement?
     Would a statement on the extent to which key data inputs 
for the credit rating were reliable or limited, including any limits on 
the adequacy of historical data and limits on the availability and 
completeness of other relevant information be beneficial? What would be 
the benefits and costs associated with such a requirement?
     Should an NRSRO be required to disclose a description of 
relevant data about the obligor, issuer, security, or money market 
instrument being rated that was used and relied on for the purpose of 
determining the credit rating? What would be the benefits and costs 
associated with such a requirement?
     Should an NRSRO be required to disclose whether material 
nonpublic information was used in determining the credit rating? Should 
an NRSRO be required to disclose, in general terms, the type of 
confidential information used and the impact this information had on 
its rating action? What would be the benefits and costs associated with 
such a requirement?
     Is the timeframe for disclosure (the NRSRO's most recent 
fiscal year end) the best timeframe to evaluate whether a conflict 
exists and the potential extent of the conflict? For example, should 
the information disclosed be based on the results over a 3-, 5-, or 10-
year period in order to better capture longer term trends?

V. Technical Amendments to Form NRSRO Instructions

    The Commission also is proposing to make certain technical 
amendments to the Instructions to Form NRSRO. The Commission is 
proposing to amend the title to Exhibit 6 to read ``Information 
concerning conflicts of interest or potential conflicts of interest 
relating to the issuance of credit ratings by the credit rating 
agency,'' rather than the current ``Identification of conflicts of 
interest relating to the issuance of credit ratings.'' The Commission 
is proposing this change to the title of Exhibit 6 to Form NRSRO to 
better reflect the additional disclosures proposed to be required, as 
described in Section III above. In addition, in the General 
Instructions \98\ to the Form NRSRO Instructions, the Commission is 
proposing to add ``Division of Trading and Markets'' and ``Mail Stop 
7010'' to the mailing address for Form NRSRO. This is designed to 
facilitate receipt of Form NRSRO by the Division of Trading and 
Markets.
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    \98\ See Paragraph A.8. ``Address'' in the General Instructions 
to the Form NRSRO Instructions.
---------------------------------------------------------------------------

    Further, in the ``Instructions for Annual Certifications,'' the 
Commission is prosing to clarify that the annual financial reports that 
an NRSRO must furnish to the Commission pursuant to Section 15E(k) of 
the Exchange Act and Exchange Act Rules 17g-3(a)(1) through (a)(6), as 
applicable, should not be furnished as part of the annual certification 
on Form NRSRO. The Commission also is proposing additional amendments 
to the instructions to state that pursuant to paragraph (b) of Rule 
17g-3, the NRSRO must attach to each financial report the certification 
required by Rule 17g-3.\99\
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    \99\ See 17 CFR 240.17g-3(b).
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    There has been some confusion among some NRSROs on the requirement 
to provide a certification for each financial report. The annual 
certification is a statutory requirement set forth in Section 15E(b)(2) 
of the Exchange Act.\100\ The Commission adopted Rule 17g-1(f) to 
require that an NRSRO furnish the Commission with its annual 
certification on Form NRSRO.\101\ The annual financial reports that an 
NRSRO must furnish to the Commission pursuant to Section 15E(k) of the 
Exchange Act and Exchange Act Rules 17g-3(a)(1) through (a)(6), are 
separate and distinct requirements from the Form NRSRO requirements. 
Consequently, the Rule 17g-3 reports should be furnished separately 
from the Form NRSRO that is used to make the annual certification. 
Therefore, the Commission is proposing this amendment to clarify the 
distinct requirements with respect to Form NRSRO and Rule 17g-3(a)(1) 
through (a)(6).
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    \100\ 15 U.S.C. 78o-7(b)(2).
    \101\ 17 CFR 240.17g-1(f).
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    The Commission also is proposing to correct certain typographical 
errors in the Form NRSRO. The Commission is proposing to change the 
phrase ``withdrawal of registration'' to ``withdrawal from 
registration'' in the first sentence in the ``Instructions for Specific 
Line Items, Item 5.'' to the Form NRSRO Instructions.\102\ In addition, 
in the instructions to Exhibit 8 to Form NRSRO, the Commission is 
proposing to delete the phrase ``(See definition below)''. In the 
instructions to Exhibit 10 to Form NRSRO, the Commission is proposing 
to change the word ``person'' to ``user of credit rating services'' in 
the first sentence. Finally, the Commission is proposing to change the 
paragraph heading for the section titled ``Explanation of Terms'' from 
``F.'' to ``I.'' The corrected heading will read: ``I. EXPLANATION OF 
TERMS''.
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    \102\ See Paragraph H in the ``Instructions for Specific Line 
Items, Item 5.'' to the Form NRSRO Instructions.
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    The Commission generally requests comment on all aspects of these 
proposed amendments to Form NRSRO.

VI. Differentiating Structured Finance Credit Ratings

    The Commission has adopted requirements that are designed to allow 
investors and other users of credit ratings to better understand the 
differences between structured finance products and their credit 
ratings and other types of debt instruments and their credit ratings. 
For example, the rules adopted in the February 2009 Adopting Release 
and in today's Companion Release include requirements for specific 
disclosures about the methodologies and procedures for determining 
credit ratings for structured finance products and the public 
disclosure of credit rating performance statistics and histories by 
class of credit rating. For instance, the February 2009 Adopting 
Release amended Exhibit 1 to Form NRSRO to require disclosure of 
performance statistics for each class of credit rating for which the 
NRSRO is registered with the Commission.\103\ Moreover, the Commission 
amended the Exhibit to require that the performance statistics for the 
class of credit ratings specified in Section 3(a)(62)(B)(iv) of the 
Rating Agency Act \104\ include credit ratings of any security or money 
market instrument issued by an asset pool or as part of any asset-
backed or mortgage-backed securities transaction.\105\ This was 
designed to capture ratings actions for credit ratings of structured 
finance products that do not meet the narrower statutory definition of 
``issuers of asset-backed securities (as that term is defined is 
section 1101(c) of part 229 of title 17, Code of Federal 
Regulations).'' \106\ The amendment requires that an NRSRO registered 
in this class of credit ratings must generate and disclose performance 
statistics for this class, which includes all structured

[[Page 63881]]

finance products. As a result, these statistics can be compared with 
performance statistics for other classes of credit ratings for which 
the NRSRO is registered, such as corporate issuers.
---------------------------------------------------------------------------

    \103\ See February 2009 Adopting Release, 74 FR at 6457-6459.
    \104\ 15 U.S.C. 78c(a)(62)(B)(iv).
    \105\ See February 2009 Adopting Release, 74 FR at 6457-6459.
    \106\ Id.
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    Similarly, the Commission adopted amendments to paragraph (d) of 
Rule 17g-2, which require that an NRSRO make publicly available, on a 
six-month delayed basis ratings action information for a random sample 
of 10% of ratings documented pursuant to paragraph (a)(8) for each 
class of credit rating for which the NRSRO is registered and has issued 
500 or more ratings paid for by the obligor being rated or by the 
issuer, underwriter, or sponsor of the security being rated (``issuer-
paid credit ratings'').\107\ This requirement will allow investors and 
market participants to compare the rating action histories for an 
NRSRO's issuer-paid structured finance ratings with the histories of 
other classes of credit ratings where the NRSRO has 500 or more 
outstanding issuer-paid credit ratings. In the Companion Release being 
issued today, the Commission is adopting an amendment to Rule 17g-2 to 
require the disclosure of all outstanding credit ratings initially 
determined on or after June 26, 2007.\108\ This will further enhance 
the ability of investors and other users of credit ratings to track the 
relative performance of structured finance credit ratings as compared 
with performance of other classes of credit ratings.
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    \107\ See February 2009 Adopting Release, 74 FR at 6460-6463.
    \108\ See Companion Release.
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    In the February 2009 Adopting Release, the Commission also adopted 
amendments to Exhibit 2 to Form NRSRO requiring specific disclosures 
with respect to the procedures and methodologies for determining credit 
ratings for structured finance products.\109\ The amendments require, 
among other things, that an NRSRO disclose: (1) Whether and, if so, how 
information about verification performed on assets underlying or 
referenced by a security or money market instrument issued by an asset 
pool or as part of any asset-backed or mortgage-backed securities 
transaction is relied on in determining credit ratings; and (2) whether 
and, if so, how assessments of the quality of originators of assets 
underlying or referenced by a security or money market instrument 
issued by an asset pool or as part of any asset-backed or mortgage-
backed securities transaction play a part in the determination of 
credit ratings.
---------------------------------------------------------------------------

    \109\ See February 2009 Adopting Release, 74 FR at 6459-6460.
---------------------------------------------------------------------------

    All these measures will assist investors and other users of credit 
ratings in understanding the different characteristics and risks of 
structured finance products and the credit ratings for those products. 
The Commission, however, also continues to explore further ways to 
increase investor understanding of the differences between structured 
finance products and other types of debt instruments and the respective 
credit ratings for those products.
    In the sections below, the Commission solicits comments on the 
following: (1) How the goal of the proposed Rule 17g-7 set forth in the 
June 2008 Proposing Release could be promoted through other measures 
designed to enhance investor understanding of the differences between 
the risk characteristics of structured finance products and other 
classes of debt instruments and the differences between the risk 
characteristics of credit ratings for structured finance products and 
credit ratings for other classes of credit ratings; and (2) what 
measures could be taken to facilitate the ability of NRSROs to 
determine unsolicited credit ratings for existing debt instruments 
issued by structured finance products. The goal of either initiative 
would be to provide the marketplace and investors with information that 
would allow them to differentiate structured finance credit ratings 
from credit ratings for other types of debt instruments.

A. The Use of Different Symbols for Structured Finance Products

    In the June 2008 Proposing Release, the Commission proposed a new 
rule--Rule 17g-7--that would have required an NRSRO to issue a report 
with respect to a structured finance credit rating or, alternatively, 
to use a distinct symbology to identify structured finance credit 
ratings.\110\ Specifically, paragraph (a) of the Rule 17g-7 proposed in 
2008 would have required an NRSRO to publish a report accompanying 
every credit rating it published for a security or money market 
instrument issued by an asset pool or as part of any asset-backed or 
mortgage-backed securities transaction. The NRSRO would have been 
required to describe in the report the rating methodology used to 
determine the credit rating and how it differed from a rating for any 
other type of obligor or debt security, as well as how the risks 
associated with a security or money market instrument issued by an 
asset pool or as part of any asset-backed or mortgage-backed securities 
transaction are different from the risks of other types of rated 
obligors and debt securities. Paragraph (b), however, would have 
permitted an NRSRO to comply with the rule by distinguishing its rating 
symbols for structured finance products. The Commission did not propose 
requiring that specific rating symbols be used to distinguish credit 
ratings for structured finance products, instead proposing that an 
NRSRO would be permitted to choose the appropriate symbol or 
identifier.\111\
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    \110\ As discussed above, the Commission is proposing in this 
release that a different proposed rule be codified as Rule 17g-7 in 
the CFR. The Rule 17g-7 being proposed in this Release would require 
an NRSRO to make publicly available a consolidated report containing 
information about relative percent of revenues of the NRSRO 
attributable to persons paying the NRSRO for the issuance or 
maintenance of a credit rating.
    \111\ See June 2008 Proposing Release.
---------------------------------------------------------------------------

    The Commission proposed Rule 17g-7 in the June 2008 Proposing 
Release to address concerns that certain investors assumed the risk 
characteristics for structured finance products, particularly highly 
rated instruments, were the same as for other types of similarly rated 
instruments, as well as concerns that some investors may not have 
performed adequate internal risk analysis on structured finance 
products before purchasing them.\112\ The goal of the proposal was to 
spur investors to perform more rigorous internal risk analysis on such 
products so that they would not overly rely on NRSRO credit ratings in 
making investment decisions. At the time, the Commission noted that a 
potential ancillary benefit of the rule would be that it could cause 
certain investors to seek to better understand the risks of structured 
finance products that are not necessarily addressed in credit ratings, 
such as market and liquidity risk.\113\
---------------------------------------------------------------------------

    \112\ See June 2008 Proposing Release, 73 FR at 36235.
    \113\ Id.
---------------------------------------------------------------------------

    In the June 2008 Proposing Release, the Commission expressed its 
preliminarily belief that requiring an NRSRO to publish a report along 
with each publication of a credit rating for a structured finance 
product likely would provide certain investors with useful information 
about structured finance products and spur investors to perform more 
rigorous internal risk analysis on structured finance products.\114\ 
Alternatively, the Commission noted, the use of distinct symbology 
would alert investors that a structured finance product was being rated 
and, therefore,

[[Page 63882]]

raise the question of how it differs from other types of debt 
instruments.\115\
---------------------------------------------------------------------------

    \114\ Id.
    \115\ Id.
---------------------------------------------------------------------------

    The Commission generally requested comment on all aspects of the 
proposed new rule as well as on several specific questions.\116\ A 
total of 40 commenters responded to this request.\117\ Sixteen 
commenters expressed opposition to the proposed rule as a whole,\118\ 
while six commenters expressed either full or conditional support for 
both parts of the proposed amendment.\119\ Eleven commenters argued in 
favor of adopting paragraph (a) alone, thereby requiring the 
publication of a report to accompany structured finance ratings and 
eliminating the paragraph (b) option of using a distinct 
symbology.\120\ Twenty-nine commenters expressed their opposition to 
adopting paragraph (b).\121\
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    \116\ See June 2008 Proposing Release, 73 FR at 36236.
    \117\ Letter dated June 10, 2008 from Deborah A. Cunningham and 
Boyce I. Greer, Co-Chairs Company, Co-Chairs, SIFMA Credit Rating 
Agency Task Force (``First SIFMA Symbology Letter''); letter dated 
June 19, 2008 from Rupert Schoder, Financial Engineer, Socit Gnrale, 
France (``SGF Symbology Letter''); letter dated July 14, 2008 from 
Robert Dobilas, President, CEO, Realpoint LLC (``Realpoint Symbology 
Letter''); letter dated July 21, 2008 from Dottie Cunningham, Chief 
Executive Officer, Commercial Mortgage Securities Association 
(``CMSA Symbology Letter''); letter dated July 21, 2008 from Bruce 
Goldstein, SunTrust Robinson Humphrey (``STRH Symbology Letter''); 
letter dated July 21, 2008 from Raymond E. Petersen, President, 
Inland Mortgage Capital Corporation (``Inland Symbology Letter''); 
letter dated July 21, 2008 from Leonard W. Cotton, Vice Chairman, 
Centerline Capital Group (``Centerline Symbology Letter''); letter 
dated July 22, 2008 from Kevin Kohler, VP--Levered Finance, Capmark 
Investments LP (``Capmark Symbology Letter''); letter dated July 22, 
2008 from Mary A. Downing, Director--Surveillance and Due Diligence, 
Hillenbrand Partners (``Hillenbrand Symbology 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 Symbology Letter''); letter dated 
July 24, 2008 from Takefumi Emori, Managing Director, Japan Credit 
Rating Agency, Ltd. (``JCR Symbology Letter''); letter dated July 
24, 2008 from Amy Borrus, Deputy Director, Council of Institutional 
Investors (``Council Symbology Letter''); letter dated July 24, 2008 
from Vickie A. Tillman, Executive Vice President, Standard & Poor's 
Ratings Services (``S&P Symbology 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 Symbology Letter''); letter dated July 25, 2008 from Sally 
Scutt, Managing Director, and Pierre de Lauzun, Chairman, Financial 
Markets Working Group, International Banking Federation (``IBFED 
Symbology Letter''); letter dated July 25, 2008 from Denise L. 
Nappier, Treasurer, State of Connecticut (``Nappier Symbology 
Letter''); letter dated July 25, 2008 from Suzanne C. Hutchinson, 
Mortgage Insurance Companies of America (``MICA Symbology Letter''); 
letter dated July 25, 2008 from Kieran P. Quinn, Chairman, Mortgage 
Bankers Association (``MBA Symbology Letter''); letter dated July 
25, 2008 from Frank Chin, Chairman, Municipal Securities Rulemaking 
Board (``MSRB Symbology Letter''); letter dated July 25, 2008 from 
Charles D. Brown, General Counsel, Fitch Ratings (``Fitch Symbology 
Letter''); letter dated July 25, 2008 from Bill Lockyer, State 
Treasurer, California (``Lockyer Symbology Letter''); letter dated 
July 25, 2008 from Jeremy Reifsnyder and Richard Johns, Co-Chairs, 
American Securitization Forum Credit Rating Agency Task Force (``ASF 
Symbology Letter''); letter dated July 25, 2008 from Francisco Paez, 
Metropolitan Life Insurance Company (``MetLife Symbology Letter''); 
letter dated July 25, 2008 from Cate Long, Multiple-Markets 
(``Multiple-Markets Symbology 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 Symbology Letter''); letter dated July 
25, 2008 from Lawrence J. White, Professor of Economics, Stern 
School of Business, New York University (``White Symbology 
Letter''); letter dated July 25, 2008 from Jack Davis, Head of Fixed 
Income Research, Schroder Investment Management North America Inc. 
(``Schroders Symbology Letter''); letter dated July 25, 2008 from 
Karrie McMillan, General Counsel, Investment Company Institute 
(``ICI Symbology 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 
Symbology Letter''); letter dated July 25, 2008 from Richard M. 
Whiting, Executive Director and General Counsel, Financial Services 
Roundtable (``Roundtable Symbology 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 Symbology Letter''); letter 
dated July 25, 2008 from James A. Kaitz, President and CEO, 
Association for Financial Professionals (``AFP Symbology Letter''); 
letter dated July 25, 2008 from Gregory W. Smith, General Counsel, 
Colorado Public Employees' Retirement Association (``Colorado PERA 
Symbology Letter''); letter dated July 25, 2008 from Keith A. 
Styrcula, Chairman, Structured Products Association (``SPA Symbology 
Letter''); letter dated July 28, 2008 from Michel Madelain, Chief 
Operating Officer, Moody's Investors Service (``Moody's Symbology 
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 Symbology Letter''); 
letter dated July 31, 2008 from Robert S. Khuzami Managing Director 
and General Counsel, Deutsche Bank Americas (``DBA Symbology 
Letter''); letter dated August 8, 2008 from Jeffrey A. Perlowitz, 
Managing Director and Co-Head of Global Securitized Markets, and 
Myongsu Kong, Director and Counsel, Citigroup Global Markets Inc. 
(``Citi Symbology Letter''); letter dated August 12, 2008 from John 
J. Niebuhr, Managing Director, Lehman Brothers, Inc. (``Lehman 
Symbology Letter''); letter dated August 17, 2008 from Olivier 
Raingeard, Ph.D (``Raingeard Symbology Letter''); letter dated 
August 22, 2008 from Robert Dobilas, CEO and President, Realpoint 
LLC (``Realpoint Symbology Letter'').
    \118\ See Realpoint Symbology Letter; CMSA Symbology Letter; 
STRH Symbology Letter; Inland Symbology Letter; Centerline Symbology 
Letter; Capmark Symbology Letter; Hillenbrand Symbology Letter; DBRS 
Symbology Letter; JCR Symbology Letter; S&P Symbology Letter; 
Nappier Symbology Letter; MBA Symbology Letter; MetLife Symbology 
Letter; AFP Symbology Letter; Moody's Symbology Letter; Raingeard 
Symbology Letter.
    \119\ See MICA Symbology Letter; Lockyer Symbology Letter; CFA 
Symbology Letter; RDBA Symbology Letter; Colorado PERA Symbology 
Letter; MSRB Symbology Letter.
    \120\ See Second SIFMA Symbology Letter; IBFED Symbology Letter; 
ASF Symbology Letter; Schroders Symbology Letter; ICI Symbology 
Letter; Principal Symbology Letter; Rapid Ratings Symbology Letter; 
ABA Business Law Committees Symbology Letter; DBA Symbology Letter; 
Citi Symbology Letter; Lehman Symbology Letter.
    \121\ See First SIFMA Letter; Realpoint Symbology Letter; CMSA 
Symbology Letter; STRH Symbology Letter; Inland Symbology Letter; 
Centerline Symbology Letter; Capmark Symbology Letter; Hillenbrand 
Symbology Letter; DBRS Symbology Letter; JCR Symbology Letter; S&P 
Symbology Letter; Second SIFMA Symbology Letter; IBFED Symbology 
Letter; Nappier Symbology Letter; MBA Symbology Letter; ASF 
Symbology Letter; Fitch Symbology Letter; MetLife Symbology Letter; 
Rapid Ratings Symbology Letter; Roundtable Symbology Letter; 
Schroders Symbology Letter; ICI Symbology Letter; Principal 
Symbology Letter; AFP Symbology Letter; Moody's Symbology Letter; 
Raingeard Symbology Letter; ABA Business Law Committees Symbology 
Letter; DBA Symbology Letter; Citi Symbology Letter; Lehman 
Symbology Letter.
---------------------------------------------------------------------------

    Commenters criticized the proposed amendment as burdensome \122\ 
and as providing little, if any, benefit to investors.\123\ Several 
commenters argued that the proposed new requirements would be confusing 
and, therefore, detrimental to investors.\124\ Others expressed 
concerns that the proposed amendments would stigmatize structured 
finance products and further weaken the market for these 
instruments.\125\
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    \122\ See JCR Symbology Letter; S&P Symbology Letter; Moody's 
Symbology Letter; Roundtable Symbology Letter.
    \123\ See Realpoint Symbology Letter; Schroders Symbology 
Letter; Raingeard Symbology Letter; MICA Symbology Letter; 
Roundtable Symbology Letter.
    \124\ See CMSA Symbology Letter; STRH Symbology Letter; Inland 
Symbology Letter; Centerline Symbology Letter; Capmark Symbology 
Letter; Hillenbrand Symbology Letter; DBRS Symbology Letter; JCR 
Symbology Letter; ICI Symbology Letter; Principal Symbology Letter; 
MetLife Symbology Letter; Rapid Ratings Symbology Letter;
    \125\ See First SIFMA Symbology Letter; Realpoint Symbology 
Letter; Principal Symbology Letter; MBA Symbology Letter; Lockyer 
Symbology Letter; ASF Symbology Letter; MetLife Symbology Letter; 
ABA Business Law Committees Symbology Letter; DBA Symbology Letter; 
Lehman Symbology Letter.
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    The Commission, like a number of commenters, is concerned that the 
proposal, if adopted, could have limited utility in encouraging 
investors to perform more rigorous internal risk analysis on such 
products because NRSROs likely would have opted to use a distinguishing 
symbology as the less costly alternative. The Commission is concerned 
about whether the use of a distinct symbol or identifier for structured 
finance ratings might not achieve the goal of the proposal: Promoting 
independent analysis and understanding of the distinct risks of 
structured finance products.
    Furthermore, the Commission is concerned that mandating a distinct 
symbology could create the inaccurate impression that the Commission 
believes other types of debt instruments

[[Page 63883]]

are less risky. The Commission believes a more effective way to 
differentiate credit ratings for structured finance products may be by 
enhancing investor understanding of the distinct risk characteristics 
of these debt instruments and their credit ratings. For these reasons, 
at this time the Commission is deferring consideration of action on the 
proposal to issue a report or use a distinct symbology at this time. 
Instead, the Commission wants to study further whether there are other 
ways to better achieve the goals of the proposal: greater investor 
awareness of the unique risks of structured finance products and credit 
ratings for structured finance products.
    The Commission believes that some differences in the risk 
characteristics seem readily apparent and are fairly well understood by 
investors. For example, the Commission believes that an investor would 
understand that the continued payment of principal and interest to the 
holder of a structured finance debt instrument typically depends on the 
performance of a pool of underlying financial assets such as mortgages, 
business and student loans, or credit card receivables; whereas the 
performance of a corporate bond typically depends on the issuer's 
ability to generate income from business operations, and the 
performance of a municipal bond typically depends on the issuer's 
ability to collect taxes or earn revenues from services provided by a 
specific utility such as a sewer or water company.
    However, even high-level generalizations about the differences 
between classes of debt instruments may not always hold true. Some 
structured finance issuers actively manage the composition of the pool 
of underlying financial assets (in contrast to a static pool) and, as a 
result, these products are more risk-sensitive to the discretion of the 
manager. For example, the performance of the structured finance issuer 
will depend on the judgment of the manager of the pool of underlying 
assets. This is similar to how the performance of corporate issuers is 
sensitive to the judgment of senior management and their boards. 
Moreover, some corporate issuers--particularly in the financial 
sector--are highly risk-sensitive to the performance of financial 
assets similar to structured finance issuers that hold or reference the 
same types of assets. In short, generalizations about differences that 
are not carefully crafted run the risk of creating more confusion or 
misunderstanding than clarity for investors.
    For these reasons, the Commission is asking a series of questions 
below designed to elicit further views from market participants and 
others on how the risk characteristics of structured finance products 
and credit ratings differ from the risk characteristics of corporate, 
municipality, and sovereign nation debt instruments and their credit 
ratings.\126\ Specifically, the Commission requests market participants 
and others to provide their views in the following four areas: (1) The 
differences between structured finance products and other debt 
instruments; (2) the differences between credit ratings for structured 
finance products and credit ratings for other types of debt 
instruments; (3) potential measures to communicate differences in 
structured finance products to investors; and (4) potential measures to 
communicate differences in structured finance credit ratings to 
investors.\127\
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    \126\ For the purposes of this request for comment, the 
Commission intends the term ``corporate issuer'' to include any 
issuer that is not a structured finance issuer or a government 
issuer.
    \127\ For views on some of these issues see, for example, The 
Role of Credit Rating Agencies in the Structured Finance Markets, 
May 2008, Technical Committee of the International Organization of 
Securities Commissioners; The Role of Ratings in Structured Finance: 
Issues and Implications, (CGFS 2005), January 2005, Committee on the 
Global Financial System, Bank of International Settlements; The Role 
of Credit Rating Agencies in Structured Finance, Consultation Paper, 
February 2008, The Committee of European Securities Regulators.
---------------------------------------------------------------------------

    Persons making submissions are asked to provide detailed 
explanations of their views and analyses and cite relevant studies.
Differences Between Structured Finance Products and Other Debt 
Instruments
     What do market participants and others believe are the 
significant differences in the risk characteristics of structured 
finance debt instruments as compared with debt instruments issued by 
corporate issuers, municipalities, and sovereign nations in terms of 
credit risk, market risk, interest rate risk, and liquidity risk? What 
do market participants and others believe are the main drivers of the 
differences in risk characteristics?
     How do market participants and others believe the trading 
markets for structured finance products compare with the trading 
markets for debt instruments of corporate issuers, municipalities, and 
sovereign nations in terms of transparency and providing liquidity to 
investors? Do market participants and others believe differences in the 
trading markets for these debt instruments create differing levels of 
credit risk, market risk, interest rate risk, or liquidity risk for 
structured finance products as compared with debt instruments issued by 
corporate issuers companies, municipalities, and sovereign nations?
     How do market participants and others assess the relative 
use of leverage by structured finance issuers as compared with 
corporate issuers, municipalities, and sovereign nations? Do 
differences in the use of leverage create differing levels of credit 
risk, market risk, interest rate risk, or liquidity risk for structured 
finance products as compared with debt instruments issued by corporate 
issuers, municipalities, and sovereign nations? Does leverage act as a 
driver of differing levels of risk for structured finance products and 
account for the fact that certain corporate issuers also employ 
leverage?
     How do market participants and others assess the relative 
complexity of structured finance issuers as compared with corporate 
issuers, municipalities, and sovereign nations in terms of capital 
structure and operations? For example, in assessing complexity, how do 
market participants and others account for the fact that a structured 
finance product can be comprised of a static pool of cash flow assets 
whereas a corporate issuer may have an array of business lines operated 
through hundreds of affiliates located around the globe? Do differences 
in complexity create differing levels of credit risk, market risk, 
interest rate risk, and liquidity risk for structured finance products 
as compared with debt instruments issued by corporate issuers, 
municipalities, and sovereign nations?
     How do market participants and others assess the relative 
sensitivity of structured finance issuers to macroeconomic factors as 
compared with corporate issuers, municipalities, and sovereign nations? 
For example, do structured finance products have greater or lesser risk 
sensitivity to a macroeconomic stress event such as a recession than 
debt instruments issued by corporate issuers, municipalities, and 
sovereign nations?
     How do market participants and others assess the relative 
risks of a sector of structured finance issuers such as issuers that 
rely on the performance of a particular type of financial asset (e.g., 
residential mortgages or credit card receivables) as compared with an 
industry of corporate debt issuers (e.g., financial services, 
automakers, technology companies, or healthcare providers) or 
geographically concentrated municipal issuers (e.g., within a State) or 
sovereign debt issuers (e.g., within a region of the globe)? For 
example, does a structured finance

[[Page 63884]]

sector have greater or lesser risk sensitivity to a macroeconomic 
stress event such as a recession than corporate debt issuers within a 
specific industry or geographically concentrated municipal or sovereign 
issuers?
     How do market participants and others perceive the degree 
of idiosyncratic risk inherent in structured finance products relative 
to debt instruments issued by corporate issuers, municipalities, and 
sovereign nations? Do market participants and others believe the 
different ways these debt issuers generate income to meet principal and 
interest payments to debt holders (e.g., through underlying income 
generating assets for structured finance products, revenues generated 
through business operations for corporate issuers, and taxing authority 
or utility revenues for municipal and sovereign issuers) create 
differing levels of idiosyncratic risk?
     In assessing the relative level of idiosyncratic risk 
inherent in structured finance issuers as compared with debt 
instruments issued by corporate issuers, municipalities, and sovereign 
nations, what do market participants and others believe is the impact 
of the fact that different structured finance issuers can hold the same 
types of underlying cash flow generating assets (e.g., residential 
mortgages) and have very similar legal structures? What is the impact 
of the fact that corporate issuers can operate using different business 
models and have differing levels of management competence?
     Do market participants and others believe there are 
material differences between structured finance products and debt 
instruments issued by corporate issuers, municipalities, and sovereign 
nations in terms of recovery after default? Do market participants and 
others believe debt holders are likely to recover more or less 
principal after a structured finance debt instrument default than after 
the default of a debt instrument issued by a corporate issuer, 
municipality, or sovereign nation?
     Do market participants and others believe there are 
important differences in the level of moral hazard present in 
structured finance products relative to debt instruments issued by 
corporate issuers, municipalities and sovereign nations? Could the fact 
that structured finance products consist of asset pools which are 
ultimately purchased from originators of such assets result in lower 
quality assets for structured finance products as compared with the 
assets of corporate issuers, municipalities and sovereign nations?
     To the extent that market participants and others identify 
differences between the risk characteristics of structured finance 
products and other debt instruments, do they believe the differences 
identified apply across all types of structured finance products or 
just to certain categories of products? Are generalizations about the 
different risk characteristics of structured finance products as 
compared to other debt instruments appropriate or is it more 
appropriate to categorize structured finance products by underlying 
asset type (e.g., residential mortgage, commercial mortgage, student 
loan, credit card receivable, lease) or structure type (e.g., asset-
backed security, collateralized debt obligation (CDO), CDO-squared or 
cubed, synthetic or hybrid CDO, constant proportion debt obligation, 
asset-backed commercial paper conduit)?
Differences Between Credit Ratings for Structured Finance Products and 
Credit Ratings for Other Types of Debt Instruments
     What are the significant differences in the risk 
characteristics of credit ratings for structured finance products as 
compared with credit ratings for debt instruments issued by corporate 
issuers, municipalities, and sovereign nations in terms of ratings 
accuracy and performance?
     Are structured finance debt instruments inherently more 
difficult to rate accurately than debt instruments issued by corporate 
issuers, municipalities, and sovereign nations? If so, what do market 
participants and others believe are the factors that make structured 
finance products more difficult to rate?
     Does the fact that the creditworthiness of a structured 
finance issuer typically depends on the performance of a pool of 
financial assets make these debt instruments more difficult to rate 
accurately than debt instruments issued by corporate issuers, 
municipalities, and sovereign nations?
     Do market participants and others believe that the 
reliance on quantitative analysis (e.g., statistical models and 
historical data) to determine credit ratings for structured finance 
products as compared with a greater reliance on qualitative analysis to 
determine credit ratings for debt instruments issued by corporate 
issuers, municipalities, and sovereign nations increases or decreases 
the accuracy risk for structured finance credit ratings?
     Do market participants and others believe that the 
information available about structured finance issuers used to 
determine credit ratings as compared to the information available to be 
used to determine credit ratings about corporate issuers, 
municipalities, and sovereign nations makes it more difficult to 
determine accurate credit ratings for structured finance debt 
instruments and/or to conduct surveillance on outstanding structured 
finance credit ratings? If so, do market participants and others 
believe it is easier to determine accurate credit ratings, and monitor 
those ratings, for corporate issuers that are required to file periodic 
public reports and financial statements and provide access to 
management? Is the information used to determine and monitor credit 
ratings of corporate issuers, municipalities, or sovereign nations more 
forward looking (e.g., based on more on forecasts)? In addition, do 
market participants and others believe that the historical data used to 
determine and monitor structured finance credit ratings of shorter 
duration or otherwise less robust than the historical data used to 
determine and monitor credit ratings for corporate issuers, 
municipalities, or sovereign nations?
     Do market participants and others believe it is more 
difficult for investors and market observers to perform independent 
analysis of structured finance products than of securities issued by 
corporate issuers, municipalities, and sovereign nations? If so, does 
this impact the accuracy of structured finance credit ratings as 
compared to credit ratings for corporate issuers, municipalities, and 
sovereign nations?
     Do market participants and others believe the conflict of 
being paid to determine credit ratings is more attenuated in the 
structured finance sector than in the corporate, municipal, and 
sovereign sectors? If so, why? Does this impact the accuracy of 
structured finance credit ratings?
     Do market participants and others believe structured 
finance credit ratings are more likely to have a greater number of 
ratings transitions (i.e., upgrades or downgrades) than credit ratings 
for debt instruments issued by corporate issuers, municipalities, or 
sovereign nations? If so, what are the factors that create this effect?
     Are structured finance credit ratings more likely to 
experience transitions of greater magnitude (i.e., upgrades or 
downgrades that span a larger number of credit rating categories 
(notches)) than credit ratings for debt instruments issued by corporate 
issuers, municipalities, or sovereign nations? If so, what are the 
factors that make structured finance credit ratings more

[[Page 63885]]

prone to transitions of greater magnitude in credit rating category?
     Do market participants and others believe issuers, 
arrangers, sponsors, and managers of structured finance products are 
able to ``game'' rating agency methodologies resulting in credit 
ratings that are less accurate than ratings for other debt instruments? 
Do they believe the ability of issuers, arrangers, sponsors and 
managers to adjust the characteristics of structured finance products, 
including the number and relative size of tranches and the composition 
of the asset pool in order to achieve particular credit ratings, result 
in ratings that are less accurate than ratings for debt instruments 
issued by corporate issuers, municipalities and sovereign nations?
     To the extent that market participants and others identify 
differences between the risk characteristics of structured finance 
credit ratings and credit ratings for other debt instruments, do 
differences identified apply globally to all structured finance 
products or just to certain categories of products? Do market 
participants and others believe generalizations about the different 
risk characteristics of credit ratings for structured finance products 
as compared to credit ratings for other debt instruments can be made? 
Is it more appropriate to categorize structured finance credit ratings 
by underlying asset type (e.g., residential mortgage, commercial 
mortgage, student loan, credit card receivable, lease) or structure 
type (e.g., asset-backed security, collateralized debt obligation 
(CDO), CDO-squared or cubed, synthetic or hybrid CDO, constant 
proportion debt obligation, asset-backed commercial paper conduit)?
Measures To Communicate Differences in Structured Finance Products to 
Investors
     To the extent that market participants and others 
identified significant differences in the risk characteristics of 
structured finance debt instruments as compared with debt instruments 
issued by corporate issuers, municipalities, and sovereign nations in 
terms of credit risk, market risk, interest rate risk, and liquidity 
risk, what are their views on whether steps should be taken to better 
communicate these differences to investors in a manner reasonably 
designed to enhance investor understanding of the differences?
     Do market participants and others believe structured 
finance issuers should be required to disclose these general 
differences in the types of securities? If so, how should the 
disclosures be made? For example, should they be stated in offering 
documents and periodic reports or are there other mechanisms that could 
be used to convey the differences in the types of securities?
     Do market participants and others believe NRSROs should be 
required to disclose these differences? If so, how should the 
disclosures be made? For example, should the disclosures be included in 
a report issued at the same time a rating action is taken with respect 
to a structured finance product, in Form NRSRO, or through some other 
mechanism?
     Do market participants and others believe the disclosure 
documents should required to be delivered to prospective investors in 
investment pools that may hold structured finance products be required 
to include these disclosures? If so, how should these disclosures be 
made?
Measures To Communicate Differences in Structured Finance Credit 
Ratings to Investors
     To the extent that market participants and others 
identified material differences in the risk characteristics of credit 
ratings for structured finance debt instruments as compared with credit 
ratings for debt instruments issued by corporate issuers, 
municipalities, and sovereign nations in terms of ratings accuracy and 
performance, what are their views on measures that can be taken to 
communicate these differences to investors in a manner reasonably 
designed to enhance investor understanding of the differences?
     Do market participants and others believe structured 
finance issuers should be required to disclose these differences? If 
so, how should the disclosures be made? Should they be stated in 
offering documents and periodic reports, or are there other mechanisms 
that could be used to convey the disclosures?
     Do market participants and others believe NRSROs should be 
required to disclose these differences? For example, it has been 
suggested that NRSRO disclose the following types of information about 
structured finance products: \128\
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    \128\ See e.g., June 25, 2008 Letter from Jeff Riefsnyder and 
Richard Johns on behalf of the American Securitization Forum to the 
US Securities and Exchange Commission regarding ``Exchange Act 
Release No. 34-57967 (File No. S7-13-08)''.
---------------------------------------------------------------------------

    1. The diligence that is performed by or provided to the NRSRO 
about the underlying assets, and quality control of numerical data 
provided to the NRSRO;
    2. The characteristics and sensitivities of models used or relied 
upon by the NRSRO in assessing the likely performance of the structured 
finance product or the underlying assets;
    3. The extent to which the NRSRO relies on representations and 
warranties made by transaction participants;
    4. The assumptions as to future events and economic conditions that 
are embedded in the analytical models used by the NRSRO in arriving at 
a given rating;
    5. Publishing ``what if'' scenario analyses that address the 
ratings implications of changes in the underlying assumptions upon 
which ratings are based and provide insight into ratings tolerance to 
changing economic or risk circumstances;
    6. Providing additional information relating to default 
probability, loss sensitivity, severity of loss given default, short-
tail and long-tail risk and similar risk metrics associated with each 
class of credit ratings.
     If you believe these types of disclosures and other 
disclosures should be made by NRSROs, how should the disclosures be 
made? Should the disclosures be stated in a report issued at the same 
time a rating action is taken with respect to a structured finance 
product, in Form NRSRO, or through some other mechanism?
     Do market participants and others believe the disclosure 
documents required to be delivered to prospective investors in 
investment pools that may hold structured finance products should be 
required to include the disclosures? If so, how should the disclosures 
be made?

B. Credit Ratings for Existing Structured Finance Debt Instruments

    Another way to differentiate credit ratings for structured finance 
products from other types of debt instrument ratings is to increase the 
opportunity for independent analysis of the credit worthiness of the 
products. To this end, in the companion release, the Commission is 
adopting amendments to Rule 17g-5 that require NRSROs that are paid by 
arrangers to determine credit ratings for structured finance products 
to provide other NRSROs access to a password-protected Internet Web 
site that lists each deal they have been hired to rate. A hired NRSRO 
also would be required to obtain representations from the arranger 
hiring the NRSRO that the arranger will maintain a password-protected 
Internet Web site that contains all the information the arranger 
provides to the hired NRSRO to determine and monitor the credit rating 
and that it will make this information available to

[[Page 63886]]

NRSROs not hired to determine and monitor the rating. As discussed in 
detail in the Commission's Companion Release, these requirements are 
designed to create a mechanism by which non-hired NRSROs will 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 provided by the arranger to the hired NRSRO during the 
entire initial rating process and, thereafter, for the purpose of 
surveillance.\129\ The hired NRSRO need only provide access to its 
password-protected Internet Web site to a non-hired NRSRO whose 
certification provided to the Commission indicates that it has either 
(1) determined and maintained credit ratings for at least 10% of the 
issued securities and money market instruments for which it accessed 
information pursuant to Rule 17g-5(a)(3) as amended in the calendar 
year prior to the year covered by the certification, if it accessed 
such information for 10 or more issued securities or money market 
instruments; or (2) has not accessed information pursuant to Rule 17g-
5(a)(3) as amended 10 or more times in the calendar year prior to the 
year covered by the certification. NRSROs also will be required to 
disclose in their certifications 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 most 
recent calendar year during which it obtained information through 
accessing these Internet Web sites certification or that they 
previously had not accessed such information 10 or more times in a 
calendar year.
---------------------------------------------------------------------------

    \129\ See Companion Release.
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    These amendments to Rule 17g-5 described above are designed to 
allow NRSROs not hired to rate a structured finance deal to get 
sufficient information to determine a credit rating for the debt 
instruments to be issued. Generally, the information relied on by the 
hired NRSROs to rate new debt issuances of structured finance issuers 
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 may be subject to the conflict of being repeatedly paid by 
certain arrangers to rate these securities and money market 
instruments).
    The rule amendments also are designed to require the disclosure of 
the necessary information to any NRSRO--whether hired or not--to permit 
non-hired NRSROs to determine credit ratings for the debt instruments 
to be issued. The Commission believes that absent this requirement a 
non-hired NRSRO would have a much more difficult time obtaining the 
information necessary to issue an unsolicited credit rating at the time 
the debt instruments were issued into the market. Without the rule 
amendment, in most cases, the non-hired NRSRO's prospects for 
determining a pre-issuance credit rating would depend on the issuer's 
willingness to provide the information to the NRSRO notwithstanding the 
fact that the issuer was paying other NRSROs to rate the to-be-issued 
debt instruments.
    The goal is to increase the number of credit ratings extant for a 
given structured finance security or money market instrument and, in 
particular, promote the issuance of credit ratings by NRSROs that are 
not hired by the arranger. This is designed to provide users of credit 
ratings with a broader range of views on the creditworthiness of the 
security or money market instrument. In addition, the rule amendments 
are designed to make it more difficult for arrangers to exert influence 
over the NRSROs they hire to determine credit ratings for structured 
finance products. By opening up the rating process to more NRSROs, the 
rule amendments 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 credit ratings issued by other NRSROs.
    As the Commission noted in the February 2009 Proposing Release, the 
text of paragraph (a)(3)(i) refers to transactions where the NRSRO is 
in the process of determining an ``initial'' credit rating.\130\ The 
rule does not require the NRSRO to include on the Internet Web site 
information about securities or money market instruments once the NRSRO 
has published the initial rating and is monitoring the rating. The 
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. 
Consequently, upon publication of the initial rating, 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 before a hired NRSRO 
publishes an initial rating, the NRSRO would be permitted to remove the 
information from the list.\131\
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    \130\ See February 2009 Proposing Release, 74 FR at 6493.
    \131\ See Companion Release.
---------------------------------------------------------------------------

    The Commission is aware that there are conflicting 
characterizations about the ability of market participants and others, 
including NRSROs not hired to rate the deal, to obtain information 
necessary to determine and monitor a credit rating for structured 
finance debt instrument after issuance. The Commission understands that 
some of the trustees and servicers involved with the structured finance 
issuer provide monthly reports that allow NRSROs not hired to rate the 
issuer's debt instruments to determine and monitor credit ratings for 
those securities and money market instruments. The Commission also 
understands that some third-party venders aggregate the information 
provided by the trustees and servicers in a manner that permits 
independent credit analysis by NRSROs and investors. The Commission 
understands that some market participants argue that the trustees and 
servicers restrict access to the information to investors and hired 
NRSROs and that the third-party venders do not provide sufficient 
information.
    The Commission believes it would be helpful to solicit comments 
from market participants and others as to whether measures should be 
taken by the Commission to enhance the ability of non-hired NRSROs to 
determine credit ratings for structured finance debt instruments that 
were issued before the compliance date of the amendments to Rule 17g-5 
being adopted in the Companion Release.
    For these reasons, the Commission is asking a series of questions 
below designed to elicit comments from market participants and others 
about whether currently there is sufficient information (or access to 
such information) to permit an NRSRO to determine unsolicited credit 
ratings for structured finance debt instruments issued prior to the 
compliance date of the amendments to Rule 17g-5 being adopted today.
    Persons making submissions are asked to provide detailed 
explanations and analyses and cite relevant studies.
     Do market participants and others believe the ability of 
NRSROs to access information about structured finance debt instruments 
issued before the compliance date for the Rule 17a-5

[[Page 63887]]

amendments (``compliance date'') is restricted in such a manner as to 
preclude or seriously discourage NRSROs from determining credit ratings 
if they have not been hired by the arranger? Do the issuers, trustees 
and servicers that control access to this information preclude a non-
hired NRSRO from accessing the information or impose barriers that 
discourage a non-hired NRSRO from accessing it?
     Do market participants and others believe the information 
disclosed by structured finance issuers, trustees, and servicers or by 
third-party venders is insufficient to determine unsolicited credit 
ratings for structured finance debt instruments issued before the 
compliance date?
     What specific measures, if any, should be taken to secure 
the disclosure of information by issuers, trustees or servicers of 
structured finance products issued before the compliance date or the 
NRSROs that were hired to rate those structured finance products to 
enable NRSROs that were not hired to determine and monitor a credit 
rating where the debt instrument was issued prior the compliance date?
     Do market participants and others believe if the 
information provided to the hired NRSRO to determine and monitor a 
credit rating for a structured finance product issued before the 
compliance date was made available to another NRSRO, the non-hired 
NRSRO would be able to determine a meaningful unsolicited credit using 
that information alone?

VII. 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 proposal contained in 
the release, including any competitive impact.

VIII. Paperwork Reduction Act

    Certain provisions of the proposed amendments to Rule 17g-3 and the 
Instructions to Exhibit 6 to Form NRSRO, as well as the new proposed 
Rule 17g-7 contain a ``collection of information'' within the meaning 
of the Paperwork Reduction Act of 1995 (``PRA''). The Commission is 
submitting the proposed amendments and the proposed new collection 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-3, Annual reports to be furnished by nationally 
recognized statistical rating organizations (OMB Control Number 3235-
0626);
    (2) Rule 17g-1, Application for registration as a nationally 
recognized statistical rating organization; Form NRSRO and the 
Instructions for Form NRSRO (OMB Control Number 3235-0625); and
    (3) Rule 17g-7, Reports to be made public by nationally recognized 
statistical rating organizations about persons that paid the nationally 
recognized statistical rating organization for the issuance or 
maintenance of a credit rating (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-3 would require an NRSRO to submit an additional annual 
report to the Commission. The proposed amendments to Rule 17g-3 would 
require an NRSRO to furnish a new unaudited report describing the steps 
taken by the NRSRO's designated compliance officer during the fiscal 
year to administer the policies and procedures that are required to be 
established pursuant to paragraphs (g) and (h) of Section 15E of the 
Exchange Act (prevention of misuse of material nonpublic information 
and management of conflicts of interest), and to ensure compliance with 
the securities laws and rules and regulations thereunder.\132\ The 
proposed amendment to Rule 17g-3 also would require that the report 
include a description of any compliance reviews of the activities of 
the NRSRO; the number of material compliance matters identified during 
each review of the activities of the NRSRO and a brief description of 
each such matter; a description of any remediation measures implemented 
to address material compliance matters identified during the reviews of 
the activities of the NRSRO; and a description of the persons within 
the NRSRO who were advised of the results of the reviews.\133\
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    \132\ See proposed Rule 17g-3(a)(7).
    \133\ See proposed Rule 17g-3(a)(7)(ii). The proposed report 
also would be certified by the designated compliance officer. See 
proposed Rule 17g-3(b)(2).
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    In addition, proposed amendments to the Instructions to Exhibit 6 
to Form NRSRO would require an applicant/NRSRO to furnish the 
Commission with information regarding the revenues an NRSRO receives 
from major clients and from services other than determining credit 
ratings. Finally, proposed Rule 17g-7 would require an NRSRO, on an 
annual basis, to make publicly available on its Internet Web site a 
consolidated report that shows certain information with respect to each 
person that paid the NRSRO to issue or maintain a credit rating. First, 
the NRSRO must include the percent of the net revenue attributable to 
the person earned by the NRSRO for that fiscal year for providing 
services and products other than credit rating services. Second, the 
NRSRO must include the relative standing of the person in terms of the 
person's contribution to the net revenue of the NRSRO for the fiscal 
year. Third, the NRSRO must include all outstanding credit ratings paid 
for by the person.\134\
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    \134\ See proposed Rule 17g-7.
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B. Proposed Use of Information

    The collections of information in the proposed amendments to Rule 
17g-3 to add an additional unaudited report to describe the steps taken 
by the designated compliance officer during the fiscal year to 
administer certain policies and procedures and to ensure compliance 
with securities laws and rules and regulations would improve the 
integrity of the ratings process by establishing a discipline under 
which the NRSRO's designated compliance officer would need to report to 
the Commission the steps taken by the compliance officer to fulfill the 
officer's statutory responsibilities. The act of reporting these steps 
is designed to promote the active engagement of the designated 
compliance officer in reviewing an NRSRO's compliance with internal 
policies and procedures. The proposed report also could strengthen the 
Commission's oversight of NRSROs by highlighting possible problem areas 
in an NRSRO's rating processes and providing an additional tool for the 
Commission to monitor how the NRSRO's designated compliance officer is 
fulfilling the responsibilities prescribed in Section 15E(j) of the 
Exchange Act. In addition, with respect to the proposed amendments to 
Rule 17g-3, the identification of the persons within the NRSRO advised 
of the results of the review could also promote the appropriate 
escalation of compliance issues to the management of the NRSRO.
    Further, the collections of information in the proposed amendments 
to Exhibit 6 to the Instructions to Form NRSRO would allow users of 
credit ratings to more effectively evaluate the integrity of the 
NRSRO's credit ratings themselves

[[Page 63888]]

and whether they believe the NRSRO is effectively managing its 
conflicts of interests otherwise identified in Exhibit 6. The 
collection of information in proposed new Rule 17g-7 would provide 
users of credit ratings with information about the potential conflicts 
of interest that arise when an NRSRO is paid to determine a credit 
rating for a specific obligor, security, or money market instrument.
    Finally, the collections of information in the proposed amendments 
also are designed to further assist the Commission in effectively 
monitoring, through its examination function, whether an NRSRO is 
conducting its activities in accordance with Section 15E of the 
Exchange Act \135\ and the rules thereunder.
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    \135\ 15 U.S.C. 78o-7.
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C. Respondents

    In adopting the original rules under the Rating Agency Act, as well 
as additional rules in February 2009, the Commission estimated that 
approximately 30 credit rating agencies would be registered as 
NRSROs.\136\ The Commission believes that this estimate continues to be 
appropriate for identifying the number of respondents for purposes of 
the amendments and the proposed new rule. Since the original rules 
under the Rating Agency Act became effective in June 2007, ten credit 
rating agencies have registered with the Commission as NRSROs.\137\ The 
rules regarding the registration have been in effect for just over two 
years; consequently, the Commission expects additional entities will 
register.
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    \136\ See June 2007 Adopting Release, 72 FR at 33607.
    \137\ A.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.
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    The Commission generally requests comment on all aspects of these 
estimates for the number of respondents. In addition, the Commission 
requests specific comment on the following items related to these 
estimates.
     For purposes of the PRA should the Commission continue to 
use the estimate that 30 credit rating agencies will register as 
NRSROs?
     Alternatively, should the Commission raise or lower that 
number, given that ten credit rating agencies have registered with the 
Commission as NRSROs in the two years that the NRSRO registration 
program has been in effect? If so, what should the number be? 
Commenters should explain how they arrived at the estimate and identify 
any sources of industry information used in arriving at the estimate.

Commenters should provide specific data and analysis to support any 
comments they submit with respect to these estimates with respect to 
the number of respondents.

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 
and proposed new rule would be approximately 2,760 hours \138\ on an 
annual basis and 4,650 hours \139\ on a one-time basis.
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    \138\ 900 + 60 + 1,800 = 2,760.
    \139\ 750 + 3,900 = 4,650.
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    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-3
    Rule 17g-3 requires an NRSRO to furnish certain reports to the 
Commission on an annual basis, including audited financial statements, 
as well as other annual reports.\140\ The Commission is proposing to 
amend Rule 17g-3 to require an NRSRO to furnish the Commission with an 
additional unaudited report containing a description of the steps taken 
by the designated compliance officer during the fiscal year to 
administer the policies and procedures that are required to be 
established pursuant to paragraphs (g) and (h) of Section 15E of the 
Exchange Act (management of conflicts of interest and prevention of the 
misuse of material nonpublic information); and ensure compliance with 
the securities laws and rules and regulations thereunder, including 
those promulgated by the Commission pursuant to Section 15E of the 
Exchange Act.\141\
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    \140\ 17 CFR 240.17g-3.
    \141\ See proposed Rule 17g-3(a)(7)(ii).
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    Proposed new paragraph (a)(7)(ii) of Rule 17g-3 also would provide 
that the report must include: (1) A description of any compliance 
reviews of the activities of the NRSRO; (2) the number of material 
compliance matters identified during each review of the activities of 
the NRSRO and a brief description of each such matter; (3) a 
description of any remediation measures implemented to address material 
compliance matters identified during the reviews of the activities of 
the NRSRO; and (4) a description of the persons within the NRSRO who 
were advised of the results of the reviews.
    The total annual burden currently approved by OMB for Rule 17g-3 is 
7,000 hours.\142\ The current annual hour burden estimate to prepare 
and file the annual reports under Rule 17g-3 is 200 hours per 
respondent, including the audited financial statements under Rule 17g-
3(a)(1).\143\ With respect to the proposed amendment, the Commission 
estimates, based on staff experience, that the amount of time it would 
take to prepare a report describing the steps taken by the designated 
compliance officer during the fiscal year to administer the policies 
and procedures that are required to be established pursuant to 
paragraphs (g) and (h) of Section 15E of the Exchange Act (management 
of conflicts of interest and prevention of the misuse of material 
nonpublic information); and to ensure compliance with the securities 
laws and rules and regulations thereunder, would be approximately 30 
hours per year for a total annual hour burden of 900 hours.\144\
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    \142\ See February 2009 Adopting Release, 74 FR at 6473.
    \143\ See February 2009 Adopting Release, 74 FR at 6472. The 
Commission based this proposed estimate, in part, on the average 
number of annual hours (200 hours) divided by the number of annual 
reports required to be prepared under current Rule 17g-3(a)(1)-(6): 
200 annual hours/6 reports = 33.33 hours (rounded to 30 hours).
    \144\ 30 hours x 30 NRSROs = 900 hours.
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    The Commission based this estimate, in part, on the fact that the 
areas covered by the proposed amendment to Rule 17g-3 overlap with the 
duties already required of the NRSRO's designated compliance officer 
pursuant to Section 15E(j) of the Exchange Act. The Commission 
preliminarily believes that the estimated hour burden under the 
proposed amendment to Rule 17a-3 would include the time it would take 
to compile information to draft the report and the preparation and 
filing of the report itself. In addition, this one-time hour burden 
estimate also includes the time it would take to identify and describe 
material compliance matters,

[[Page 63889]]

any remediation and the persons advised of the results of the reviews. 
Consequently, the Commission also based this estimate, in part, on the 
average estimated number of hours it would currently take an NRSRO to 
complete one annual report under current Rule 17g-3 (i.e., 
approximately 30 hours).\145\
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    \145\ 15 U.S.C. 78o-7(j). Under this provision of the statute, 
an NRSRO must ``designate an individual responsible for 
administering the policies and procedures that are required to be 
established pursuant to [Sections 15E(g) and (h) of the Exchange Act 
(15 U.S.C. 78o-7(g) and (h))], and for ensuring compliance with the 
securities laws and rules and regulations thereunder, including 
those promulgated by the Commission pursuant to [Section 15E of the 
Exchange Act].'' Id.
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    Given the potentially sensitive nature of the proposed report, the 
Commission also preliminarily believes that an NRSRO would likely 
engage outside counsel to assist it in the process of drafting and 
reviewing the proposed report under Rule 17g-3. The Commission 
estimates that the time an outside attorney would spend on this work 
would depend on the size and complexity of the NRSRO. The Commission 
estimates that, on average, an outside counsel would spend 
approximately 20 hours assisting an NRSRO and its designated compliance 
officer in drafting and reviewing the proposed report on a one-time 
basis for an aggregate burden to the industry of 600 hours.\146\ Based 
on industry sources, the Commission estimates that the cost of an 
outside counsel would be approximately $400 per hour. For these 
reasons, the Commission estimates that the average one-time cost to an 
NRSRO would be approximately $8,000 \147\ and the one-time cost to the 
industry would be approximately $240,000.\148\
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    \146\ 30 NRSROs x 20 hours = 600 hours.
    \147\ $400 per hour x 20 hours = $8,000.
    \148\ $8,000 x 30 NRSROs = $240,000.
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    The Commission generally requests comment on all aspects of the 
burden estimates for the proposed amendments to Rule 17g-3. Commenters 
should provide specific data and analysis to support any comments they 
submit with respect to these burden estimates. In addition, the 
Commission requests specific comment on the following items related to 
these estimates.
     To what extent would NRSROs rely on outside counsel with 
respect to the preparation, drafting and review of the proposed report?
2. Amendments to Form NRSRO
    The Commission is proposing to amend the Instructions to Exhibit 6 
to Form NRSRO to require an applicant/NRSRO to furnish the Commission 
with information regarding the revenues an NRSRO receives from major 
clients and from services other than determining credit ratings.
    As stated above, the Commission proposes amending the instructions 
for Exhibit 6 to augment the information about conflicts of interest 
disclosed in Form NRSRO. The Commission prescribed the information 
currently required in Exhibit 6 to implement Section 15E(a)(1)(B)(vi) 
of the Exchange Act, which requires that an application for 
registration contain information regarding any conflict of interest 
relating to the issuance of credit ratings by the applicant/NRSRO.\149\ 
The proposed amendments to Form NRSRO would change the instructions for 
the Form to require that NRSROs provide specific disclosure of certain 
percentages of its revenue related to its large customers and services 
it provides, other than the issuance of credit ratings, in Exhibit 6 to 
the Form. The Commission preliminarily believes that an NRSRO would 
generate the financial information and complete the proposed new 
additional disclosures required by Exhibit 6 to Form NRSRO using 
internal records and current NRSRO personnel.
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    \149\ 15 U.S.C. 78o-7(a)(1)(B)(vi).
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    The total annual burden currently approved by OMB for Rule 17g-1 
and Form NRSRO is 6,400 hours.\150\ Based on staff experience, the 
Commission estimates that the average time necessary for an applicant 
or NRSRO to gather the information for the first time in order to 
complete the additional disclosures that would be required by the 
proposed amendments to Exhibit 6 to Form NRSRO would be 25 hours per 
NRSRO, which would be a one-time hour burden to the industry of 750 
hours.\151\ The Commission preliminarily believes, based on staff 
experience, that the average time it would take an NRSRO to complete 
the additional disclosures that would be required by the proposed 
amendments would be comparable to the current estimate of 25 hours that 
it would take an NRSRO to complete an amendment to a Form NRSRO.\152\ 
The Commission preliminarily believes that these burden estimates would 
be comparable because, based on the staff's experience with Form NRSRO 
filings furnished to the Commission over the past two years, the 
Commission believes that time and amount of information involved in 
filing an amendment to part of the Form NRSRO would be similar to the 
time involved to update the Form NRSRO with the proposed information to 
Exhibit 6 to Form NRSRO.
    In addition, the proposed amendments to the Instructions to Exhibit 
6 would provide that after registration, an NRSRO with a fiscal year 
end of December 31 must update the proposed additional disclosures in 
Exhibit 6 information as part of its annual certification. Rule 17g-
1(f) requires an NRSRO to furnish the annual certification no later 
than 90 days after the calendar year.\153\ The currently approved OMB 
annual hour estimate to complete the annual certification is 10 hours 
per NRSRO, for a total aggregate annual hour burden to the industry of 
300 hours. The Commission estimates that once an NRSRO completes its 
first annual certification with the additional proposed disclosures 
required in the Instructions to Exhibit 6 to Form NRSRO that the 
completion of subsequent annual certifications, generally, would take 
less time because the additional disclosures proposed to be required 
would be furnished on a regular basis (albeit yearly) and, therefore, 
become more a matter of routine over time. Consequently, the Commission 
believes that the annual certifications with the proposed additional 
discloses would take more time to complete in the first year the rule 
would become effective, than it would take to complete in subsequent 
years.
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    \150\ 2,100 annual hours + [13,000 one-time hours annualized 
over the three year approval period/3] = 6,433 hours = rounded to 
6,400 hours.
    \151\ 30 NRSROs x 25 hours = 750 hours. The Commission also 
notes that the currently approved PRA collection for Rule 17g-1 and 
Form NRSRO includes an estimate that an outside counsel would spend 
approximately 40 hours assisting a credit rating agency in the 
process of completing and furnishing a Form NRSRO to the Commission. 
June 2007 Adopting Release, 72 FR at 33608. The Commission believes 
that any outside counsel review of the amendments to Exhibit 6 to 
Form NRSRO would de minimis and therefore the current estimate 
remains accurate.
    \152\ See June 2007 Adopting Release, at 72 FR 33609.
    \153\ 17 CFR 240.17g-4(f). The Commission also notes that if an 
NRSRO has an annual year end other than December 31st, the proposed 
additional instructions Exhibit 6 to Form NRSRO would require that 
the NRSRO file an Update of Registration no later than 90 days 
following the end of the NRSRO's fiscal year. The Commission 
believes that the annual hour burden for this proposed collection of 
information is encompassed within the time it would take an NRSRO to 
file an amendment to the Form NRSRO which has been estimated to be a 
25 annual hour burden per year. The Commission estimates that an 
NRSRO will on average file two amendments to Form NRSRO per year.
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    Therefore, based on staff experience, the Commission estimates that 
with the additional disclosures proposed to be contained in 
Instructions to Exhibit 6 to Form NRSRO, the annual hour burden for 
each NRSRO to complete the annual certification would increase 2 hours 
per year, from 10 to 12 hours, for a total

[[Page 63890]]

aggregate annual hour burden of 360 hours, resulting in an increase to 
the estimated annual hour burden for Rule 17g-1 and Form NRSRO of 60 
hours.\154\
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    \154\ 12 hours x 30 NRSROs = 360 hours. The Commission also 
based this estimate, in part, on the time it would take an NRSRO to 
furnish a withdrawal of registration on Form NRSRO of 1 hour. June 
2007 Proposing Release, 72 FR at 33608-33609. However, because the 
NRSRO would have to update information for calculations with respect 
to its revenues, the Commission believes it would take an NRSRO 
longer than 1 hour. Therefore, the Commission preliminarily believes 
that it would take an NRSRO approximately 2 hours each year to 
update the proposed information.
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    The Commission preliminarily believes that an applicant/NRSRO would 
incur only limited internal costs to modify its systems to generate and 
disclose the proposed additional disclosures in Exhibit 6 to Form NRSRO 
because an applicant/NRSRO is already required to generate similar 
financial information in other parts of Form NRSRO and certain 
financial reports required under Rule 17g-3.
    The Commission generally requests comment on all aspects of these 
proposed burden estimates for Rule 17g-1 and Form NRSRO, as proposed to 
be amended. Commenters should provide specific data and analysis to 
support any comments they submit with respect to these burden 
estimates.
3. Proposed Rule 17g-7
    The Commission is proposing new Rule 17g-7, which would require an 
NRSRO, on an annual basis, to make publicly available on its Internet 
Web site a consolidated report that would contain certain information 
about the revenues earned by the NRSRO for providing products and 
services to any obligor, issuer, underwriter, sponsor, and subscriber 
that paid the NRSRO to issue or maintain the credit rating. In order to 
generate the report as required by proposed paragraph (a)(1) of Rule 
17g-7, the NRSRO would have to perform two calculations and identify 
any outstanding credit ratings at the end of the fiscal year.
    As proposed under new Rule 17g-7, an NRSRO would be required to 
perform a calculation to state the percentage of net revenue earned by 
the NRSRO from providing services to the entity that is derived from 
services other than credit ratings attributable to each person that 
paid the NRSRO for the issuance or maintenance of a credit rating.
    The second calculation that the NRSRO would be required to perform 
to generate the report once a year as described in paragraph (a)(1)(i) 
of proposed Rule 17g-7 would require the NRSRO to derive and state the 
relative standing of the entity as a contributor of revenues to the 
NRSRO as compared to other entities that contribute revenue to the 
NRSRO. In particular, the NRSRO would need to identify which of the 
following cohorts of contributors to the annual net revenue of the 
NRSRO the entity is included in: top 10%, top 25%, top 50%, bottom 50%, 
bottom 25%. Finally, once a year an NRSRO would also be required to 
identify all outstanding credit ratings paid for by the person, which 
the NRSRO must identify by name of obligor, security, or money market 
instrument and, as applicable, CIK number, CUSIP, or ISIN.
    The Commission also notes that paragraph (a)(2) of proposed Rule 
17g-7 would exempt an NRSRO from publishing the reports if, as of the 
end of the fiscal year, the NRSRO had no credit ratings outstanding 
that the NRSRO issued or maintained as a result of a person paying the 
NRSRO for the issuance or maintenance of the credit ratings.\155\
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    \155\ For purposes of this collection of information, the 
Commission has determined that it would preliminarily use 30 
respondents in calculating the burden estimates. While some 
subscriber-based NRSROs would be exempt from new Rule 17g-7, the 
Commission has preliminarily determined to include all 30 
respondents because if a subscriber-paid NRSRO was specifically 
requested to issue a rating, the NRSRO would no longer be exempt 
from Rule 17g-7. Therefore, the Commission preliminarily believes 
that this approach would result in an appropriate PRA estimate for 
new Rule 17g-7.
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    For purposes of the PRA, based on staff experience, the Commission 
estimates that it would take an NRSRO approximately 100 hours on a one-
time basis to develop the calculations necessary to generate the 
percents required under the report under proposed Rule 17g-7; to 
populate the proposed report with the required data; and to develop and 
draft the form report. Additionally, the Commission is basing this one-
time hour burden estimate on the Commission's experience with, and 
burden estimates for, Rules 17g-1 through 17g-6, given that the NRSRO 
rules have been in effect for over two years.\156\ More specifically, 
the Commission notes that the current one-time hour burden estimates 
under the PRA for an NRSRO to file a Form NRSRO is 400 hours, and to 
file an amendment to Form NRSRO is 25 hours.\157\
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    \156\ See generally, June 2007 Adopting Release.
    \157\ June 2007 Adopting Release, 72 FR at 33609; see also 
February 2009 Adopting Release, 74 FR at 6470.
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    The Commission preliminarily believes that the report to be 
required under proposed Rule 17g-7 would be more complex and 
comprehensive to complete than a typical amendment to Form NRSRO 
because the new proposed rule would require an NRSRO to calculate 
percents for every person that paid the NRSRO for the issuance or 
maintenance of a credit rating. In contrast, however, the Commission 
preliminarily does not believe that the one-time hour burden to comply 
with the new Rule 17g-7 would be as extensive and time consuming as the 
time necessary to complete the initial Form NRSRO. Therefore, the 
Commission preliminarily believes that the estimate of a one-time 
burden of 100 hours per respondent is conservative and reasonable given 
the significant variance in size between the largest NRSROs and the 
smallest NRSROs. Thus, based on staff experience, the Commission 
preliminarily estimates that the aggregate initial one-time hour burden 
to complete the report required by proposed Rule 17g-7 would be 3,000 
hours for 30 NRSROs.\158\
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    \158\ 100 hours x 30 NRSROs = 3,000 hours.
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    In addition to the one-time hour burden, proposed new Rule 17g-7 
also would result in an annual hour burden for an NRSRO to generate the 
percents required under the proposed report and to populate the 
proposed report with the required data once a year. The Commission 
notes that an NRSRO would have already developed the equations 
necessary to generate the percents in order to comply with the new Rule 
17g-7 in the first year. Additionally, the Commission believes that 
once an NRSRO complies with Rule 17g-7 in the first year, that 
preparation of the new annual report would become more routine. 
Therefore, based on staff experience, the Commission estimates that it 
would take an NRSRO approximately 50 hours per year to generate the 
percents required under the proposed report, as well as to generate the 
report itself.\159\ Thus, the Commission preliminarily estimates that 
this would result in a total annual hour burden of 1,500 hours for 30 
NRSROs.\160\
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    \159\ The Commission based this estimate, in part, on the number 
of estimated hours it would take an NRSRO to file an amendment to 
Form NRSRO of 25 hours. The Commission, however, preliminarily 
believes that it would take an NRSRO substantially more time to 
generate the information once a year to complete the proposed report 
under proposed Rule 17g-7. Therefore, the Commission preliminarily 
estimates that the average time necessary to complete the report 
under proposed Rule 17g-7 would be more comparable to the time it 
would take an NRSRO to file 2 amendments to Form NRSRO, or 50 hours 
(2 x 25 hours).
    \160\ 50 hours x 30 NRSROs = 1,500 hours.
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    Proposed Rule 17g-7 also would require an NRSRO to make publicly 
available on its Internet Web site the report required under paragraph

[[Page 63891]]

(a)(1).\161\ The Commission estimates that it would take an NRSRO 
approximately 30 hours to disclose the initial information in its Web 
site for a total one-time burden of 900 hours,\162\ and thereafter 10 
hours per year to disclose updated information for a total annual 
burden of 300 hours.\163\ This one-time hour burden is estimated in 
part based on the current one-time and annual burden hours for an NRSRO 
to publicly disclose its Form NRSRO.\164\ Accordingly, the Commission 
estimates that implementation of proposed new Rule 17g-7 would result 
in a total one-time hour burden of 3,900 \165\ hours and a total annual 
hour burden of 1,800 hours.\166\
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    \161\ See proposed Rule 17g-7(a)(1).
    \162\ 30 hours x 30 NRSROs = 900 hours.
    \163\ 30 NRSROs x 10 hours = 300 hours.
    \164\ June 2007 Adopting Release, 71 FR at 33609.
    \165\ 3,000 hours + 900 hours = 3,900 total hours for one-time 
burden.
    \166\ 1,500 hours + 300 hours = 1,800 total annual hours.
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    The Commission also believes that an NRSRO may need to purchase 
and/or modify its software and operating systems in order to generate 
and publish the information proposed to be required in the report in 
proposed new Rule 17g-7. The Commission estimates that the cost of any 
software incurred in connection with its systems modifications would 
vary based on the size and complexity of the NRSRO. The Commission 
estimates that some NRSROs would not need such software because they 
may already have such systems in place to generate the proposed report, 
or given their small size, other NRSROs may find the purchase of 
additional software unnecessary. The Commission preliminarily believes 
that an NRSRO would be able to generate and compile the information for 
the reports using the NRSRO's own personnel. Therefore, based on staff 
experience, the Commission estimates that the average cost of software 
across all NRSROs would be approximately $4,000 per firm, with an 
aggregate one-time cost to the industry of $120,000.\167\
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    \167\ $4,000 x 30 NRSROs = $120,000. As a means of comparison, 
the Commission notes that the average cost of recordkeeping software 
across all NRSROs under Rule 17g-2 is estimated to be $1,800 per 
respondent. See February 2009 Adopting Release, 74 FR, at 6472. The 
Commission preliminarily believes that the one-time cost of 
purchasing software in order to comply with proposed new Rule 17g-7 
would be greater than $1,800 because the proposed rule would require 
the publication of two new reports not previously required by any 
rule.
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    The Commission generally requests comment on all aspects of these 
burden estimates for proposed Rule 17g-7. In addition, the Commission 
requests specific comment on the following items related to these 
burden estimates:
     Would there be additional systems costs or other costs 
involved in developing this collection of information?
     Given that paragraph (a)(2) of proposed Rule 17g-7 would 
exempt an NRSRO from publishing the reports if, as of the end of the 
fiscal year, the NRSRO had no credit ratings outstanding that the NRSRO 
issued or maintained as a result of a person paying the NRSRO for the 
issuance or maintenance of the credit ratings, should the Commission 
revise the number of respondents for this proposed new collection of 
information? If so, what should the number be?

    Commenters should provide specific data and analysis to support any 
comments they submit with respect to these estimates.

E. Collection of Information Is Mandatory

    The collection of information obligations imposed by the proposed 
rule amendments and the proposed new rule would be mandatory for credit 
rating agencies that are registered with the Commission as NRSROs. Such 
registration is voluntary.\168\
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    \168\ See Section 15E of the Exchange Act (15 U.S.C. 78o-7).
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F. Confidentiality

    The information collected under the proposed amendments to Rule 
17g-3 would be generated from the internal records of the NRSRO and 
would be furnished to the Commission on a confidential basis, to the 
extent permitted by law.\169\ The proposed disclosures that would be 
required under Exhibit 6 to Form NRSRO and proposed Rule 17g-7 would be 
public.
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    \169\ 15 U.S.C. 78o-7(k). An NRSRO can request that the 
Commission keep this information confidential. See Section 24 of the 
Exchange Act (15 U.S.C. 78x), 17 CFR 240.24b-2, 17 CFR 200.80 and 17 
CFR 200.83.
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G. Record Retention Period

    The records required under the proposed amendments to Rules 17g-3 
and 17g-7, as well as Exhibit 6 to Form NRSRO would need to be retained 
by the NRSRO for at least three years.\170\
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    \170\ 17 CFR 240.17g-2(c).
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H. Request for Comment

    The Commission requests pursuant to 44 U.S.C. 3306(c)(2)(B) 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 Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090, and refer to File No. S7-28-09. 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. S7-28-09, and be submitted to the Securities and Exchange 
Commission, Records Management Office, 100 F Street, NE., Washington, 
DC 20549.

IX. Costs and Benefits of the Proposed Rules

    The Commission is sensitive to the costs and benefits that result 
from its rules. The Commission has identified certain costs and 
benefits of the proposed rule amendments and proposed new rule and 
requests comment on all aspects of this cost-benefit analysis, 
including identification and assessment of any costs and benefits not 
discussed in the analysis.\171\ The

[[Page 63892]]

Commission seeks comment and data on the value of the benefits 
identified. The Commission also seeks comments on the accuracy of its 
cost estimates in each section of this cost-benefit analysis, and 
requests those commenters to provide data, 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 these 
proposed rule amendments and the new proposed rule.
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    \171\ For 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 2008, 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. The salary costs derived from the 
report and referenced in this cost benefit section are modified to 
account for an 1,800-hour work year and multiplied by 5.35 to 
account for bonuses, firm size, employee benefits and overhead. The 
Commission used comparable estimates in adopting final rules 
implementing the Rating Agency Act in 2007 and additional rules in 
2009, requested comments on such estimates, and received no comments 
in response to these requests. See June 2007 Adopting Release, note 
576, and February 2009 Adopting Release, note 179. Hereinafter, 
references to data derived from the report as modified in the manner 
described above will be cited as ``SIFMA 2008 Report as Modified.''
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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.\172\ 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.'' \173\
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    \172\ See ``Senate Report,'' p. 2.
    \173\ Id., p. 7.
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    The Commission is proposing to amend Rule 17g-3 to require an NRSRO 
to furnish the Commission with an additional unaudited report 
containing a description of the steps taken by the designated 
compliance officer during the fiscal year to administer the policies 
and procedures that are required to be established pursuant to 
paragraphs (g) and (h) of Section 15E of the Exchange Act (management 
of conflicts of interest and prevention of the misuse of material 
nonpublic information); and ensure compliance with the securities laws 
and rules and regulations thereunder, including those promulgated by 
the Commission pursuant to Section 15E of the Exchange Act.
    The Commission's staff understands that the designated compliance 
officer of some NRSROs may, in some cases, not be fulfilling the 
compliance officer's statutorily mandated duties, as prescribed by 
Section 15E(j) of the Exchange Act.\174\ Further, during examinations 
in 2008 of three of the largest NRSROs, Commission staff also 
identified issues with respect to each NRSRO's policies and procedures 
and improvements that could be made.\175\ In light of these concerns 
and the importance of an effective NRSRO compliance program, the 
Commission is proposing to amend Rule 17g-3 by adding paragraph (a)(7), 
which would require an NRSRO to furnish to the Commission an additional 
unaudited annual report.
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    \174\ 15 U.S.C. 78o-7(j).
    \175\ See generally, Summary Report of Issues Identified in the 
Commission Staff's Examinations of Select Credit Rating Agencies 
(July 8, 2008). The report is available on the Commission's Internet 
Web site, located at http://www.sec.gov/news/studies/2008/
craexamination070808.pdf.
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    The amendments to proposed new paragraph (a)(7) of Rule 17g-3 would 
also provide that the report must include: (1) A description of any 
compliance reviews of the activities of the NRSRO; (2) the number of 
material compliance matters identified during each review of the 
activities of the NRSRO and a brief description of each such finding; 
(3) a description of any remediation measures implemented to address 
material compliance matters identified during the reviews of the 
activities of the NRSRO; and (4) a description of the persons within 
the NRSRO who were advised of the results of the reviews.\176\
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    \176\ See proposed Rule 17g-3(a)(7)(ii).
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    The Commission believes that the proposed amendment to Rule 17g-3 
would further address concerns about the integrity of the ratings 
process by establishing a discipline under which the NRSRO's designated 
compliance officer would need to report to the Commission the steps 
taken by the compliance officer to fulfill the officer's 
responsibilities as set forth in Section 15E(j) of the Exchange Act. 
The act of reporting these steps is designed to promote the active 
engagement of the designated compliance officer in reviewing an NRSRO's 
compliance with internal policies and procedures. The reports also 
could strengthen the Commission's oversight of NRSROs by highlighting 
possible problem areas in an NRSRO's rating processes and providing an 
additional tool for the Commission to monitor how the NRSRO's 
designated compliance officer is fulfilling the responsibilities 
prescribed in Section 15E of the Exchange Act. For example, if an NRSRO 
reports an unusual level of significant compliance exceptions in a 
particular area, the Commission examination staff could focus their 
next review of the NRSRO in that particular area. Alternatively, if a 
report indicates no problems, but a subsequent staff examination 
reveals significant compliance exceptions, this could be brought to the 
attention of the NRSRO's management to be used to assess whether the 
designated compliance officer is adequately fulfilling the officer's 
statutory duties.
    As stated above, the proposed amendment to Rule 17g-3 also would 
set forth specific items to be included in the proposed new report 
under Rule 17g-3(a)(7). The first item the Commission is proposing be 
included in the report is a description of any compliance reviews of 
the activities of the NRSRO.\177\ The Commission intends that the 
designated compliance officer would describe all such reviews conducted 
during the most recently ended fiscal year. This would provide the 
Commission with an understanding of the scope of the designated 
compliance officer's reviews of the NRSRO's activities. The second item 
the Commission is proposing be included in the report is the number of 
material compliance matters identified during each review of the 
activities of the NRSRO and a brief description of each such finding. 
The Commission preliminarily intends a ``material compliance matter'' 
to be the discovery that the NRSRO or a person within the NRSRO had 
violated the securities laws \178\ or the rules thereunder or the 
policies, procedures, or methodologies established, maintained and 
enforced by the NRSRO to, for example, determine credit ratings, 
prevent the misuse of material non-public information, manage conflicts 
of interest, and comply with the Commission's NRSRO rules.\179\ The 
proposed requirement to report a material compliance matter would be 
designed to alert the Commission to matters identified by the 
designated compliance officer that could raise questions about the 
integrity of the NRSRO's activities and operations. It also could 
assist the Commission's oversight of NRSROs to the extent a reported 
material compliance matter is one that could arise in other NRSROs 
because, for example, it relates to a new

[[Page 63893]]

type of debt instrument that is being rated by more than one NRSRO or 
involves interactions with an issuer that hired several NRSROs to rate 
its securities.
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    \177\ See proposed Rule 17g-3(a)(7)(ii)(A).
    \178\ The term ``securities laws'' is defined in Section 
3(a)(47) of the Exchange Act.
    \179\ See e.g., 17 CFR 270.38a-1(e)(2); see also supra note 37.
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    The third item the Commission is proposing be included in the 
report is a description of any remediation measures implemented to 
address material compliance matters identified during the reviews of 
the activities of the NRSRO.\180\ The reporting of these measures could 
assist the Commission in evaluating the risk of such re-occurrences. It 
also could provide the Commission with potential ``best practices'' for 
mitigating the risk of future material compliance matters, which could 
assist the Commission in its overall supervision of NRSROs. Finally, 
the fourth item the Commission is proposing be included in the report 
is a description of the persons within the NRSRO who were advised of 
the results of the reviews. The information with respect to those 
persons who were advised of the results of reviews is designed to 
provide the Commission with an understanding of how the NRSRO responds 
to material compliance matters and the role and structure of the 
compliance program within the NRSRO. For example, it would indicate 
whether the compliance officer reported the matters to the NRSRO's 
board or senior management or only to the business unit that underwent 
the compliance review. This is designed to promote the appropriate 
escalation of compliance issues to the management of the NRSRO. The 
Commission also believes that this proposed information would be a 
useful tool for examiners to improve the focus of examination resources 
of a particular NRSRO on practices related to material compliance 
matters reported and the possible selection of NRSROs for examination.
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    \180\ See proposed Rule 17g-3(a)(7)(ii)(C).
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    In summary, as stated above, the amendments to Rule 17g-3 related 
to the new unaudited annual report related to the NRSRO's compliance 
function could serve to improve the NRSRO's compliance function. This 
improved compliance function, in turn, could improve the integrity of 
NRSROs' ratings processes.
    The Commission also believes that the proposed new report would 
facilitate improvements to an NRSRO's compliance program in light of 
the concerns that the designated compliance officer of some NRSROs may, 
in some cases, not be fulfilling the compliance officer's statutorily 
mandated duties as prescribed in Section 15E(j) of the Exchange Act. 
The proposed rule amendments also would further enhance the 
Commission's oversight of NRSROs by providing the Commission staff an 
additional resource with which to evaluate the performance of the 
designated compliance officers in carrying out their statutory 
responsibilities prescribed in Section 15E(j) of the Exchange Act. In 
addition to improving the quality of credit ratings, increased 
oversight of NRSROs could increase the accountability of an NRSRO to 
its subscribers, investors, and other persons who rely on the 
credibility and objectivity of a credit rating in making an investment 
decision.
    Finally, the Commission believes that the proposed amendments to 
Rule 17g-3 would complement the Commission's examination program for 
NRSROs, and that the proposed amendments would enhance the Commission's 
ability to protect investors. The requirement to furnish the Commission 
with an annual report related to an NRSRO's compliance program would 
serve to help facilitate the examination staff's efforts to conduct 
each NRSRO examination in an organized and efficient manner and thus to 
allocate resources to maximize investor protection. The Commission 
notes that the proposed report would be one of numerous factors the 
Commission's exam staff may use to determine the focus of a particular 
exam.
    The proposed amendments to the Instructions to Exhibit 6 to Form 
NRSRO would require an applicant/NRSRO to furnish the Commission with 
information regarding the revenues an NRSRO receives from major clients 
and from services other than determining credit ratings. The proposed 
new information is designed to assist users of NRSRO credit ratings in 
assessing the potential magnitude of the conflicts of interest inherent 
in a given NRSRO's business operations. In particular, by disclosing 
information about revenues received from major clients and other 
services, users of credit ratings would have access to more information 
about conflicts of interest that may exist when the NRSRO is being paid 
to determine credit ratings and is offering other services to persons 
who pay for ratings. The Commission believes these enhanced disclosures 
would allow users of credit ratings to more effectively assess the 
conflicts of interest affecting an NRSRO. Although the disclosures an 
NRSRO provides on the Form NRSRO, including the proposed additional 
disclosures to Exhibit 6 to Form NRSRO cannot substitute for an 
investor's due diligence in evaluating a credit rating and the 
integrity of an NRSRO, the Commission believes the proposed amendment 
to Exhibit 6 to Form NRSRO would aid investors by providing additional 
publicly accessible information about an NRSRO.
    The first proposed new disclosure in Exhibit 6 would require that 
an applicant/NRSRO disclose the percentage of total net revenue 
attributable to the 20 largest users of credit rating services of the 
applicant/NRSRO. The Commission preliminarily believes this disclosure 
would assist investors and other users of credit ratings by providing 
them with an understanding of the degree to which revenues earned by 
the NRSRO come from a concentrated base of customers. This could be 
useful in understanding the conflicts inherent in the NRSRO's business 
given that an increase in concentration would result in an increase in 
the potential risk that the customers could use their contribution to 
the NRSRO's revenues to influence the objectivity of its credit 
ratings. Making the degree of this concentration transparent would 
allow investors and market participants to take this potential risk 
into account when considering the accuracy and reliability of the 
NRSRO's credit ratings. This, in turn, could improve the integrity of 
NRSROs. Increased confidence in the integrity of NRSROs and the credit 
ratings they issue could promote participation in the securities 
markets. In addition, the Commission believes that the proposed 
disclosures would allow investors and market participants to more 
effectively compare the concentrations across all NRSROs.
    The second proposed new disclosure would require the applicant/
NRSRO to disclose the percentage of total revenue attributable to other 
services and products of the applicant/NRSRO. The Commission 
preliminarily believes this information would be useful to investors 
and other users of credit ratings because it would provide scale to the 
amount of revenues an NRSRO earns from providing services other than 
credit ratings. An NRSRO that obtains substantial revenues from other 
services may be inclined to favor a client that purchases those other 
services when determining credit ratings solicited by the client. 
Consequently, creating greater transparency about the revenues 
generated from other services could assist investors and other users of 
credit ratings in assessing the potential risks to the NRSRO's 
objectivity.
    Proposed Rule 17g-7 would require an NRSRO to make publicly 
available on its Internet Web site a consolidated

[[Page 63894]]

report, which would need to be updated annually, containing information 
about the revenues earned by the NRSRO as a result of providing 
services and products to persons that paid the NRSRO to issue or 
maintain a credit rating. The Commission preliminarily believes that 
proposed Rule 17g-7 would provide users of credit ratings with 
information about the potential risk that arises when an NRSRO is paid 
to determine a credit rating for a specific obligor, security, or money 
market instrument--the risk that the revenue generated from the person 
paying the NRSRO to determine a credit rating could influence the 
NRSRO's objectivity if the NRSRO feels the need to curry favor from 
that person with a corresponding negative impact on the quality and 
accuracy of the credit rating. Simply put, it could cause the credit 
rating agency to determine a higher than warranted credit rating, 
which, as a result, does not accurately reflect the NRSRO's true view 
of the level of credit risk inherent in the obligor, security, or money 
market instrument. Providing users of credit ratings with the 
information on revenue generated from other services provided to the 
person paying the NRSRO for the issuance or maintenance of the credit 
rating and on the relative standing of the entity as a contributor of 
revenue to the NRSRO would enable them to better assess the degree that 
a particular rating may be subject to this risk.
    In addition, proposed Rule 17g-7 could have the benefit of helping 
to mitigate the potential ability an obligor, issuer, underwriter, 
sponsor, and subscriber as a large consumer of the services and 
products of the NRSRO from using its status to exert undue influence on 
the NRSRO. Specifically, by making the potential conflict more 
transparent to the marketplace, users of credit ratings, market 
participants, and others could assess how credit ratings solicited by 
large revenue providers are handled by the NRSRO, particularly with 
respect to NRSROs that make their ratings publicly available for free.
    As stated above, the Commission also believes that the reports that 
would be required to be published by proposed Rule 17g-7 would create 
greater transparency about the revenues generated from other services 
and could assist investors and other users of credit ratings in 
assessing the potential risks to the NRSRO's objectivity by providing 
investors and other users of credit ratings with information to assess 
the degree of risk that a credit rating may be compromised by the undue 
influence of the person that paid for the issuance or maintenance of 
the credit rating. The Commission generally requests comment on all 
aspects of the proposed new rule. 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 of empirical data that could be used for such 
metrics?
     With respect to Rule 17g-7, to what use do users of credit 
ratings anticipate putting the proposed disclosures? To what extent, if 
any, might these disclosures create misimpressions as to the existence 
of potential conflicts? Are the proposed disclosures in proposed Rule 
17g-7 granular enough to be of value to users of credit ratings?

Commenters should provide specific data and analysis to support any 
comments they submit with respect to the benefits discussed above and 
any other benefits identified by the commenters.

B. Costs

    The Commission recognizes that there are potential costs that would 
result if the Commission adopts the proposed rule amendments to Rule 
17g-3,\181\ Exhibit 6 to Form NRSRO and proposed new Rule 17g-7. The 
Commission preliminarily believes that potential costs incurred by an 
NRSRO to comply 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. Any costs 
incurred would also vary depending on which classes of credit ratings 
an NRSRO issues and how many outstanding ratings it has in each class. 
For these reasons, the cost estimates represent the average cost across 
all NRSROs.
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    \181\ See proposed Rule 17g-3(a)(7).
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1. Proposed Amendments to Rule 17g-3
    Rule 17g-3 requires an NRSRO to furnish audited annual financial 
statements to the Commission, including certain specified 
schedules.\182\ The Commission is proposing to amend Rule 17g-3 to 
require an NRSRO to furnish the Commission with an additional unaudited 
report containing a description of the steps taken by the designated 
compliance officer during the fiscal year to administer the policies 
and procedures that are required to be established pursuant to 
paragraphs (g) and (h) of Section 15E of the Exchange Act; and ensure 
compliance with the securities laws and rules and regulations 
thereunder, including those promulgated by the Commission pursuant to 
Section 15E of the Exchange Act. The proposed amendments to Rule 17g-3 
also would provide that the report must include: (1) A description of 
any compliance reviews of the activities of the NRSRO; (2) the number 
of material compliance matters identified during each review of the 
activities of the NRSRO and a brief description of each such matter; 
(3) a description of any remediation measures implemented to address 
material compliance matters identified during the reviews of the 
activities of the NRSRO; and (4) a description of the persons within 
the NRSRO who were advised of the results of the reviews.\183\
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    \182\ 17 CFR 240.17g-3.
    \183\ See proposed Rule 17g-3(a)(7)(ii).
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    The Commission believes that the costs to NRSROs to comply with the 
proposed amendment to Rule 17g-3 would vary depending on the size and 
complexity of the NRSRO, as well as the size of its compliance 
programs. Larger NRSROs with comprehensive compliance programs may 
already periodically review portions of their compliance programs. 
These larger NRSROs may incur a cost associated with transforming their 
periodic reviews into more systematic reviews and developing the report 
to be required under Rule 17g-3. While smaller NRSROs all have 
designated compliance officers, the Commission preliminarily believes, 
based on issues brought to the staff's attention, that some NRSROs may 
have less robust compliance programs than others. The Commission 
believes, however, that the information to be included in the proposed 
report under the amendments to Rule 17g-3 for smaller NRSROs would be 
less extensive, because smaller NRSROs may have less complex 
organizational structures, fewer employees and fewer sources of revenue 
than larger NRSROs which may be part of a complex global organization 
with thousands of employees. Therefore, it may be less costly than for 
larger NRSROs.
    Further, the Commission notes that the proposed report would 
explicitly require the NRSRO to describe the steps taken by the 
designated compliance officer during the fiscal year to administer the 
policies and procedures that are required to be established pursuant to 
paragraphs (g) and (h) of

[[Page 63895]]

Section 15E of the Exchange Act; and ensure compliance with the 
securities laws and rules and regulations thereunder. Since these are 
statutorily mandated responsibilities of the designated compliance 
officer under Section 15E(j) of the Exchange Act, the Commission notes 
that certain costs are already being incurred by the NRSRO and 
therefore are not direct costs of the proposed amendments to Rule 17g-
3. The Commission has preliminarily quantified certain costs with 
respect to the amendments to Rule 17g-3 which are discussed in detail 
below.
    As discussed with respect to the PRA, the Commission preliminarily 
believes that the estimated hour burden under the proposed amendments 
to Rule 17a-3 would include the time it would take to compile 
information to draft the report and the preparation and filing of the 
report itself. In addition, this one-time hour burden estimate also 
includes the time it would take to identify and describe material 
compliance matters, any remediation and the persons advised of the 
results of the reviews. Consequently, the Commission also based this 
estimate, in part, on the average estimated number of hours it would 
currently take an NRSRO to complete one annual report under current 
Rule 17g-3 (i.e., approximately 30 hours).\184\ Consequently, as 
discussed above with respect to the PRA, the Commission estimates that 
the average amount of time across all NRSROs to prepare the additional 
report proposed to be required under the rule would be approximately 
900 hours \185\ at a total aggregate annual cost to the industry of 
$232,200.\186\
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    \184\ 15 U.S.C. 78o-7(j). Under this provision of the statute, 
an NRSRO must ``designate an individual responsible for 
administering the policies and procedures that are required to be 
established pursuant to [Sections 15E(g) and (h) of the Exchange Act 
(15 U.S.C. 78o-7(g) and (h))], and for ensuring compliance with the 
securities laws and rules and regulations thereunder, including 
those promulgated by the Commission pursuant to [Section 15E of the 
Exchange Act].'' Id.
    \185\ 30 hours x 30 NRSROs = 900 hours.
    \186\ $7,740 x 30 NRSROs = $232,200.
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    Given the potentially sensitive nature of the proposed report, the 
Commission also preliminarily believes that an NRSRO would likely 
engage outside counsel to assist it in the process of drafting and 
reviewing the proposed report under Rule 17g-3 on a one-time basis. The 
Commission estimates that the time an outside attorney would spend on 
this work would depend on the size and complexity of the NRSRO. 
Therefore, the Commission estimates that, on average, an outside 
counsel would spend approximately 20 hours assisting an NRSRO and its 
designated compliance officer in drafting and reviewing the proposed 
report on a one-time basis for an aggregate burden to the industry of 
600 hours.\187\ Based on industry sources, the Commission estimates 
that the cost of an outside counsel would be approximately $400 per 
hour. For these reasons, the Commission estimates that the average one-
time cost to an NRSRO would be approximately $8,000 \188\ and the one-
time cost to the industry would be approximately $240,000.\189\
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    \187\ 30 NRSROs x 20 hours = 600 hours.
    \188\ $400 per hour x 20 hours = $8,000.
    \189\ $8,000 x 30 NRSROs = $240,000.
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    The Commission generally requests comment on all aspects of these 
cost estimates for the proposed amendments to Rule 17g-3. In addition, 
the Commission requests specific comment on the following items related 
to these cost estimates:
     Would an NRSRO incur any additional costs to employ an 
outside counsel on an annual basis to review the proposed 17g-3 report, 
rather than just on a one-time basis?
     Would the cost incurred by an NRSRO be less than those 
estimated because the designated compliance officer is already 
performing many of the responsibilities required to be described in the 
proposed report, as well as drafting compliance reports?
     What other costs are NRSROs likely to incur?
     Are the proposals likely to impose costs on other market 
participants, including persons who use credit ratings to make 
investment decisions or for regulatory purposes, and persons who 
purchase services and products from NRSROs?

Commenters should provide specific data and analysis to support any 
comments they submit with respect to the costs discussed above and any 
other costs identified by commenters.
2. Proposed Amendments to Form NRSRO
    The proposed amendments to the Instructions to Exhibit 6 of Form 
NRSRO would require an applicant/NRSRO to furnish the Commission with 
information regarding the revenues an NRSRO receives from major clients 
and from products and services other than determining credit ratings. 
In particular, the additional disclosures to Exhibit 6 would require an 
applicant/NRSRO to provide the following disclosures, as applicable:
     The percentage of the applicant/NRSRO's net revenue 
attributable to the 20 largest users of credit rating services of the 
applicant/NRSRO; and
     The percentage of the applicant/NRSRO's revenue 
attributable to services and products other than credit rating services 
of the applicant/NRSRO.
    The Commission believes that the costs to NRSROs to comply with the 
proposed amendment to Exhibit 6 to Form NRSRO would vary depending on 
the size and complexity of the NRSRO. Larger NRSROs may have more 
customers and complex revenue streams, while smaller NRSROs may be less 
complex in terms of sources of revenue or numbers of customers. 
Consequently, as discussed above with respect to the PRA, the 
Commission estimates that the average time necessary for an applicant 
or NRSRO to gather the information on a one-time basis in order to 
complete the additional disclosures proposed to be required by the 
amendments to Exhibit 6 to Form NRSRO would be one-time hour burden to 
the industry of 750 hours.\190\ For these reasons, the Commission 
estimates that the average one-time cost to an NRSRO would be $6,520 
\191\ and the total aggregate one-time cost to the industry would be 
$195,600.\192\
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    \190\ 30 NRSROs x 25 hours = 750 hours.
    \191\ The Commission estimates that these responsibilities would 
be split between a Financial Reporting Manager (10 hours) and a 
Compliance Manager (15 hours). The SIA Management Report 2008 
indicates that the average hourly cost for a Financial Reporting 
Manager is $265 and for a Compliance Manager is $258. Therefore, the 
average one-time cost would be $6,520 [(10 hours x $265 per hour) + 
(15 hours x $258 per hour)].
    \192\ $6,520 x 30 NRSROs = $195,600.
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    In addition, with respect to the PRA, the Commission estimated that 
the average annual burden to complete an annual certification under 
Rule 17g-1(f) would increase 60 hours for all NRSROs.\193\ For these 
reasons, the Commission estimates that the average annual cost with 
respect to the proposed amendment to an NRSRO would be $516 \194\ and 
the total aggregate annual cost to the industry would be $15,480.\195\
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    \193\ 2 hours x 30 NRSROs = 60 hours.
    \194\ The Commission estimates that these responsibilities would 
be performed by a Compliance Manager. The SIA Management Report 2008 
indicates that the average hourly cost for a Compliance Manager is 
$258. Therefore, the average annual cost to an NRSRO would be $516 
(2 hours x $258).
    \195\ $516 x 30 NRSROs = $15,480.
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    The Commission also notes that included in the current estimated 
costs for the Form NRSRO are the costs related to the engagement of 
outside counsel to assist in the process of completing and submitting a 
Form NRSRO.\196\ In the June 2007 Proposing Release, the Commission 
estimated that the amount of time an outside attorney

[[Page 63896]]

will spend on this work will depend on the size and complexity of the 
NRSRO. Therefore, the Commission estimated that, on average, an outside 
counsel will spend approximately 40 hours assisting an NRSRO in 
preparing its application for registration. The Commission further 
estimated that the average hourly cost for an outside counsel will be 
approximately $400 per hour. For these reasons, the Commission 
estimated that the average one-time cost to an NRSRO will be $16,000 
and the one-time cost to the industry will be $480,000.\197\ With 
respect to the proposed amendments to Exhibit 6 to Form NRSRO, the 
Commission estimates that the cost to outside counsel to review a Form 
NRSRO containing the additional disclosures to Exhibit 6 to Form NRSRO 
would already be included within the original cost estimate for Rule 
17g-1 and Form NRSRO \198\ or that such costs would be de minimis.\199\
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    \196\ June 2007 Adopting Release, 72 FR at 33614.
    \197\ Id.
    \198\ Id.
    \199\ The Commission believes that the review of the additional 
disclosures would overlap with the review of similar financial 
information already required to be disclosed in Exhibits 10 and 12 
in Form NRSRO.
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    As discussed above with respect to the PRA, the Commission 
preliminarily believes that an applicant/NRSRO would incur only limited 
internal costs to modify its systems to generate and disclose the 
proposed additional disclosures in Exhibit 6 to Form NRSRO because an 
applicant/NRSRO is already required to generate similar financial 
information in other parts of Form NRSRO and certain financial reports 
required under Rule 17g-3.
    The Commission generally requests comment on all aspects of these 
cost estimates for the proposed amendment to Form NRSRO. In addition, 
the Commission requests specific comment on the following items related 
to these cost estimates:
     Whether the proposals would impose costs on other market 
participants, including persons who use credit ratings to make 
investment decisions or for regulatory purposes, and persons who 
purchase services and products from NRSROs?
     Would the one-time cost to engage an outside counsel to 
assist in the preparation of the Form NRSRO increase as a result of the 
amendments to Exhibit 6 to Form NRSRO?
     Would the proposed disclosures in Exhibit 6 to Form NRSRO 
have any effect on the willingness of persons to pay for ratings as 
well as other credit rating services? What are the risks that investors 
and other users of credit ratings would be confused as to the 
significance of the revenue-based conflicts of interest being disclosed 
as a result of the proposed amendments to Exhibit 6 to Form NRSRO?

    Commenters should provide specific data and analysis to support any 
comments they submit with respect to the costs discussed above and any 
other costs identified by commenters.
3. Proposed Rule 17g-7
    Proposed Rule 17g-7 would require an NRSRO to make publicly 
available on its Internet Web site a consolidated report containing 
information about the revenues earned by the NRSRO as a result of 
providing services and products to persons that paid the NRSRO to issue 
or maintain a credit rating. This report would need to be updated 
annually. As discussed above with respect to PRA, the Commission 
estimates that it would take an NRSRO approximately 100 hours to 
develop the calculations necessary to generate the percents required by 
the report under proposed Rule 17g-7; to populate the proposed report 
with the required data; and to develop and draft the form report. The 
Commission estimates that the proposed new Rule 17g-7 would impose a 
total one-time hour burden of 3,000 hours for 30 NRSROs to prepare the 
report. The Commission estimates that the average one-time cost to an 
NRSRO would be $23,500 \200\ and the total aggregate one-time cost for 
all NRSROs would be $705,000.\201\
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    \200\ The Commission estimates an NRSRO would have a Senior 
Accountant and a Senior Programmer working together to generate the 
initial calculations and report and that the two senior officers 
would divide the estimated 100 hours equally. The SIFMA 2008 Report 
as Modified indicates that the average hourly cost for a Senior 
Accountant is $178 and that the average hourly cost for a Senior 
Programmer is $292. Therefore, the average one-time cost to an NRSRO 
would be $23,500 (50 hours x $178) + (50 hours x $292).
    \201\ 30 NRSROs x $23,500 = $705,000.
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    As discussed above with respect to the PRA, the Commission also 
estimates that after the first year it would take NRSRO 50 hours per 
year to generate the percents required under the proposed report and to 
populate the proposed report with the required data once a year. 
Therefore, the Commission estimates that the average annual cost to an 
NRSRO would be $3,150 \202\ and the total aggregate annual cost to the 
industry would be $94,500 to generate the proposed report once a 
year.\203\
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    \202\ The Commission estimates that after the equations and 
initial report has been developed that an NRSRO would have a 
Compliance Clerk perform the necessary tasks to generate the annual 
report. The SIFMA 2008 Office Salaries Report as Modified indicates 
that the average hourly cost for a Compliance Clerk is $63. 
Therefore, the average yearly cost to an NRSRO would be $3,150 (50 
hours x $63).
    \203\ $3,150 x 30 NRSROs = $94,500.
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    Proposed Rule 17g-7 would also require an NRSRO to make publicly 
available on its Internet Web site the report required under paragraph 
(a)(1). As discussed with respect to the PRA, the Commission estimates 
that it would take an NRSRO approximately 30 hours to disclose the 
initial information in its Web site for a total one-time burden of 900 
hours, and thereafter 10 hours per year to disclose updated information 
for an annual hour burden of 300 hours. The Commission estimates that 
an NRSRO would incur an average one-time cost of $8,760 and an average 
annual cost of $2,920.\204\ The total one-time cost to the industry 
would be approximately $262,800 \205\ and the total aggregate annual 
cost to the industry would be approximately $87,600.\206\
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    \204\ The Commission estimates that an NRSRO will have a Senior 
Programmer perform this work. The SIFMA 2008 Report as Modified 
indicates that a Senior Programmer is $292. Therefore the average 
one-time cost will be $8,760 (30 hours x $292) and the average 
annual cost will be $2,920 (10 hours x $292).
    \205\ $8,760 x 30 NRSROs = $262,800.
    \206\ $2,920 x 30 NRSROs = $87,600.
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    Finally, the Commission also believes that an NRSRO may need to 
purchase and/or modify its software and operating systems in order to 
generate and publish the information required in the proposed reports 
in proposed Rule 17g-7. As discussed in the PRA, the Commission 
estimates that the cost of any software would vary based on the size 
and complexity of the NRSRO. The Commission estimates that some NRSROs 
would not need such software. Therefore, the Commission estimates that 
the average cost of software across all NRSROs would be approximately 
$120,000.\207\
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    \207\ $4,000 x 30 NRSROs = $120,000.
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    The Commission generally requests comment on all aspects of these 
cost estimates for the proposed Rule 17g-7. 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 the proposed disclosures in new Rule 17g-7 have any 
effect on the willingness of persons to pay for ratings and other 
credit rating services? What are the risks that investors and other 
users of credit ratings would be confused as to the significance of the 
information being disclosed as a result of new Rule 17g-7?

[[Page 63897]]

     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?
     To what extent, if any, might issuers shift to larger 
NRSROs in which their revenue contribution would contribute a lower 
percentage to the NRSROs overall revenue to avoid being in a particular 
tier?
    Commenters should provide specific data and analysis to support any 
comments they submit with respect to the costs discussed above and any 
other costs identified by commenters.

X. Consideration of Burden on Competition and Promotion of Efficiency, 
Competition, and Capital Formation

    Under Section 3(f) of the Exchange Act,\208\ the Commission shall, 
when engaging in rulemaking that requires the Commission to consider or 
determine whether an action is necessary or appropriate in the public 
interest, consider, in addition to the protection of investors, whether 
the action will promote efficiency, competition, and capital formation. 
Section 23(a)(2) of the Exchange Act \209\ 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 may promote efficiency, competition, and 
capital formation.
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    \208\ 15 U.S.C. 78c(f).
    \209\ 15 U.S.C. 78w(a)(2).
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    The Commission generally requests comment on all aspects of this 
analysis of the burden on competition and promotion of efficiency, 
competition, and capital formation.
    Commenters should provide specific data and analysis to support 
their views.

A. Rule 17g-3

    The proposed amendment to Rule 17g-3 \210\ would require an NRSRO 
to furnish the Commission with an additional unaudited report 
containing a description of the steps taken by the designated 
compliance officer during the fiscal year to administer the policies 
and procedures that are required to be established pursuant to 
paragraphs (g) and (h) of Section 15E of the Exchange Act; and ensure 
compliance with the securities laws and rules and regulations 
thereunder, including those promulgated by the Commission pursuant to 
Section 15E of the Exchange Act.\211\
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    \210\ See proposed Rule 17g-3(a)(7).
    \211\ See proposed Rule 17g-3(a)(7).
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    The amendments to Rule 17g-3 also would provide that the proposed 
report must include: (1) A description of any compliance reviews of the 
activities of the NRSRO; (2) the number of material compliance matters 
identified during each review of the activities of the NRSRO and a 
brief description of each such matter; (3) a description of any 
remediation measures implemented to address material compliance matters 
identified during the reviews of the activities of the NRSRO; and (4) a 
description of the persons within the NRSRO who were advised of the 
results of the reviews. As stated above, the proposed new report would 
be unaudited, consistent with the other unaudited reports currently 
required under Rule 17g-3.\212\
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    \212\ 17 CFR 240.17g-3(a)(2)-(6). Under Rule 17g-3, the only 
required audited report is the NRSRO's financial statements as of 
its most recent fiscal year. 17 CFR 240.17g-3(a)(1).
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    The Commission believes that the proposed amendments to Rule 17g-3 
could indirectly increase efficiency in a number of ways. The proposed 
amendments to Rule 17g-3 may improve the efficiency of the credit 
ratings process by establishing a more structured discipline under 
which the NRSRO's designated compliance officer would need to report to 
the Commission the steps taken to fulfill the officer's statutory 
responsibilities. The act of reporting these steps is designed to 
promote the active engagement of the designated compliance officer in 
reviewing an NRSRO's compliance with the securities laws and its own 
internal policies and procedures.
    The Commission also believes that improved compliance as a result 
of the proposed rule amendments may increase efficiency in the credit 
ratings process by focusing the NRSRO's designated compliance officer 
in fulfilling his or her responsibilities prescribed under Section 
15E(j) of the Exchange Act, as well as by facilitating an NRSRO's early 
intervention to decrease the severity of compliance violations which 
may occur. Because the compliance officer would be required to report 
these steps, the proposed amendments may foster improved compliance 
overall. This may, in turn, promote greater efficiencies in the credit 
rating process.
    The Commission further believes that these proposed amendments 
could promote more efficient allocation of capital by investors to the 
extent that the quality of credit ratings is improved.
    Additionally, the Commission believes that the proposed report 
could promote efficient allocation of Commission resources and time by 
facilitating the Commission's examination staff efforts to conduct each 
exam of an NRSRO in an organized and efficient manner. These 
efficiencies will help the Commission to better allocate its own 
resources to maximize investor protection.\213\
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    \213\ The Commission also notes that other areas of the 
Commissions rules and regulations also require an annual report by a 
chief compliance officer with respect to investment companies and 
investment advisers. See generally, Rule 38a-1, 17 CFR 270.38a-1, 
and Rule 206(4)-7, 17 CFR 275.206(4)-7.
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    The Commission believes that the proposed amendments to Rule 17g-3 
could promote participation in the securities markets, and, thereby, 
promote capital formation and competition among NRSROs by increasing 
confidence in the integrity of NRSROs and the credit ratings they 
issue. Consequently, the Commission also does not believe that the 
proposed amendments to Rule 17g-3 would be a burden on competition.
    The proposed amendments to Rule 17g-3 could improve the integrity 
of the ratings process by establishing a discipline under which the 
NRSRO's designated compliance officer would need to report to the 
Commission the steps taken by the compliance officer to fulfill the 
officer's statutory responsibilities. The act of reporting these steps 
is designed to promote the active engagement of the designated 
compliance officer in reviewing an NRSRO's compliance with internal 
policies and procedures. The proposed report also could strengthen the 
Commission's oversight of NRSROs by highlighting possible problem areas 
in an NRSRO's rating processes and providing an additional tool for the 
Commission to monitor how the NRSRO's designated compliance officer is 
fulfilling the responsibilities prescribed in Section 15E of the 
Exchange Act. For example, if an NRSRO reports an unusual level of 
significant compliance exceptions in a particular area, the Commission 
examination staff could focus their next review of the NRSRO in that 
particular area. Alternatively, if a report indicates no problems, but 
a subsequent staff examination reveals significant compliance 
exceptions, this could be brought to the attention of the NRSRO's 
management to be used to assess whether the designated compliance

[[Page 63898]]

officer is adequately fulfilling the officer's statutory duties. 
Furthermore, the identification of the persons within the NRSRO advised 
of the results of the review and remediation measures implemented could 
also promote the appropriate escalation of compliance issues to the 
management of the NRSRO.
    Thus, enhancing the Commission's oversight and improving compliance 
of the NRSROs could help in restoring confidence in credit ratings 
issued by NRSROs which, in turn, could promote capital formation.

B. Amendments to Form NRSRO

    The proposed amendments to the Instructions to Exhibit 6 to Form 
NRSRO are designed to provide more information to users of credit 
ratings with respect to an NRSRO's conflicts of interest. The 
Commission is proposing to require an applicant/NRSRO to furnish the 
Commission with information regarding the revenues an NRSRO receives 
from major clients and from services other than determining credit 
ratings. In particular, the additional disclosures to Exhibit 6 to Form 
NRSRO would require an applicant/NRSRO to provide the following 
disclosures, as applicable:
     The percentage of the applicant/NRSRO's net revenue 
attributable to the 20 largest users of credit rating services of the 
applicant/NRSRO; and
     The percentage of the applicant/NRSRO's revenue 
attributable to services and products other than credit rating services 
of the applicant/NRSRO.
    By assisting investors and other users of credit ratings in 
assessing the potential magnitude of the conflicts of interest inherent 
in a given NRSRO's business operations, the proposed additional 
disclosures to Exhibit 6 to Form NRSRO may promote more efficient 
investment analyses and decisions by these investors and users.
    The proposed additional disclosures are designed to provide the 
marketplace with additional information for comparing NRSROs and, 
therefore, provide users of credit ratings with more useful metrics 
with which to compare these NRSROs. In particular, by disclosing 
information about revenues received from major clients and for other 
services, users of credit ratings would be given more information about 
the potential dimensions of the conflict of being paid to determine 
credit ratings and offering other services to persons who pay for 
ratings. Increased disclosure of these conflicts would make the 
incentives of the NRSROs more transparent to the marketplace and, 
thereby, highlight those firms that may have fewer or less significant 
conflicts of interest. These proposed disclosures would allow investors 
and other users of credit ratings to compare concentrations of revenue 
across all NRSROs, thus promoting efficiency for investors and other 
users of credit ratings in evaluating NRSROs and a particular credit 
rating in making an investment decision.
    The Commission further believes that these proposed amendments 
could promote more efficient allocation of capital by investors to the 
extent that the quality of credit ratings is improved.
    These proposed disclosures are also designed to increase 
competition and promote capital formation by restoring confidence in 
the NRSROs credit ratings, which are an integral part of the capital 
formation process.
    By proposing to provide more information about an NRSRO's conflicts 
of interest, investors and users of credit ratings will be better able 
to evaluate the integrity of an NRSRO and the credit ratings that it 
issues. This enhanced information, in turn, may promote greater 
competition among NRSROs for the business of those users and investors. 
Consequently, the Commission does not believe that the proposed 
disclosures would be a burden on competition among NRSROs.
    Moreover, because users of credit ratings would have greater 
confidence in the integrity of the NRSROs as well as the credit ratings 
that they issue, such increased confidence could promote investor 
participation in the securities markets, and, thereby, promote capital 
formation.

C. Rule 17g-7

    The Commission also is proposing to adopt a new rule--Rule 17g-7--
which would require an NRSRO to make publicly available on its Internet 
Web site a consolidated report containing information about the 
revenues earned by the NRSRO as a result of providing services and 
products to persons that paid the NRSRO to issue or maintain a credit 
rating. This report would need to be updated annually. Specifically, 
proposed Rule 17g-7 would require the NRSRO to include in the report: 
(1) The percent of the net revenue attributable to the person that paid 
the NRSRO that were earned by the NRSRO during the most recently ended 
fiscal year from providing services and products other than credit 
rating services to the person; (2) the relative standing of the person 
in terms of the person's contribution to the NRSRO's net revenue as 
compared with other persons that contributed to the NRSRO's net 
revenues; and (3) the identity of all outstanding credit ratings issued 
by the NRSRO and paid for by the person.
    The Commission preliminarily believes that proposed Rule 17g-7 
would provide users of credit ratings with information about the 
potential risk that arises when an NRSRO is paid to determine a credit 
rating for a specific obligor, security, or money market instrument. 
Namely, the risk that the revenue generated from the person soliciting 
the NRSRO to determine a credit rating could influence the NRSRO's 
objectivity in an effort to favor with that person with a corresponding 
negative impact on the quality and accuracy of the credit rating.
    By assisting investors and other users of credit ratings in 
analyzing the nature and degree of potential conflicts, proposed Rule 
17g-7 may promote more efficient investment analyses and decisions by 
these investors and users.
    The proposed additional disclosures are designed to provide the 
marketplace with additional information for comparing NRSROs and, 
therefore, provide users of credit ratings with more useful metrics 
with which to compare these NRSROs. The Commission believes that the 
enhanced disclosure requirements of proposed Rule 17g-7 may enable 
investors and other users of credit ratings to better assess when and 
to what degree a NRSRO's objectivity may be compromised. Increased 
disclosures also will make the incentives of the NRSROs more 
transparent to the marketplace. Based on this information, investors 
and users of credit ratings issued by an NRSRO may make more informed 
investment decisions when considering credit ratings, which could 
promote efficiency.
    The Commission further believes that these proposed amendments 
could promote more efficient allocation of capital by investors to the 
extent that the quality of credit ratings is improved.
    These proposed disclosures, like the proposed additional 
disclosures to Form NRSRO, are designed to increase competition and 
promote capital formation by restoring confidence in the credit 
ratings. By providing more information about the nature and extent of 
potential revenue-based conflicts, investors and users of credit 
ratings will be better able to evaluate the integrity of an NRSRO and 
the credit ratings that it issues and assess whether its objectivity 
may be compromised. This enhanced information, in turn, may promote 
greater competition among NRSROs for the business of those users and 
investors.

[[Page 63899]]

    A risk, however, exists with respect to proposed Rule 17g-7 that 
competition may be negatively impacted to the extent that issuers shift 
to larger NRSROs in which their revenue contribution will likely make 
up a smaller percentage of revenue to avoid any potential ``stigma'' 
associated with being perceived as a large client of an NRSRO.
    Moreover, because users of credit ratings would have greater 
confidence in the integrity of the NRSROs as well as the credit ratings 
that they issue, such increased confidence could promote investor 
participation in the securities markets, and, thereby, promote capital 
formation.

XI. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,'' \214\ 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:
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    \214\ Pub. L. 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).
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     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.

XII. 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,\215\ regarding the proposed rule 
amendments to Rule 17g-3 and Form NRSRO under the Exchange Act and 
proposed new Rule 17g-7.
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    \215\ 5 U.S.C. 603.
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A. Reasons for the Proposed Action

    The proposed amendments and proposed new rule would prescribe 
additional requirements for NRSROs to address concerns raised about the 
role of credit rating agencies in the recent credit market turmoil. The 
proposed amendments and proposed new rule would enhance and strengthen 
the rules the Commission to implement specific provisions of the Rating 
Agency Act.\216\ The Rating Agency Act defines the term ``nationally 
recognized statistical rating organization'' as a credit rating agency 
registered with the Commission, provides authority for the Commission 
to implement registration, recordkeeping, financial reporting, and 
oversight rules with respect to registered credit rating agencies.
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    \216\ Pub. L. 109-291 (2006); see also Exchange Act Release No. 
55857 (June 5, 2007), 72 FR 33564, 33609 (June 18, 2007).
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    As discussed in detail above, the proposed amendments seek to 
further the substantive goals of the Commission's current oversight 
program for NRSROs, including, increasing transparency and disclosure, 
diminishing conflicts, and strengthening oversight more generally.\217\
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    \217\ See Report of the Senate Committee on Banking, Housing, 
and Urban Affairs to Accompany S. 3850, Credit Rating Agency Reform 
Act of 2006, S. Report No. 109-326, 109th Cong., 2d Sess. (Sept. 6, 
2006) (``Senate Report''), p. 2.
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    The Commission believes that the proposed amendments to Rule 17g-3 
would improve the integrity of the ratings process by establishing a 
discipline under which the NRSRO's designated compliance officer would 
need to report to the Commission the steps taken by the compliance 
officer to fulfill the officer's statutory responsibilities.\218\ The 
act of reporting these steps is designed to promote the active 
engagement of the designated compliance officer in reviewing an NRSRO's 
compliance with internal policies and procedures. The proposed report 
also could strengthen the Commission's oversight of NRSROs by 
highlighting possible problem areas in an NRSRO's rating processes and 
providing an additional tool for the Commission to monitor how the 
NRSRO's designated compliance officer is fulfilling the 
responsibilities prescribed in Section 15E of the Exchange Act. 
Furthermore, the identification of the persons within the NRSRO advised 
of the results of the review and remediation measures implemented could 
also promote the appropriate escalation of compliance issues to the 
management of the NRSRO.
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    \218\ See proposed Rule 17g-3(a)(7) and (b)(2).
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    The Commission believes that the proposed amendments to Exhibit 6 
to the Instructions to Form NRSRO would allow users of credit ratings 
to more effectively evaluate the integrity of the NRSRO's credit 
ratings themselves and whether they believe the NRSRO is effectively 
managing its conflicts of interests otherwise identified in Exhibit 6. 
Finally, the purpose of proposed new Rule 17g-7 is to provide users of 
credit ratings with information about the potential risk that arises 
when an NRSRO is paid to determine a credit rating for a specific 
obligor, security, or money market instrument.

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.'' \219\ The proposed amendments and proposed new rule 
are designed to further enhance these objectives and assist the 
Commission in monitoring whether an NRSRO complies with the provisions 
of the Rating Agency Act and rules thereunder, fulfilling the 
Commission's statutory mandate to adopt rules to implement the NRSRO 
regulatory program, and provide information regarding NRSROs to the 
public and to users of credit ratings.
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    \219\ See Senate Report, supra note 217.
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    The objective of the proposed amendment to Rule 17g-3 is to improve 
the integrity of the ratings process and enhance accountability by 
requiring the designated compliance officer to annually report on 
actions taken to fulfill the officer's statutory responsibilities. The 
requirement to provide the Commission with such a report would, the 
Commission believes, help establish or reinforce a discipline and rigor 
in the compliance officer's performance of his or her duties. It also 
is designed to strengthen the Commission's oversight of NRSROs by 
highlighting possible problem areas in an NRSRO's rating processes and 
providing an additional tool for the Commission to determine whether 
the NRSRO's designated compliance officer is fulfilling the 
responsibilities prescribed in Section 15E of the Exchange Act.\220\ In 
addition, this information is designed to assist the Commission staff 
in its examination of NRSROs. Furthermore, the identification of the 
persons within the NRSRO advised of the results of the review and 
remediation measures implemented could also promote the appropriate 
escalation of compliance issues to the management of the NRSRO.
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    \220\ 15 U.S.C. 78o-7(j).
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    The proposed amendments to the Exhibit 6 Instructions to Form NRSRO 
that would require additional disclosures are designed to increase

[[Page 63900]]

transparency by allowing users of credit ratings to more effectively 
evaluate the integrity of an NRSRO's credit ratings and analyze whether 
the NRSRO is effectively managing its conflicts of interest.
    Finally, proposed new Rule 17g-7 is designed to increase 
transparency as well as enhance disclosures with respect to an NRSRO's 
management of its conflicts of interest by providing users of credit 
ratings with information about the potential risk of undue influence 
that arises when an NRSRO is paid to determine a credit rating for a 
specific obligor, security, or money market instrument.

C. Legal Basis

    Pursuant to the Exchange Act \221\ and, particularly, Sections 15E 
and 17(a) of the Exchange Act, the Commission is proposing amendments 
to Rule 17g-3 and Exhibit 6 to Form NRSRO, as well as proposing new 
Rule 17g-7.\222\
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    \221\ 15 U.S.C. 78a et seq.
    \222\ 15 U.S.C. 78o-7.
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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.'' \223\ 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. Currently, there are two NRSROs that are classified as 
``small'' entities for purposes of the Regulatory Flexibility Act.\224\
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    \223\ 17 CFR 240.0-10(a).
    \224\ See 17 CFR 240.0-10(a). Two of the 10 credit rating 
agencies currently registered as NRSROs would be considered 
``small'' entities for purposes of the Regulatory Flexibility Act. 
The Commission previously sought comment on the number of small 
entities that may be affected by other proposed rule amendments to 
the Commission's NRSRO rules. The Commission received no comments in 
response to those requests. See generally, February 2009 Adopting 
Release, at 74 FR 6481.
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E. Reporting, Recordkeeping, and Other Compliance Requirements

    The proposal would amend Rule 17g-3 to require an NRSRO to furnish 
the Commission with an additional unaudited annual report containing a 
description of the steps taken by the designated compliance officer 
during the fiscal year to administer the policies and procedures that 
are required to be established pursuant to paragraphs (g) and (h) of 
Section 15E of the Exchange Act; and ensure compliance with the 
securities laws and rules and regulations thereunder, including those 
promulgated by the Commission pursuant to Section 15E of the Exchange 
Act.\225\
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    \225\ See proposed Rule 17g-3(a)(7).
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    The amendments to proposed new paragraph (a)(7) of Rule 17g-3 would 
also provide that the report must include: (1) A description of any 
compliance reviews of the activities of the NRSRO; (2) the number of 
material compliance matters identified during each review of the 
activities of the NRSRO and a brief description of each such matter; 
(3) a description of any remediation measures implemented to address 
material compliance matters identified during the reviews of the 
activities of the NRSRO; and (4) a description of the persons within 
the NRSRO who were advised of the results of the reviews.\226\
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    \226\ See proposed Rule 17g-3(a)(7)(ii).
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    The Commission believes that the costs to NRSROs to comply with the 
proposed amendment to Rule 17g-3 would vary depending on the size and 
complexity of the NRSRO, as well as the size of its compliance 
programs. Larger NRSROs with comprehensive compliance programs may 
already periodically review portions of their compliance programs. 
These larger NRSROs may incur a cost associated with transforming their 
periodic reviews into a more systematic review and developing a form of 
report. While smaller NRSROs all have designated compliance officers, 
the Commission preliminarily believes, based on issues brought to the 
staff's attention, that some NRSROs may have less robust compliance 
programs than others NRSRO's. The Commission believes that the 
information to be included in the proposed report for smaller NRSROs 
would be less extensive, because smaller NRSRO's may have less complex 
organizational structures, fewer employees and fewer sources of revenue 
than larger NRSROs which may be part of a complex global organization 
with thousands of employees. Therefore, it may be less costly than for 
larger NRSROs. Finally, the proposed new report under Rule 17g-3 would 
need to be retained by NRSROs for three years under Rule 17g-2.
    The Commission is proposing to amend the Instructions to Exhibit 6 
to Form NRSRO to require an applicant/NRSRO to furnish the Commission 
with information regarding the revenues an NRSRO receives from major 
clients and from services other than determining credit ratings. In 
particular, the amendments to Exhibit 6 would require an applicant/
NRSRO to provide the following disclosures, as applicable:
     The percentage of the applicant/NRSRO's net revenue 
attributable to the 20 largest users of credit rating services of the 
applicant/NRSRO; and
     The percentage of the applicant/NRSRO's revenue 
attributable to services and products other than credit rating services 
of the applicant/NRSRO.
    In order to comply with the proposed amendments to Exhibit 6 to 
Form NRSRO, an applicant/NRSRO would need to compile the information in 
order to complete the additional disclosures. The Commission believes 
that the burdens imposed by the proposed rule amendments would vary 
based on the size and complexity of each applicant/NRSRO. The 
Commission believes that the potential impact of the amendments to 
Exhibit 6 to Form NRSRO on small NRSROs should not be significant 
because these entities would have fewer clients and less revenue and 
therefore lower costs to produce the additional disclosures under the 
amendments to Exhibit 6 to Form NRSRO.
    The Commission is also proposing new Rule 17g-7, which would 
require an NRSRO to make publicly available on its Internet Web site a 
consolidated report containing information about the revenues earned by 
the NRSRO as a result of providing services and products to persons 
that paid the NRSRO to issue or maintain a credit rating. This report 
would need to be updated annually. In order to comply with new Rule 
17g-7, each NRSRO would need to develop the calculations necessary to 
generate the percents required under the report; to populate the 
proposed report with the required data; and to develop and draft the 
form report. The Commission believes that the burdens imposed by new 
Rule 17g-7 would vary based on the size and complexity of each 
applicant/NRSRO. The Commission believes that the potential impact of 
the proposed Rule 17g-7 on small NRSROs should not be significant 
because these entities would have fewer clients and less revenue and 
therefore lower costs to produce the consolidated report required by 
proposed new Rule 17g-7. The consolidated report would need to be 
retained for three years in accordance with Rule 17g-2.

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 and 
the proposed new rule.

[[Page 63901]]

G. Significant Alternatives

    Pursuant to Section 3(a) of the Regulatory Flexibility Act,\227\ 
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.
---------------------------------------------------------------------------

    \227\ 5 U.S.C. 603(c).
---------------------------------------------------------------------------

    The Commission considered 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. The 
Commission also preliminarily believes that the proposed rule 
amendments and proposed new rule are flexible and simple enough to 
allow small NRSROs to comply without the need for the establishment of 
differing compliance or reporting requirements for small entities.

H. Request for Comments

    The Commission encourages written comments on matters discussed in 
this IRFA. In particular, the Commission seeks comment on the number of 
small entities that would be affected by the proposed rule amendments 
and the proposed new rule, and whether the effect on small entities 
would be economically significant. Commenters are asked to describe the 
nature of any effect and to provide empirical data to support their 
views.

XIII. Statutory Authority

    The Commission is proposing amendments to Rule 17g-3 and the 
Instructions to Form NRSRO and new Rule 17g-7, pursuant to the 
authority conferred by the Exchange Act, including Sections 15E and 
17(a).\228\
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    \228\ 15 U.S.C. 78o-7 and 78q.
---------------------------------------------------------------------------

Text of Proposed Rules

List of Subjects in 17 CFR Parts 240 and 249b

    Brokers, Reporting and recordkeeping requirements, Securities.

    In accordance with the foregoing, the Commission hereby proposes 
that Title 17, Chapter II of the Code of Federal Regulation be amended 
as follows.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority 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, 78u-5, 
78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 
80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise 
noted.
* * * * *
    2. Section 240.17g-3 is amended by:
    a. Adding a new paragraph (a)(7); and
    b. Revising paragraph (b).
    The additions and revisions read as follows:

Sec.  240.17g-3  Annual financial reports to be furnished by nationally 
recognized statistical rating organizations.

    (a) * * *
    (7)(i) An unaudited report containing a description of the steps 
taken by the designated compliance officer during the fiscal year to:
    (A) Administer the policies and procedures that are required to be 
established pursuant to paragraphs (g) and (h) of Section 15E of the 
Exchange Act (15 U.S.C. 78o-7(g) and (h)); and
    (B) Ensure compliance with the securities laws and rules and 
regulations thereunder, including those promulgated by the Commission 
pursuant to Section 15E of the Exchange Act.
    (ii) The report required pursuant to paragraph (a)(7)(i) of this 
section must include:
    (A) A description of any compliance reviews of the activities of 
the nationally recognized statistical rating organization;
    (B) The number of material compliance matters identified during 
each review of the activities of the nationally recognized statistical 
rating organization and a brief description of each such matter;
    (C) A description of any remediation measures implemented to 
address material compliance matters identified during the reviews of 
the activities of the nationally recognized statistical rating 
organization; and
    (D) A description of the persons within the nationally recognized 
statistical rating organization who were advised of the results of the 
reviews.
* * * * *
    (b) The nationally recognized statistical rating organization must:
    (1) Attach to the financial reports furnished pursuant to 
paragraphs (a)(1) through (a)(6) of this section a signed statement by 
a duly authorized person associated with the nationally recognized 
statistical rating organization stating that the person has 
responsibility for the financial reports and, to the best knowledge of 
the person, the financial reports fairly present, in all material 
respects, the financial condition, results of operations, cash flows, 
revenues, analyst compensation, and credit rating actions of the 
nationally recognized statistical rating organization for the period 
presented; and
    (2) Attach to the report furnished pursuant to paragraph (a)(7) of 
this section a signed statement by the designated compliance officer of 
the nationally recognized statistical rating organization stating that 
the person has responsibility for the report and, to the best knowledge 
of the designated compliance officer, the report fairly presents, in 
all material respects, steps taken by the designated compliance officer 
for the period presented.
* * * * *
    3. Section 240.17g-7 is added to read as follows:

Sec.  240.17g-7  Reports to be made public by nationally recognized 
statistical rating organizations about persons that paid the nationally 
recognized statistical rating organization for the issuance or 
maintenance of a credit rating.

    (a)(1) A nationally recognized statistical rating organization must 
annually, not later than 90 calendar days after the end of its fiscal 
year (as indicated on its current Form NRSRO), make publicly available 
on its Internet Web site a consolidated report that shows, with respect 
to each person that paid the nationally recognized statistical rating 
organization to issue or maintain a credit rating that was outstanding 
as of the end of the fiscal year, the following information:
    (i) The percent of the net revenue attributable to the person 
earned by the nationally recognized statistical rating organization for 
that fiscal year from providing services and products other than credit 
rating services to the person, which the nationally recognized 
statistical rating organization must calculate in accordance with 
paragraph (a)(3)(i) of this section;

[[Page 63902]]

    (ii) The relative standing of the person in terms of the person's 
contribution to the net revenue of the nationally recognized 
statistical rating organization for the fiscal year, which the 
nationally recognized statistical rating organization must determine in 
accordance with paragraph (a)(3)(ii) of this section; and
    (iii) All outstanding credit ratings paid for by the person, which 
the nationally recognized statistical rating organization must 
determine in accordance with paragraph (a)(3)(iii) of this section.
    (2) A nationally recognized statistical rating organization is not 
required to make publicly available on its Internet Web site the report 
required by paragraph (a)(1) of this section or include with the 
publication of a credit rating the statement required by paragraph (b) 
of this section if, as of the end of the fiscal year, there are no 
credit ratings outstanding that the nationally recognized statistical 
rating organization issued or maintained as a result of a person paying 
the nationally recognized statistical rating organization for the 
issuance or maintenance of such credit ratings.
    (3)(i) The nationally recognized statistical rating organization 
must calculate the percent of the net revenue attributable to the 
person earned by the nationally recognized statistical rating 
organization for the fiscal year from providing services and products 
other than credit rating services to the person as follows:
    (A) Calculate the net revenue attributable to the person earned by 
the nationally recognized statistical rating organization for the 
fiscal year from providing services and products other than credit 
rating services to the person;
    (B) Calculate the net revenue attributable to the person earned by 
the nationally recognized statistical rating organization for the 
fiscal year from providing all services and products, including credit 
rating services, to the person; and
    (C) Divide the amount calculated pursuant to paragraph (a)(3)(i)(A) 
of this section by the amount calculated pursuant to paragraph 
(a)(3)(i)(B) of this section and convert that quotient to a percent.
    (ii) The nationally recognized statistical rating organization must 
determine the relative standing of the person in terms of the person's 
contribution to the net revenue of the nationally recognized 
statistical rating organization for the fiscal year as follows:
    (A) For each person from whom the nationally recognized statistical 
rating organization earned net revenue during the fiscal year, 
calculate the net revenue attributable to the person earned by the 
nationally recognized statistical rating organization for the fiscal 
year from providing all services and products, including credit rating 
services, to the person;
    (B) Make a list that sorts the persons subject to the calculation 
in paragraph (a)(3)(ii)(A) of this section in order from largest to 
smallest in terms of the amount of net revenue attributable to the 
person, as determined pursuant to that paragraph; and
    (C) Divide the list generated pursuant to paragraph (a)(3)(ii)(B) 
of this section into the following categories: Top 10%, top 25%, top 
50%, bottom 50%, and bottom 25% and determine which category contains 
the person.
    (iii) Identify by name of obligor, security, or money market 
instrument and, as applicable, CIK number, CUSIP, or ISIN each 
outstanding credit rating generated as a result of the person paying 
the nationally recognized statistical rating organization for the 
issuance or maintenance of the credit rating and attribute the 
outstanding credit rating to the person.
    (b) A nationally recognized statistical rating organization must 
prominently include the following statement indicating where on its 
Internet Web site the consolidated report required pursuant to 
paragraph (a)(1) of this section is located each time the nationally 
recognized statistical rating organization publishes a credit rating or 
credit ratings in a research report, press release, announcement, 
database, Internet Web site page, compendium, or any other written 
communication that makes the credit rating publicly available for free 
or a reasonable fee: ``Revenue information about persons that paid the 
nationally statistical rating organization for the issuance or 
maintenance of a credit rating is available at: [insert address to 
Internet Web site].''
    (c) For purposes of this section:
    (1) The term credit rating services means any of the following: 
Rating an obligor (regardless of whether the obligor or any other 
person paid for the credit rating); rating an issuer's securities or 
money market instruments (regardless of whether the issuer, 
underwriter, or any other person paid for the credit rating); and 
providing credit ratings, credit ratings data, or credit ratings 
analysis to a subscriber.
    (2) The term net revenue means revenue earned for any type of 
service or product provided to a person, regardless of whether related 
to credit rating services, and net of any rebates and allowances paid 
or owed to the person.

PART 249b--FURTHER FORMS, SECURITIES EXCHANGE ACT OF 1934

    4. The authority citation for part 249b continues to read in part 
as follows:

    Authority: 15 U.S.C. 78a et seq., unless otherwise noted;
* * * * *

Sec.  249b.300  [Amended]

    5. Form NRSRO (referenced in Sec.  249b.300) is amended by revising 
Exhibit 6 in Item 9 to read as follows:

    Note: The text of Form NRSRO does not and this amendment will 
not appear in the Code of Federal Regulations.

Form NRSRO

* * * * *

9. Exhibits * * *

* * * * *
    Exhibit 6. Information concerning conflicts of interest or 
potential conflicts of interest relating to the issuance of credit 
ratings by the credit rating agency.
    [ballot] Exhibit 6 is attached to and made a part of this Form 
NRSRO.
* * * * *
    6. Amend Form NRSRO Instructions (referenced in Sec.  249b.300) by:
    a. Revising Instruction A.8.;
    b. Adding a Note to the end of Instruction F;
    c. Removing the words ``withdrawal of registration'' and adding in 
their place the words ``withdrawal from registration'' in the first 
sentence of Instruction H, Item 5;
    d. Revising Exhibit 6 in Instruction H, Item 9;
    e. Removing the words ``(See definition below)'' from the first 
sentence of Exhibit 8 in Instruction H, Item 9;
    f. Removing the word ``person'' and adding in its place the words 
``user of credit rating services'' in the first sentence in Exhibit 10, 
Instruction H, Item 9, and removing the fifth sentence in Exhibit 10, 
Instruction H, Item 9, which includes the definitions of ``net 
revenue'' and ``credit rating services'';
    g. Redesignating Instruction F as Instruction I; and
    h. Revising newly redesignated Instruction I.
    The revisions and addition read as follows:

    Note:  The text of Form NRSRO does not and this amendment will 
not appear in the Code of Federal Regulations.

FORM NRSRO INSTRUCTIONS

* * * * *

[[Page 63903]]

A. GENERAL INSTRUCTIONS

* * * * *
    8. ADDRESS--The mailing address for Form NRSRO is: Division of 
Trading and Markets, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-7010.
* * * * *

F. INSTRUCTIONS FOR ANNUAL CERTIFICATIONS

* * * * *

    Note to Instruction F: The annual financial reports that an 
NRSRO must furnish to the Commission pursuant to Section 15E(k) of 
the Exchange Act and Exchange Act Rules 17g-3(a)(1) through (a)(6), 
as applicable, should not be furnished as part of the Annual 
Certification on Form NRSRO. If the fiscal year end of the NRSRO is 
December 31, however, the financial reports may be furnished in the 
same mailing as the Annual Certification. In accordance with 
Exchange Act Rule 17g-3(b), the NRSRO must attach to each report the 
certification required by the Rule.

* * * * *

H. INSTRUCTIONS FOR SPECIFIC LINE ITEMS

* * * * *
    Item 9. Exhibits. * * *
* * * * *
    Exhibit 6. Provide in this Exhibit information concerning conflicts 
of interest or potential conflicts of interest relating to the issuance 
of credit ratings by the Applicant/NRSRO.
    Part A. Identify the types of conflicts of interest relating to the 
issuance of credit ratings by the Applicant/NRSRO that are material to 
the Applicant/NRSRO. First, identify the conflicts described in the 
list below that apply to the Applicant/NRSRO. The Applicant/NRSRO may 
use the descriptions below to identify an applicable conflict of 
interest and is not required to provide any further details. Second, 
briefly describe any other type of conflict of interest relating to the 
issuance of credit ratings by the Applicant/NRSRO that is not covered 
in the descriptions below that is material to the Applicant/NRSRO (for 
example, one the Applicant/NRSRO has established specific policies and 
procedures to address):
     The Applicant/NRSRO is paid by issuers or underwriters to 
determine credit ratings with respect to securities or money market 
instruments they issue or underwrite.
     The Applicant/NRSRO is paid by obligors to determine 
credit ratings of the obligors.
     The Applicant/NRSRO is paid for services in addition to 
determining credit ratings by issuers, underwriters, or obligors that 
have paid the Applicant/NRSRO to determine a credit rating.
     The Applicant/NRSRO is paid by persons for subscriptions 
to receive or access the credit ratings of the Applicant/NRSRO and/or 
for other services offered by the Applicant/NRSRO where such persons 
may use the credit ratings of the Applicant/NRSRO to comply with, and 
obtain benefits or relief under, statutes and regulations using the 
term ``nationally recognized statistical rating organization.''
     The Applicant/NRSRO is paid by persons for subscriptions 
to receive or access the credit ratings of the Applicant/NRSRO and/or 
for other services offered by the Applicant/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 
Applicant/NRSRO.
     The Applicant/NRSRO allows persons within the Applicant/
NRSRO to:
    [cir] Directly own securities or money market instruments of, or 
have other direct ownership interests in, obligors or issuers subject 
to a credit rating determined by the Applicant/NRSRO.
    [cir] Have business relationships that are more than arm's length 
ordinary course business relationships with obligors or issuers subject 
to a credit rating determined by the Applicant/NRSRO.
     A person associated with the Applicant/NRSRO is a broker 
or dealer engaged in the business of underwriting securities or money 
market instruments (identify the person).
     The Applicant/NRSRO has any other material conflict of 
interest that arises from the issuances of credit ratings (briefly 
describe).
    Part B. Provide the following information concerning revenues of 
the Applicant/NRSRO. An Applicant must provide this information for the 
fiscal year ending immediately before the date of the Applicant's 
initial application to the Commission. An NRSRO with a fiscal year end 
of December 31 must provide this information as part of its Annual 
Certification. Otherwise, an NRSRO must provide this information with 
an Update of Registration not later than 90 days after the end of each 
fiscal year.
    (1) Provide the percentage of total net revenue attributable to the 
20 largest users of credit rating services of the Applicant/NRSRO by 
dividing:
    [cir] The total amount of net revenue earned by the Applicant/NRSRO 
attributable to the 20 largest users of credit rating services of the 
Applicant/NRSRO; by
    [cir] The total amount of the four classifications of revenue of 
the Applicant as reported in Exhibit 12 to Form NRSRO or the NRSRO as 
reported in the financial report furnished to the Commission under 
Exchange Act Rule 17g-3(a)(4).

    Note to Part B(1) of Exhibit 6: The 20 largest users of credit 
rating services includes issuers, subscribers, obligors, and 
underwriters, and may not be the same as the list of 20 largest 
issuers and subscribers identified by the Applicant in Exhibit 10 to 
Form NRSRO or by the NRSRO in the financial report furnished to the 
Commission under Exchange Act Rule 17g-3(a)(5).

    (2) Provide the percentage of total net revenue attributable to 
other services and products of the Applicant/NRSRO by dividing:
    [cir] The total amount of revenue earned by the Applicant/NRSRO for 
``all other services and products'' of the Applicant as reported in 
Exhibit 12 to Form NRSRO or of the NRSRO as reported in the financial 
report furnished to the Commission under Exchange Act Rule 17g-3(a)(4); 
by
    [cir] The total amount of the four classifications of revenue of 
the Applicant as reported in Exhibit 12 to Form NRSRO or of the NRSRO 
as reported in the financial report furnished to the Commission under 
Exchange Act Rule 17g-3(a)(4).
* * * * *
    Exhibit 10. Provide in this Exhibit a list of the largest users of 
credit rating services of the Applicant by the amount of net revenue 
earned by the Applicant attributable to the user of credit rating 
services during the fiscal year ending immediately before the date of 
the initial application. First, determine and list the 20 largest 
issuers and subscribers in terms of net revenue. Next, add to the list 
any obligor or underwriter that, in terms of net revenue during the 
fiscal year, equaled or exceeded the 20th largest issuer or subscriber. 
In making the list, rank the persons in terms of net revenue from 
largest to smallest and include the net revenue amount for each person.
    An NRSRO is not required to make this Exhibit publicly available on 
its Web site, or through another comparable, readily accessible means 
pursuant to Exchange Act Rule 17g-1(i). An NRSRO may request that the 
Commission keep this Exhibit confidential by marking each page 
``Confidential Treatment'' and complying with Commission rules 
governing confidential treatment (See 17 CFR 200.80 and 17 CFR 200.83). 
The Commission will keep the information and documents in the Exhibit

[[Page 63904]]

confidential upon request to the extent permitted by law.
* * * * *

I. EXPLANATION OF TERMS

    1. COMMISSION--The U.S. Securities and Exchange Commission.
    2. CREDIT RATING [Section 3(a)(60) of the Exchange Act]--An 
assessment of the creditworthiness of an obligor as an entity or with 
respect to specific securities or money market instruments.
    3. CREDIT RATING AGENCY [Section 3(a)(61) of the Exchange Act]--Any 
person:
     Engaged in the business of issuing credit ratings on the 
Internet or through another readily accessible means, for free or for a 
reasonable fee, but does not include a commercial credit reporting 
company;
     Employing either a quantitative or qualitative model, or 
both to determine credit ratings; and
     Receiving fees from either issuers, investors, other 
market participants, or a combination thereof.
    4. CREDIT RATING SERVICES--Any of the following services:
     Rating an obligor (regardless of whether the obligor or 
any other person paid for the credit rating);
     Rating an issuer's securities or money market instruments 
(regardless of whether the issuer, underwriter, or any other person 
paid for the credit rating); and
     Providing credit ratings, credit ratings data, or credit 
ratings analysis to a subscriber.
    5. NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION [Section 
3(a)(62) of the Exchange Act]--A credit rating agency that:
     Has been in business as a credit rating agency for at 
least the 3 consecutive years immediately preceding the date of its 
application for registration as an NRSRO;
     Issues credit ratings certified by qualified institutional 
buyers in accordance with Section 15(a)(1)(B)(ix) of the Exchange Act 
with respect to:
    [cir] Financial institutions, brokers, or dealers;
    [cir] Insurance companies;
    [cir] Corporate issuers;
    [cir] Issuers of asset-backed securities;
    [cir] Issuers of government securities, municipal securities, or 
securities issued by a foreign government; or
    [cir] A combination of one or more of the above; and
     Is registered as an NRSRO.
    6. NET REVENUE--revenue earned by the Applicant/NRSRO for any type 
of service or product provided to a person, regardless of whether 
related to credit rating services, and net of any rebates and 
allowances the Applicant/NRSRO paid or owes to the person.
    7. PERSON--An individual, partnership, corporation, trust, company, 
limited liability company, or other organization (including a 
separately identifiable department or division).
    8. PERSON WITHIN AN APPLICANT/NRSRO--The person furnishing Form 
NRSRO identified in Item 1, any credit rating affiliates identified in 
Item 3, and any partner, officer, director, branch manager, or employee 
of the person or the credit rating affiliates (or any person occupying 
a similar status or performing similar functions).
    9. SEPARATELY IDENTIFIABLE DEPARTMENT OR DIVISION--A unit of a 
corporation or company:
     That is under the direct supervision of an officer or 
officers designated by the board of directors of the corporation as 
responsible for the day-to-day conduct of the corporation's credit 
rating activities for one or more affiliates, including the supervision 
of all employees engaged in the performance of such activities; and
     For which all of the records relating to its credit rating 
activities are separately created or maintained in or extractable from 
such unit's own facilities or the facilities of the corporation, and 
such records are so maintained or otherwise accessible as to permit 
independent examination and enforcement by the Commission of the 
Exchange Act and rules and regulations promulgated thereunder.
    10. QUALIFIED INSTITUTIONAL BUYER [Section 3(a)(64) of the Exchange 
Act]--An entity listed in 17 CFR 230.144A(a) that is not affiliated 
with the credit rating agency.
* * * * *

    By the Commission.

    Dated: November 23, 2009.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-28497 Filed 12-3-09; 8:45 am]

BILLING CODE 8011-01-P