Document ID: SEC-2018-1543-0001
Agency: sec
Document Type: Proposed Rule
Title: Amendments to Rules for Nationally Recognized Statistical Rating Organizations
Posted Date: 2018-10-05T04:00Z

[Federal Register Volume 83, Number 194 (Friday, October 5, 2018)]
[Proposed Rules]
[Pages 50297-50310]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-21295]

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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 83, No. 194 / Friday, October 5, 2018 / 
Proposed Rules  

[[Page 50297]]

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-84289; File No. S7-22-18]
RIN 3235-AM05

Amendments to Rules for Nationally Recognized Statistical Rating 
Organizations

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
proposing amendments to rules for nationally recognized statistical 
rating organizations (``NRSROs'') under the Securities Exchange Act of 
1934 (``Exchange Act''). The amendments would provide an exemption from 
a rule for NRSROs with respect to credit ratings if the issuer of the 
security or money market instrument referred to in the rule is not a 
U.S. person, and the NRSRO has a reasonable basis to conclude that all 
offers and sales of such security or money market instrument by any 
issuer, sponsor, or underwriter linked to such security or money market 
instrument will occur outside the United States. In addition, the 
amendments would make conforming changes to similar exemptions in two 
other Exchange Act rules. The Commission is requesting comment on the 
proposed rule amendments.

DATES: Comments should be received on or before November 5, 2018.

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 email to [email protected]. Please include 
File Number S7-22-18 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-22-18. This file number 
should be included on the subject line if email is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's website (http://www.sec.gov/rules/proposed.shtml). 
Comments also are available for website viewing and printing in the 
Commission's Public Reference Room, 100 F Street NE, Washington, DC 
20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. All comments received will be posted without change. Persons 
submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make publicly available.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on the SEC's website. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Harriet Orol, Kevin Vasel, or Patrick 
Boyle, at (212) 336-9080, Office of Credit Ratings, Securities and 
Exchange Commission, New York Regional Office, 200 Vesey Street, Suite 
400, New York, NY 10281.

SUPPLEMENTARY INFORMATION: The Commission is proposing amendments to:
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    \1\ 15 U.S.C. 78a et seq.

 
------------------------------------------------------------------------
                                    CFR citation (17
      Commission reference                CFR)
------------------------------------------------------
Securities Exchange Act of 1934   Rule 17g-5(a)(3)...    Sec.   240.17g-
 (Exchange Act) \1\.                                             5(a)(3)
                                  Rule 17g-7(a)......    Sec.   240.17g-
                                                                    7(a)
                                  Rule 15Ga-2........  Sec.   240.15Ga-2
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Table of Contents

I. Background 6
    A. Rule 17g-5(a)(3) 6
    B. Rule 17g-7(a) and Rule 15Ga-2 8
II. Proposed Rule Amendments 11
    A. Rule 17g-5(a)(3) 11
    B. Conforming Amendments to Rule 17g-7(a) and Rule 15Ga-2 18
III. Request for Comment 21
IV. Paperwork Reduction Act 23
    A. Summary of Collection of Information under the Proposed Rule 
Amendments and Proposed Use of Information 24
    1. Proposed Amendments to Rule 17g-5(a)(3) 24
    2. Proposed Amendments to Rule 17g-7(a) 24
    B. Respondents 25
    C. Burden and Cost Estimates Related to the Proposed Amendments 
25
    1. Proposed Amendments to Rule 17g-5(a)(3) 25
    2. Proposed Amendments to Rule 17g-7(a) 27
    D. Collection of Information is Required to Obtain a Benefit 28
    E. Confidentiality 28
    F. Request for Comment 28
V. Economic Analysis 29
    A. Introduction 29
    B. Baseline and Affected Parties 31
    C. Anticipated Costs and Benefits, Including Potential Effects 
on Efficiency, Competition, and Capital Formation 34
    1. Potential Benefits 34
    2. Potential Costs and Other Anticipated Effects 36
    3. Alternative Considered: Allow Exemptive Order to Expire 38
    a. Benefits 39
    b. Costs 42

[[Page 50298]]

VI. Small Business Regulatory Enforcement Fairness Act 46
VII. Regulatory Flexibility Act Certification 47
VIII. Statutory Authority 50

I. Background

A. Rule 17g-5(a)(3)

    In 2009, the Commission adopted amendments to 17 CFR 240.17g-5 
(``Rule 17g-5'') designed to address conflicts of interest arising from 
the business of determining credit ratings, and to improve competition 
and the quality of credit ratings for structured finance products, by 
making it possible for more NRSROs to rate such securities.\2\ The 
amendments established a program (``Rule 17g-5 Program'') by which an 
NRSRO that is not hired by an issuer, sponsor, or underwriter 
(collectively, ``arranger'') is able to obtain the same information 
that the arranger provides to an NRSRO hired to determine a credit 
rating for the structured finance product at the same time the 
information is provided to the hired NRSRO.\3\
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    \2\ Amendments to Rules for Nationally Recognized Statistical 
Rating Organizations, Exchange Act Release No. 61050 (Nov. 23, 
2009), 74 FR 63832 (Dec. 4, 2009) (``Rule 17g-5 Adopting Release''). 
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 securities 
transaction. This broad category of financial instruments includes 
an asset-backed security as defined in Section 3(a)(79) of the 
Exchange Act (15 U.S.C. 78c(a)(79)) and other types of structured 
debt instruments, including synthetic and hybrid collateralized debt 
obligations. See, e.g., Nationally Recognized Statistical Rating 
Organizations, Exchange Act Release No. 72936 (Aug. 27, 2014), 79 FR 
55078, 55081 n.18 (Sept. 15, 2014) (``2014 NRSRO Amendments'').
    \3\ Rule 17g-5 Adopting Release, supra note 2, 74 FR at 63832. 
See also 17 CFR 240.17g-5. Throughout this release, an NRSRO that is 
not hired by an arranger is referred to as a ``non-hired NRSRO.'' An 
NRSRO that is hired by an arranger is referred to as a ``hired 
NRSRO.''
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    The Rule 17g-5 Program operates by requiring a hired NRSRO to 
maintain a password-protected website containing a list of each 
structured finance product for which it is currently in the process of 
determining an initial credit rating.\4\ The list must be in 
chronological order and identify the type of structured finance 
product, the name of the issuer, the date the credit rating process was 
initiated, and the website where the arranger of the structured finance 
product represents that the information provided to the hired NRSRO can 
be accessed by non-hired NRSROs.\5\ The hired NRSRO must provide free 
and unlimited access to the website it maintains pursuant to the Rule 
17g-5 Program to any non-hired NRSRO that provides a copy of a 
certification it has furnished to the Commission in accordance with 17 
CFR 240.17g-5(e).\6\
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    \4\ See 17 CFR 240.17g-5(a)(3)(i).
    \5\ Id.
    \6\ See 17 CFR 240.17g-5(a)(3)(ii); 17 CFR 240.17g-5(e).
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    The Rule 17g-5 Program also requires the hired NRSRO to obtain a 
written representation from the arranger of the structured finance 
product that can be reasonably relied on by the hired NRSRO.\7\ Such 
representation must include: That the arranger will maintain a 
password-protected website that other NRSROs can access; that the 
arranger will post on this website all information the arranger 
provides to the hired NRSRO (or contracts with a third party to provide 
to the hired NRSRO) for the purpose of determining the initial credit 
rating and undertaking credit rating surveillance; and that the 
arranger will post this information to the website at the same time 
such information is provided to the hired NRSRO.\8\
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    \7\ See 17 CFR 240.17g-5(a)(3)(iii).
    \8\ Id.
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    Prior to the June 2, 2010 compliance date for the Rule 17g-5 
Program, the Commission by order granted a temporary conditional 
exemption to NRSROs from Rule 17g-5(a)(3). This temporary conditional 
exemption (the ``existing Rule 17g-5(a)(3) exemption'') applies solely 
with respect to credit ratings if: (1) The issuer of the security or 
money market instrument is not a U.S. person (as defined under 17 CFR 
230.902(k)); and (2) the NRSRO has a reasonable basis to conclude that 
the structured finance product will be offered and sold upon issuance, 
and that any arranger linked to the structured finance product will 
effect transactions of the structured finance product after issuance, 
only in transactions that occur outside the United States.\9\ These 
conditions were designed to confine the existing Rule 17g-5(a)(3) 
exemption's application to credit ratings of structured finance 
products issued in, and linked to, financial markets outside of the 
United States. The Commission granted this relief in light of concerns 
raised by various foreign securities regulators and market participants 
that local securitization markets may be disrupted if the rule applied 
to transactions outside the United States.\10\ The Commission has 
extended the existing Rule 17g-5(a)(3) exemption several times, most 
recently until the earlier of December 2, 2019, or the compliance date 
set forth in any final rule that may be adopted by the Commission that 
provides for a similar exemption.\11\
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    \9\ See Order Granting Temporary Conditional Exemption for 
Nationally Recognized Statistical Rating Organizations from 
Requirements of Rule 17g-5 Under the Securities Exchange Act of 1934 
and Request for Comment, Exchange Act Release No. 62120 (May 19, 
2010), 75 FR 28825 (May 24, 2010) (``Exemptive Order'').
    \10\ Id. at 28826-27. Such foreign securities regulators and 
market participants indicated that arrangers of structured finance 
products located outside the United States generally were not aware 
that they would be required to make the representations prescribed 
in Rule 17g-5 in order to obtain credit ratings from NRSROs and were 
not prepared to make and adhere to the new requirements set forth in 
Rule 17g-5(a)(3). These commenters also identified potential 
conflicts with local law in non-U.S. jurisdictions as a concern. Id.
    \11\ See Order Extending Conditional Temporary Exemption for 
Nationally Recognized Statistical Rating Organizations from 
Requirements of Rule 17g-5(a)(3) Under the Securities Exchange Act 
of 1934, Exchange Act Release No. 82144 (Nov. 22, 2017), 82 FR 56309 
(No. 28, 2017).
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B. Rule 17g-7(a) and Rule 15Ga-2

    In 2014, the Commission adopted Rule 17g-7(a) and Rule 15Ga-2. Rule 
17g-7(a) requires an NRSRO, when taking a rating action, to publish an 
information disclosure form containing specified information about the 
related credit rating.\12\ For example, the information disclosure form 
must specify, among other things, the version of the methodology used 
to determine the credit rating, a description of the types of data 
relied upon to determine the credit rating, and information on the 
sensitivity of the credit rating to assumptions made by the NRSRO.\13\ 
The NRSRO must also attach to the information disclosure form an 
attestation affirming that no part of the credit rating was influenced 
by any other business activities, that the credit rating was based 
solely upon the merits of the obligor, security, or money market 
instrument being rated, and that the rating was an independent 
evaluation of the credit risk of the obligor, security, or money market 
instrument.\14\
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    \12\ 17 CFR 240.17g-7(a)(1). Rule 17g-7(a) sets forth the 
required format and content of the information disclosure form and 
specifies that the form (and other items required by Rule 17g-7(a)) 
must be published in the same manner as the credit rating that is 
the result or subject of the rating action.
    \13\ See 17 CFR 240.17g-7(a)(1)(ii)(B), (H), and (M). For a 
comprehensive discussion of the required content of the form, see 
2014 NRSRO Amendments, supra note 2, 79 FR at 55167-77.
    \14\ 17 CFR 240.17g-7(a)(1)(iii).
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    Rule 17g-7(a) also requires an NRSRO, when taking a rating action, 
to publish any executed Form ABS Due Diligence-15E containing 
information about the security or money market instrument subject to 
the rating action received by the NRSRO or obtained by the NRSRO 
through the website maintained by an arranger under the Rule 17g-5 
Program.\15\ Form ABS Due Diligence-15E is the form on which a person 
employed by an NRSRO, issuer,

[[Page 50299]]

or underwriter to provide third-party due diligence services in 
connection with an asset-backed security must, among other things, 
describe the scope and manner of the due diligence provided, summarize 
the findings and conclusions of its review, and certify that it 
conducted a thorough review in performing the due diligence.\16\
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    \15\ 17 CFR 240.17g-7(a)(2).
    \16\ Rule 17g-10 identifies Form ABS Due Diligence-15E as the 
form on which the certification required pursuant to Exchange Act 
Section 15E(s)(4)(B) must be set forth. See 17 CFR 240.17g-10; see 
also 15 U.S.C. 78o-7(s)(4)(B).
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    Rule 15Ga-2 also relates to third-party due diligence services and 
requires the issuer or underwriter of an asset-backed security that is 
to be rated by an NRSRO to furnish to the Commission Form ABS-15G 
containing the findings and conclusions of any third-party due 
diligence report obtained by the issuer or underwriter.\17\
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    \17\ See 17 CFR 240.15Ga-2; 17 CFR 249.1400. Forms ABS-15G are 
made publicly available through the Commission's EDGAR system. See 
17 CFR 232.101(a)(xvi).
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    In response to concerns raised by commenters when the rules were 
proposed,\18\ the Commission included paragraph (a)(3) in 17 CFR 
240.17g-7 (``Rule 17g-7'') and paragraph (e) in Rule 15Ga-2 to provide 
an exemption from the disclosure requirements for certain offshore 
transactions.\19\ The Commission closely modeled the language of the 
Rule 17g-7(a) exemption on the existing Rule 17g-5(a)(3) exemption.\20\ 
The Commission noted that it was appropriate for the Rule 15Ga-2 
exemption to be aligned with the Rule 17g-7(a) exemption so that there 
is a consistent approach to determining when the Commission's NRSRO 
rules apply to offshore transactions.\21\
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    \18\ With respect to Rule 17g-7(a), a commenter suggested that 
local laws could impede the ability of an NRSRO to obtain or 
disclose information about the issuer as required by the proposed 
rule. See 2014 NRSRO Amendments, supra note 2, 79 FR at 55165. 
Similarly, with respect to Rule 15Ga-2, a commenter indicated that 
application of the rule to offshore transactions may conflict with 
foreign securities laws and other laws, rules, and regulations. See 
2014 NRSRO Amendments, supra note 2, 79 FR at 55184, n.1420. As 
discussed in Section II.A. of this release, similar concerns 
regarding potentially overlapping or conflicting foreign regulations 
have been raised by commenters with respect to Rule 17g-5(a)(3).
    \19\ See 2014 NRSRO Amendments, supra note 2, 79 FR at 55165, 
55184-85. See also 17 CFR 240.17g-7(a)(3) (providing for an 
exemption if: (1) The rated obligor or issuer of the rated security 
or money market instrument is not a U.S. person; and (2) the NRSRO 
has a reasonable basis to conclude that a security or money market 
instrument issued by the rated obligor or the issuer will be offered 
and sold upon issuance, and that any underwriter or arranger linked 
to the security or money market instrument will effect transactions 
in the security or money market instrument, only in transactions 
that occur outside the United States); 17 CFR 240.15Ga-2(e) 
(providing for an exemption with respect to offerings of asset-
backed securities if: (1) The offering is not required to be, and is 
not, registered under the Securities Act; (2) the issuer of the 
rated security is not a U.S. person; and (3) the security will be 
offered and sold upon issuance, and any underwriter or arranger 
linked to the security will effect transactions of the security 
after issuance, only in transactions that occur outside the United 
States).
    \20\ 2014 NRSRO Amendments, supra note 2, 79 FR at 55165.
    \21\ Id. at 55185 n.1422.
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II. Proposed Rule Amendments

A. Rule 17g-5(a)(3)

    In the Exemptive Order, the Commission requested comment regarding 
the application of Rule 17g-5(a)(3) to transactions outside the United 
States, including whether any specific conflicts would arise with 
respect to foreign regulators, regulations, and laws.\22\ In subsequent 
extension orders, the Commission continued to provide interested 
parties with the opportunity to comment. The Commission received a 
number of comment letters in response to these requests for 
comment.\23\
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    \22\ See Exemptive Order, supra note 9, 75 FR at 28825, 28828.
    \23\ Comment letters received in response to the request for 
comment regarding the application of Rule 17g-5(a)(3) to 
transactions outside the United States are available at https://www.sec.gov/comments/s7-04-09/s70409.shtml.
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    Commenters on the Exemptive Order and extensions generally have 
supported the existing Rule 17g-5(a)(3) exemption, with many commenters 
expressly requesting that such exemption be extended indefinitely, made 
permanent, or codified in Rule 17g-5(a)(3).\24\ In support of the 
existing Rule 17g-5(a)(3) exemption, some commenters indicated that 
broad application of Rule 17g-5(a)(3) to credit ratings of structured 
finance products offered and sold by non-U.S. persons outside the 
United States could disrupt local securitization markets or inhibit the 
ability of local firms to raise capital.\25\
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    \24\ See, e.g., letter from Rick Watson, Managing Director, 
Association for Financial Markets in Europe/European Securitisation 
Forum, dated November 11, 2010 (``AFME 2010 Letter''); letter from 
Jack Rando, Director, Capital Markets, Investment Industry 
Association of Canada, dated September 22, 2010 (``IIAC Letter''); 
letter from Masamichi Kono, Vice Commissioner for International 
Affairs, Financial Services Agency, Government of Japan, dated 
November 12, 2010 (``Japan FSA Letter''); letter from Takefumi 
Emori, Managing Director, Japan Credit Rating Agency, Ltd., dated 
June 25, 2010 (``JCR Letter''); letter from Patrick D. Dolan, Chair, 
Structured Finance Committee, New York City Bar Association, dated 
October 20, 2016 (``NYC Bar Association Letter''); letter from 
Richard Johns, Executive Director, Structured Finance Industry 
Group, and Chris Dalton, Chief Executive Officer, Australian 
Securitisation Forum, dated July 19, 2017 (``SFIG/AuSF Letter''); 
letter from Masaru Ono, Executive Director, Securitization Forum of 
Japan, dated November 12, 2010 (``SFJ Letter'').
    \25\ See, e.g., AFME 2010 Letter; letter from Chris Dalton, 
Chief Executive Officer, Australian Securitisation Forum, dated June 
25, 2010 (``AuSF Letter''); Japan FSA Letter; JCR Letter; SFJ 
Letter. Other commenters indicated more generally that such 
application of the rule could have a negative impact on foreign 
markets. See, e.g., IIAC Letter; NYC Bar Association Letter; SFIG/
AuSF Letter.
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    Specifically, some commenters discussed potentially overlapping 
regulatory regimes as a reason the exemption was appropriate.\26\ For 
example, one commenter indicated that new securitization disclosure 
requirements in Europe take a different approach in regulating the same 
general activity as Rule 17g-5(a)(3).\27\ In an earlier comment letter, 
this commenter asserted that subjecting European market participants to 
overlapping regulatory regimes may impose significant compliance issues 
and an increased execution burden.\28\ In this commenter's view, the 
application of Rule 17g-5(a)(3) in a non-U.S. offered context may be 
disruptive to local markets because the rule does not reflect certain 
features specific to the securitization market in Europe.\29\
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    \26\ See, e.g., AFME 2010 Letter; Japan FSA Letter;SFJ Letter.
    \27\ See letter from Richard Hopkin, Managing Director & Head of 
Fixed Income, Association for Financial Markets in Europe, dated 
November 1, 2017 (``AFME 2017 Letter'').
    \28\ See AFME 2010 Letter.
    \29\ See AFME 2010 Letter; AFME 2017 Letter.
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    Commenters also supported the exemption based on the disclosure of 
confidential information that could result from the application of Rule 
17g-5(a)(3) to non-U.S. offered transactions.\30\ One commenter 
indicated that compliance with Rule 17g-5(a)(3) could potentially 
conflict with local bank confidentiality and/or data protection 
laws.\31\ Other commenters also identified concerns regarding the 
posting of confidential information through the Rule 17g-5 Program, 
stating that a reluctance to disclose confidential information to non-
hired NRSROs could cause market participants to provide less 
information to hired NRSROs \32\ or to forgo obtaining credit ratings 
on structured finance products.\33\
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    \30\ See, e.g., AFME 2010 Letter; JCR Letter; SFJ Letter.
    \31\ See AFME 2010 Letter.
    \32\ See SFJ Letter. This commenter asserted that it would be 
difficult for Japanese market participants to obtain an adequate 
level of comfort regarding how non-hired NRSROs that are neither 
established in Japan nor have an affiliate registered in Japan would 
protect confidential information posted pursuant to the Rule 17g-5 
Program.
    \33\ See JCR Letter. This commenter noted a concern that an 
arranger may ``be held liable to a third party for disclosing such 
party's sensitive, proprietary information'' through the Rule 17g-5 
Program.

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[[Page 50300]]

    One commenter also discussed business practices and characteristics 
of the securitization market in its jurisdiction that, according to the 
commenter, may make the Rule 17g-5 Program less likely to be 
effective.\34\ Among other things, the commenter indicated that it is 
not customary for credit rating agencies in Japan to issue unsolicited 
ratings on structured finance products. \35\ The commenter posited 
that, unless an NRSRO is established in Japan or has a Japanese 
affiliate, it may not have the requisite knowledge and expertise to 
rate Japanese structured finance products.\36\ This commenter also 
suggested that, given the smaller and less mature securitization market 
in Japan as compared to the United States, market participants in Japan 
may utilize other sources of financing rather than bear the costs 
associated with the Rule 17g-5 Program.\37\
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    \34\ See SFJ Letter.
    \35\ Id.
    \36\ Id.
    \37\ Id.
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    A number of commenters also advocated for the existing Rule 17g-
5(a)(3) exemption based on principles related to international comity, 
asserting that the Commission has a limited interest in regulating 
securities offered and sold exclusively outside the United States and 
that these transactions are more appropriately regulated by the 
relevant local authorities.\38\ A number of these commenters pointed to 
17 CFR 230.901 through 230.905 (``Regulation S''), which excludes 
offers and sales that occur outside the United States from the 
registration requirements under Section 5 of the Securities Act of 1933 
(``Securities Act''),\39\ as evidence, in the commenters' view, of the 
Commission's limited interest in regulating securities offered and sold 
solely outside the United States.\40\
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    \38\ See, e.g., AFME 2010 Letter; AuSF Letter; IIAC Letter; 
Japan FSA Letter; JCR Letter; NYC Bar Association Letter; SFJ 
Letter. Some of these commenters posited that these policy 
considerations are particularly acute given that Rule 17g-5(a)(3) 
impacts both the regulated entities (i.e., NRSROs) and their 
customers (i.e., the issuers of rated structured finance products). 
See, e.g., NYC Bar Association Letter.
    \39\ See 17 CFR 230.901 through 230.905.
    \40\ See, e.g., AFME 2010 Letter; AuSF Letter; NYC Bar 
Association Letter.
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    The Commission has considered the views and policy considerations 
expressed by commenters and preliminarily believes it is appropriate to 
provide relief regarding the application of Rule 17g-5(a)(3) to 
transactions outside the United States. The Commission is of the view 
that such an approach is consistent with the approach it has taken in 
other contexts, and with notions of international comity and the 
generally limited interest of the Commission in regulating securities 
offered and sold exclusively outside of the United States. For example, 
in adopting Regulation S,\41\ the Commission stated that ``[p]rinciples 
of comity and the reasonable expectations of participants in the global 
markets justify reliance on laws applicable in jurisdictions outside 
the United States to define requirements for transactions effected 
offshore.'' \42\ The Commission believes that the approach it 
articulated in adopting Regulation S applies similarly to the proposed 
exemption to Rule 17g-5(a)(3)--i.e., that providing relief regarding 
the application of Rule 17g-5(a)(3) to transactions outside the United 
States recognizes the reasonable expectations of participants in the 
global markets in defining requirements for transactions effected 
outside the United States.
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    \41\ 17 CFR 230.901 through 230.905.
    \42\ See Offshore Offers and Sales, Securities Act Release No. 
6863 (Apr. 24, 1990). As described in the Commission's adopting 
release for Regulation S, Regulation S relates solely to the 
applicability of the registration requirements of Section 5 of the 
Securities Act and does not limit in any way the scope or 
applicability of the antifraud or other provisions of the federal 
securities laws.
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    For the reasons discussed above, the Commission preliminarily 
believes that it is not necessary or appropriate in the public interest 
or for the protection of investors to require NRSROs and arrangers to 
comply with Rule 17g-5(a)(3) with respect to ratings of structured 
finance products offered and sold exclusively outside the United States 
and that it is therefore appropriate to propose to codify, with certain 
clarifying changes, the existing Rule 17g-5(a)(3) exemption.\43\ The 
proposed exemption only applies to the provisions of paragraphs (i) 
through (iii) of Rule 17g-5(a)(3). It does not limit in any way the 
scope or applicability of the other requirements in Rule 17g-5 or other 
provisions of the federal securities laws, including the antifraud 
provisions.
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    \43\ Codifying an exemption to Rule 17g-5(a)(3) also will 
standardize the manner in which the exemptions to Rule 17g-5(a)(3), 
Rule 17g-7(a), and Rule 15Ga-2 are promulgated. Unlike the existing 
Rule 17g-5(a)(3) exemption, the Rule 17g-7(a) and Rule 15Ga-2 
exemptions are included in the rule text and not subject to 
expiration. See supra Section I.B.
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    Accordingly, the Commission proposes to add new paragraph 
(a)(3)(iv) to Rule 17g-5 to provide that the provisions of paragraphs 
(i) through (iii) of Rule 17g-5(a)(3) will not apply to an NRSRO when 
issuing or maintaining a credit rating for a security or money market 
instrument issued by an asset pool or as part of any asset-backed 
securities transaction, if: (1) The issuer of the security or money 
market instrument is not a U.S. person (as defined in 17 CFR 
230.902(k)); and (2) the NRSRO has a reasonable basis to conclude that 
all offers and sales of the security or money market instrument by any 
issuer, sponsor, or underwriter linked to the security or money market 
instrument will occur outside the United States (as that phrase is used 
in Regulation S).\44\
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    \44\ See proposed new paragraph (a)(3)(iv) of Rule 17g-5.
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    The first condition of the proposed exemption to Rule 17g-5(a)(3)--
that the issuer of the structured finance product must not be a U.S. 
person--is designed to limit relief to non-U.S. issuers. To this end, 
and for purposes of the exemption, the Commission is proposing that 
``U.S. person'' have the same definition as under Regulation S.\45\ 
Consequently, to qualify for the exemption, the NRSRO would have to be 
determining a credit rating for a structured finance product issued by 
a person that is not a U.S. person. This condition is identical to the 
corresponding condition in the existing Rule 17g-5(a)(3) exemption.
---------------------------------------------------------------------------

    \45\ See 17 CFR 230.902(k).
---------------------------------------------------------------------------

    The second condition of the proposed exemption to Rule 17g-
5(a)(3)--that the NRSRO has a reasonable basis to conclude that all 
offers and sales of the structured finance product by any arranger 
linked to the structured finance product will occur outside the United 
States--would limit the relief to transactions offered and sold 
exclusively outside the United States. This condition contains certain 
modifications to the corresponding condition in the existing Rule 17g-
5(a)(3) exemption. The Commission is proposing these modifications for 
two reasons: (1) To clarify the relationship between the proposed 
exemption and Regulation S--i.e., that the exemption applies when all 
offers and sales of a structured finance product by any arranger linked 
to the structured finance product are excluded from the registration 
requirements of Section 5 of the Securities Act in reliance on 
Regulation S; and (2) to clarify that the standards in the second 
condition are not the same as the standards that are developing in the 
case law with respect to Section 10(b) of the Exchange Act following 
the Supreme Court's decision in Morrison v. National Australia Bank, 
Ltd., 561 U.S. 247 (2010). The second condition of the proposed 
exemption closely tracks the language of Regulation

[[Page 50301]]

S \46\ and specifies that the phrase ``occur outside the United 
States'' has the same meaning as in Regulation S. The proposed 
modifications are not designed to change the scope of the second 
condition of the proposed exemption from the corresponding condition in 
the existing Rule 17g-5(a)(3)exemption.\47\
---------------------------------------------------------------------------

    \46\ See 17 CFR 230.901.
    \47\ From its inception, the existing Rule 17g-5(a)(3) exemption 
has been linked to Regulation S. For instance, in the Exemptive 
Order, the example given of a transaction that occurs outside the 
United States is a transaction that complies with the applicable 
safe harbor under Rules 903 and 904 of Regulation S. See Exemptive 
Order, supra note 9, 75 FR at 28827.
---------------------------------------------------------------------------

    The determination of whether an NRSRO would have a reasonable basis 
to conclude that all offers and sales of the structured finance product 
by any arranger linked to the structured finance product will occur 
outside the United States would depend on the facts and circumstances 
of a given situation. To have a reasonable basis to reach such a 
conclusion, the NRSRO generally should ascertain how any arranger 
linked to the structured finance product intends to market and sell the 
structured finance product and to engage in any secondary market 
activities (i.e., re-sales) of the structured finance product, and 
whether any such efforts and activities will occur in the United States 
(including any ``directed selling efforts,'' as defined in Regulation 
S).\48\
---------------------------------------------------------------------------

    \48\ 17 CFR 230.902(c).
---------------------------------------------------------------------------

    For instance, an NRSRO could obtain from the applicable arranger a 
representation upon which the NRSRO can reasonably rely that all offers 
and sales by the arranger of the structured finance product to be rated 
by the NRSRO will occur outside the United States. For example, the 
arranger's representation could provide assurances that all such offers 
and sales will be conducted in accordance with the applicable safe 
harbor under Regulation S.\49\ In determining whether it is reasonable 
to rely on any such representation, an NRSRO should evaluate the 
representation in light of other information known to the NRSRO, such 
as information in the relevant transaction documents, any ongoing or 
prior failures by the arranger to adhere to its representations, and 
any pattern of conduct by the arranger of it failing to promptly 
correct breaches of its representations.
---------------------------------------------------------------------------

    \49\ See 17 CFR 230.903 and 904.
---------------------------------------------------------------------------

    An NRSRO generally should reevaluate the reasonableness of its 
basis for concluding that the structured finance product will be 
offered and sold outside the United States if the NRSRO obtains 
information during the course of its engagement that could cause it to 
reasonably believe there are activities inside the U.S. In this regard, 
the NRSRO could include in any representation obtained from an arranger 
a mechanism for the arranger to promptly notify the NRSRO of any change 
that would render the representation untrue or inaccurate.

B. Conforming Amendments to Rule 17g-7(a) and Rule 15Ga-2

    As discussed in Section I.B. of this release, Rule 17g-7(a) and 
Rule 15Ga-2 contain exemptions similar to the existing Rule 17g-5(a)(3) 
exemption. The Commission closely modeled the language of the Rule 17g-
7(a) exemption on the existing Rule 17g-5(a)(3) exemption.\50\ The 
Commission then aligned the Rule 15Ga-2 exemption to the Rule 17g-7(a) 
exemption so that there is a consistent approach to determining when 
the Commission's NRSRO rules apply to offshore transactions.\51\
---------------------------------------------------------------------------

    \50\ 2014 NRSRO Amendments, supra note 2, 79 FR at 55165.
    \51\ Id. at 55185 n.1422.
---------------------------------------------------------------------------

    The Commission continues to believe that it is appropriate for 
there to be a consistent approach to determining how Rule 17g-5(a)(3), 
Rule 17g-7(a), and Rule 15Ga-2 apply to offshore transactions. 
Commenters raised similar concerns with respect to all three rules 
regarding the potential conflicts between such rules and foreign 
regulations and practices with respect to transactions offered and sold 
exclusively outside the United States.\52\ As discussed in Section 
II.A. of this release, the Commission believes that it has a limited 
interest in regulating securities offered and sold solely outside the 
United States (a view which is also consistent with international 
comity).
---------------------------------------------------------------------------

    \52\ See supra note 18 and Section II.A.
---------------------------------------------------------------------------

    Further, as discussed in Section II.A. of this release, the 
proposed modifications to the conditions of the existing Rule 17g-
5(a)(3) exemption are not designed to change the scope of the 
exemption, but rather to clarify how the exemption relates to 
Regulation S. The Commission believes that clarifying the conditions to 
the exemption with respect to Rule 17g-5(a)(3) without also clarifying 
the substantially identical conditions to the exemptions in Rule 17g-
7(a) and Rule 15Ga-2 could raise interpretive questions regarding the 
intended application of those exemptions. Accordingly, to promote 
clarity and consistency, the Commission proposes to amend Rule 17g-7(a) 
and Rule 15Ga-2 to align the exemptions to such rules with the proposed 
exemption to Rule 17g-5(a)(3).\53\
---------------------------------------------------------------------------

    \53\ See supra Section II.A.
---------------------------------------------------------------------------

    Specifically, the Commission proposes to amend the third condition 
of the Rule 15Ga-2 exemption to clarify that the exemption is available 
only if all offers and sales of an asset-backed security by any issuer, 
sponsor, or underwriter linked to the security will occur outside the 
United States (as that phrase is used in Regulation S).\54\
---------------------------------------------------------------------------

    \54\ See proposed revised paragraph (e)(3) of Rule 15Ga-2.
---------------------------------------------------------------------------

    Likewise, the Commission proposes to amend the second condition of 
the Rule 17g-7(a) exemption to clarify that the exemption is available 
only if an NRSRO has a reasonable basis to conclude that: (A) With 
respect to any security or money market instrument issued by a rated 
obligor, all offers and sales by any issuer, sponsor, or underwriter 
linked to the security or money market instrument will occur outside 
the United States (as that phrase is used in Regulation S); or (B) with 
respect to a rated security or money market instrument, all offers and 
sales by any issuer, sponsor, or underwriter linked to the security or 
money market instrument will occur outside the United States (as that 
phrase is used in Regulation S).\55\
---------------------------------------------------------------------------

    \55\ See proposed revised paragraph (a)(3)(ii) of Rule 17g-7.
---------------------------------------------------------------------------

    As is the case with the proposed exemption to Rule 17g-5(a)(3), the 
determination of whether an NRSRO would have a reasonable basis to 
conclude that all offers and sales of the applicable securities or 
money market instruments by any arranger linked to such securities or 
money market instruments will occur outside the United States would 
depend on the facts and circumstances of a given situation. The 
discussion in Section II.A. of this release regarding how an NRSRO may 
obtain such a reasonable basis for purposes of the proposed exemption 
to Rule 17g-5(a)(3) also applies for purposes of the proposed amendment 
to Rule 17g-7(a).
    The proposed amendment to Rule 17g-7(a) also clarifies that the 
second condition of the Rule 17g-7(a) exemption applies differently in 
the case of rated obligors than it does in the case of rated securities 
or money market instruments. In the case of rated securities or money 
market instruments, the condition to the Rule 17g-7(a) exemption 
applies in the same way as the condition to the proposed Rule 17g-
5(a)(3) exemption--i.e., an NRSRO must have a reasonable basis to 
conclude that

[[Page 50302]]

all offers and sales of the rated security or money market instrument 
by any arranger linked to that security or money market instrument will 
occur outside the United States. For the Rule 17g-7(a) exemption to 
apply with respect to a rating of an obligor, however, an NRSRO must 
have a reasonable basis to conclude that the condition is satisfied 
with respect to all securities or money market instruments issued by 
that obligor. Accordingly, if any of a rated obligor's securities or 
money market instruments are offered and sold by an arranger linked to 
those securities or money market instruments within the United States, 
the exemption would not apply to rating actions involving the credit 
rating assigned to the obligor as an entity. The Commission previously 
discussed the distinction between the application of the exemption with 
respect to rated obligors and rated securities or money market 
instruments in the adopting release for Rule 17g-7(a).\56\ The proposed 
amendment to Rule 17g-7(a) more clearly states this distinction in the 
rule text itself.
---------------------------------------------------------------------------

    \56\ See 2014 NRSRO Amendments, supra note 2, 79 FR at 55165 
n.1107.
---------------------------------------------------------------------------

III. Request for Comment

    The Commission generally requests comment on the proposal to add 
new paragraph (a)(3)(iv) of Rule 17g-5 and to amend paragraph 
(a)(3)(ii) of Rule 17g-7 and paragraph (e)(3) of Rule 15Ga-2. In 
addition, the Commission requests comment, including empirical data in 
support of comments, in response to the following questions:
    1. Is it appropriate for the Commission to amend Rule 17g-5(a)(3) 
to provide an exemption from the rule with respect to credit ratings 
where the issuer of the structured finance product is not a U.S. person 
and the NRSRO has a reasonable basis to conclude that all offers and 
sales of the structured finance product by any arranger linked to the 
structured finance produce will occur outside the United States? Why or 
why not?
    2. Would the proposed exemption be consistent with the Commission's 
general approach to regulating securities offered and sold exclusively 
outside the United States?
    3. Is it appropriate for the Commission to amend Rule 17g-7(a) and 
Rule 15Ga-2 to conform to the proposed exemption in Rule 17g-5(a)(3)? 
Why or why not?
    4. Are there other ways in which the Commission should consider 
amending Rule 17g-5, Rule 17g-7, and Rule 15Ga-2? Please be specific.
    5. What information might an NRSRO consider in order to form a 
reasonable basis to conclude that all offers and sales of a structured 
finance product by any arranger linked to the structured finance 
product will occur outside the United States?
    6. What actions might an NRSRO take to ensure that it continues 
throughout the ratings process to have a reasonable basis to conclude 
that all offers and sales of a structured finance product by any 
arranger linked to the structured finance product will occur outside 
the United States? In what circumstances might an NRSRO need to 
reevaluate its conclusion?
    7. Should Rule 17g-5(a)(3) be amended to require an NRSRO to take 
specific actions in order to obtain and continue to ensure that it has 
a reasonable basis to conclude that all offers and sales of a 
structured finance product by any arranger linked to the structured 
finance product will occur outside the United States? If so, how? For 
example, should an NRSRO be required to obtain from the applicable 
arranger a representation upon which the NRSRO can reasonably rely that 
all offers and sales by the arranger of the structured finance product 
to be rated by the NRSRO will occur outside the United States?
    8. If the Exemptive Order were allowed to expire without amending 
Rule 17g-5(a)(3) as proposed, are there any jurisdictions where 
applicable law would preclude compliance with Rule 17g-5(a)(3)? If so, 
what impact would application of Rule 17g-5(a)(3) to structured finance 
products offered and sold in such jurisdictions have on NRSROs? Would 
NRSROs and their affiliates be precluded from issuing ratings of 
structured finance products in such jurisdictions?
    9. What actions would NRSROs and arrangers need to take in order to 
comply with Rule 17g-5(a)(3) if the Exemptive Order were allowed to 
expire without codifying the existing Rule 17g-5(a)(3) exemption? How 
much advance notice would market participants currently relying on the 
Exemptive Order require in order to prepare to comply with Rule 17g-
5(a)(3)?
    10. If the Exemptive Order were allowed to expire without codifying 
the existing Rule 17g-5(a)(3) exemption, would any NRSROs use 
information available through the websites maintained by arrangers 
under the Rule 17g-5 Program to determine and monitor credit ratings 
with respect to transactions that would be exempted by the proposed 
rule?
    In responding to the specific requests for comment above, the 
Commission encourages interested persons to provide supporting data and 
analysis and, when appropriate, suggest modifications to the proposed 
rule text. Responses that are supported by data and analysis assist the 
Commission in considering the practicality and effectiveness of a 
proposed new requirement as well as evaluating the benefits and costs 
of the proposed rule.

IV. Paperwork Reduction Act

    The proposed amendments to Rule 17g-5(a)(3) and Rule 17g-7(a) 
contain new ``collection of information'' requirements within the 
meaning of the Paperwork Reduction Act of 1995 (``PRA'').\57\ The 
Commission will submit the proposed rule amendments to the Office of 
Management and Budget (``OMB'') for review in accordance with the 
PRA.\58\ An agency may not conduct or sponsor, and a person is not 
required to respond to, a collection of information unless it displays 
a currently valid control number.
---------------------------------------------------------------------------

    \57\ 44 U.S.C. 3501 et seq.
    \58\ See 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------

    The titles and OMB control numbers for the collections of 
information are:
    (1) Rule 17g-5, Conflicts of interest (OMB control number 3235-
0649); and
    (2) Rule 17g-7, Disclosure requirements (OMB control number 3235-
0656).
    The amendments to Rule 15Ga-2 do not contain a collection of 
information requirement within the meaning of the PRA.

A. Summary of Collection of Information Under the Proposed Rule 
Amendments and Proposed Use of Information

1. Proposed Amendments to Rule 17g-5(a)(3)
    The Commission is proposing amendments to Rule 17g-5(a)(3) that 
would provide an exemption to the rule with respect to credit ratings 
of structured finance products if the issuer of the structured finance 
product is not a U.S. person and the NRSRO has a reasonable basis to 
conclude that all offers and sales of the structured finance product by 
any arranger linked to the structured finance product will occur 
outside the United States.\59\ In order to have a reasonable basis for 
such a conclusion, an NRSRO may collect information from an arranger. 
For instance, an NRSRO may elect to obtain a representation from an 
arranger regarding the manner in which the structured finance product 
will be

[[Page 50303]]

offered and sold. Such information regarding the manner in which the 
structured finance product will be offered and sold may be necessary 
for an NRSRO to determine whether the proposed exemption applies with 
respect to the rating of the structured finance product.
---------------------------------------------------------------------------

    \59\ See proposed paragraph (a)(3)(iv) of Rule 17g-5; see also 
supra Section II.A. (discussing the proposed exemption in more 
detail).
---------------------------------------------------------------------------

2. Proposed Amendments to Rule 17g-7(a)
    The Commission is proposing amendments to an existing exemption in 
Rule 17g-7(a). The proposed amendment would clarify that, in order for 
the exemption to apply, an NRSRO must have a reasonable basis to 
conclude that: (A) With respect to any security or money market 
instrument issued by a rated obligor, all offers and sales by any 
issuer, sponsor, or underwriter linked to the security or money market 
instrument will occur outside the United States; or (B) with respect to 
a rated security or money market instrument, all offers and sales by 
any issuer, sponsor, or underwriter linked to the security or money 
market instrument will occur outside the United States.\60\ In order to 
have a reasonable basis for such a conclusion, an NRSRO may collect 
information from an arranger or obligor. For instance, an NRSRO may 
elect to obtain a representation from an arranger regarding the manner 
in which a rated security or money market instrument will be offered 
and sold or from an obligor regarding the manner in which all its 
securities and money market instruments have been offered and sold. 
Such information may be necessary for an NRSRO to determine whether the 
proposed exemption applies with respect to a rating action.
---------------------------------------------------------------------------

    \60\ See proposed paragraph (a)(3)(ii) of Rule 17g-7; see also 
supra Section II.B. (discussing the proposed amendments in more 
detail).
---------------------------------------------------------------------------

B. Respondents

    Rule 17g-5(a)(3) applies to NRSROs that rate structured finance 
products. Currently, there are seven NRSROs that are registered in the 
issuers of asset-backed securities ratings class that could rely on the 
proposed exemption to Rule 17g-5(a)(3).
    Rule 17g-7(a) applies to all rating actions taken by an NRSRO. 
There are currently ten credit rating agencies registered with the 
Commission as NRSROs that could rely on the proposed exemption to Rule 
17g-7(a).

C. Burden and Cost Estimates Related to the Proposed Amendments

1. Proposed Amendments to Rule 17g-5(a)(3)
    The Commission is proposing amendments to Rule 17g-5(a)(3) that 
would provide an exemption to the rule with respect to ratings of 
certain structured finance products if, among other things, the NRSRO 
has a reasonable basis to conclude that all offers and sales of the 
structured finance product by any arranger linked to the structured 
finance product will occur outside the United States.\61\ The proposed 
amendment would codify the existing Rule 17g-5(a)(3) exemption, with 
certain clarifying changes.
---------------------------------------------------------------------------

    \61\ See proposed paragraph (a)(3)(iv)(B) of Rule 17g-5; see 
also supra Section II.A. (discussing the proposed exemption in more 
detail).
---------------------------------------------------------------------------

    The Commission preliminarily believes that NRSROs will modify their 
processes to reflect the clarifying changes being proposed to the 
exemption. For instance, an NRSRO that currently seeks written 
representations from an arranger to support the reasonable belief 
required under the existing Rule 17g-5(a)(3) exemption may modify the 
form of the representation to conform to the language of the condition 
as proposed. The Commission estimates that it would take an NRSRO 
approximately five hours to update its process for obtaining a 
reasonable basis to reflect the clarifying language in the proposed 
exemption, for an industry-wide one-time burden of approximately 35 
hours.\62\
---------------------------------------------------------------------------

    \62\ 5 hours x 7 NRSROs registered to rate asset-backed 
securities = 35 hours.
---------------------------------------------------------------------------

    In order to have a reasonable basis to conclude that all offers and 
sales of the structured finance product by any arranger linked to the 
structured finance product will occur outside the United States, the 
Commission preliminarily believes that NRSROs will likely seek 
information from arrangers, thereby resulting in associated costs. The 
Commission estimates that an NRSRO would spend approximately two hours 
per transaction gathering and reviewing information received from 
arrangers to determine if the exemption applies. The Commission also 
currently estimates that approximately 267 rated transactions would be 
eligible for the proposed exemption in a given year and that each 
transaction is rated by approximately two NRSROs,\63\ resulting in a 
total aggregate annual hour burden of 1,068 hours.\64\
---------------------------------------------------------------------------

    \63\ These estimates were calculated using information, as of 
September 5, 2018, from the databases maintained by Asset-Backed 
Alert and Commercial Mortgage Alert. Isolating the transactions 
coded in the databases as ``Non-U.S.'' offerings provided an 
estimate of the number of transactions that would have been eligible 
for the proposed exemption. The databases also specify the number of 
NRSROs rating each transaction, which was used to calculate the 
average number of NRSROs per transaction (1.90). For purposes of the 
Commission's estimates, the number of NRSROs per transaction was 
rounded to the nearest whole number. The estimates represent the 
average number of transactions and NRSROs per transaction for the 
years ended December 31, 2015, 2016, and 2017.
    \64\ 2 hours x 267 transactions x 2 NRSROs per transaction = 
1,068 hours.
---------------------------------------------------------------------------

2. Proposed Amendments to Rule 17g-7(a)
    The Commission is proposing conforming and clarifying amendments to 
an existing exemption in Rule 17g-7(a). The proposed amendment would 
clarify that, in order for the exemption to apply, an NRSRO must have a 
reasonable basis to conclude that: (A) With respect to any security or 
money market instrument issued by a rated obligor, all offers and sales 
by any issuer, sponsor, or underwriter linked to the security or money 
market instrument will occur outside the United States; or (B) with 
respect to a rated security or money market instrument, all offers and 
sales by any issuer, sponsor, or underwriter linked to the security or 
money market instrument will occur outside the United States.\65\
---------------------------------------------------------------------------

    \65\ See proposed paragraph (a)(3)(ii) of Rule 17g-7; see also 
supra Section II.B. (discussing the proposed amendments in more 
detail).
---------------------------------------------------------------------------

    The Commission preliminarily believes that NRSROs will modify their 
processes to reflect the proposed amendments to the Rule 17g-7(a) 
exemption. For instance, an NRSRO that currently seeks written 
representations from an obligor or arranger to support the reasonable 
belief required under the Rule 17g-7(a) exemption, as currently in 
effect, may modify the form of the representation to conform to the 
language of the condition as proposed to be amended. The Commission 
estimates that it would take an NRSRO approximately five hours to 
update its process for obtaining a reasonable basis to reflect the 
proposed amendment to the Rule 17g-7(a) exemption, for an industry-wide 
one-time burden of approximately 50 hours.\66\
---------------------------------------------------------------------------

    \66\ 5 hours x 10 NRSROs = 50 hours.
---------------------------------------------------------------------------

D. Collection of Information is Required To Obtain a Benefit

    The proposed collection of information is required to obtain or 
maintain a benefit. In order to form a reasonable basis to conclude 
that all offers and sales of the structured finance

[[Page 50304]]

product will occur outside the United States, an NRSRO likely will 
gather certain information from the arranger including, for example, 
obtaining from the arranger a representation to that effect. The 
determination of a reasonable basis would be necessary for the proposed 
exemption to Rule 17g-5(a)(3) and the proposed amended exemption to 
Rule 17g-7(a) to apply.

E. Confidentiality

    Any information obtained by an NRSRO from an obligor or arranger to 
establish a reasonable basis will not be made public, unless the NRSRO, 
obligor, or arranger chooses to make it public. Information provided to 
the Commission in connection with staff examinations or investigations 
would be kept confidential, subject to the provisions of applicable 
law.

F. Request for Comment

    The Commission requests comment on the proposed collections of 
information in order to: (1) Evaluate whether the proposed collections 
of information are necessary for the proper performance of the 
functions of the Commission, including whether the information would 
have practical utility; (2) evaluate the accuracy of the Commission's 
estimate of the burden of the proposed collection of information; (3) 
determine whether there are ways to enhance the quality, utility, and 
clarity of the information to be collected; and (4) evaluate whether 
there are ways to minimize the burden of collection of information on 
those who respond, including through the use of automated collection 
techniques or other forms of information technology.
    Persons who desire to submit comments on the collection of 
information should direct their comments to the OMB, Attention: Desk 
Officer for the U.S. Securities and Exchange Commission, Office of 
Information and Regulatory Affairs, Washington, DC 20503, and should 
also send a copy of their comments to Secretary, U.S. Securities and 
Exchange Commission, 100 F Street NE, Washington, DC 20549-1090, with 
reference to File No. S7-22-18. Requests for materials submitted to the 
OMB with regard to these collections of information should be in 
writing, refer to File No. S7-22-18, and be submitted to the U.S. 
Securities and Exchange Commission, Office of FOIA Services, 100 F 
Street NE, Washington, DC 20549-2736. OMB is required to make a 
decision concerning the collection of information between 30 and 60 
days after publication of this release. Consequently, a comment to OMB 
is best assured of having its full effect if OMB receives it within 30 
days of publication.

V. Economic Analysis

A. Introduction

    As discussed above, the Commission is proposing to amend Rule 17g-
5(a)(3) to provide an exemption from the rule with respect to credit 
ratings where the issuer of the structured finance product is not a 
U.S. person, and the NRSRO has a reasonable basis to conclude that all 
offers and sales of the structured finance product by any arranger 
linked to the structured finance product will occur outside the United 
States. The Commission is also proposing conforming amendments to 
similar exemptions set forth in Rule 17g-7(a) and Rule 15Ga-2. The 
Commission is sensitive to the costs and benefits of its rules. When 
engaging in rulemaking that requires the Commission to consider or 
determine whether an action is necessary or appropriate in the public 
interest, Section 3(f) of the Exchange Act requires that the Commission 
consider, in addition to the protection of investors, whether the 
action will promote efficiency, competition, and capital formation.\67\ 
In addition, Section 23(a)(2) of the Exchange Act requires the 
Commission to consider the effects on competition of any rules the 
Commission adopts under the Exchange Act, and 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.\68\
---------------------------------------------------------------------------

    \67\ See 15 U.S.C. 78c(f).
    \68\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The Commission has considered the effects of the proposed 
amendments on competition, efficiency, and capital formation. Many of 
the benefits discussed below are difficult to quantify, in particular 
when considering the potential impact on conflicts of interest or 
competition. Consequently, while the Commission has, wherever possible, 
attempted to quantify the economic effects expected to result from this 
proposal, much of the discussion below is qualitative in nature. 
Moreover, because the existing Rule 17g-5(a)(3) exemption is currently 
in effect (and has been in effect since May 19, 2010--i.e., prior to 
the compliance date for Rule 17g-5(a)(3)), there has been no effect on 
transactions outside the United States because changes in the market 
related to the application of Rule 17g-5(a)(3) have not occurred with 
respect to these transactions as a consequence of the Exemptive Order. 
Where the Commission is unable to quantify the economic effects of the 
proposed amendment, the Commission provides a qualitative assessment of 
the potential effects and encourages commenters to provide data and 
information that could help quantify the costs, benefits, and the 
potential impacts of the proposed amendment to Rule 17g-5(a)(3) on 
efficiency, competition, and capital formation.
    The Commission's preliminary view is that the codification of 
current practices with respect to Rule 17g-5(a)(3) is appropriate when 
compared to the alternative of allowing the existing Rule 17g-5(a)(3) 
exemption to expire, as discussed below. This view was shared by the 
various commenters who requested that the existing Rule 17g-5(a)(3) 
exemption be extended indefinitely, made permanent, or codified in Rule 
17g-5(a)(3).\69\
---------------------------------------------------------------------------

    \69\ See supra note 24 and accompanying text.
---------------------------------------------------------------------------

    As discussed in Section II.B. of this release, the amendments to 
Rule 17g-7(a) and Rule 15Ga-2 are conforming and clarifying in nature. 
Further, unlike the existing Rule 17g-5(a)(3) exemption, the Rule 17g-
7(a) and Rule 15Ga-2 exemptions are already included as part of the 
rule text, and thus not subject to expiration. Therefore, the 
Commission's preliminary view is that the proposed amendments to Rule 
17g-7(a) and Rule 15Ga-2 will not have a material impact on efficiency, 
competition, and capital formation or impose new costs of any 
significance.

B. Baseline and Affected Parties

    The Exemptive Order serves as the economic baseline against which 
the costs and benefits, as well as the impact on efficiency, 
competition, and capital formation, of the proposed codification of the 
existing Rule 17g-5(a)(3) exemption is considered.
    Currently, pursuant to the Exemptive Order, NRSROs are exempt from 
the requirements of paragraphs (i) through (iii) of Rule 17g-5(a)(3) 
for credit ratings where: (1) The issuer of the security or money 
market instrument is not a U.S. person (as defined under 17 CFR 
230.902(k)); and (2) the NRSRO has a reasonable basis to conclude that 
the structured finance product will be offered and sold upon issuance, 
and that any arranger linked to the structured finance product will 
effect transactions of the structured finance product after issuance, 
only in transactions that occur outside the United States. As a result, 
with respect to such structured finance products, NRSROs are currently 
not required to comply with the requirements of Rule 17g-5(a)(3),

[[Page 50305]]

including the requirement to obtain from the arranger a representation 
that the arranger will maintain a website containing all information 
the arranger provides to the hired NRSRO in connection with the rating.
    Similarly, the existing exemptive language of paragraph (a)(3) of 
Rule 17g-7 and paragraph (e) of Rule 15Ga-2 serves as the economic 
baseline against which the costs and benefits, as well as the impact on 
efficiency, competition, and capital formation, of the amendments to 
such rules are considered. As previously noted, the Commission believes 
the amendments to Rule 17g-7(a) and Rule 15Ga-2 are clarifying and 
conforming in nature and do not substantively deviate from the 
baseline.
    The economic and regulatory analysis in this section reflects 
structured finance product markets and the credit rating industry as 
they exist today. We begin with a summary of the approximate number of 
NRSROs that would be directly affected by the proposed codification and 
features of the regulatory and economic environment in which the 
affected entities operate. A discussion of the current economic 
environment will provide a framework for assessing how the proposed 
regulation may impact efficiency, competition, and capital formation in 
this market.
    Currently, ten credit rating agencies are registered with the 
Commission as NRSROs.\70\ Of the ten NRSROs, seven are currently 
registered in the class of credit ratings for issuers of asset-backed 
securities.\71\ Among these seven, three of the larger NRSROs accounted 
for approximately 96 percent of credit ratings outstanding as of 
December 31, 2017; \72\ these three firms have operations outside of 
the United States.
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    \70\ The following credit rating agencies are currently 
registered as NRSROs: A.M. Best Rating Services, Inc. (``A.M. 
Best''); DBRS, Inc. (``DBRS''); Egan-Jones Ratings Company; Fitch 
Ratings, Inc. (``Fitch''); HR Ratings de M[eacute]xico, S.A. de C.V. 
(``HR Ratings''); Japan Credit Rating Agency, Ltd. (``JCR''); Kroll 
Bond Rating Agency, Inc. (``KBRA''); Moody's Investors Service, Inc. 
(``Moody's''); Morningstar Credit Ratings, LLC (``Morningstar''); 
and S&P Global Ratings (``S&P'').
    \71\ The seven NRSROs registered to rate asset-backed securities 
are: A.M. Best; DBRS; Fitch; KBRA; Moody's; Morningstar; and S&P.
    \72\ The three NRSROs are Fitch, Moody's, and S&P. The 
percentage of credit ratings outstanding attributable to Fitch, 
Moody's, and S&P was calculated using information reported by each 
NRSRO on Item 7A of Form NRSRO with respect to its annual 
certification for calendar year 2017. Annual certifications on Form 
NRSRO must be filed with the Commission on EDGAR pursuant to Rule 
17g-1(f) and made publicly and freely available on each NRSRO's 
website pursuant to Rule 17g-1(i). The number of outstanding credit 
ratings for each class of credit ratings for which an NRSRO is 
registered is reported on Item 7A of Form NRSRO.
---------------------------------------------------------------------------

    The credit rating industry is highly concentrated and this market 
structure persists, in part, as a result of the costs associated with 
building the necessary reputational capital. In addition, large and 
incumbent NRSROs benefit from economies of scale, as well as from 
switching costs that issuers are likely to bear if they were to 
consider using different NRSROs. These costs provide incentives for 
issuers to use the services of NRSROs that they have preexisting 
relationships with and represent a barrier that newcomers entering the 
market for credit ratings would need to overcome to compete with 
incumbent credit rating agencies.
    In addition to the above economic barriers to entry, there exist 
some commercial and other barriers to entry.\73\ For instance, the 
investment guidelines of fixed income mutual fund managers and pension 
plan sponsors often specify use of the ratings of particular credit 
rating agencies, and many of these guidelines refer to the larger 
NRSROs by name. Some fixed income indices also require ratings by 
specific NRSROs, thus increasing the demand for ratings from those 
NRSROs. However, it has been reported that some investors are changing 
their guidelines to include ratings from additional NRSROs, and several 
of the smaller NRSROs have reported success in gaining market share 
with respect to the issuers of asset-backed securities.\74\
---------------------------------------------------------------------------

    \73\ See 2017 Annual Report on Nationally Recognized Statistical 
Rating Organizations, available at https://www.sec.gov/ocr/reportspubs/annual-reports/2017-annual-report-on-nrsros.pdf, 24-25 
(discussing various potential barriers to entry including economic, 
commercial, and regulatory barriers).
    \74\ See id. at 21-24.
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    Gathering comprehensive data on foreign issuances of asset-backed 
securities is difficult given the breadth of markets and products one 
needs to consider and that data may not be available for several 
lesser-developed markets. Further, it is often not clear whether these 
issuances are made by non-U.S. persons. However, there has been an 
increase in the issuances of asset-backed securities worldwide since 
2011, with the issuances amounting to approximately $693.9 billion in 
2017.\75\ For example, when considering all underwriters for deals in 
Europe, while the trend has varied over the past five years, the two 
highest annual issuance totals over such period were achieved in 2016 
and 2017.\76\ Asset-backed securities constitute a growing market in 
Europe and other major financial markets, and, as discussed below, any 
application of Rule 17g-5(a)(3) to transactions outside the United 
States could affect the functioning of these foreign markets.\77\
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    \75\ See Asset-Backed Alert (Rankings for Issuers of Worldwide 
Asset- and Mortgage-Backed Securities), available at https://www.abalert.com/rankings.pl?Q=100. See also Commercial Mortgage 
Alert (CMBS Summary--Global CMBS Issuance in 2017), available at 
https://www.cmalert.com/rankings.pl?Q=67. The information on these 
websites, reported as of September 5, 2018, indicates that, 
notwithstanding a slight decline in issuances in 2016, there has 
been an upward trend in the total annual issuances of asset-backed 
securities from 2011 through 2017.
    \76\ See Asset-Backed Alert (Rankings for Bookrunners of 
European Structured Finance Deals), available at https://www.abalert.com/rankings.pl?Q=98, information reported as of 
September 5, 2018. Total issuances in Europe amounted to 
approximately $101.1 billion in 2016 and approximately $95.5 billion 
in 2017. Id.
    \77\ See, e.g., the SIFMA databases that cover historical 
issuances and outstanding values in Europe, the United States, and 
Australia for the following: asset-backed securities, collateralized 
debt obligations/collateralized loan obligations, commercial 
mortgage-backed securities, and residential mortgage-backed 
securities, available at http://www.sifma.org.
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C. Anticipated Costs and Benefits, Including Potential Effects on 
Efficiency, Competition, and Capital Formation

1. Potential Benefits
    As discussed above, the Commission issued the Exemptive Order in 
2010, and an extension of the Exemptive Order is currently in effect. 
Because the proposed exemption to Rule 17g-5(a)(3) and amendments to 
Rule 17g-7(a) and Rule 15Ga-2 would generally maintain the status 
quo,\78\ we do not expect the amendments would result in any major 
economic effects. For the same reason, we also do not expect this 
rulemaking to affect efficiency, competition, or capital formation in 
any major way.
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    \78\ Although the language of the second condition of the 
proposed exemption to Rule 17g-5(a)(3) differs from the comparable 
condition set forth in the Exemptive Order, and conforming changes 
are being proposed to the corresponding conditions in Rule 17g-7(a) 
and Rule 15Ga-2, the changes are clarifying in nature and the 
Commission does not believe they will alter the status quo. See 
supra Section II. The conforming changes being proposed in Rule 17g-
7(a) and Rule 15Ga-2, however, could result in changes from the 
current state. Specifically, those changes could avoid potential 
confusion by arrangers and NRSROs that could result from differences 
in the language of the conditions set forth in the rules.
---------------------------------------------------------------------------

    To the extent that the proposed amendments to Rule 17g-5(a)(3) 
would enhance the certainty of the future status of an exemption to 
this rule, they could result in marginal economic benefits to 
arrangers, NRSROs, and regulators. Specifically, if NRSROs and 
arrangers expect to be required to comply with Rule 17g-5(a)(3) in the 
future, they may allocate personnel and financial resources to 
correspond with foreign and U.S. regulators and to set up applicable 
websites in anticipation of

[[Page 50306]]

future compliance. By promulgating an exemptive rule without a set 
termination date, the Commission preliminarily believes the proposed 
amendment would eliminate the need to incur such costs. Furthermore, by 
reducing the need to incur such costs, the proposed amendment could 
allow issuers and smaller NRSROs to expand in the global structured 
finance market, and could improve competition.
    The proposed exemption would not necessarily result in more intense 
competition between issuers and other intermediaries because issuers 
would continue to offer structured finance products as they do under 
the current regulatory regime. Further, all existing NRSROs rating 
structured finance products could continue to rely on the exemption as 
they do currently under the extended Exemptive Order; therefore, 
competition among these existing credit rating agencies would most 
likely not be affected by the proposed exemption.
2. Potential Costs and Other Anticipated Effects
    Similarly, because the existing Rule 17g-5(a)(3) exemption is 
currently in effect, the proposed amendment to Rule 17g-5(a)(3) should 
not impose any significant additional costs on NRSROs or arrangers of 
structured finance products relative to the baseline.
    However, as is the case with the existing Rule 17g-5(a)(3) 
exemption, issuers and NRSROs may incur some expenses in relying on the 
proposed exemption to Rule 17g-5(a)(3), which is conditioned on an 
NRSRO having a reasonable basis to conclude that all offers and sales 
of the structured finance product by any arranger linked to the 
structured finance product will occur outside the United States. In 
order to have a reasonable basis for such a conclusion, the Commission 
preliminarily believes that NRSROs will likely seek representations 
from arrangers, thereby resulting in associated costs. The Commission 
currently estimates that approximately 267 rated transactions would be 
eligible for the proposed exemption in a given year.\79\ To the extent 
that NRSROs seek representations to support their reasonable belief, 
the Commission estimates that it would cost an arranger approximately 
$720 per transaction to provide such representations,\80\ for total 
aggregate annual costs for all arrangers of approximately 
$192,240.81.\81\
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    \79\ See supra note 63.
    \80\ Calculated as 2 hours per transaction x legal fee for a 
compliance attorney at $360 per hour = $720. The Commission 
estimates the wage rate associated with these burden hours based on 
salary information for the securities industry compiled by the 
Securities Industry and Financial Markets Association (SIFMA). For 
example, the estimated wage figure for compliance attorneys is based 
on published rates for compliance attorneys, modified to account for 
a 1,800-hour work-year and multiplied by 5.35 to account for 
bonuses, firm size, employee benefits, and overhead, yielding an 
effective hourly rate for 2013 of $334 for compliance attorneys. See 
Securities Industry and Financial Markets Association, Report on 
Management & Professional Earnings in the Securities Industry 2013. 
These estimates are adjusted for inflation based on Bureau of Labor 
Statistics data on CPI-U between January 2013 (230.280) and January 
2018 (247.873). Therefore, the 2018 inflation-adjusted effective 
hourly wage rates for compliance attorneys are estimated at $360 
($334 x 247.873/230.280). All effective hourly wage rates discussed 
throughout the release rely on the same SIFMA data inflation 
adjusted to January 2018.
    \81\ Calculated as $720 per transaction x 267 annual 
transactions = $192,240.
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    Similarly, for an NRSRO that chooses to seek representations to 
support its reasonable belief, the Commission estimates that it would 
cost the NRSRO approximately $720 per transaction.\82\ The Commission 
further estimates that each transaction is rated by approximately two 
NRSROs,\83\ for total aggregate annual costs for all NRSROs of 
$384,480.\84\ Thus, to the extent that all NRSROs seek representations 
for all transactions eligible to rely on the proposed exemption to Rule 
17g-5(a)(3) each year, the Commission estimates the proposed amendment 
would result in total annual costs of $576,720.\85\
---------------------------------------------------------------------------

    \82\ Calculated as 2 hours per transaction x legal fee for a 
compliance attorney at $360 per hour = $720.
    \83\ See supra note 63.
    \84\ Calculated as $720 per transaction x 267 annual 
transactions x 2 NRSROs per transaction = $384,480.
    \85\ Calculated as $720 per transaction x 267 annual 
transactions (for arrangers) + $720 per transaction x 267 annual 
transactions x 2 NRSROs per transaction (for NRSROs) = $576,720.
---------------------------------------------------------------------------

    In addition, although the conditions with respect to the exemption 
to Rule 17g-5(a)(3) are substantially the same under the Exemptive 
Order, NRSROs may incur a modest one-time cost to conform their 
processes to reflect the clarifying change being proposed to one of the 
conditions to the exemption. For instance, an NRSRO that currently 
seeks written representations from an arranger to support the 
reasonable belief required under the Exemptive Order may modify the 
form of the representation to conform to the language of the condition 
as proposed. The Commission expects an NRSRO's in-house attorney would 
oversee revisions to the form representation and that there would be a 
one-time burden of five hours for the language to be revised, approved, 
and documented. Accordingly, the Commission estimates a one-time 
aggregate cost of $12,600 for NRSROs to adjust their procedures to 
reflect the clarifying language of the proposed exemption.\86\
---------------------------------------------------------------------------

    \86\ Calculated as 5 hours per NRSRO x legal fee for a 
compliance attorney at $360 per hour x the 7 NRSROs registered to 
rate asset-backed securities = $12,600.
---------------------------------------------------------------------------

    Similarly, additional one-time costs may be incurred by NRSROs to 
modify their processes to reflect the proposed conforming amendments to 
the conditions with respect to the Rule 17g-7(a) exemption. The 
Commission expects the one-time costs incurred by such NRSROs to 
approximate the costs set forth with respect to Rule 17g-5(a)(3) above. 
As with Rule 17g-5(a)(3), the Commission expects an NRSRO's in-house 
attorney would oversee revisions to the form representation with 
respect to the Rule 17g-7(a) exemption and that there would be a one-
time burden of five hours for the language to be revised, approved, and 
documented. Accordingly, the Commission estimates a one-time aggregate 
cost of $18,000 for NRSROs to adjust their procedures to reflect the 
proposed conforming changes to the Rule 17g-7(a) exemption.\87\
---------------------------------------------------------------------------

    \87\ Calculated as 5 hours per NRSRO x legal fee for a 
compliance attorney at $360 per hour x all 10 NRSROs = $18,000.
---------------------------------------------------------------------------

    The Commission believes that no similar costs will be incurred by 
issuers and underwriters as a result of the proposed amendment to Rule 
15Ga-2, given that such rule relates to an obligation of the issuer or 
underwriter of a structured finance product and there is no equivalent 
need to obtain information from a third party to determine if the Rule 
15Ga-2 exemption applies.

3. Alternative Considered: Allow Exemptive Order to Expire

    The Commission considered the alternative of allowing the current 
extension of the Exemptive Order to expire without codifying an 
exemption to Rule 17g-5(a)(3). The Commission preliminarily believes 
that this alternative is not consistent with notions of international 
comity or the Commission's limited interest in regulating securities 
offered and sold exclusively outside the United States. As discussed in 
Section II.A. of this release, the Commission believes principles of 
international comity and reasonable expectations of participants would 
be better served by not allowing the expiration of the current 
extension of the Exemptive Order. The Commission has nevertheless 
considered the economic effects of this alternative, and, as with its 
economic analysis of the proposed exemption to Rule 17g-5(a)(3), the 
Commission

[[Page 50307]]

solicits comment, including estimates and data from interested parties, 
which could help it refine its analysis of the economic effects of this 
alternative.
a. Benefits
    This alternative offers several potential economic benefits. The 
last three decades have witnessed an increase in the globalization of 
financial markets and in cross-border trading. Greater international 
capital flows can contribute to the development of new product markets 
and industries by enabling issuers to raise capital in markets around 
the world. The Commission considered the potential implications of the 
expiration of the existing Rule 17g-5(a)(3) exemption on cross-listing 
activity for U.S. and non-U.S. issuers.\88\ One possible factor that 
hypothetically could affect the flow of capital from U.S. markets to 
foreign alternative trading venues is the costs associated with 
complying with U.S. securities laws. If complying with Rule 17g-5(a)(3) 
implies higher costs for issuers of structured finance products, and 
the costs affect the choice of an issuer's venue, non-U.S. issuers may 
benefit from the current exemptive relief by obtaining funding at a 
lower all-in cost than similarly situated U.S. issuers. If the 
Exemptive Order were to expire, however, such non-U.S. issuers would be 
unable to pursue such a strategy because they would have the same 
regulatory treatment as U.S. issuers. As a result, if the existing Rule 
17g-5(a)(3) exemption were to expire, U.S. and non-U.S. issuers may 
compete for funding on more even terms.
---------------------------------------------------------------------------

    \88\ Although the Commission regulations are designed to promote 
competition, efficiency, and capital formation in U.S. markets and 
to protect U.S. investors, the Commission recognizes that some of 
its regulations impact market participants globally. When 
applicable, the economic effects to those market participants are 
discussed.
---------------------------------------------------------------------------

    Investors and issuers globally could obtain potential economic 
benefits, such as reduced conflicts of interest and informational 
efficiency in credit ratings, if arrangers were required to comply with 
the Rule 17g-5 Program. With respect to certain debt and structured 
finance products, credit ratings provided by non-hired NRSROs using 
information provided pursuant to the Rule 17g-5 Program could serve a 
verification function in capital markets by offering market 
participants a broader set of opinions on the creditworthiness of those 
products.\89\ This information could help investors in their decisions 
to augment the risk profiles of their portfolios through economic 
exposure to investment opportunities.\90\
---------------------------------------------------------------------------

    \89\ See Rule 17g-5 Adopting Release, supra note 2, 74 FR at 
63857.
    \90\ See e.g., Arthur R. Pinto, Control and Responsibility of 
Credit Rating Agencies in the United States, American Journal of 
Comparative Law, Vol. 54 at 341-56 (2006). See also John R.M. Hand 
et al., The Effect of Bond Rating Agency Announcements on Bond and 
Stock Prices, Journal of Finance, Vol. 47, No. 2 at 733-52 (1992).
---------------------------------------------------------------------------

    Globalization, however, can be a conduit of risk and could lead to 
problems in one market or jurisdiction spilling over to other markets 
or jurisdictions.\91\ If the existing Rule 17g-5(a)(3) exemption were 
to expire, then it is possible that any benefits of this rule with 
respect to the credit rating industry in the United States may apply to 
foreign markets as well, potentially reducing the risk of spillovers 
that may result from conflicts of interest that Rule 17g-5(a)(3) was 
designed to address.\92\ Specifically, arrangers that engage in 
structured finance transactions in foreign markets would also need to 
maintain websites containing all information provided to hired NRSROs 
with respect to the rating of such structured finance products and 
provide access to any non-hired NRSRO that makes the required 
certifications. This may permit non-hired NRSROs to provide ratings of 
these products. The availability of additional ratings from an 
independent source may provide incentives to hired NRSROs to provide 
more accurate and unbiased ratings due to reputational concerns. Any 
additional ratings by non-hired NRSROs could, in turn, provide 
investors with independent views on the risk profiles of the structured 
finance products and improve the reliability of the credit ratings of 
these products.\93\ The potential improvement in the quality of ratings 
in foreign markets could attenuate the risk of spillovers, which could 
benefit financial markets globally.
---------------------------------------------------------------------------

    \91\ For instance, the European sovereign debt crisis renewed 
the debate on the role credit rating agencies play during crises and 
the interdependence between different financial markets. This debt 
crisis has included sovereign credit rating downgrades, widening of 
sovereign bond and credit default swap spreads, and pressures on 
stock markets. See, e.g., Manfred G[auml]rtner et al., PIGS or 
Lambs? The European Sovereign Debt Crisis and the Role of Rating 
Agencies, International Advances in Economic Research, Vol. 17, No. 
3 at 288 (2011). See also Valerie De Bruyckere et al., Bank/
Sovereign Risk Spillovers in the European Debt Crisis, Journal of 
Banking & Finance, Vol. 37, Issue 12 at 4793-809 (2013).
    \92\ See Rule 17g-5 Adopting Release, supra note 2, 74 FR at 
63857.
    \93\ See, e.g., Daniel Covitz and Paul Harrison, Testing 
Conflicts of Interest at Bond Rating Agencies with Market 
Anticipation: Evidence that Reputation Incentives Dominate, Federal 
Reserve Board Working Paper No. 2003-68 (2003), for evidence on the 
role of reputation among credit rating agencies. However, there is 
also some evidence to the contrary, wherein the argument is that if 
reputation losses are lower in an industry due to increased 
competition, then there are lesser incentives to provide accurate 
ratings. See Bo Becker and Todd Milbourn, How Did Increased 
Competition Affect Credit Ratings?, Journal of Financial Economics, 
Vol. 101, No. 3 at 493-514 (2011).
---------------------------------------------------------------------------

    The Commission notes, however, that the possible benefits 
attributable to the expiration of the Exemptive Order for Rule 17g-
5(a)(3) should be viewed in light of the concerns expressed by 
commenters (as described in Section II.A. of this release). If any 
foreign laws limit the information an arranger is able to post on the 
website maintained pursuant to the Rule 17g-5 Program, a hired NRSRO 
may not have sufficient information on which to base a credit rating 
or, if the arranger provides information to a hired NRSRO that it 
cannot also post to the website, the hired NRSRO will not be able to 
reasonably rely on the representation it received from the 
arranger.\94\ In either case, NRSROs effectively would be precluded 
from rating structured finance products in such jurisdictions, 
attenuating the benefits described above.
---------------------------------------------------------------------------

    \94\ See supra notes 7-8 and accompanying text.
---------------------------------------------------------------------------

b. Costs
    Several costs of expiration of the existing Rule 17g-5(a)(3) 
exemption are relevant to consider. As mentioned earlier, the 
Commission currently estimates that approximately 267 rated 
transactions would be eligible for the proposed exemption to Rule 17g-
5(a)(3) in a given year.\95\ If the existing Rule 17g-5(a)(3) exemption 
were allowed to expire, the requirements of Rule 17g-5(a)(3) would 
apply with respect to these transactions. The Commission preliminarily 
estimates the following costs as a result of expiration of the existing 
Rule 17g-5(a)(3) exemption.
---------------------------------------------------------------------------

    \95\ See supra note 63.
---------------------------------------------------------------------------

    The Commission believes that expiration of the existing Rule 17g-
5(a)(3) exemption would result in an annual increase in costs of 
$155,916 for NRSROs for additional website maintenance and associated 
compliance costs.\96\ The Commission also estimates

[[Page 50308]]

an annual increase in costs of $45,924 for arrangers to post 
information about new structured finance product transactions to the 
related websites.\97\ Additionally, if certain sponsors do not also 
currently issue rated structured finance products in transactions that 
occur within the United States (which are currently subject to the 
requirements of Rule 17g-5(a)(3)), then they may incur one-time costs 
to set up websites. The Commission estimates that it would take a 
sponsor 300 hours to develop a system, as well as the policies and 
procedures governing the disclosures, resulting in a total of up to 
41,400 hours across 138 sponsors.\98\ The Commission estimates that the 
average one-time cost to each sponsor would be $81,300, and the total 
aggregate one-time cost across all sponsors would be up to 
$11,219,400.\99\ Finally, on an ongoing basis, the Commission estimates 
an annual increase in costs of $2,231,453 for arrangers to make 
additional information about these transactions available on the 
related websites each month and to monitor compliance with its 
obligations over the life of the structured finance products.\100\
---------------------------------------------------------------------------

    \96\ The Commission estimates that it will take approximately 
one hour per transaction for website maintenance and that an NRSRO 
would have a webmaster perform these responsibilities, at a cost of 
$244 per hour. The Commission further estimates that each 
transaction will be rated by approximately two NRSROs (see supra 
note 63). Therefore, the estimated annual cost for website 
maintenance by NRSROs involved with 267 structured finance ratings 
would be $130,296 (267 transactions x 1 hour per transaction x $244 
per hour x 2 NRSROs per transaction). In addition, the Commission 
estimates that compliance personnel at an NRSRO will spend, on 
average, one hour per month to monitor compliance with the 
requirements of the Rule 17g-5 Program. Staff estimates a $305 per 
hour figure for a compliance manager. Therefore, the estimated 
annual compliance cost would be $25,620 (12 months per year x 1 hour 
per month x $305 per hour x 7 NRSROs registered to rate asset-backed 
securities). As a result, the total estimated annual cost for NRSROs 
would be $155,916 ($130,296 website maintenance cost + $25,620 
compliance cost).
    \97\ The Commission estimates that it will take an arranger 
approximately one hour per transaction to post the information it 
provides to a hired NRSRO to the related website. The Commission 
believes that an arranger would have a junior business analyst 
perform these responsibilities, at a cost of $172 per hour. 
Therefore, based on the estimate of 267 rated transactions per year, 
the estimated annual cost for arrangers to make such information 
available on the related website would be $45,924 (267 transactions 
x 1 hour per transaction x $172 per hour).
    \98\ Total hours to develop systems would be 41,400 (138 
sponsors x 300 hours per sponsor). The number of sponsors was 
estimated using information as of September 5, 2018 from the Asset-
Backed Alert and Commercial Mortgage Alert databases. Isolating the 
transactions coded in the database as ``Non-U.S.'' offerings and 
sorting the data by sponsor (in the case of the Asset-Backed Alert 
database) or seller (in the case of the Commercial Mortgage Alert 
database) enables an estimate of the number of separate sponsors 
that would be eligible for the exemption. The estimate represents 
the average number of such sponsors for the years ended December 31, 
2015, 2016, and 2017. We note that the estimate of the aggregate 
hours across all sponsors represents upper bounds, as it is 
plausible that some sponsors also issue structured finance products 
in U.S.-based transactions and would have already incurred any such 
one-time costs.
    \99\ As discussed in the Rule 17g-5 Adopting Release, the 
Commission believes that a sponsor would use a compliance manager 
and a programmer analyst to perform these functions, and each would 
spend 50% of the estimated hours conducting these tasks. The average 
hourly cost for a compliance manager is $305 and the average hourly 
cost for a programmer analyst is $237. Therefore, the average one-
time cost to a sponsor would be $81,300 ([150 hours x $305 per hour] 
+ [150 hours x $237 per hour]). The aggregate cost across all 
sponsors would be up to $11,219,400 (138 sponsors x $81,300 per 
sponsor). We note that these estimates represent upper bounds. As 
noted in note 98, some sponsors may have already incurred any one-
time set up costs in connection with U.S.-based issuances. In 
addition, it is plausible that sponsors will obtain these services 
for a much lower cost from web service providers.
    \100\ The Commission estimates that it will take an arranger 
approximately half an hour per month for each transaction to make 
such information available on the related website. The hourly burden 
per transaction for a year is 6 hours (0.5 hours per month x 12 
months). The Commission believes that an arranger would have a 
junior business analyst perform these responsibilities at a rate of 
$172. Further, we relied on the Rule 17g-5 Adopting Release to infer 
the total number of outstanding deals under surveillance. In that 
release, the Commission indicated that, on average, an arranger will 
issue 20 new deals a year and will have 125 outstanding deals, or 
6.25 outstanding deals for every new deal. Combining this with our 
estimate of 267 new transactions per year yields an estimate of 6.25 
x 267 = 1,669 outstanding deals. Combining these estimates, the 
annual cost for arrangers to provide information on ongoing deals is 
$1,722,408 (1,669 outstanding transactions x $172 per hour x 6 hours 
per year). In addition, the Commission estimates that compliance 
personnel at an arranger will spend, for each outstanding 
transaction, one hour per year to monitor compliance with its 
requirements in connection with the Rule 17g-5 Program. The 
Commission estimates a $305 per hour figure for a compliance 
manager. Therefore, the estimated annual compliance cost would be 
$509,045 (1 hour per transaction, per year x $305 per hour x 1,669 
outstanding transactions). As a result, the total estimated annual 
ongoing cost for arrangers would be $2,231,453 ($1,722,408 website 
maintenance cost + $509,045 compliance cost).
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    In addition to these direct compliance costs, expiration of the 
existing Rule 17g-5(a)(3) exemption could result in costs that are 
difficult to quantify. For instance, an incremental increase in costs 
resulting from the applicability of the Rule 17g-5 Program may vary 
significantly from transaction to transaction, contributing to the 
difficulty in quantifying such costs. A bespoke transaction may require 
significantly more communications between the arranger and the hired 
NRSRO than a transaction by a frequent issuer of similar securities, 
resulting in the incurrence of higher costs to arrangers. Moreover, the 
Rule 17g-5 Program requires that information must be posted to the 
arranger's website at the same time such information is provided to a 
hired NRSRO. If the exemption were to expire, information that may have 
previously been communicated verbally to a hired NRSRO may need to be 
memorialized in writing. In certain cases, an arranger may enlist 
outside counsel to draft or review materials to be provided to a hired 
NRSRO, resulting in additional costs.
    Further, there are potential negative economic consequences. Since 
the global financial crisis there have been other efforts, in addition 
to the Dodd-Frank Wall Street Reform and Consumer Protection Act,\101\ 
to assess and regulate the credit rating industry as well as to 
encourage market participants to establish stronger internal credit 
risk assessment practices. As discussed in Section II.A. of this 
release, commenters have expressed concerns that the requirements of 
Rule 17g-5(a)(3) could potentially be duplicative of or conflict with 
regulations applicable to NRSROs and arrangers in foreign markets, and 
thus harm the competitive position of NRSROs in those markets.\102\ 
Failure to provide relief regarding the application of Rule 17g-5(a)(3) 
to transactions offered and sold exclusively outside the United States 
may be viewed as inconsistent with notions of international comity.
---------------------------------------------------------------------------

    \101\ Public Law 111-203, 124 Stat. 1376, H.R. 4173 (July 21, 
2010).
    \102\ See supra notes 26-33 and accompanying text.
---------------------------------------------------------------------------

    The expiration of the existing Rule 17g-5(a)(3) exemption may lead 
to losses for NRSROs if, as commenters suggest, conflicts exist between 
the requirements of the Rule 17g-5 Program and foreign laws that limit 
the information available to NRSROs. Some NRSROs could be precluded 
from rating structured finance products in such jurisdictions, which 
could lead to loss of revenue associated with credit ratings that 
NRSROs currently provide under the existing Exemptive Order. NRSROs may 
also experience losses as a result of the expiration of the existing 
Rule 17g-5(a)(3) exemption due to competitive pressures in the foreign 
markets from credit rating agencies that are not registered as NRSROs 
(``non-NRSRO rating agencies'') and therefore not subject to Rule 17g-
5(a)(3). Expiration of the existing Rule 17g-5(a)(3) exemption may also 
lead to new compliance costs for NRSROs and arrangers relating to 
posting information on the websites with respect to credit ratings 
maintained by NRSROs that had previously been subject to the exemption. 
From the point of view of arrangers, additional costs of compliance 
could result in a decline in their issuances of structured finance 
products if alternative non-NRSRO rating agencies are unavailable or 
unacceptable to arrangers or investors.
    Finally, if the existing Rule 17g-5(a)(3) exemption were allowed to 
expire, this could also raise legal barriers to entry for smaller 
NRSROs that may be planning to expand their

[[Page 50309]]

foreign ratings business.\103\ The increased set-up costs may lower 
such NRSROs' incentives to rate structured finance products in those 
foreign markets.
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    \103\ Three of the four smaller NRSROs registered in the class 
of credit ratings for issuers of asset-backed securities list 
foreign affiliates as credit rating affiliates on their most 
recently filed Form NRSRO. Form NRSRO filings can be accessed 
through the Commission's EDGAR system.
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VI. Small Business Regulatory Enforcement Fairness Act

    Under the Small Business Regulatory Enforcement Fairness Act of 
1996, or ``SBREFA,'' \104\ the Commission must advise OMB as to whether 
the proposed regulation constitutes a ``major rule.'' Under SBREFA, a 
rule is considered ``major'' where, if adopted, it results or is likely 
to result in: (i) An annual effect on the economy of $100 million or 
more (either in the form of an increase or a decrease); (ii) a major 
increase in costs or prices for consumers or individual industries; or 
(iii) a significant adverse effect on competition, investment, or 
innovation. If a rule is ``major,'' its effective date will generally 
be delayed for 60 days pending Congressional review.
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    \104\ 123 Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C. and 15 U.S.C., including 
as a note to 5 U.S.C. 601).
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    The Commission requests comment on the potential annual economic 
impact of the proposed amendments to Rule 17g-5(a)(3), Rule 17g-7(a), 
and Rule 15Ga-2, any potential increase in costs or prices for 
consumers or individual industries, and any potential effect on 
competition, investment, or innovation. Commenters are requested to 
provide empirical data and other factual support for their views to the 
extent possible.

VII. Regulatory Flexibility Act Certification

    Section 603(a) of the Regulatory Flexibility Act of 1980 (``RFA'') 
\105\ requires the Commission to undertake an initial regulatory 
flexibility analysis of the proposed rule amendments on small entities 
unless the Commission certifies that the proposal, if adopted, would 
not have a significant economic impact on a substantial number of small 
entities.\106\ Pursuant to 5 U.S.C. 605(b), the Commission hereby 
certifies that the proposed amendments to Rule 17g-5(a)(3), Rule 17g-
7(a), and Rule 15Ga-2 would not, if adopted, have a significant 
economic impact on a substantial number of small entities.
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    \105\ 5 U.S.C. 601 et seq.
    \106\ See 5 U.S.C. 605(b).
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    The proposed amendment to Rule 17g-5(a)(3) would provide an 
exemption from the requirements of paragraphs (i) through (iii) of Rule 
17g-5(a)(3) with respect to credit ratings if the issuer of the 
structured finance product is not a U.S. person, and the NRSRO has a 
reasonable basis to conclude that all offers and sales of the 
structured finance product by any arranger linked to the structured 
finance product will occur outside the United States. The proposed 
amendments to Rule 17g-7(a) and Rule 15Ga-2 conform the existing 
exemptions with respect to such rules to the proposed amendment to Rule 
17g-5(a)(3) in order to reflect certain clarifying changes to the 
conditions thereof.
    The Commission's rules do not define ``small business'' or ``small 
organization'' with respect to NRSROs. However, 17 CFR 240.0-10(a) 
provides that, for purposes of the RFA, 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.'' 
\107\ The Commission has stated in the past that an NRSRO with total 
assets of $5 million or less would qualify as a ``small'' entity for 
purposes of the RFA.\108\ The Commission continues to believe this 
threshold of total assets of $5 million or less would qualify an NRSRO 
as ``small'' for purposes of the RFA.\109\
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    \107\ See Rule 0-10(a).
    \108\ See, e.g., Oversight of Credit Rating Agencies Registered 
as Nationally Recognized Statistical Rating Organizations, Exchange 
Act Release No. 55857 (June 5, 2007), 72 FR 33564, 33618 (June 18, 
2007); Amendments to Rules for Nationally Recognized Statistical 
Rating Organizations, Exchange Act Release No. 59342 (Feb. 2, 2009), 
74 FR 6456, 6481 (Feb. 9, 2009); Rule 17g-5 Adopting Release, supra 
note 2, 74 FR at 63863.
    \109\ Under Section 601(3) of the RFA, the term ``small 
business'' is defined as having ``the same meaning as the term 
`small business concern' under Section 3 of the Small Business Act, 
unless an agency, after consultation with the Office of Advocacy of 
the Small Business Administration and after opportunity for public 
comment, establishes one or more definitions of such term which are 
appropriate to the activities of the agency and publishes such 
definition(s) in the Federal Register.''
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    Currently, there are ten credit rating agencies registered with the 
Commission as NRSROs and, based on their most recently filed annual 
reports pursuant to 17 CFR 240.17g-3,\110\ two NRSROs are small 
entities under the above definition. Neither of these two NRSROs is 
currently registered for the class of credit ratings for issuers of 
asset-backed securities.
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    \110\ See Rule 17g-3.
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    The Commission preliminarily believes that the proposed amendments 
to Rule 17g-5(a)(3) would not, if adopted, have a significant economic 
impact on a substantial number of ``small entities'' as defined by the 
RFA. The proposed amendment to Rule 17g-5(a)(3) applies exclusively to 
rated structured finance products and the NRSROs that are considered 
small under the above definition are not currently registered for the 
class of credit ratings for issuers of asset-backed securities.
    The Commission preliminarily believes that the proposed amendments 
to Rule 17g-7(a) would not, if adopted, have a significant economic 
impact on a substantial number of ``small entities'' as defined by the 
RFA. Although Rule 17g-7(a) applies to all NRSROs, including the two 
NRSROs that qualify as ``small'' for purposes of the RFA, the 
Commission preliminarily believes that the economic impact of the 
proposed amendments to Rule 17g-7(a) would not be significant. The Rule 
17g-7(a) exemption is already included as part of the rule text, and 
the proposed amendments to such exemption are clarifying in 
nature.\111\ The Commission preliminarily believes NRSROs may incur 
modest one-time costs to modify their processes to reflect the proposed 
amendments to the Rule 17g-7(a) exemption,\112\ but that any ongoing 
annual costs related to the exemption, amended as proposed, are likely 
to be unchanged relative to the existing exemption.
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    \111\ See supra Section II.B. (discussing the proposed 
amendments to Rule 17g-7(a) in more detail).
    \112\ The Commission estimates that it will take an NRSRO 
approximately 5 hours to modify its processes to reflect the 
proposed amended language of the exemption. The Commission believes 
that the work will likely be completed by a compliance attorney at 
$360 per hour, resulting in a cost of $1,800 for each NRSRO. See 
supra note 87 and accompanying text.
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    The adopting release for Rule 15Ga-2 certified that Rule 15Ga-2 and 
the amendments to Form ABS-15G will not have a significant economic 
impact on a substantial number of small entities.\113\ As is the case 
with Rule 17g-7(a), the Rule 15Ga-2 exemption is already included as 
part of the rule text, and the proposed amendments to such exemption 
are clarifying in nature.\114\ In addition, Rule 15Ga-2 relates to an 
obligation of the issuer or underwriter of a structured finance product 
and there is no need to obtain information from a third party to 
determine if the 15Ga-2 exemption applies. As such, the Commission 
preliminarily believes that

[[Page 50310]]

no costs will be incurred by issuers and underwriters as a result of 
the proposed amendment to the Rule 15Ga-2 exemption.
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    \113\ See 2014 NRSRO Amendments, supra note 2, 79 FR at 55257.
    \114\ See supra Section II.B. (discussing the proposed 
amendments to Rule 17g-7(a) in more detail).
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    The Commission encourages written comments regarding this 
certification. We solicit comment as to whether the proposed amendments 
to Rule 17g-5(a)(3), Rule 17g-7(a), and Rule 15Ga-2 could have a 
significant economic impact on a substantial number of small entities. 
The Commission requests that commenters describe the nature of any 
impact on small entities and provide empirical data to support the 
extent of such impact.

VIII. Statutory Authority

    The Commission is proposing an amendment to 17 CFR 240.17g-5(a)(3), 
17 CFR 240.17g-7(a), and 17 CRF 240.15Ga-2 pursuant to the authority 
conferred by the Exchange Act, including Sections 15E, 17(a), and 36 
(15 U.S.C. 78o-7, 78q, and 78mm).

List of Subjects in 17 CFR Part 240

    Reporting and recordkeeping requirements, Securities.

Text of Proposed Amendment

    In accordance with the foregoing, the Commission proposes that 
title 17, chapter II of the Code of Federal Regulations be amended as 
follows:

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

0
1. The authority citation for part 240 continues to read as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq.; and 
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; and 
Pub. L. 111-203, 939A, 124 Stat. 1887 (2010); and secs. 503 and 602, 
Pub. L. 112-106, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
    Section 240.15Ga-2 is also issued under sec. 943, Public Law 
111-203, 124 Stat. 1376.
* * * * *
    Section 240.17g-7 is also issued under sec. 943, Public Law 111-
203, 124 Stat. 1376.
* * * * *
0
2. Amend Sec.  240.15Ga-2 by revising paragraph (e) to read as follows:

Sec.  240.15Ga-2  Findings and conclusions of third-party due diligence 
reports.

* * * * *
    (e) The requirements of this rule would not apply to an offering of 
an asset-backed security if certain conditions are met, including:
    (1) The offering is not required to be, and is not, registered 
under the Securities Act of 1933;
    (2) The issuer of the rated security is not a U.S. person (as 
defined in Sec.  230.902(k)); and
    (3) All offers and sales of the security by any issuer, sponsor, or 
underwriter linked to the security will occur outside the United States 
(as that phrase is used in Sec. Sec.  230.901 through 230.905 
(Regulation S)).
* * * * *
0
3. Amend Sec.  240.17g-5 by adding paragraph (a)(3)(iv) to read as 
follows:

Sec.  240.17g-5  Conflicts of interest.

    (a) * * *
    (3) * * *
    (iv) The provisions of paragraphs (a)(3)(i) through (iii) of this 
section will not apply to a nationally recognized statistical rating 
organization when issuing or maintaining a credit rating for a security 
or money market instrument issued by an asset pool or as part of any 
asset-backed securities transaction, if:
    (A) The issuer of the security or money market instrument is not a 
U.S. person (as defined in Sec.  230.902(k) of this chapter); and
    (B) The nationally recognized statistical rating organization has a 
reasonable basis to conclude that all offers and sales of the security 
or money market instrument by any issuer, sponsor, or underwriter 
linked to the security or money market instrument will occur outside 
the United States (as that phrase is used in Sec. Sec.  230.901 through 
230.905 (Regulation S) of this chapter).
* * * * *
0
4. Amend Sec.  240.17g-7 by revising paragraph (a)(3) to read as 
follows:

Sec.  240.17g-7   Disclosure requirements.

    (a) * * *
    (3) Exemption. The provisions of paragraphs (a)(1) and (2) of this 
section do not apply to a rating action if:
    (i) The rated obligor or issuer of the rated security or money 
market instrument is not a U.S. person (as defined in Sec.  230.902(k) 
of this chapter); and
    (ii) The nationally recognized statistical rating organization has 
a reasonable basis to conclude that:
    (A) With respect to any security or money market instrument issued 
by a rated obligor, all offers and sales by any issuer, sponsor, or 
underwriter linked to the security or money market instrument will 
occur outside the United States (as that phrase is used in Sec. Sec.  
230.901 through 230.905 (Regulation S) of this chapter); or
    (B) With respect to a rated security or money market instrument, 
all offers and sales by any issuer, sponsor, or underwriter linked to 
the security or money market instrument will occur outside the United 
States (as that phrase is used in Sec. Sec.  230.901 through 230.905 
(Regulation S) of this chapter).
* * * * *

    By the Commission.

    Dated: September 26, 2018.
Brent J. Fields,
Secretary.
[FR Doc. 2018-21295 Filed 10-4-18; 8:45 am]
BILLING CODE 8011-01-P