Credit Rating Analysts: Views Varied on Merits of a Professional Organization, but Creating One Now Viewed as Premature
Published: 2015-07-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The 2007–2009 financial crisis renewed concerns about the integrity of the credit rating industry. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) imposed new requirements on NRSROs and required SEC to implement regulations for training, experience, and competence of credit rating analysts. The Dodd-Frank Act also included a provision for GAO to conduct a study on the merits and feasibility of creating a professional organization for rating analysts employed by NRSROs.
This report describes views on (1) the potential merits of and need for a professional organization for credit rating analysts, and (2) any challenges associated with creating and operating such an organization. For this report, GAO reviewed SEC documentation and academic literature; held focus groups with approximately 100 credit rating analysts from different-sized firms who had a range of experience and skills; and interviewed SEC staff, representatives from all 10 NRSROs, and experts and stakeholders (including, academics, investors, advocacy groups, and international regulators). GAO also analyzed the structure and activities of six professional organizations that develop and oversee professional standards and a code of conduct, and interviewed representatives of the organizations.
section_title: What GAO Found
paragraphs: Views varied on the merits of a professional organization for credit rating analysts of nationally recognized statistical rating organizations (NRSRO), but some concluded it was too early to tell if one was needed, in part because of new Securities and Exchange Commission (SEC) requirements on NRSROs to establish standards for their analysts. The analysts, representatives of NRSROs and existing professional organizations, and experts and stakeholders (including academics, investors, advocacy groups, and international regulators) with whom GAO spoke said the merits of such an organization included improving the industry's reputation, enhancing the quality of work done by the professionals, and supplementing existing oversight. However, some said creating such an organization could duplicate existing standards, codes of conduct, or the services provided by other professional organizations. Some said that establishing a professional organization without evaluating the effectiveness of SEC's new regulations (which became effective in June 2015) would be premature. These rules require each NRSRO to establish training, experience, and competence standards to ensure analysts produce accurate ratings and to periodically test analysts' knowledge of the NRSRO's procedures and methodologies. Thus, some held the view that it was too early to determine in what areas a professional organization might add value—that is, add to or complement (rather than duplicate) standards, codes of conduct, training, or oversight—or if one was needed at all.
Creating and operating a professional organization for NRSRO credit rating analysts would not be without certain challenges. According to most analysts and representatives of NRSROs and some experts and stakeholders, the challenges primarily would relate to achieving the following aims:
Clearly delineated purpose . Delineating the mission or purposes of an organization would be difficult at the present time because the effects of the new SEC regulations were unknown.
Adequate funding. Obtaining sufficient funding through membership fees also might be difficult because of the relatively small population of analysts (about 4,500 as of 2014) to provide the fees.
Balanced representation. Creating an organizational structure that would provide equitable representation for all members, including from smaller NRSROs, could be challenging because of industry concentration (88 percent of analysts work for 3 of the 10 NRSROs).
Meaningful activities. Developing core activities and services, including professional standards, education and training curricula, certification tests, and structures to oversee member compliance could be challenging because of differences in NRSRO methodologies, concerns about sharing confidential information, and analyst specialization in specific rating classes (such as insurance or asset-backed securities).

section_title: Letter
paragraphs: Credit rating agencies registered with the Securities and Exchange  Commission (SEC) as nationally recognized statistical rating  organizations (NRSRO) had more than 2 million credit ratings outstanding  and employed more than 4,500 credit rating analysts at the end of 2014.  Historically, investors and financial regulators relied heavily on credit  ratings produced by NRSROs. Since the 1970s, the NRSRO designation  became embedded in federal and state laws and regulations, as well as  in investment guidelines and private contracts, and NRSRO ratings  became benchmarks for establishing minimum quality investment  standards. After the 2007-2009 financial crisis, questions were once  again raised about the quality and accuracy of credit ratings when many  investment-grade rated securities were downgraded to junk bond status.  In addition, in 2008, SEC published a report on a self-initiated  examination of the three largest NRSROs that determined that the  agencies did not have comprehensive written procedures for analysts to  use when rating certain types of securities and did not disclose significant  aspects of rating processes and methodologies.
In 2010, Congress moved to address concerns related to credit ratings— particularly those of NRSROs—in the Dodd-Frank Wall Street Reform  and Consumer Protection Act (Dodd-Frank Act).  Congress noted that the  activity and performance of credit rating agencies, including NRSROs, are  matters of public interest, as credit rating agencies, which play a critical  “gatekeeper” role in the debt market, are central to capital formation,  investor confidence, and the efficient performance of the U.S. economy.  The Dodd-Frank Act also required SEC to issue rules that are reasonably  designed to ensure that any person employed by an NRSRO to perform  credit ratings meets training, experience, and competence standards and  is tested for knowledge of the rating process. SEC issued a final rule  implementing this requirement in August 2014, which became effective on  June 15, 2015.
Section 939E of the Dodd-Frank Act also requires us to conduct a study  and issue a report on the feasibility and merits of creating an independent  professional organization for credit rating analysts employed by NRSROs  that would be responsible for establishing independent standards for  governing the profession of rating analysts, establishing a code of ethical  conduct, and overseeing the profession of rating analysts. describes views on (1) the potential merits of and need for a professional  organization for credit rating analysts and (2) identified components of  and challenges associated with creating and operating such an  organization, and possible alternatives for establishing and overseeing  professional standards and a code of ethical conduct.
To address these objectives, we obtained information from SEC  roundtables and comment letters on SEC’s proposed rules relating to  standards for training, experience, and competence of credit rating  analysts, improved ethics training, and possible licensing and certification  requirements for credit rating analysts. We also conducted a literature  review to identify available information about the credit rating industry,  including the definition of a credit rating and professional organization;  number and nature of firms that serve as credit rating agencies, or  NRSROs; and relevant laws and regulations. We collected and analyzed  information on existing professional organizations such as membership  requirements, funding channel, government role, source of authority, and  typical services provided. We identified three potential models of a  professional organization for credit rating analysts. We also obtained  information on other structures or instruments (regulatory or otherwise)  that could be used to establish standards and a code of ethical conduct  for governing and overseeing the profession.
Pub. L. No. 111-203, § 939E, 124 Stat. at 1,888. prior SEC events; recommendations from experts, and other internal and  external stakeholders; participation in prior congressional hearings or  industry conferences; literature reviews and Internet searches; and  bibliographies of relevant papers and studies. Included in the  semistructured interviews were SEC officials and NRSRO  representatives. In addition, to incorporate other perspectives, we  interviewed investors, representatives of credit rating and analysis firms  not registered with SEC, representatives of the Software and Information  Industry Association, officials with the European Securities and Markets  Authority and International Organization of Securities Commissions  (IOSCO), academics, and advocacy groups. We refer to this group of  individuals as “experts and stakeholders” throughout the report. We also  interviewed representatives of existing professional organizations to  obtain perspectives on the merits of creating a professional organization,  advantages and disadvantages, and challenges that can arise in creating  and operating professional organizations, generally. Additionally, we  obtained and reviewed available information on why such organizations  are generally formed (the perceived need, pertaining to the specific  industry, profession, or the public) as well as the need for professional  standards and codes of ethical conduct for members. Lastly, we held  focus group discussions with credit rating analysts from different-sized  NRSROs who have a range of experience and skills to obtain their views  about creating a professional organization for analysts. Throughout this  report, we use certain qualifiers when describing these interview  participants, such as “few,” “some,” and “most.” We define few as a small  number such as two or three; some as at least four or more; and most as  the majority or nearly all.
We conducted this performance audit from October 2014 to July 2015 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives. More information on our scope  and methodology is contained in appendix I.
subsections: section_title: Background
paragraphs: The credit rating industry is highly concentrated. As of April 2015, there  were 10 registered NRSROs. In fiscal year 2013, the 3 largest NRSROs  accounted for 95 percent of the year’s total reported NRSRO revenue and  as of December 2014, they issued 96 percent of all outstanding ratings.  These 3 firms also employed 88 percent of the approximately 4,500 credit  rating analysts who work at NRSROs (see table 1). Other firms that do  not describe themselves as rating agencies and firms that are not  registered with SEC also conduct credit rating-type analyses. According  to SEC, the agency does not collect data on this group of firms.
subsections: section_title: Credit Ratings
paragraphs: A credit rating is an assessment of the creditworthiness of an obligor as  an entity or with respect to specific securities or money market  instruments. These assessments reflect a variety of quantitative and  qualitative factors that vary based on sector and NRSRO. To determine  an appropriate rating, analysts use publicly available information and  market and economic data, and may hold discussions and obtain  nonpublic information from the issuer. Commonly, analysts then present  their proposed rating to a ratings committee in their agency, and the  committee discusses and evaluates the data before voting on a decision.  The decision of the ratings committee then is communicated to the issuer  seeking the rating and a final rating is issued.
Issuers seek credit ratings to improve the marketability or pricing of their  securities or to satisfy investors, lenders, or counterparties. Institutional  investors may use credit ratings as one of several inputs to internal credit  assessments and investment analyses, or to facilitate the trading of  securities. Broker-dealers also use ratings to recommend and sell  securities to clients or determine acceptable counterparties and collateral  levels for outstanding credit exposures.
An NRSRO can be registered in one or more of five classes of credit  ratings: (1) financial institutions, brokers, or dealers; (2) insurance  companies; (3) corporate issuers; (4) issuers of asset-backed securities;  and (5) issuers of government securities, municipal securities, or  securities issued by a foreign government. Five NRSROs are registered  with SEC to rate in five classes, while others are registered in fewer.
section_title: U.S. Credit Rating Industry Reforms
paragraphs: Since the early 2000s, Congress has taken measures to reform the credit  rating industry. In 2006, Congress passed the Credit Rating Agency  Reform Act, to improve ratings quality by fostering accountability,  transparency, and competition in the credit rating industry. The Credit  Rating Agency Reform Act added section 15E to the Exchange Act, which  established SEC oversight over NRSROs. Section 15E also requires  SEC to conduct examinations at least annually of each NRSRO to  monitor compliance with statutory and regulatory requirements. Each  examination must include a review of areas including, among other  things, whether the NRSRO conducts business in accordance with its  policies, procedures, and methodologies, as well as the management of  conflicts of interest by and internal supervisory controls of the NRSRO.
The performance of the three largest NRSROs in rating subprime  residential mortgage-backed securities (RMBS) and related securities  renewed questions about the accuracy of their credit ratings generally,  the integrity of the ratings process, and investor reliance on NRSRO  ratings for investment decisions. Since the 2007–2009 financial crisis, the  United States has put in place additional regulation of credit rating  agencies. The Dodd-Frank Act required that SEC establish the Office of  Credit Ratings (OCR) to administer SEC rules with respect to the  practices NRSROs use in determining credit ratings. SEC established  the office in June 2012; OCR has since assumed responsibility for  oversight activities, such as the annual examinations of NRSROs to  assess their compliance with SEC rules.
The Dodd-Frank Act also required SEC to issue regulations imposing new  requirements on NRSROs related to qualification standards for credit  rating analysts. SEC issued new rules, which became effective in June  2015, containing the following requirements:
Each NRSRO must establish, maintain, enforce, and document  standards of training, experience, and competence for its credit  analysts.
In the required standards, each NRSRO must include a requirement  for periodic testing of its credit analysts on their knowledge of the  NRSRO’s procedures and methodologies used to determine credit  ratings.
The standards also must include a requirement that at least one  individual with an “appropriate level of experience in performing credit  analysis, but not less than 3 years” participates in the determination of  a credit rating. These standards apply to all individuals who participate  in the determination of credit ratings, including individuals at NRSROs  and credit rating affiliates located in other countries.
Before SEC issued the new rules, there were no regulatory requirements  for training and testing of credit rating analysts in the United States.
section_title: Select International Credit Rating Industry Reforms
paragraphs: Regulatory requirements also exist internationally for credit rating  agencies. For example, in 2009, the European Union (EU) established  rules for credit rating agencies in the EU. These rules include basic  requirements that all staff involved in the ratings process have  appropriate knowledge and experience to complete their assigned duties,  but do not specify training and competence standards for analysts or  require testing. Similar to OCR in the United States, the European  Commission established the European Securities and Markets  Authority—the EU financial regulatory institution and European  Supervisory Authority—in January 2011 to provide exclusive registration  and supervision of credit rating agencies in the EU.
In 2008, the leaders of the Group of 20 (G20) pledged to strengthen  oversight of credit rating agencies. Specifically, as part of the G20  declaration at its November 2008 summit, regulators were charged with  taking steps to ensure that credit rating agencies met IOSCO—an  international standard-setting body for the securities sector—standards,  avoided conflicts of interest, and had the right incentives and appropriate  oversight to enable them to provide unbiased information and  assessments. Subsequently, several countries’ regulators took additional  steps to increase oversight of these agencies. For example, regulatory  authorities in Hong Kong, Singapore, and Saudi Arabia established  licensing regimes for credit rating analysts.
Many credit rating agencies around the world voluntarily comply with  IOSCO’s Code of Conduct Fundamentals for Credit Rating Agencies  (Code). The Code includes standards about implementing and enforcing  procedures for methodologies analysts must use, ethical practices they  should follow, and conflicts of interest they should avoid. Additionally, a  March 2015 revision includes a new provision that analysts undergo  formal ongoing training at reasonably timed intervals, including education  on the agency’s code of conduct, methodologies, and on policies and  laws that govern the agency. Most NRSROs voluntarily comply with and  adhere to a code of conduct that is consistent with some or all of the  IOSCO Code.
section_title: Professional Organizations
paragraphs: Generally, independent professional organizations are established to help  protect the integrity of a specific profession and provide safeguards for  stakeholders, such as investors, and the public. Professional  organizations are membership-based. The specific responsibilities of  professional organizations may evolve over time, but the primary  responsibilities of these organizations generally include the following: educating members, which often includes promoting knowledge  sharing among members and engaging in research related to the  profession; developing standards to govern the profession (including codes of overseeing member compliance with the standards; registering or providing certification or examination for members in the  profession, or both; and engaging in public education, outreach, or (in some cases) advocacy  about the profession.
Key elements of these organizations vary depending on the type and  purpose of the organization, including membership requirements  (mandatory versus voluntary and institutional versus individual), funding,  and the role of government. In addition, professional organizations take  various measures to safeguard their independence, including  consideration of the composition of their governing board and their  funding source.
section_title: Views Varied on the Merits of a Professional Organization for Credit Rating Analysts
paragraphs: Views varied on the merits of a professional organization for credit rating  analysts of nationally recognized statistical rating organizations, but most  concluded it was too early to tell if one was needed. Professional  organizations, including a professional organization for credit rating  analysts, can improve the reputation of the industry where the  professionals work, promote collaboration and sharing to enhance quality,  and supplement existing oversight. However, all analysts with whom we  spoke as well as representatives of NRSROs; a few experts and  stakeholders (including academics, investors, advocacy groups, and  international regulators); and SEC officials told us that such an  organization for credit rating analysts could duplicate existing professional  standards, codes of ethical conduct, and oversight of credit rating  analysts. More importantly, in light of SEC’s new standards to help ensure  the training, experience, and competence of credit rating analysts, some  representatives and a few analysts and experts and stakeholders said  that it was too early to determine what role a professional organization  would play, or whether a professional organization was needed at all.
Professional organizations can help to improve an industry’s reputation,  enhance quality, and supplement existing regulatory oversight.
Improved reputation. According to some professional organization  representatives with whom we spoke, professional organizations can  increase the public’s trust in an industry by developing shared  professional standards and oversight processes to help ensure the  quality of the work. For example, shared standards can help define a  minimum baseline for skills that professionals need, promote ethical  behaviors in the profession, and provide a process for identifying and  removing bad actors. A few analysts and one NRSRO representative  explained that a professional organization for credit rating analysts  could improve the reputation of NRSROs and credit rating analysts.
Enhanced quality. Professional organizations facilitate sharing and  collaboration among professionals to enhance the quality of the work  they perform. Specifically, a few representatives of professional  organizations, analysts, and experts and stakeholders told us that one  advantage of an organization would be the forum it could provide for  professionals to network and share and develop best practices or  standards. In addition, most NRSRO representatives and all analysts  with whom we spoke told us that analysts usually learn the skills  necessary to issue ratings from internal training programs and on-the- job experience. According to a few experts and stakeholders, an  analyst, and one NRSRO representative, an organization could be  beneficial for all credit rating analysts, regardless of employer,  because they would receive similar information and training that could  play a quality control function.
Supplemented oversight. According to a few representatives of  existing professional organizations and one NRSRO representative, a  professional organization has the potential to enhance or supplement  existing oversight. For example, a professional organization can fill in  gaps in regulatory oversight by providing more detailed rules than  regulatory agencies can provide. Representatives of one professional  organization also could provide more robust oversight programs than  regulatory agencies, and can sometimes carry out responsibilities  faster.
However, analysts, NRSRO representatives, and experts and  stakeholders told us that these benefits would be unlikely to result from  an organization for credit rating analysts. Specifically, all analysts and  NRSRO representatives and a few experts said that creating a  professional organization for credit rating analysts employed by NRSROs  could duplicate existing structures and organizations rather than enhance  or supplement those structures. Some NRSRO representatives and  analysts explained that certain SEC rules apply to credit rating analysts,  including rules prohibiting conflicts of interest, and SEC may oversee  certain activities of credit rating analysts through its oversight of  NRSROs—two of the key activities associated with a professional  organization. A few NRSRO representatives added that SEC examines  NRSROs annually to ensure adherence to SEC rules. For example,  during the 2014 examinations, SEC staff reviewed each NRSRO’s ethics  policy and procedures, as well as a sample of each NRSRO’s employee   In  certifications or monitoring activities concerning their code of ethics.addition, some NRSRO representatives and a few analysts told us the  IOSCO Code includes professional standards applicable to credit rating  analysts and 8 of the 10 NRSROs cite the IOSCO Code in their codes of  ethical conduct. Finally, according to some analysts with whom we spoke,  many analysts belong to professional organizations, such as AICPA, CFA  Institute, or industry groups, that provide the services of a professional  organization (education, development and oversight of professional  standards, certification, and public outreach and advocacy).all analysts and representatives of NRSROs and a few experts and  stakeholders told us that a professional organization for credit rating  analysts might duplicate existing standards and oversight.
In addition, other NRSRO representatives and some experts and  stakeholders told us that it was unclear whether, or how, the organization  would address some of the well-known and widely reported issues that  have harmed the reputation of NRSROs. For example, representatives  from one expert organization explained that ratings downgrades in 2008  and 2009 (during the financial crisis) hurt the reputation of rating agencies  and that investigations and enforcement actions, such as Standard &  Poor’s $1.375 billion settlement associated with their misrepresenting the  true credit risks of securities they rated during 2004-2007, had not helped  to restore investors’ confidence. and a few experts and stakeholders, said that concerns about the  accuracy and quality of credit ratings were not due to incompetent or  poorly trained analysts. They noted that in their opinion, other issues in  the industry, such as concerns about industry concentration, are more   They stated that a professional organization established to  relevant.
See Securities and Exchange Commission, Summary Report of Issues Identified in the  Commission Staff’s Examinations of Select Credit Rating Agencies (Washington, D.C.:  July 2008); and Senate Permanent Subcommittee on Investigations, Wall Street and the  Financial Crisis: Anatomy of a Financial Collapse, 112th Cong., 1st sess. (Washington,  D.C., Apr. 13, 2011). In February 2015, Standard & Poor’s and its parent company  McGraw Hill Financial, Inc. entered into a $1.375 billion settlement with the Department of  Justice, 19 states, and the District of Columbia for charges related to misrepresenting the  true credit risk of securities they rated during 2004–2007. They also settled for $125  million with the California Public Employees Retirement System at the same time for  similar charges. In addition, in January 2015 they settled for $58 million with SEC and $19  million with the New York Attorney General’s office and the Massachusetts Attorney  General’s office for charges involving fraudulent misconduct in ratings, particularly of  certain commercial mortgage-backed securities. develop and oversee standards for analysts may be unable to deal with  these issues at this time. As a result, a few experts questioned how well a  professional organization would improve the industry’s reputation or  enhance the quality of ratings.
Finally, some NRSRO representatives, a few experts and analysts, and  SEC officials said that it was too early to determine whether a  professional organization might add to or complement the quality or  oversight of analysts’ work, particularly in light of SEC’s new requirements  designed to enhance the standards of training, experience, and  competence for credit rating analysts at NRSROs. As we stated earlier,  the new rules, which became effective in June 2015, require NRSROs to  ensure that analysts meet additional quality standards to produce  accurate ratings and are periodically tested on their knowledge of the  NRSRO’s credit rating process. Additionally, SEC’s new rules address  certain policies and procedures with respect to the methodologies used to  determine credit ratings, conflicts of interest with respect to sales and  marketing considerations, and certain actions when a review conducted  by an NRSRO determines that a conflict of interest relating to post- NRSRO employment influenced a credit rating. They explained that  SEC’s new rules address some of the services that one can expect from  a professional organization (such as training and certification), and  therefore it seemed appropriate to first determine if there were specific  gaps that a professional organization might be able to fill at a later date.  Some NRSRO representatives with whom we spoke said that they have  made changes to their training and testing requirements in response to  these new requirements. Some NRSRO representatives and one expert  commented that, because of these recent changes, SEC should first  evaluate whether the actions taken by NRSROs meet the new  requirements. In addition, SEC previously noted that regulations affecting  financial markets should be reviewed and revised as necessary to ensure  the regulations continue to fulfill SEC's mission. Retrospective analyses  can help agencies evaluate how existing regulations work in practice.
Moreover, retrospective analyses can provide SEC the opportunity to  assess how well the new regulations have achieved their policy goals.
section_title: Views on Challenges to Creating and Operating a Professional Organization and Potential Alternatives
paragraphs: According to most analysts and representatives of NRSROs, and some  experts and stakeholders, creating and operating a professional  organization for credit rating analysts might be challenging. For example,  some noted that it might be difficult to clearly define the organization’s  purpose at this time because of new SEC requirements, which became  effective in June 2015, for NRSROs to put standards and testing  requirements into place for analysts. Similarly, others said that a relatively  small membership base could make obtaining adequate funding difficult  and the organization could struggle to define meaningful standards  because of the potentially limited applicability of common standards  across NRSROs. In light of these challenges, some analysts and experts  and a few representatives of NRSROs identified other ways to develop  and oversee professional standards for credit rating analysts, such as  enhancing SEC oversight, engaging a third party to credential all analysts  on minimum standards, or creating an organization with a broader  membership base.
subsections: section_title: Potential Challenges to Creating and Operating a Professional Organization
paragraphs: Creating and operating any professional organization requires identifying  the organization’s purpose, funding, organizational structure, and core  activities. Most analysts and representatives of NRSROs and some  experts and stakeholders (including academics, investors, advocacy  groups, and international regulators) told us that putting these  components in place for an organization for NRSRO credit rating analysts  could be challenging.
subsections: section_title: Clearly Delineated Purpose
paragraphs: Creating and operating any professional organization requires a clear  mission, purpose, and identification of the value the organization would  bring its members, their industry, and the public. According to some  NRSRO representatives, experts, and a few analysts, defining a clear  purpose and mission for an organization for credit rating analysts would  be difficult at this time because of the new SEC regulations. According to  some representatives of existing professional organizations, clearly  defining the purpose of an organization helps ensure that it will be viewed  as a credible actor—able to effectively influence the behavior of members  and industry. They noted that most professional organizations arise out of  a specific public policy need, problem, or other precipitating event that a  core group of professionals wants to address. Understanding the specific  motivation for creating the organization can help orient the organization  and define its value to its members. However, some NRSRO  representatives and experts told us that because SEC’s rules for  NRSROs to implement standards for their credit rating analysts were  newly effective, it would be difficult at this time to effectively identify  potential gaps in the training, credentialing, or oversight of credit rating  analysts that a new organization would be designed to address. As we  noted earlier, effective June 2015, each NRSRO must establish, maintain,  enforce, and document standards of the training, experience, and  competence for its credit rating analysts. According to most NRSRO  representatives, they are in the process of making changes to their  training and testing activities in response to these rules, including  introducing new mandatory training programs, developing formal periodic  testing regimes, and expanding support for analysts pursuing credentials  from existing professional organizations. As a result, some of them  questioned the role and potential value-added of creating a professional  organization at this time.
section_title: Adequate Funding
paragraphs: Professional organizations require funding to cover operational expenses  and provide member services, such as the development and oversight of  professional standards. Some representatives of NRSROs and existing  professional organizations, experts, and analysts with whom we spoke  stated that the relatively small population of credit rating analysts—as of  December 2014, NRSROs employed approximately 4,500 analysts— suggests it might be challenging to obtain adequate funding to create and  operate the organization, at least initially. Generally, member dues  partially fund organizations. As shown in figure 2, of the six existing  professional organizations we reviewed, in 2014, membership dues  provided from 3 to 60 percent of revenue, with annual dues ranging from   Organizations also receive revenue from  $125 to $425 for members.other sources, including fees for services, examinations, conferences,  education programs, and publications; fines or other disciplinary actions;  and assessments on certain transactions, such as the assessment  collected by MSRB on the trading and underwriting activities of municipal  securities dealers. With regard to revenue from examinations and  education programs, however, a few representatives of existing  professional organizations noted that it might take several years for a new  organization, such as one created for credit rating analysts, to receive  sufficient revenue from these activities.
One source of funding for an organization representing credit rating  analysts could be from NRSROs themselves, but the views of NRSRO  representatives and experts were mixed on the potential advantages and  disadvantages of such an approach. A few representatives of NRSROs  and some experts stated that an organization funded by NRSROs would  be vulnerable to having its core activities, including the development and  oversight of professional standards, influenced by NRSROs. They noted  that this influence risked undercutting the organization’s independence  from NRSROs and weakening its ability to act as a safeguard for investor  and public interests—one of the noted responsibilities of a professional  organization. In contrast, a few representatives of NRSROs and experts  stated that NRSRO involvement in the organization would be an  advantage because it would help ensure that the organization would have  NRSRO support and acceptance to facilitate incorporation of the  organization’s standards into analysts’ work. One expert noted that the  NRSRO, as the employer, could be best placed to confirm that its credit  rating analyst employees adhered to the organization’s standards. As an  alternative to receiving direct funding from NRSROs, the organization  could be partly funded through transactions fees paid to NRSROs. For  example, FINRA and MSRB both receive funds directly from member   Of the six organizations we reviewed,  firms for certain transactions.MSRB is closest in size—it has approximately 3,300 members—to what  would be the likely size of an organization representing credit rating  analysts. In 2014, membership fees accounted for only 4 percent of its  total revenue, whereas underwriting and trading fees accounted for more  than 80 percent of revenue. The MSRB’s reliance on additional funding  sources, including transaction fees, may serve as a model for funding a  like-size organization.
section_title: Balanced Representation
paragraphs: To identify the issues to consider in developing the organizational structure for a  professional organization, we identified three models that could provide the basis for the  creation and operation of a professional organization for credit rating analysts. For  additional discussion of our methodology, see appendix I, and for additional discussion of  the organizations we considered in developing our models, see appendix II. number of credit rating analysts employed by each NRSRO, could create  challenges for developing an organizational structure that helps ensure  equitable representation of all members, in particular those members  employed by smaller NRSROs. For instance, consideration should be  given to whether membership is mandatory or voluntary and whether the  organization’s authority comes from the government or the public and  industry (for additional discussion of various organizational structures,  see app. II). In addition, successful professional organizations require  personnel—whether paid staff, contractors, or volunteers—with  experience leading and managing professional organizations and the  technical knowledge and leadership to help ensure the organization’s  relevance. As we noted earlier, the three largest NRSROs employ 88  percent of credit rating analysts. Some NRSRO representatives, analysts,  and experts commented that this might require an organization to take  additional steps to ensure it considers the experience and needs of  members from both larger and smaller NRSROs in determining its  organizational structure and personnel decisions.
According to most representatives of existing professional organizations,  a number of steps can be taken to safeguard an organization’s  independence from dominance by certain elements in an industry. For  example, an organization can help balance members’ interests through  the composition of its board. Several existing professional organizations  have nonindustry representation on the board and MSRB officials noted  the Dodd-Frank Act modified MSRB’s board structure to require the  majority of the board members be independent public representatives.representative of one professional organization explained that seeking  stakeholder input or allowing for public comment before announcing new  policies or rules also could help ensure that a variety of views and  experiences were taken into account. Another representative of a  professional organization noted that the organization requires  professionals who volunteer to participate in the organization’s activities— such as the development or oversight of standards or the development of  educational and testing programs—to attest that they will engage with the  professional organization independently of their engagement with their  employer.
section_title: Meaningful Activities
paragraphs: Creating and operating any professional organization requires developing  core activities and services, such as professional standards, education  and training curricula, certification tests, and structures to oversee  member compliance. According to most analysts and NRSRO  representatives, the proprietary methodologies used to conduct ratings  and the specialization of credit rating analysts’ knowledge might make  developing a meaningful credential or set of professional standards  challenging. According to representatives from existing professional  organizations, developing these services is a time- and labor-intensive  process that requires extensive stakeholder involvement and buy-in.  However, most NRSRO representatives and some analysts with whom  we spoke noted that opportunities to share information about credit rating  activities to develop those standards could be limited due to concerns  about safeguarding confidential information and proprietary ratings  methodologies. In addition, they explained that conducting ratings is  highly technical, varies greatly depending on the specific asset class and  the types of ratings being provided in that class, and relies on the  individual NRSRO’s methodology. For example, the Department of the  Treasury (Treasury) recently led an exercise that found the ratings results  diverged widely among six credit rating agencies that conducted  hypothetical ratings of identical pools of mortgage loans. A few NRSRO  representatives noted that they had individually identified core knowledge,  including information on financial market operations that their analysts  needed to know. This core knowledge could provide the basis for an  examination or credentialing process or the development of professional  standards, but the extent to which it would promote higher quality ratings  was unclear. For example, most credit rating analysts with whom we  spoke noted that this core knowledge was a valuable foundation for  conducting ratings, but producing ratings also required specialized  knowledge and experience. As a result, some NRSRO representatives  and analysts stated that a relatively limited set of standardized knowledge  or activities was applicable across all NRSROs or asset classes.
According to representatives of existing professional organizations, one  approach to bridging differences among actors in a profession is to  develop principle-based standards, rather than rules. Principle-based  standards provide a broad framework on the types of behavior and  approaches to certain activities expected of members. For example, the  AICPA Code of Professional Conduct identifies specific principles to  guide certified public accountants’ activities, including the responsibility to  conduct work with integrity and in the public interest. Under a principle- based approach, individual professionals are expected to apply the  principles to assess the unique factors and circumstances that arise  during their work. However, these standards may stop short of providing  specific details on acceptable actions or activities. Representatives of  existing professional organizations noted that the types of standards used  by an organization evolve over time and that an organization’s standards  can be a combination of principles and rules.
section_title: Potential Alternatives to a Professional Organization for Credit Rating Analysts
paragraphs: In light of the challenges and other concerns with creating a professional  organization for analysts, which we discussed earlier, some experts and  analysts with whom we met and a few NRSRO representatives identified  alternative approaches that could be used to establish and oversee  standards and a code of conduct, as the following examples illustrate.
Expand SEC oversight. SEC could expand its oversight of analysts  by defining minimum experience or knowledge requirements for  analysts or requiring all analysts to pass an examination before  conducting ratings. One expert and SEC officials noted that SEC  might require additional resources to implement any additional  activities or requirements.
Engage a third party. A third party (such as an existing professional  organization, a private business, or a taskforce of regulatory and other  experts) could be engaged to develop and communicate professional  standards for credit rating analysts and oversee application of the  standards. Some experts noted this approach might be more  efficient than creating a new organization because it could leverage  existing resources and mitigate concerns about larger NRSROs  dominating an organization. SEC considered public comments  regarding this type of approach after proposing its new rule for the  training and testing of credit rating analysts, but did not adopt this  approach because it did not allow NRSROs sufficient flexibility to  design standards tailored to their business model, size, and  methodologies.
Broaden the potential member base. According to some analysts,  an organization with a broader membership base (all credit analysts,  not just those that determine credit ratings) would have a larger  potential membership base and could provide services, such as a  credential, which were valued outside of the credit rating profession.  Representatives of one NRSRO noted that this might be developed  within an existing organization, such as CFA Institute.
However, as we noted earlier, a few analysts and some NRSRO  representatives and experts did not see a need for a professional  organization and some analysts and NRSRO representatives and one  expert did not identify any alternative structures to establish or oversee  standards and a code of conduct for credit rating analysts.
section_title: Agency Comments
paragraphs: We provided a draft of this report to SEC for review and comment. In  addition, we provided a draft of the organizational profiles and  assessments to the existing professional organizations for review. SEC  staff as well as representatives from each organization provided technical  comments, which we have included, as appropriate.
We are sending copies of this report to the appropriate congressional  committees and members, SEC, and other interested parties. This report  will also be available at no charge on our website at http://www.gao.gov.
Should you or your staff have questions concerning this report, please  contact me at (202) 512-8678 or sciremj@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. Key contributors to this report are listed in  appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Section 939E of the Dodd-Frank Wall Street Reform and Consumer  Protection Act (Dodd-Frank Act) required us to study the feasibility and  merits of creating an independent professional organization for rating  analysts employed by nationally recognized statistical rating organizations  (NRSRO) that would be responsible for establishing independent  standards for governing the profession of rating analysts, establishing a  code of ethical conduct, and overseeing the profession of rating analysts.  This report describes views on (1) the potential merits of and need for a  professional organization for credit rating analysts; and (2) identified  components of and challenges associated with creating and operating  such an organization, and possible alternatives for establishing and  overseeing professional standards and a code of ethical conduct.
To address both objectives, we conducted a literature review. We used  Internet search techniques and keyword search terms to identify available  information about the credit rating industry, including the definition of a  credit rating; number and nature of companies that serve as credit rating  agencies, or NRSROs; and relevant laws and regulations, including the  Securities and Exchange Commission’s (SEC) recent rules requiring  NRSROs to establish standards of training, experience, and competence  for rating analysts. We also identified sources describing the founding,  development, and assessment of professional organizations (or  associations) and professional designations. From research databases  such as ProQuest and LexisNexis, we obtained information from publicly  available documents, such as financial reports, journals, trade  publications, periodicals, studies, white papers, and aggregated  databases relevant to professional organizations and the credit rating  industry.
To address the first objective, we collected and analyzed information on  existing organizations that develop and oversee professional standards  and codes of conduct, including the American Institute of Certified Public  Accountants (AICPA); American Society of Association Executives  (ASAE); CFA Institute; Financial Industry Regulatory Authority (FINRA);  Institute of Internal Auditors (IIA); Municipal Securities Rulemaking Board  (MSRB); and the Public Company Accounting Oversight Board (PCAOB).  We interviewed representatives of these organizations to obtain  information on the merits of creating a professional organization, in  general, as well as the potential merits of creating an independent  professional organization for credit rating analysts. We also obtained  available information on the advantages and disadvantages of a  professional organization, why such organizations are generally formed  (the perceived need, pertaining to the specific industry, profession, or the  public), as well as the need for professional standards and codes of  conduct for members.
We obtained information from transcripts of SEC’s roundtable on credit  ratings held on May, 14, 2013, in which participants, including NRSROs,  international regulators, academics, and other industry experts, discussed  ethics training and possible certification requirements for credit rating  analysts. We also obtained information from comments submitted in  response to SEC’s 2011 proposed rules to enhance oversight of  NRSROs.  We obtained and analyzed information on existing NRSRO  professional standards and codes of conduct, including information on  each NRSRO’s Code of Conduct/Ethics submitted to SEC as part of their  annual certification on “Form NRSRO” for calendar year 2014 (the most  recent filings to date). We also analyzed the International Organization of  Securities Commissions (IOSCO) Code of Conduct Fundamentals for  Credit Rating Agencies as well as SEC’s new rule requiring NRSROs to  establish standards for training, experience, and competence of credit  rating analysts. Additionally, we reviewed the 2014 Summary Report of  Commission Staff’s Examinations of Each Nationally Recognized  Statistical Rating Organization and the 2014 Annual Report to Congress  on Nationally Recognized Statistical Rating Organizations for reported information on NRSRO professional standards and codes of conduct.
To address the second objective, we held semi-structured interviews with  representatives of the professional organizations we identified, and  reviewed their websites and publicly available documents. We obtained  and analyzed information on the operational structure and approaches  used to provide services to members including the organizations’  membership requirements, funding channel, government role, and source  of authority. We also obtained information on the resources and actions  needed to create and operate a professional organization for credit rating  analysts and possible organizations that could serve as models for such  an organization. We used the information we obtained through interviews  and the results of our literature review to develop a working definition of  an independent professional organization and identify three potential  models of a professional organization for credit rating analysts (see fig. 3,  app. II). We defined an independent professional organization as a  membership-based organization that is established to help protect the  integrity of the profession, provide safeguards for investors and the  general public, and take steps to safeguard independence through the  composition of a governing board. To ensure the validity of our results,  we provided our definition and models to the existing organizations for  comment and adjusted our results based on their input. We also obtained  information on other structures or instruments (regulatory or otherwise)  that could be used to establish standards and a code of ethical conduct  for governing and overseeing the profession. For example, we obtained  and analyzed information on international regulatory organizations in four  jurisdictions (Hong Kong, Saudi Arabia, Singapore, and Turkey) identified  by SEC as having established various structures for oversight, such as  direct registration and licensure for credit rating analysts and related  professional standards and codes of conduct for the profession.
To gather a diverse set of perspectives, we interviewed SEC officials;  NRSRO representatives; industry experts and stakeholders—including  investors, academics, representatives of credit rating and analysis firms  not registered with SEC, representatives of the Software and Information  Industry Association, representatives of a research institute, and officials  with the European Securities and Markets Authority and IOSCO—and  leadership or governing bodies of existing professional organizations.We obtained their views about (1) the advantages and disadvantages (for  regulators, credit rating agencies, rating analysts, investors, and the  public) of creating a professional organization for credit rating analysts,  and (2) how a professional organization would fit within the existing  structure of regulation and oversight of credit rating agencies and credit  rating analysts. We also obtained their views on the nature and common characteristics of professional organizations,  including organizational structure, relationship to members, and  regulatory body (such as SEC); professional certifications for members; resources and actions needed to create and operate a professional  organization for rating analysts; organizations that could serve as an appropriate model in evaluating  the feasibility and merits of a professional organization for rating  analysts; and how and to what extent professional organizations develop and  oversee professional standards and a code of ethical conduct for  members.
We also obtained their views on the potential challenges involved in  creating and operating an organization, such as obtaining funding,  attracting and retaining membership, developing professional standards  and a code of ethical conduct, and overseeing rating analysts. We  obtained their views on the need for an independent professional  organization for credit rating analysts; the circumstances under which  analysts and other stakeholders would use the services of such an  organization; and how, or whether, an independent professional  organization for credit rating analysts would address some of the current  challenges facing the credit rating industry.
We used a modified Delphi approach to identify and confirm the most  important issues for each objective. In doing so, we conducted an initial  round of interviews with officials in SEC’s Office of Credit Ratings,  representatives of select NRSROs and professional organizations, and  select industry experts to discuss the information collected through our  literature search. In our second round of interviews, we held semi- structured interviews with senior management from all NRSROs, and  select industry experts and stakeholders to obtain a depth of  understanding and a variety of perspectives, as well as to corroborate the  information obtained in the research and initial interviews. The criteria for  selecting these interviewees consisted of factors such as participation in  prior SEC events, including roundtables; recommendations from GAO  stakeholders, industry experts, and other external stakeholders;  participation in prior congressional hearings or industry conferences;  appearance in our literature reviews and Internet searches; and  bibliographies of relevant papers and studies where they were mentioned.
Finally, to ensure that we obtained the perspectives of credit rating  analysts in particular, we conducted a series of 11 focus groups with  approximately 100 credit rating analysts, at 6 of the 10 NRSROs. We  judgmentally selected 6 of the 10 NRSROs based on the size of the firm  (number of ratings performed and number of analyst staff) to ensure a  mix of large, medium, and small firms were represented. At five of these  firms, we held two separate focus groups—one with analysts and one  with supervisory analysts (analyst staff with supervisory responsibilities).  We contacted NRSROs to request data to identify and select a  judgmental sample of analysts. To promote widespread NRSRO  participation, we generally provided three options to NRSROs for  identifying analysts for selection to participate in our focus group  discussions: (1) provide a complete list of all analysts; (2) provide names  of 25 analysts and 25 supervisory analysts; (3) identify and self-select  approximately 8-12 analysts. Additionally, we requested that the  NRSROs provide information on analysts’ years of service with the organization, credit rating specialization, geographic location.
We tailored our requests to account for the number of analyst staff. For  example, for the smaller NRSROs (60 or fewer analyst staff), we  requested that they provide a complete list of all analysts. After receiving  the information from NRSROs, we selected from 8 to 15 analysts to  participate in the focus groups. (We allowed at least two analysts to serve  as alternates, if necessary.) We selected credit rating analysts to obtain a  range of years of experience, job title, and class of ratings for which they  participated in credit rating determinations. We grouped each list by class  of ratings and ordered the groups by years of experience. We verified the  total number of analysts and supervisory analyst names provided, divided  the total number by 15 to come up with a selection number (the “nth”  number), and selected every nth name to participate in the focus groups.  In addition, to ensure that every asset class represented had a participant  in the focus group, where necessary, we selected alternates with similar  titles, years of service, and credit rating specialization. We also selected  fewer than 8-15 analysts at the smaller NRSROs. For example, one   In one case, we slightly  NRSRO had less than 10 supervisory analysts.adjusted our methodology to accommodate one NRSRO management’s  request that they be able to select alternate analysts to participate in the  focus groups, if alternates were needed. The management noted that  they needed some flexibility in the event that any analysts we selected  were unable to participate due to vacation, training, or other scheduling  conflicts.
In facilitating each focus group, we focused our discussions on the  following topics:  current training received and any certifications held by credit rating  analysts; extent to which credit rating analysts currently have access to the  services typically offered by a professional organization, such as  education, professional standards and a code of ethical conduct for  governing the profession, professional certification or license,  oversight, and public education, outreach, or advocacy; extent to which there is a need for a professional organization for  credit rating analysts and any potential challenges in operating an  organization for analysts; potential advantages and disadvantages of creating a professional  organization for credit rating analysts based on the three models we  developed; and  feasibility of developing and overseeing professional standards for  credit rating analysts.
Based on records of these discussions, we analyzed the content to define  overall themes and develop our findings. We also used the results from  the focus groups to corroborate information we obtained in our interviews  on the merits and need for an independent professional organization for  analysts; potential requirements for creating and operating a professional  organization; associated challenges; and potential alternatives to creating  a professional organization. These results led to our synopsis of the  feasibility and merits of a professional organization for credit rating  analysts. Throughout this report, we use certain qualifiers when  describing results from focus groups and interview participants, such as  “few,” “some,” and “most.” We define few as a small number such as two  or three; some as at least four or more; and most as the majority or nearly  all. While the information we collected from the focus groups provided  context on the issues discussed, it was not generalizable to the entire  population of credit rating analysts.
We conducted this performance audit from October 2014 through July  2015, in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: General Models for Professional Organizations and Profiles of Six Organizations, Including Approaches to Service Delivery
paragraphs: As part of our analysis for this report, we identified three models for  professional organizations, profiled existing organizations, and reviewed  how they delivered services (see app. I). In the following sections, we discuss three models for professional organizations and how  membership, funding, regulatory role, and organizational authority is  structured, operated, or obtained in each model; profile six professional organizations, which are the State Bar of  California, Financial Industry Regulatory Authority (FINRA), Municipal  Securities Rulemaking Board (MSRB), American Institute of Certified  Public Accountants (AICPA), CFA Institute, and Institute of Internal  Auditors (IIA); and discuss how the six organizations deliver education and other  services to members.
subsections: section_title: Three General Models for Professional Organizations
paragraphs: The models we identified vary in key aspects—whether membership is  mandatory or voluntary, individual members or employers register and  pay dues, government has a direct oversight role or not, and what the  sources of authority or legitimacy are for the organization (see fig.3).
Mandatory or voluntary membership. Under models I and II, all  members of a profession must join in order to practice that profession.  If a professional organization for credit rating analysts had mandatory  membership, all credit rating analysts employed by NRSROs would  be required to join. In model III, membership is voluntary and  professionals who elect to join agree to meet any membership  requirements, such as specific education or work experience. If a  professional organization for credit rating analysts were voluntary, all  credit rating analysts (including those analysts not employed by  NRSROs) could join if they met the requirements.
Individual or employer registration and funding of membership.  Models I and III rely on individual members to register directly with the  organization and pay dues. In model II, employers register the  members and pay dues. For example, FINRA and MSRB use  employer-based membership systems.
Government role and source of authority. In models I and II, a  regulatory or judicial body has a direct role in some aspects of the  organization’s operations (for example, approving rules or overseeing  supervisory actions). In these models, the organization receives its  authority directly from government. In model III, government has no  direct role, instead. The organization’s authority derives from public or  industry recognition of the legitimacy of the organization’s activities.
section_title: Profiles of Six Existing Professional Organizations
paragraphs: These profiles of the six organizations we reviewed further illustrate how  the organizations function in practice and can provide insight about  membership structures and requirements, funding sources, and any  government oversight role. We obtained the information from publicly  available documents (including financial reports and the organizations’  websites) and, where noted, from interviews with representatives of the  organizations. We have not independently verified the information.
subsections: section_title: State Bar of California, Example of Model I
paragraphs: The State Bar of California is charged with regulating the legal profession,  formulating and elevating education and professional standards, raising  the quality of legal services, advancing the science of jurisprudence, and  aiding in the improvement of the administration of justice.
Membership. Mandatory—the State Bar of California licenses  attorneys to practice law in the State of California. As of April 2015,  the State Bar reported it had approximately 253,000 licensees, of  which more than 183,000 were active.
Registration. To receive a license, individual attorneys must pass the  California Bar Examination and pay their annual membership fees to  the state bar. The 2015 membership fee was $430 for active  members.
Funding. The State Bar had $138 million in operating revenue in  2014, of which 60 percent came from membership fees and  donations. Examination application fees, grants, and seminars  provided additional funding.
Government role. The State Bar is a public corporation within the  judicial branch. The primary purpose of the State Bar is to serve as  the administrative adjunct to the California Supreme Court in all  matters pertaining to the admission, discipline, and regulation of  California lawyers.
Source of authority. The State Bar was created by the state  legislature in 1927.
section_title: Financial Industry Regulatory Authority, Example of Model II
paragraphs: FINRA is responsible for writing and enforcing rules governing the  activities of broker-dealer firms and their registered individuals, including  examining firms for compliance with those rules, fostering market  transparency, and educating investors.
Membership. Mandatory—all professionals associated with a broker- dealer (registered individuals) must register with FINRA.2015, FINRA reported more than 637,000 registered individuals.
Registration. The broker-dealer firm registers the individual employee  with FINRA and pays a $100 initial registration fee. The individual  applicant applying for registration also must pass a qualifying test to  ensure a minimum level of understanding of and expertise on financial  markets, the securities industry, and regulatory structure. Firms also pay  an annual fee of $175-$195 for each member.
Funding. FINRA had total revenue in fiscal year 2014 of $970 million. Of  this amount, 15 percent came from fees paid by broker-dealers based on  the number of registered individuals employed by firms. The principal  sources of revenue were regulatory activities and assessments, fines,  contract services, and dispute resolution.
Government role. The Securities and Exchange Commission (SEC)  reviews and approves all of FINRA’s proposed rules and monitors and  inspects FINRA’s regulatory activities.
Source of authority. FINRA is a self-regulatory organization whose  function as a national securities association was authorized under the  Securities Exchange Act and approved by SEC in July 2007.
section_title: Municipal Securities Rulemaking Board, Example of Model II
paragraphs: MSRB is responsible for writing the rules that regulate the broker-dealers  and municipal advisory firms that underwrite, sell, and trade municipal  securities and provide municipal advisory services—with the goals of  protecting investors and issuers and promoting a fair and efficient  marketplace. MSRB also provides guidance to FINRA, SEC, and bank regulators in the oversight of compliance with MSRB rules.
Membership. Mandatory—all professionals associated with municipal  advisory firms must be registered with SEC and meet MSRB’s  qualification requirements before engaging in any transaction.  According to the MSRB, there were approximately 3,300 associated  professionals in fiscal year 2014.
Registration. Each municipal advisory firm pays a $300 annual  membership fee for each associated professional and all the firm’s  professionals must pass a qualification examination.
Funding. MSRB had total revenue of $32 million in fiscal year 2014,  less than 5 percent of which came from fees that municipal advisory  firms paid for each associated professional. Principal sources of  revenue include fees on transactions, underwriting, and technology.
Government role. MSRB is required by statute to conduct rule- making in certain areas and SEC reviews and provides final approval  of MSRB rules.
Source of authority. MSRB is a congressionally chartered, self- regulatory organization subject to oversight by SEC. Its rules have the  force and effect of federal law.
section_title: American Institute of Certified Public Accountants, Example of Model III
paragraphs: AICPA represents the certified public accountant profession in relation to  rule-making and standard-setting. It serves as an advocate before  legislative bodies, public interest groups, and professional organizations;  sets ethical standards for the profession; sets U.S. auditing standards for  private companies, nonprofit organizations, and federal, state, and local  governments; develops and grades the Uniform Certified Public  Accountant Examination; and monitors and enforces compliance with  technical and ethical standards.
Membership. Voluntary—individuals who meet AICPA’s qualifications  can apply for membership. In 2014, AICPA reported it had  approximately 365,000 voting members.
Registration. As a voting member, the applicant must pass the  Uniform Certified Public Accountant Examination; obtain 150  semester hours of education at an accredited college or university;  agree to abide by AICPA’s bylaws and code of professional conduct;  obtain a valid and unrevoked certified public accountant certificate  and, for applicants in public practice, be enroll in the AICPA Peer  Review Program. In addition, members must pay annual dues. The  regular membership fee for 2014-2015 ranged from $235 to $425,  depending on the individual’s role and industry.
Funding. AICPA had operating revenue of $235 million in fiscal year  2014. Membership dues generated approximately 53 percent of  revenue. Conferences, publications, examination activities, and other  sources provided additional revenue.
Government role. According to a representative from AICPA, federal  and state officials have no direct role in the organization, but  participate in certain AICPA committees.disciplined members to state boards of accountancy for follow-up.
In addition, AICPA refers  Source of authority. The organization was founded in 1887.  According to an AICPA representative, the organization derives its  authority from transparent processes that engage many stakeholders  (including members, government, and industry) to help develop  professional standards and programs.
section_title: CFA Institute, Example of Model III
paragraphs: The CFA Institute promotes ethical standards, education, and  professional excellence for investment professionals (including financial  analysts, investment managers, and securities analysts). It develops and  administers examinations, encourages research and other educational  programs in investment decision making, develops and enforces  standards of professional conduct and a code of ethics, and raises public  awareness of the principles and practices of investment decision making.
Membership. Voluntary—individuals who meet the Institute’s  qualifications can apply for membership. In 2014, CFA Institute  reported it had approximately 120,000 regular members.
Registration. Regular members must hold a bachelor’s degree from  an accredited institution or have equivalent education or work  experience, pass Level I of the CFA examination, have 48 months of  appropriate professional work experience in investment decision  making, provide professional references, agree to the Member’s  Agreement and Professional Conduct Statement, and pay annual  dues. The dues were $275 in 2015 for regular members.
Funding. CFA Institute had $241 million in operating revenue in fiscal  year 2014. Approximately 14 percent of revenue was generated  primarily from membership dues, but also included advertising.  Certification programs and conferences were the principle sources of  revenue.
Government role. According to CFA Institute representatives,  regulators have no direct role in the organization.
Source of authority. Financial analysts founded the Institute’s  predecessor organization in 1947. According to CFA Institute  representatives, the organization derives its authority from the  recognition of the value of its education and certificate programs.
section_title: Institute of Internal Auditors, Example of Model III
paragraphs: IIA is the professional organization for internal auditors and provides  professional education and development opportunities to its members,  standards of practice, research on internal auditing, and advocacy and  education about internal audit professionals and best practices in internal  auditing.
Membership. Voluntary—individuals who meet IIA’s qualifications  can apply for membership. As of May 2015, IIA reported it had  approximately 180,000 members, of which roughly 66,000 were  based in the United States.
Registration. Applicants agree to apply and uphold the code of ethics  and applicable International Standards for the Professional Practice of  Internal Auditing. Individual members pay annual dues that range  from $125 to $265, depending on the member’s employer.
Funding. In 2014, IIA and its related entities reported total revenue of  approximately $50 million. IIA officials reported that membership dues generated approximately 27 percent of revenue. The certification  process, seminars, and conferences generated additional funds.
Government role. Government officials have no direct role in the  organization.
Source of authority. According to IIA representatives, the  organization derives its authority from its membership’s oversight of  the development and execution of internal processes to help ensure  the quality and integrity of its activities and products, including its  professional standards and code of conduct.
section_title: Approaches Used by the Six Organizations to Deliver Services
paragraphs: The specific responsibilities of professional organizations may evolve  over time, but their primary responsibilities generally encompass five  areas:  1.  educating members, which often includes promoting knowledge  sharing among members and engaging in research related to the  profession;  2.  developing standards to govern the profession (including codes of  3.  overseeing member compliance with the standards;  4.  registering or providing certification or examination for members in the  profession, or both; and  5.  engaging in public education, outreach, or (in some cases) advocacy  about the profession.
According to representatives of the six organizations we reviewed,  members’ priorities and needs, available funding, and other mandates  help determine what services organizations provide and how they deliver  the services.
Education. The organizations offered a range of educational programs.  All six offered training or educational opportunities through conferences,  online or web-based courses, events, or lectures. For example, MSRB  holds periodic education and training events to provide information on  market topics, regulatory and compliance issues, and use of MSRB’s  systems. Other organizations, such as CFA Institute, develop and  administer a curriculum for their examination processes. Finally, as of  May 2015, three organizations (AICPA, FINRA, and the State Bar of  California) required members to receive a certain number of periodic  continuing education hours to maintain membership.
Standard development. All the organizations had or were establishing  professional standards, in particular rules or requirements for ethical  conduct. According to representatives of professional organizations, the  organizations need to consider the extent to which they utilize principle- based standards—broad guidance about the behavior expected of  members—rather than rule-based guidance that details specific  requirements or prohibitions. According to one representative, the extent  of the organization’s resources and information about members’ activities  helps determine the type of standards it might adopt. For instance,  members tend to ask for more detailed rules and guidance if they must  undergo rigorous enforcement or inspections for their certifications or  jobs. Principle-based standards may be more appropriate when  organizations have limited resources and access to information on  members. Finally, representatives of one organization noted that  organizations also need to educate members about standards to help  members understand the standards and implement them in challenging  situations.
Overseeing standards. Approaches for overseeing member compliance  with professional standards varied depending on the authority provided to  organizations. Organizations with mandatory membership that derived  their authority from regulators or legislation tended to have robust  examination and inspection processes. For instance, the State Bar of  California reviews formal allegations of misconduct and determines any  disciplinary actions. FINRA and MSRB engage in formal supervisory  review of members.rely on voluntary compliance with the standards, such as periodic  reaffirmation of compliance and voluntary reporting. Two voluntary  organizations (AICPA and CFA Institute) have an additional investigative  process that can be used when the organization receives specific  complaints or regulators issue disciplinary actions against members.
Organizations with voluntary membership tend to  According to representatives of some voluntary organizations, staff or  members can investigate alleged violations of standards and may  recommend disciplinary actions or refer the case to government  authorities. One representative of an organization noted that voluntary  organizations could have trouble accessing information for investigations  that members or their employers considered proprietary or confidential.
Registering or certifying members. All six organizations have certain  requirements for members—based on years or type of education or  professional experience, agreement to adhere to standards or rules of  professional conduct, or payment of annual dues. In addition, all the  organizations offer a required or voluntary examination. For example,  CFA Institute, FINRA, MSRB, and the State Bar of California require  members to pass an examination to become a member. Other  professional organizations, including IIA, offer members the opportunity to  pass an examination to receive a voluntary credential. One organization,  AICPA, did not register public accountants or certify them in the  profession; however, it develops and administers the Uniform Certified  Public Accountant Examination that most states require for licensing.
Public education, outreach, or advocacy. The organizations have used  differing approaches to communicating information with the public about  the industries or professions. All six have public websites, make speakers  available, or produce information to increase public awareness of their  industries. AICPA, CFA Institute, and IIA also engage in advocacy to  educate and influence key stakeholders, such as federal and state  officials, about policies and issues that affect the profession. For example,  CFA Institute publishes policy briefs and analysis on issues affecting  investors, including corporate governance and market structure.
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Angela Nicole Clowers (Director),  Debra Johnson (Assistant Director), Michelle Bowsky (analyst-in-charge),  William R. Chatlos, Farrah Graham, Patricia MacWilliams, Patricia Moye,  Barbara Roesmann, Bridgette Savino, and Jena Sinkfield made key  contributions to this report.
JoAnna Berry, James Dalkin, Joseph O’Neill, and Frank Todisco also  contributed to this report.