[Federal Register Volume 72, Number 116 (Monday, June 18, 2007)]
[Rules and Regulations]
[Pages 33564-33636]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-11166]



[[Page 33563]]

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Part II





Securities and Exchange Commission





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17 CFR Parts 240 and 249b



 Oversight of Credit Rating Agencies Registered as Nationally 
Recognized Statistical Rating Organizations; Final Rule

  Federal Register / Vol. 72, No. 116 / Monday, June 18, 2007 / Rules 
and Regulations  

[[Page 33564]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249b

[Release No. 34-55857; File No. S7-04-07]
RIN 3235-AJ78


Oversight of Credit Rating Agencies Registered as Nationally 
Recognized Statistical Rating Organizations

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

ACTION: Final rule.

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SUMMARY: The Commission is adopting rules to implement provisions of 
the Credit Rating Agency Reform Act of 2006 (the ``Rating Agency 
Act''), enacted on September 29, 2006. The Rating Agency Act defines 
the term ``nationally recognized statistical rating organization,'' 
provides authority for the Commission to implement registration, 
recordkeeping, financial reporting, and oversight rules with respect to 
registered credit rating agencies, and directs the Commission to issue 
final implementing rules no later than 270 days after its enactment (or 
by June 26, 2007). The rule and form prescribing the process for a 
credit rating agency to apply for registration are immediately 
effective. The remaining rules are effective on June 26, 2007.

EFFECTIVE DATES: June 18, 2007, except that Sec. Sec.  240.17g-2, 
240.17g-3, 240.17g-4, 240.17g-5, and 240.17g-6 are effective on June 
26, 2007.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate 
Director, at (202) 551-5525; Thomas K. McGowan, Assistant Director, at 
(202) 551-5521; Randall W. Roy, Branch Chief, at (202) 551-5522; Rose 
Russo Wells, Attorney, at (202) 551-5527; Sheila D. Swartz, Attorney, 
at (202) 551-5545, Division of Market Regulation, Securities and 
Exchange Commission, 100 F Street, NE., Washington, DC 20549-6628.

SUPPLEMENTARY INFORMATION: 

I. Background

    The term nationally recognized statistical rating organization 
(``NRSRO'') is used in federal and state statutes and regulations to 
confer regulatory benefits or prescribe requirements based on credit 
ratings issued by credit rating agencies identified as NRSROs.\1\ The 
process of identifying NRSROs has historically been undertaken by the 
Commission staff through the issuance of no-action letters where the 
staff has determined, among other things, that the credit rating agency 
is recognized nationally by the predominant users of credit ratings as 
issuing credible and reliable ratings.\2\ The Rating Agency Act 
replaces the no-action letter process--which has been criticized as 
lacking transparency--with a registration program and Commission 
oversight of credit rating agencies that choose to be treated as 
NRSROs.
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    \1\ See, e.g., federal statutes: 15 U.S.C. 78c(a)(41) (defining 
the term ``mortgage related security''); 15 U.S.C. 78c(a)(53)(A) 
(defining the term ``small business related security''); 15 U.S.C. 
80a-6(a)(5)(A)(iv)(I) (exempting certain companies from the 
provisions of the Investment Company Act of 1940''); Gramm-Leach-
Bliley Act, Pub. L. No. 106-102 (1999); Transportation Equity Act 
for the 21st Century, Pub. L. No. 105-178 (1998); Reigle Community 
Development and Regulatory Improvement Act of 1994, Pub. L. No. 103-
325 (1994); Department of Commerce, Justice, and State, The 
Judiciary, and Related Agencies Appropriations Act, FY2001, Pub. L. 
No. 106-553 (2000); Higher Education Amendments of 1992, Pub. L. No. 
102-325 (1992); Housing and Community Development Act of 1992, Pub. 
L. No. 102-550 (1992); Federal Deposit Insurance Corporation 
Improvement Act of 1991, Pub. L. No. 102-242 (1991); and Financial 
Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. 
No. 101-72 (1989); Commission rules: 17 CFR 228.10(e), 229.10(c), 
230.134(a)(14), 230.436(g), 239.13, 239.32, 239.33, 240.3a1-1(b)(3), 
240.10b-10(a)(8), 240.15c3-1(c)(2)(vi)(E), (F), and (H), 240.15c3-
1a(b)(1)(i)(C), 240.15c3-1f(d), 240.15c3-3a, Item 14, Note G, 
242.101(c)(2), 242.102(d), 242.300(k)(3) and (l)(3), 270.2a-
7(a)(10), 270.3a-7(a)(2), 270.5b-3(c), and 270.10f-3(a)(3); and 
state rule: Cal. Ins. Code 1192.10.
    \2\ See letter from Nelson S. Kibler, Assistant Director, 
Division of Market Regulation, Commission, to John T. Anderson, 
Esquire, of Lord, Bissell & Brook, on behalf of Duff & Phelps, Inc. 
(February 24, 1982); letter from Michael A. Macchiaroli, Assistant 
Director, Division of Market Regulation, Commission, to Paul 
McCarthy, President, McCarthy, Crisanti & Maffei, Inc. (September 
13, 1983); letter from Michael A. Macchiaroli, Assistant Director, 
Division of Market Regulation, Commission, to Robin Monro-Davies, 
President, IBCA Limited (November 27, 1990); letter from Michael A. 
Macchiaroli, Assistant Director, Division of Market Regulation, 
Commission, to David L. Lloyd, Jr., Dewey Ballentine, Bushby, Palmer 
& Wood (October 1, 1990); letter from Michael A. Macchiaroli, 
Assistant Director, Division of Market Regulation, Commission, to 
Gregory A. Root, President, Thomson BankWatch, Inc. (August 6, 
1991); letter from Michael A. Macchiaroli Assistant Director, 
Division of Market Regulation, Commission, to Lee Pickard, Pickard 
and Djinis LLP (January 25, 1999); letter from Annette L. Nazareth, 
Director, Division of Market Regulation, Commission, to Mari-Anne 
Pisarri, Pickard and Djinis LLP (February 24, 2003); letter from 
Mark M. Attar, Special Counsel, Division of Market Regulation, 
Commission, to Arthur Snyder, President, A.M. Best Company, Inc. 
(March 3, 2005); letter from Erik R. Sirri, Director, Division of 
Market Regulation, Commission, to Neal E. Sullivan, Bingham 
McCutchen LLP (May 21, 2007); letter from Erik R. Sirri, Director, 
Division of Market Regulation, Commission, to Yoshihiro Saito, 
Perkins Coie LLP (May 23, 2007).
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    The Rating Agency Act implements the program for NRSRO registration 
and oversight by adding definitions to Section 3 of the Securities 
Exchange Act of 1934 (``Exchange Act''),\3\ creating a new Section 15E 
of the Exchange Act,\4\ and amending Section 17 of the Exchange Act.\5\ 
Under these new statutory provisions, a credit rating agency seeking to 
be treated as an NRSRO must apply for, and be granted, registration 
with the Commission, make public in its application certain information 
to help persons assess its credibility, and implement procedures to 
manage the handling of material nonpublic information and conflicts of 
interest. In addition, the Rating Agency Act provides the Commission 
with rulemaking authority to prescribe: the form of the application 
(including requiring the furnishing of additional information); the 
records an NRSRO must make and retain; the financial reports an NRSRO 
must furnish to the Commission on a periodic basis; the specific 
procedures an NRSRO must implement to manage the handling of material 
nonpublic information; the conflicts of interest an NRSRO must manage 
or avoid altogether; and the practices that an NRSRO must not engage in 
if the Commission determines they are unfair, coercive, or abusive.
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    \3\ 15 U.S.C. 78c.
    \4\ 15 U.S.C. 78o-7.
    \5\ 15 U.S.C. 78q.
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II. Timing of Final Rules

    On February 2, 2007, the Commission proposed a package of rules 
pursuant to these grants of rulemaking authority.\6\ The rules 
published today incorporate many of the proposed provisions but also 
include significant revisions based on the comments received.\7\ The 
Commission, in adopting these rules today, intends that Rule 17g-1 (17 
CFR 240.17g-1), Form NRSRO, and 17 CFR 249b.300 be issued in final form 
and be effective on the date of their publication in the Federal 
Register. The Commission further intends that Rules 17g-2 (17 CFR 
240.17g-2), 17g-3 (17 CFR 240.17g-3), 17g-4 (17 CFR 240.17g-4), 17g-5 
(17 CFR 240.17g-5), and 17g-6 (17 CFR 240.17g-6) be issued in final 
form on June 26, 2007 and become effective on that date.
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    \6\ See Exchange Act Release No. 55231 (February 2, 2007), 72 FR 
6378 (February 9, 2007) (``Proposing Release'').
    \7\ These comments are available on the Commission's Internet 
Web site, located at http://www.sec.gov/comments/s7-04-07/s70407.shtml, and in the Commission's Public Reference Room in its 
Washington, DC headquarters.
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III. Effective Date

    Section 553(d) of the Administrative Procedure Act generally 
provides that, unless an exception applies, a substantive rule may not 
be made effective less than 30 days after notice of the rule has been 
published in the

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Federal Register.\8\ One exception to the 30-day requirement is an 
agency's finding of good cause for providing a shorter effective 
date.\9\
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    \8\ 5 U.S.C. 553(d).
    \9\ Id.
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    The Rating Agency Act provides that the new program for NRSRO 
registration and oversight shall apply on the earlier of the date on 
which regulations are issued in final form under Section 15E(n) of the 
Exchange Act, or 270 days after the enactment of the Rating Agency Act, 
which will be June 26, 2007.\10\ The Rating Agency Act voids existing 
Commission staff no-action letters on and after the effective date of 
the new program for NRSRO registration and oversight, but creates a 
transitional measure allowing credit rating agencies with existing no-
action letters to continue to act as NRSROs ``during Commission 
consideration of the application, if such entity has furnished an 
application for registration.'' \11\ Consequently, as noted above, the 
Commission intends that Rule 17g-1 and Form NRSRO be effective 
immediately upon publication. Further, the Commission intends that the 
remaining rules, Rule 17g-2 through Rule 17g-6, be effective on June 
26, 2007, the statutory deadline.
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    \10\ 15 U.S.C. 78o-7(p).
    \11\ 15 U.S.C. 78o-7(l).
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    Immediate effectiveness of Form NRSRO and Rule 17g-1 is necessary 
to allow credit rating agencies that are currently the subject of staff 
no-action letters identifying them as NRSROs to have a period of time 
to submit applications for registration as NRSROs before the provisions 
of the Rating Agency Act and the recordkeeping, reporting, and conduct 
rules issued under the Rating Agency Act become effective, and thus 
before the no-action letters become void. This will avoid a gap in time 
when no NRSROs exist, which would disrupt the regulatory use of that 
term in applicable statutes and regulations, resulting in uncertainty 
in the marketplace for all persons that rely upon credit ratings issued 
by NRSROs. Further, this result would be inconsistent with 
Congressional intent in creating the transitional measure. Finally, the 
accelerated effectiveness for the remaining rules, Rule 17g-2 through 
Rule 17g-6, is necessary to meet the statutory deadline.
    The primary purpose of the 30-day delayed effectiveness requirement 
is to give affected parties a reasonable period of time to adjust to 
the new rules. Here, the existing NRSROs would not be harmed by 
immediate effectiveness, and would in fact benefit from the opportunity 
to utilize the transitional measure Congress provided. Further, an 
entity would not be required to comply with Rule 17g-2 through Rule 
17g-6 until its voluntary registration has been approved.
    The Commission acted expeditiously in proposing and adopting these 
rules under a very tight, statutorily-imposed deadline. The Rating 
Agency Act was enacted on September 29, 2006. Just over four months 
later, on February 2, 2007, the Commission voted to propose the new 
rules and form, which were designed to comply with the statutory 
mandate to establish an entirely new regulatory regime for NRSROs. The 
Commission voted to adopt these rules and Form NRSRO on May 23, 2007, 
over a month before the statutory deadline. In doing so, the Commission 
carefully responded to industry, user, and investor perspectives to 
ease the transition to a new, Congressionally-created registration and 
regulatory scheme.
    Failure to accelerate effectiveness of Rule 17g-1 through Rule 17g-
6 and Form NRSRO could interfere with the goals of the Rating Agency 
Act. For these reasons, the Commission finds that good cause exists for 
Rule 17g-1 and Form NRSRO to be immediately effective upon publication, 
and for Rule 17g-2 through Rule 17g-6 to be effective on June 26, 2007.

IV. Review of Commission Rules

    Section 15E(n)(2) of the Exchange Act requires the Commission to 
review its existing rules using the term ``NRSRO'' within 270 days of 
its enactment.\12\ The statute further provides that the Commission 
shall amend or revise the rules in accordance with Section 15E(n)(2) of 
the Exchange Act.\13\ The Commission has reviewed all of its rules 
using the term ``NRSRO.'' The Commission does not believe these rules 
need to be amended at this time. The term ``NRSRO'' in each rule will 
refer to an ``NRSRO'' as that term is defined in the Rating Agency Act 
when the statutory provisions become effective.\14\ For example, 
Commission Rule 15c3-1 (the broker-dealer net capital rule) uses the 
term ``nationally recognized statistical rating organization'' to 
prescribe the amount a broker-dealer must haircut proprietary corporate 
debt securities when computing its regulatory capital.\15\ The rule 
does not otherwise define the term ``nationally recognized statistical 
rating organization.'' Consequently, after the effective date of the 
NRSRO regulatory program, the term, as used in this rule, will refer to 
a credit rating agency that is an NRSRO as determined by the provisions 
of the Rating Agency Act.\16\
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    \12\ 15 U.S.C. 78o-7(n)(2).
    \13\ Id.
    \14\ See Sections 3(a)(62) and 15E(l)(2) of the Exchange Act (15 
U.S.C. 78c(a)(62) and 15 U.S.C. 78o-7(l)(2)).
    \15\ See 17 CFR 240.15c3-1(c)(2)(vi)(F).
    \16\ See Sections 3(a)(62) and 15E(l)(2) of the Exchange Act (15 
U.S.C. 78c(a)(62) and 15 U.S.C. 78o-7(l)(2)).
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    The Commission notes that several commenters raised potential 
concerns about how other Commission rules may operate after the NRSRO 
registration and oversight program takes effect.\17\ These commenters 
suggested that requirements in Rule 2a-7 \18\ under the Investment 
Company Act of 1940,\19\ which regulates the operation of money market 
funds, may need to be modified depending on the number of credit rating 
agencies that become registered as NRSROs.\20\ For example, one 
commenter noted that Rule 2a-7(c)(6)(i)(A)(2) requires a money market 
fund to re-assess the minimal credit risk of its portfolio whenever it 
becomes aware that any unrated or second tier security held by the fund 
has been given a credit rating by any NRSRO below the NRSRO's second 
highest category.\21\ Another commenter noted that Rule 2a-7 prescribes 
that money market funds determine whether a security is eligible for 
purchase based on whether it has received a credit rating in one of the 
two highest categories from any NRSRO.\22\ This commenter was concerned 
that this might lead to money market funds filling portfolios that most 
NRSROs consider third tier.\23\ One of the these commenters also 
expressed concern that the proposal did not require that an NRSRO have 
a particular number of credit rating categories or that the categories 
of one NRSRO might not correspond to those of another NRSRO.\24\ Based 
on the uncertainty of how many credit rating agencies ultimately will 
register as NRSROs, the Commission intends to monitor for now how the 
NRSRO regulatory program impacts Rule 2a-7 and the Commission's other 
rules using the term ``NRSRO.'' As the program develops, the

[[Page 33566]]

Commission will evaluate whether modifications to these rules would be 
appropriate.
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    \17\ See letter dated March 12, 2007 from Elizabeth Krentzman, 
General Counsel, Investment Company Institute (``ICI Letter''); 
letter dated March 12, 2007 from Stephen A. Keen, Attorney, on 
behalf of Federated Investors, Inc. (``FI Letter''); letter dated 
April 4, 2007 from Charles S. Morrison, Senior Vice President and 
Money Market Group Leader, Fidelity Management and Research Company 
(``FMRC Letter'').
    \18\ 17 CFR 270.2a-7.
    \19\ 15 U.S.C. 80a-1 et seq.
    \20\ See ICI Letter; FI Letter; FMRC Letter.
    \21\ See FI Letter.
    \22\ See FMRC Letter.
    \23\ Id.
    \24\ See FI Letter.
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V. The Final Rules

A. Rule 17g-1--Registration Requirements

    The Rating Agency Act, through the enactment of new Section 15E of 
the Exchange Act, provides the Commission with rulemaking authority 
with respect to the process for applying for registration as an NRSRO, 
keeping an NRSRO registration current, and withdrawing an NRSRO 
registration.\25\ The Commission proposed to implement its rulemaking 
authority in these areas through a new rule, Rule 17g-1. The provisions 
of proposed Rule 17g-1 would have prescribed: How a credit rating 
agency must apply to be registered as an NRSRO; the form of the 
application; how an NRSRO must make non-confidential information in the 
application public; how an NRSRO must apply to be registered in an 
additional class of credit ratings; how an NRSRO must update its 
application; how an NRSRO must annually certify that the information 
and documents in its registration continue to be accurate; and how an 
NRSRO must provide notice of the withdrawal of its registration.
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    \25\ 15 U.S.C. 78o-7.
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    As discussed below, the Commission is adopting Rule 17g-1 with 
certain modifications that address issues raised by commenters, 
restructure the order of the paragraphs, and remove text that was 
unnecessary. Any textual changes not specifically discussed are non-
substantive and designed to make the rule text more cohesive and 
consistent both within the rule and across the other NRSRO rules 
published today.
1. Paragraph (a) of Rule 17g-1
    As adopted, paragraph (a) of Rule 17g-1 provides that a credit 
rating agency applying to register with the Commission as an NRSRO must 
furnish an application on Form NRSRO. Section 15E(a)(1)(A) of the 
Exchange Act provides that a credit rating agency applying for 
registration must furnish the Commission with an application in a form 
prescribed by Commission rule.\26\ Paragraph (a) of Rule 17g-1, as 
proposed, similarly provided that a credit rating agency applying to be 
registered with the Commission as an NRSRO must furnish the Commission 
with an application on Form NRSRO that follows all instructions for the 
Form. The Commission did not receive any comments on the proposed rule 
text of this paragraph and is adopting it substantially as proposed 
with one modification. Specifically, there is no longer a reference in 
the text to the ``credit ratings described in section 3(a)(62)(B) of 
the [Exchange] Act (15 U.S.C. 78c(a)(62)).'' This reference to a 
component of the statutory definition of ``NRSRO'' in the proposed rule 
was redundant and unnecessary. A credit rating agency, by statutory 
definition, must apply to be registered in one or more of the classes 
of credit ratings identified in section 3(a)(62)(B) of the Exchange 
Act.\27\
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    \26\ 15 U.S.C. 78o-7(a)(1)(A).
    \27\ See 15 U.S.C. 78c(a)(62).
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2. Paragraph (b) of Rule 17g-1
    As adopted, paragraph (b) of Rule 17g-1 provides a mechanism for an 
NRSRO registered for fewer than the five classes of credit ratings 
identified in the definition of NRSRO to apply to be registered in an 
additional class.\28\ Specifically, the NRSRO must apply by furnishing 
an amendment on Form NRSRO.\29\ This provision was proposed in 
paragraph (e) of Rule 17g-1.
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    \28\ See 15 U.S.C. 78c(3)(a)(62)(B).
    \29\ This provision further implements Section 15E(a)(1) of the 
Exchange Act, which requires the Commission, by rule, to prescribe 
the form of an application for registration (15 U.S.C. 78o-7(a)(1)).
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    Section 15E(a)(1)(B) of the Exchange Act, prescribes certain 
minimum information the credit rating agency must provide in its 
application for registration as an NRSRO.\30\ This includes information 
regarding the classes of credit ratings set forth in the definition of 
``NRSRO'' in Section 3(a)(62)(B) of the Exchange Act with respect to 
which the credit rating agency ``intends to apply for registration.'' 
\31\ A credit rating agency may apply to be registered for fewer than 
all five classes of credit ratings described in Section 3(a)(62)(B) of 
the Exchange Act.\32\ Accordingly, this provision provides a mechanism 
for an NRSRO to apply to be registered in an additional class.\33\
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    \30\ 15 U.S.C. 78o-7(a)(1)(B).
    \31\ See Section 15E(a)(1)(B)(vii) of the Exchange Act (15 
U.S.C. 78o-7(a)(1)(B)(vii)).
    \32\ 15 U.S.C. 78c(a)(62)(B).
    \33\ This provision further implements Section 15E(a)(1) of the 
Exchange Act, which requires the Commission, by rule, to prescribe 
the form of an application for registration (15 U.S.C. 78o-7(a)(1)).
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    The application to register for an additional class will be subject 
to the requirements in Section 15E of the Exchange Act \34\ applicable 
to an application to be registered as an NRSRO. This means the time 
periods for the Commission to act on the application set forth in 
Sections 15E(a)(2)(A) and (B) of the Exchange Act also will apply to an 
application to be registered in an additional class of credit 
ratings.\35\
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    \34\ 15 U.S.C. 78o-7.
    \35\ 15 U.S.C. 78o-7(a)(2)(A) and (B).
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    Finally, the provisions of paragraphs (c) and (h) respectively, 
regarding the requirement to notify the Commission and amend the 
application prior to final Commission action and when an application is 
deemed to have been furnished to the Commission also apply to these 
applications.
    The Commission did not receive any comments on these provisions. 
The Commission is adopting them substantially as proposed with several 
technical modifications. The rule text is modified to delete language 
instructing the NRSRO to indicate where appropriate on the form the 
additional class of credit ratings for which it is applying for 
registration. In its place, the rule text provides that the NRSRO must 
follow all applicable instructions for the Form, which include an 
instruction to indicate where appropriate on the Form the additional 
class of credit ratings for which registration is sought. The 
Commission is adopting the provision with the modifications discussed 
above.
3. Paragraph (c) of Rule 17g-1
    As adopted, paragraph (c) of Rule 17g-1 provides that an applicant 
for registration and an NRSRO applying to be registered in an 
additional class of credit ratings must promptly furnish the Commission 
with a notice if information in the application becomes, or is found to 
be, materially inaccurate before the Commission has granted or denied 
the application. Thereafter, the applicant will be required to update 
the application with complete and accurate information by submitting an 
amended application on Form NRSRO.\36\
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    \36\ This provision is being implemented under the Commission's 
authority in Section 15E(a)(1)(A) of the Exchange Act to prescribe 
the form of the application (15 U.S.C. 78o-7(a)(1)(A)).
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    These provisions were proposed in paragraphs (c) and (e) of Rule 
17g-1 for initial applicants and for NRSROs applying to be registered 
in an additional class of credit ratings, respectively. The 
notification provision is designed to alert the Commission as soon as 
possible that the application under consideration is materially 
inaccurate. The intent is to avoid situations where the Commission 
continues to review an application that is no longer materially 
accurate. The Commission has modified Form NRSRO to further clarify how 
a pending application should be updated using Form NRSRO. Specifically, 
the Form now has a check box for ``Application Supplement'' and 
specific instructions

[[Page 33567]]

about how to complete the Form in this instance. The Commission did not 
receive any comments on these provisions and is adopting them with the 
modifications discussed above.
4. Paragraph (d) of Rule 17g-1
    As adopted, paragraph (d) of Rule 17g-1 provides a mechanism for an 
entity that has applied to be registered as an NRSRO, or an NRSRO that 
has applied to be registered in an additional class of credit ratings, 
to withdraw the registration application before the Commission takes 
final action on the application.\37\ Specifically, it requires the 
applicant to furnish the Commission with a written notice of withdrawal 
executed by a duly authorized person.
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    \37\ The withdrawal of a granted registration is discussed 
separately below.
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    The application provisions were proposed in paragraphs (b)(2) and 
(e) of Rule 17g-1 for initial applicants and for applications to be 
registered in an additional class of credit ratings, respectively. The 
requirement for execution by a duly authorized person is designed to 
ensure that the withdrawal notice reflects the intent of the credit 
rating agency. The Commission did not receive any comments on these 
provisions and is adopting them substantially as proposed.
5. Paragraph (e) of Rule 17g-1
    As adopted, paragraph (e) of Rule 17g-1 provides that an NRSRO 
updating its application for registration pursuant to Section 15E(b)(1) 
of the Exchange Act \38\ must promptly furnish the amendment to the 
Commission on Form NRSRO.\39\ Section 15E(b)(1) of the Exchange Act 
requires an NRSRO to promptly update its application for registration 
if, after registration, any information or document provided as part of 
the application becomes materially inaccurate.\40\ The statute further 
provides that the information on credit ratings performance statistics 
(discussed below) must only be updated on an annual basis and that the 
certifications from qualified institutional buyers (QIBs), discussed 
below, are not required to be updated.\41\ This provision was proposed 
in paragraph (f) of Rule 17g-1.
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    \38\ 15 U.S.C. 78o-7(b)(1).
    \39\ The Commission is implementing this provision under Section 
15E(a)(1) of the Exchange Act (15 U.S.C. 78o-7(a)(1)), which 
requires the Commission, by rule, to prescribe the form of an 
application for registration.
    \40\ 15 U.S.C. 78o-7(b)(1).
    \41\ Id.
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    The Commission has added in the instructions to Form NRSRO a 
description of this statutory requirement as a means to alert NRSROs 
that they must promptly update information or a document submitted on 
or with their Form NRSRO that has become materially inaccurate.
    The Commission is not defining the term ``promptly'' as used in 
Section 15E(b)(1) of the Exchange Act.\42\ The Commission, however, did 
express its view in the proposing release that meeting the statutory 
requirement to update a registration when information becomes 
materially inaccurate should not take more than two days. In response, 
five commenters stated that it would be unreasonable to expect an NRSRO 
to submit an amendment in two days.\43\ Three commenters proposed that 
the Commission define the term ``promptly'' to mean 10 days.\44\ One 
commenter suggested 20 days.\45\ Another commenter suggested the 
Commission use a facts and circumstances standard for determining 
whether an amendment was ``promptly'' furnished.\46\ The Commission 
agrees that the analysis of whether an amendment is furnished promptly 
will depend on the facts and circumstances. For example, if an NRSRO 
changes its principal business address, it should not take more than a 
few days to complete Form NRSRO (inputting the new information), have 
the Form executed, and furnish the Form to the Commission. On the other 
hand, it may take a few days longer to complete the Form if the 
information or documents in an Exhibit become materially inaccurate.
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    \42\ Id.
    \43\ See letter dated March 12, 2007 from William G. Connolly, 
on behalf of A.M. Best Company, Inc. (``A.M. Best Letter''); letter 
dated March 12, 2007 from Yasuhiro Harada, President, Ratings & 
Investment Information (``R&I Letter''); letter dated March 12, 2007 
from Jeanne M. Dering, Executive Vice President, Moody's Investors 
Services (``Moody's Letter''); letter dated March 12, 2007 from Kent 
Wideman, Group Managing Director, and Mary Keogh, Managing Director, 
Dominion Bond Rating Service (``DBRS Letter''); letter dated March 
12, 2007 from Charles D. Brown, General Counsel, Fitch Ratings 
(``Fitch Letter'').
    \44\ See R&I Letter; A.M. Best Letter; and Fitch Letter.
    \45\ See Moody's Letter.
    \46\ See DBRS Letter.
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    One commenter also stated that the rule should require an update of 
the registration application only when the information in the current 
registration application becomes ``materially inaccurate.'' \47\ In 
response, the Commission notes that the requirement to update an 
application arises from Section 15E(b)(1) of the Exchange Act, which 
provides, in pertinent part, that an NRSRO shall promptly update its 
application for registration ``if any information or document provided 
therein becomes materially inaccurate.'' \48\ As noted above, the 
instructions to Form NRSRO have been modified to include a description 
of this statutory provision.
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    \47\ See Moody's Letter.
    \48\ 15 U.S.C. 78o-7(b)(1).
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    In all other respects, the Commission is adopting the provision 
substantially as proposed.
6. Paragraph (f) of Rule 17g-1
    As adopted, paragraph (f) of Rule 17g-1 provides that an NRSRO 
updating its application for registration pursuant to Section 15E(b)(2) 
of the Exchange Act \49\ (the annual certification) must furnish the 
amendment to the Commission on Form NRSRO.\50\ Section 15E(b)(2) of the 
Exchange Act requires an NRSRO to furnish the Commission with an 
amendment to its registration not later than 90 days after the end of 
each calendar year.\51\ This section further provides that the 
amendment must (1) certify that the information and documents provided 
in the application for registration (except the QIB certifications) 
continue to be accurate and (2) list any material change to the 
information and documents during the previous calendar year.\52\
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    \49\ 15 U.S.C. 78o-7(b)(2).
    \50\ The Commission is implementing this provision under Section 
15E(b)(2) of the Exchange Act (15 U.S.C. 78o-7(b)(2)), which 
requires the Commission, by rule, to prescribe the form of the 
annual certification.
    \51\ 15 U.S.C. 78o-7(b)(2).
    \52\ Id.
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    This provision was proposed in paragraph (g) of Rule 17g-1. A 
commenter suggested that the proposed provision should be revised to 
permit the filing of the annual certification within 90 days after the 
end of an NRSRO's fiscal year (if different than the end of the 
calendar year).\53\ However, as noted, the calendar year requirement is 
statutory. The instructions to Form NRSRO have been modified from those 
proposed to include a description of this statutory provision. In all 
other respects, the Commission is adopting the provision substantially 
as proposed.
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    \53\ See Fitch Letter.
---------------------------------------------------------------------------

7. Paragraph (g) of Rule 17g-1
    As adopted, paragraph (g) of Rule 17g-1 provides that an NRSRO 
withdrawing its registration pursuant to Section 15E(e)(1) of the 
Exchange Act \54\ must furnish the Commission with a notice of 
withdrawal on Form NRSRO. The rule further provides that the withdrawal 
becomes effective 45

[[Page 33568]]

calendar days after the furnishing of the form. Section 15E(e)(1) of 
the Exchange Act \55\ provides that an NRSRO may withdraw from 
registration, subject to such terms and conditions the Commission may 
establish as necessary in the public interest or for the protection of 
investors, by furnishing the Commission with a written notice of 
withdrawal.\56\ The rule text references this statutory standard.
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78o-7(e)(1).
    \55\ Id.
    \56\ Id.
---------------------------------------------------------------------------

    This provision was proposed in paragraph (h) of Rule 17g-1 without 
specifying the form of the notice or the conditions for withdrawal. A 
commenter suggested that the withdrawal provision be modified to 
provide that the withdrawal of the registration becomes effective 
within 90 days of the notice and that the notice be provided through an 
amendment to registration furnished on Form NRSRO.\57\ The Commission 
did note in the proposing release that the conditions for withdrawal 
potentially could include a requirement that the NRSRO provide public 
notice that its credit ratings will cease to be eligible for regulatory 
use.
---------------------------------------------------------------------------

    \57\ See Moody's Letter.
---------------------------------------------------------------------------

    The Commission agrees with the commenter that the notice should be 
furnished on Form NRSRO. This provides for public notice of the 
withdrawal, since the current Form NRSRO must be made publicly 
available pursuant to Section 15E(a)(3) of the Exchange Act \58\ and 
Rule 17g-1(i) discussed below. The Commission also agrees with the 
commenter that in the normal course an NRSRO's withdrawal of 
registration should become effective within a prescribed time period. 
This will provide a degree of certainty to the NRSRO as to when it will 
no longer be subject to the Commission's regulatory program. It also 
will be consistent with withdrawal requests by certain other regulated 
entities. For example, a broker-dealer's request for withdrawal of its 
registration becomes effective within 60 days of the filing of the 
appropriate form.\59\ The Commission also believes users of credit 
ratings should have adequate prior notice of an NRSRO's intent to 
withdraw its application. This will give them notice that they will no 
longer be able to rely on the entity's credit ratings to meet statutory 
or regulatory requirements using the term ``NRSRO.'' It also will 
provide them with notice that the entity will no longer be subject to 
the Commission's oversight, including requirements to disclose 
information about its performance, methodologies, procedures, and 
organization.
---------------------------------------------------------------------------

    \58\ 15 U.S.C. 78o-7(a)(3).
    \59\ See 17 CFR 240.15b6-1.
---------------------------------------------------------------------------

    The Commission believes the 45 calendar day time period for the 
withdrawal to become effective is necessary in the public interest or 
for the protection of investors for several reasons. First, as 
discussed below, pursuant to paragraph (i) of Rule 17g-1, an NRSRO must 
make its current Form NRSRO publicly available within 10 business days 
of being furnished to the Commission. Consequently, notice of an 
NRSRO's withdrawal will be made publicly available at least 30 calendar 
days before becoming effective. This notice will provide users of 
credit ratings with time to prepare for the NRSRO's withdrawal. Second, 
subject to certain limited exceptions, an entity acting as a ``broker'' 
or ``dealer'' as defined in Sections 3(a)(4) and (5) of the Exchange 
Act \60\ respectively must register with the Commission.\61\ 
Conversely, an entity may act as a ``credit rating agency'' as defined 
in Section 3(a)(61) of the Exchange Act \62\ without being required to 
register with the Commission. In this sense, registration as an NRSRO 
is more voluntary than registration as a broker-dealer. Therefore, a 
shorter time period to withdraw an NRSRO registration is appropriate.
---------------------------------------------------------------------------

    \60\ 15 U.S.C. 78c(a)(4) and (5).
    \61\ See Section 15 of the Exchange Act (15 U.S.C. 78o).
    \62\ 15 U.S.C. 78c(a)(61).
---------------------------------------------------------------------------

    Form NRSRO has been modified to include a checkbox to indicate when 
the Form is being furnished to withdraw a registration and the 
instructions for the Form have been modified from those proposed to 
include an explanation of how to complete the Form in this case. 
Specifically, an NRSRO would complete each Item on the Form, except 
Item 6, and have the Form executed.
    For these reasons, the Commission is adopting the provision in Rule 
17g-1 concerning a withdrawal of registration with the modifications 
described above.
8. Paragraph (h) of Rule 17g-1
    As adopted, paragraph (h) of Rule 17g-1 provides that a Form NRSRO 
submitted to the Commission pursuant to any provision in Rule 17g-1 
will be deemed furnished to the Commission on the date that the 
Commission receives a complete and properly executed Form NRSRO that 
follows all applicable instructions for the form.\63\ The requirement 
for completeness comports with the requirements imposed on other types 
of registrants under the Exchange Act.\64\ In addition, 
Section15E(a)(2)(A) of the Exchange Act requires the Commission to 
grant an application for registration as an NRSRO or commence 
proceedings on whether to deny the application within 90 days from the 
date the application is furnished to the Commission or a longer period 
if the applicant consents.\65\ Further, if proceedings are commenced, 
Section 15E(a)(2)(B) of the Exchange Act \66\ requires the Commission 
to conclude them within 120 days of the date the application is 
furnished to the Commission.\67\ These statutory requirements make it 
necessary for the Commission to receive a complete initial application 
before the 90-day and 120-day periods begin to run.
---------------------------------------------------------------------------

    \63\ This provision is adopted under the Commission's authority 
in Section 15E(a)(1)(A) of the Exchange Act to prescribe the form of 
the application (15 U.S.C. 78o-7(a)(1)(A)).
    \64\ See, e.g., 17 CFR 240.15b1-1 and 17 CFR 240.15b3-1 (broker-
dealers); 17 CFR 240.15Ba2-1 (municipal securities dealers); 17 CFR 
240.17Ab2-1 (clearing agencies); and 17 CFR 240.17Ac2-1 (transfer 
agents).
    \65\ 15 U.S.C. 78o-7(a)(2)(A).
    \66\ 15 U.S.C. 78o-7(a)(2)(B).
    \67\ Under Section 15E(a)(2)(B)(iii) of the Exchange Act, the 
Commission can extend this period for an additional 90 days for good 
cause or for such other period as the applicant consents (15 U.S.C. 
78o-7(a)(2)(B)(iii)). An applicant will be required to consent to 
extend both the period for the Commission to make the initial 
determination and the 120-day period to conclude proceedings; since 
the 120-day period begins when the application is furnished to the 
Commission, not when the Commission determines to commence 
proceedings.
---------------------------------------------------------------------------

    Rule 17g-1, as proposed, explicitly applied the standard described 
above for when a Form NRSRO would be deemed ``furnished'' for 
submissions of the Form to apply for registration and to add a class of 
credit ratings to an existing registration. The Commission did not 
receive any comments on these provisions as proposed.
    Rule 17g-1, as adopted, clarifies that the ``when furnished'' 
standard also applies to furnishings of Form NRSRO to update a 
registration, make the annual certification, and withdraw a 
registration. As discussed above, amendments to update materially 
inaccurate information must be furnished promptly, annual 
certifications must be furnished within 90 days of the end of the 
calendar year, and withdrawals of registration become effective in 45 
calendar days. Therefore, a Form NRSRO submitted for these purposes 
will be deemed ``furnished'' upon the submission of a complete and 
properly executed form.
    Rule 17g-1(h), as adopted, contains a provision stating that the 
Commission will, to the extent permitted by law, keep confidential 
information that is furnished on a confidential basis and requested to 
be kept confidential. As in

[[Page 33569]]

any situation where a person wishes to obtain confidential treatment 
for information provided to the Commission, an applicant and NRSRO must 
comply with the requirements of the Exchange Act governing confidential 
treatment.\68\ This provision has been added to highlight for credit 
rating agencies and NRSROs the fact that information required by Form 
NRSRO includes information that will be furnished ``on a confidential 
basis.'' \69\ Some of the information to be furnished to the Commission 
``on a confidential basis'' in the Form is required by Section 
15E(a)(1)(B) of the Exchange Act,\70\ and the Commission will consider 
requests for confidential treatment for that information. In addition, 
certain other information also is required in the Form and it may be 
appropriate for the Commission to provide confidential treatment to 
some of this information. The Commission will evaluate all requests for 
confidential treatment under the existing rules governing confidential 
treatment for information furnished to the Commission.\71\
---------------------------------------------------------------------------

    \68\ See, e.g., Section 24 of the Exchange Act (15 U.S.C. 78x), 
17 CFR 240.24b-2, 17 CFR 200.80 and 17 CFR 200.83.
    \69\ See, e.g., Section 15E(a)(1)(B)(viii) of the Exchange Act.
    \70\ See Sections 15E(a)(1)(B)(viii) and (ix) of the Exchange 
Act (15 U.S.C. 78o-7(a)(1)(B)(viii) and (ix)).
    \71\ See 17 CFR 200.80 and 17 CFR 200.83.
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting the provision in Rule 
17g-1 concerning when a Form NRSRO will be deemed to have been 
furnished with the modifications described above.
9. Paragraph (i) of Rule 17g-1
    As modified, paragraph (i) of Rule 17g-1 requires that an NRSRO 
make its current Form NRSRO and information and documents submitted in 
Exhibits 1 though 9 publicly available within 10 business days of being 
granted an initial registration or registration in an additional class 
of credit ratings and within 10 business days of furnishing an update 
to amend information on the form, to provide the annual certification, 
and to withdraw a registration. Section 15E(a)(3) of the Exchange Act 
provides that the Commission, by rule, shall require an NRSRO, after 
registration, to make the information submitted in its application and 
any amendments publicly available on its Web site or through another 
comparable, readily accessible means.\72\ The 10 business day period is 
intended to provide the NRSRO with sufficient time to make the 
information public and designed to ensure that users of credit ratings 
have access to the information within a reasonably short timeframe.
---------------------------------------------------------------------------

    \72\ 15 U.S.C. 78o-7(a)(3).
---------------------------------------------------------------------------

    This provision was proposed in paragraph (d) of Rule 17g-1, except 
that the time period to make the information publicly available was 
proposed to be five business days. The Commission received three 
comments on the five business day time period. Two commenters stated 
that five business days was not enough time to make their application 
information publicly available, given the volume of information.\73\ 
They commented that the time period should be 15 and 20 business days, 
respectively.\74\ The third commenter stated that the five business day 
time period should not be lengthened as the information is an important 
way for users of credit ratings to become familiar with a new 
NRSRO.\75\
---------------------------------------------------------------------------

    \73\ See DBRS Letter; Fitch Letter.
    \74\ See Fitch Letter and DBRS Letter, respectively.
    \75\ See ICI Letter.
---------------------------------------------------------------------------

    The Commission agrees with the third commenter that making the 
information publicly available as soon as possible will be an important 
means for users of credit ratings to understand the methodologies, 
procedures, and business models of new NRSROs. At the same time, the 
Commission agrees with the two other commenters that larger more 
complex NRSROs could have substantial amounts of information in their 
applications, which may make it difficult to provide all this 
information in a publicly available format in five business days. 
Therefore, the Commission is lengthening the time period to ten 
business days. This is shorter than the 15 and 20 day periods advocated 
by the two commenters. However, as discussed below, Form NRSRO has been 
modified in ways that reduce the volume of information that must be 
made publicly available. Consequently, the Commission believes 10 
business days will be a sufficient amount of time.
    Finally, while Section 15E(a)(3) of the Exchange Act \76\ does not 
address whether an application to register as an NRSRO shall be made 
publicly available prior to registration, this type of information 
typically would be made available by the Commission to members of the 
public before the application is acted on by the Commission.\77\ Two 
commenters, both current NRSROs, stated that the Commission should not 
make information in the application available to the public until after 
registration was granted.\78\ The Commission notes that an applicant 
can seek confidential treatment for information in the application 
under existing laws and rules governing confidential treatment.\79\ The 
Commission will accord this information confidential treatment to the 
extent permitted by law. This is consistent with how the Commission 
treats applications of other entities.
---------------------------------------------------------------------------

    \76\ 15 U.S.C. 78o-7(a)(3).
    \77\ See 17 CFR 200.80(b)(4) and 17 CFR 200.80a. 17 CFR 200.80a 
contains a compilation of records generally available at the public 
reference room in the principal office of the Commission, including, 
for example, applications for registration as a broker-dealer or 
investment adviser.
    \78\ See DBRS Letter; A.M. Best Letter.
    \79\ See 17 CFR 200.80 and 17 CFR 200.83.
---------------------------------------------------------------------------

B. Form NRSRO

    The Commission proposed Form NRSRO to serve four functions: For a 
credit rating agency to apply for registration as an NRSRO; for an 
NRSRO to apply to be registered in an additional class of credit 
ratings; for an NRSRO to update public information required to be 
disclosed and kept accurate on the Form; and for an NRSRO to make an 
annual certification. Proposed instructions for the Form described how 
an applicant, and after registration, an NRSRO, should complete the 
Form in each of these circumstances.
    The Commission believes that having just one form (and one set of 
instructions) will reduce the burden on applicants, NRSROs, and 
Commission staff. For example, it will reduce the complexity of having 
different forms for the application, amendments, and annual 
certification. Using one form also will allow NRSROs to more quickly 
become familiar with the Form and its instructions, which will reduce 
the potential for making mistakes in completing the Form. It also will 
assist users of credit ratings in understanding the Form and public 
Exhibits and where to look on the Form for specific information.
    As discussed below, the Commission is adopting Form NRSRO with 
substantial modifications that address issues commenters raised and 
allow the Form to be used to furnish a notice of withdrawal of 
registration. Much of the information elicited in the Form is required 
to be submitted to the Commission pursuant to Section 15E(a)(1)(B) of 
the Exchange Act.\80\ The Commission, under authority in Section 
15E(a)(1)(B)(x), is requiring certain additional information.\81\ The 
Commission believes this additional information elicited in the Form is 
necessary or appropriate in the public

[[Page 33570]]

interest or for the protection of investors because, as discussed 
below, it will: (1) Assist the Commission in making the findings 
required in Section 15E(a)(2)(C) of the Exchange Act with respect to 
whether an applicant should be granted registration as an NRSRO; \82\ 
(2) assist the Commission in making the findings required in Section 
15E(d) of the Exchange with respect to whether the Commission should 
censure, place limitations on the activities, functions or operations 
of, suspend for a period not exceeding 12 months, or revoke the 
registration of an NRSRO; \83\ (3) assist the Commission in reviewing 
whether an NRSRO is complying with Section 15E of the Exchange Act \84\ 
and the Commission's rules thereunder; and (4) provide users of credit 
ratings with information that will assist them in comparing NRSROs and 
understanding how a given NRSRO conducts its activities.
---------------------------------------------------------------------------

    \80\ 15 U.S.C. 78o-7(a)(1)(B).
    \81\ 15 U.S.C. 78o-7(a)(1)(B)(x).
    \82\ 15 U.S.C. 78o-7(a)(2)(C).
    \83\ 15 U.S.C. 78o-7(d).
    \84\ 15 U.S.C. 78o-7.
---------------------------------------------------------------------------

1. Checkboxes Indicating Nature of Submission
    The first entry an applicant or NRSRO must make on Form NRSRO is to 
indicate, by checking the appropriate box, the reason the form is being 
furnished: To apply for registration as an NRSRO; to apply to be 
registered in an additional class of credit ratings; to supplement 
either type of application while the application is pending; to update 
public information on the Form that has become materially inaccurate; 
to make the annual certification; and to provide notice of a withdrawal 
of registration. If the Form is furnished to supplement an application 
or update a registration, the NRSRO also must identify by number the 
specific items or Exhibits on the form that are being supplemented or 
amended. For example, if the NRSRO is furnishing an update to its 
registration because its address and organizational structure have 
changed, the NRSRO is required to enter ``Item 1C'' and ``Exhibit 4'' 
in the appropriate field on the Form. The Form, as proposed, required a 
brief description of the nature of the amendment. This requirement has 
been eliminated to simplify the process of completing the Form.
    The Commission also has added two checkboxes that were not on the 
proposed version of the Form. The first new checkbox--``Application 
Supplement''--is for when a credit rating agency applying for 
registration as an NRSRO or an NRSRO applying to be registered in an 
additional class of credit ratings must furnish an amendment to its 
application because information submitted in the application is or has 
become materially inaccurate. As proposed, an NRSRO would have checked 
the more generic ``Amendment'' checkbox. The Commission added a 
separate checkbox to distinguish amendments relating to a pending 
application from other amendments, which will make the reason for the 
furnishing of the Form more transparent.
    Second, the Commission added a checkbox to indicate when the Form 
is being furnished to withdraw a registration in light of the change to 
Rule 17g-1 requiring the notice of withdrawal to be furnished on Form 
NRSRO.
2. Item 1 (Identifying Information)
    As adopted, Item 1 requires an applicant and NRSRO to enter on to 
Form NRSRO identifying information about itself and its contact person. 
The instructions for Form NRSRO provide that the individual listed as 
the contact person must be authorized to receive all communications and 
papers from the Commission and will be responsible for their 
dissemination within the NRSRO. One commenter suggested that Item 1 
require the telephone number, fax, and email address of the contact 
person.\85\ The Commission elicits the telephone number for broker-
dealer contact persons.\86\ The number of NRSROs will be substantially 
smaller than the number of registered broker-dealers. The Commission 
believes at this time it will be able to easily obtain the contact 
information for the contact person without the necessity of having the 
information disclosed on the Form.
---------------------------------------------------------------------------

    \85\ See DBRS Letter.
    \86\ See Form BD--Uniform Application for Broker-Dealer 
Registration.
---------------------------------------------------------------------------

    The instructions to Item 1 of Form NRSRO indicate that the name 
entered on Line A of Item 1 must be the ``person'' that is applying for 
registration or registered as the NRSRO. The instructions further 
clarify through the definition of ``person'' that a separately 
identifiable department or division of a corporation or company may be 
registered as an NRSRO. This clarification had been made because 
certain credit rating agencies provide their credit rating services 
through operating divisions that may be a part of a larger legal entity 
or encompass several different legal entities located throughout the 
world.\87\ In an effort to more narrowly tailor the requirements for 
registration, the Commission believes it is appropriate in these 
circumstances to permit the operating division to register as the NRSRO 
as opposed to the larger legal entity that may engage in activities not 
intended to be regulated under the Rating Agency Act. Similarly, the 
Commission believes it is appropriate that the registered operating 
division include each separate legal entity that provides credit rating 
services, provided the operating division treats the credit ratings of 
the separate legal entities as its own and has global procedures, 
methodologies, policies, and controls that apply to the separate legal 
entities.
---------------------------------------------------------------------------

    \87\ See, e.g., letter dated March 12, 2007 from Vickie A. 
Tillman, Executive Vice President, Standard & Poors (``S&P 
Letter''); DBRS Letter; Fitch Letter; Moody's Letter.
---------------------------------------------------------------------------

    The instructions to Form NRSRO now include a definition of 
``separately identifiable department or division'' that is designed 
with these goals in mind.\88\ The first component of the definition is 
that the operating division must be a unit of a corporation or company 
that is under the direct supervision of an officer or officers 
designated by the board of directors of the corporation as responsible 
for the day-to-day conduct of the corporation's credit rating 
activities for one or more affiliates, including the supervision of all 
employees engaged in the performance of such activities. The second 
component of the definition is that all of the records relating to the 
operating division's credit rating activities must be separately 
created or maintained in or extractable from its own facilities or the 
facilities of the corporation, and such records must be maintained or 
otherwise accessible to permit independent examination for, and 
enforcement by, the Commission of Section 15E of the Exchange Act \89\ 
and rules and regulations promulgated thereunder.
---------------------------------------------------------------------------

    \88\ See 15 U.S.C. 80b-2 for a similar definition of separately 
identifiable departments or divisions of banks.
    \89\ 15 U.S.C. 78o-7.
---------------------------------------------------------------------------

    In all other respects, Item 1 to Form NRSRO is being adopted 
substantially as proposed.
3. Certification
    The applicant or NRSRO must have a duly authorized individual 
execute a certification that the information and statements furnished 
in the Form NRSRO are accurate in all significant respects. The 
Commission added the ``in all significant respects'' language to the 
certification in response to comments that the certification, as 
proposed, could have been construed to hold the certifying individual 
to an unrealistic standard of having to ensure the Form

[[Page 33571]]

did not include even trivial inaccuracies.\90\ The additional language 
is intended to allay these concerns. In light of this new language, the 
instructions for the Form now clarify that the Chief Executive Officer 
or the President of the applicant or NRSRO, or an individual with 
similar responsibilities, must execute the certification. This is 
designed to ensure that the person executing the certification has 
responsibilities that will make the person aware of the basis for the 
information being provided in the form.
---------------------------------------------------------------------------

    \90\ See Letter dated March 26, 2007 from Vickie A. Tillman, 
Executive Vice President, Standard & Poors (``S&P 2nd Letter''); 
Moody's Letter.
---------------------------------------------------------------------------

    In all other respects, the language of the certification is being 
adopted substantially as proposed.
4. Item 2 (Legal Status, Place of Formation, Fiscal Year End)
    As adopted, Item 2 requires an applicant and NRSRO to enter on to 
Form NRSRO information about its legal status (for example, corporation 
or partnership), the place and date of its formation, and its fiscal 
year end. The information with respect to the fiscal year end of the 
applicant or NRSRO is relevant because Form NRSRO requires applicants 
to submit audited financial statements with the application and Rule 
17g-3 requires NRSROs to annually furnish the Commission with audited 
financial statements covering the previous fiscal year. The Commission 
did not receive any comments on this provision and is adopting it 
substantially as proposed.
5. Item 3 (Credit Rating Affiliates)
    As discussed above, commenters with global operations stated that a 
credit rating agency with separate legal entities in different 
countries should be able to include them in a single NRSRO 
registration.\91\ The Commission agrees that permitting a single 
registration is appropriate in that it will lessen the burden of having 
a parent company register multiple legal entities that make up the 
parent company's credit rating division. Consequently, an applicant 
with affiliates that would be, or an NRSRO with affiliates that are, a 
part of its registered separately identifiable department or division 
must identify and provide the address of each such affiliate. The 
instructions to Form NRSRO clarify that any credit rating issued by a 
credit rating affiliate will be considered a credit rating issued by 
the NRSRO for purposes of Section 15E of the Exchange Act \92\ and the 
regulations thereunder. For example, the provisions in Rule 17g-5 with 
respect to issuing or maintaining credit ratings while having certain 
conflicts of interest will apply.
---------------------------------------------------------------------------

    \91\ See DBRS Letter; Fitch Letter.
    \92\ 15 U.S.C. 78o-7.
---------------------------------------------------------------------------

    The instructions also provide that an applicant and NRSRO in 
completing Form NRSRO must incorporate information about the credit 
ratings, methodologies, procedures, policies, financial condition, 
results of operations, and organizational structure of each credit 
rating affiliate identified in Item 3 in the other items and Exhibits. 
For example, the description of the procedures and methodologies for 
determining credit ratings in Exhibit 2 must include the procedures and 
methodologies used by the credit rating affiliates.
    For these reasons, the Commission is adopting Item 3 to Form NRSRO 
as described above.
6. Item 4 (Compliance Officer)
    As adopted, Item 4 requires an applicant and NRSRO to provide the 
name and address of its designated compliance officer required under 
Section 15E(j) of the Exchange Act.\93\ This person is responsible for 
administering the policies and procedures of the credit rating agency 
to prevent the misuse of nonpublic information, to manage conflicts of 
interest, and to ensure compliance with the securities laws and the 
rules and regulations under those laws. The Commission did not receive 
any comments on this provision and is adopting it substantially as 
proposed.
---------------------------------------------------------------------------

    \93\ 15 U.S.C. 78o-7(j).
---------------------------------------------------------------------------

7. Item 5 (Method of Making Form and Exhibits Publicly Available)
    As adopted, Item 5 requires an applicant and NRSRO to describe how 
it will make, or makes, its current Form NRSRO and Exhibits 1 through 9 
publicly available pursuant to Section 15E(a)(3) of the Exchange Act 
\94\ and Rule 17g-1(i) thereunder. As discussed above, paragraph (i) of 
Rule 17g-1 is being adopted under Section 15E(a)(3) of the Exchange 
Act, which provides that the Commission shall, by rule, require an 
NRSRO, upon the granting of its registration, to make the information 
submitted to the Commission in the initial application, amendments, or 
annual certifications publicly available on the NRSRO's Web site or 
through another comparable, readily accessible means.\95\ As discussed 
above, paragraph (i) of Rule 17g-1 requires an NRSRO to make its 
current Form NRSRO and Exhibits 1 through 9 publicly available within 
10 business days after the date of the Commission order granting an 
initial application and an application to be registered in an 
additional class of credit ratings and within 10 business days after 
furnishing the Commission with an amendment on Form NRSRO (including an 
annual certification and withdrawal of registration). This information 
elicited in Item 5 will assist the Commission in reviewing whether the 
NRSRO is complying with this requirement and assist the public in 
locating the information.
---------------------------------------------------------------------------

    \94\ 15 U.S.C. 78o-7(a)(3).
    \95\ Id.
---------------------------------------------------------------------------

    The Commission did not receive any comments on this provision and 
is adopting it substantially as proposed.
8. Item 6 (Classes of Credit Ratings for Which Registration Is Sought 
and QIB Certifications)
    An applicant for registration as an NRSRO or an NRSRO applying to 
add another class of credit ratings to its registration must complete 
Item 6 of Form NRSRO. This item elicits information about the classes 
of credit ratings for which the applicant is applying to be registered. 
It also requires the applicant to attach the requisite number of QIB 
certifications (two for each class of credit rating for which 
registration is sought and at least 10 with an initial application).
    Item 6 elicits the approximate number of credit ratings issued in 
each class as of the application date. Commenters objected to the 
requirement to provide the number of credit ratings in a particular 
class because it could make it more difficult for new entrants to 
obtain business.\96\ The Commission believes that users of credit 
ratings will find this information useful in understanding an NRSRO. 
For example, it will provide information as to how broad an NRSRO's 
coverage is with respect to issuers and obligors within a particular 
class of credit ratings.
---------------------------------------------------------------------------

    \96\ See, e.g., A.M. Best Letter.
---------------------------------------------------------------------------

    Item 6 also elicits the date the applicant first began issuing 
credit ratings in that class on a continuous basis without 
interruption. The Form, as proposed, required the applicant to provide 
the number of years it has been issuing credit ratings on a continuous 
basis. One commenter suggested that an NRSRO be required to provide the 
date of first issuance, instead of the number of years, to avoid the 
necessity of having to frequently update the information.\97\ The 
Commission agrees with the commenter that this will make the 
information submitted on the Form less subject to change and reduce the

[[Page 33572]]

requirement to, and burden of, updating the Form. Consequently, the 
Commission has modified Items 6 and 7 accordingly. The information on 
how long an NRSRO has issued credit ratings in a particular class will 
assist users of credit ratings in assessing the NRSRO's level of 
experience.\98\ Section 15E(a)(1)(C) of the Exchange Act also requires 
that the QIB certifications include a representation that the QIB has 
used the credit ratings of the applicant in the class of credit ratings 
for at least the three years immediately preceding the date of the 
application. The instructions provide that an applicant cannot tack on 
periods when a credit rating affiliate issued credit ratings in the 
particular class if the entity was not an affiliate during that time 
period. This provision is designed to avoid the submission of 
misleading information by providing that only credit ratings issued by, 
or on behalf of, the NRSRO are used in determining the start date.
---------------------------------------------------------------------------

    \97\ See letter dated March 8, 2007 from Majorie E. Gross 
(``Gross Letter'').
    \98\ Because Item 7, discussed below, will not be filled out 
when the NRSRO applies for registration, it will remain blank for a 
period of time between the granting of an initial registration and 
the time when the NRSRO furnishes a new Form NRSRO either as an 
amendment or annual certification. Item 6, however, will have been 
filled out as part of the application for registration. This item 
requires the same information as Item 7. Therefore, users of credit 
ratings will have the access to the information through Item 6 until 
the NRSRO furnishes an annual certification. Thereafter, the 
information will be located in Item 7 and updated annually with each 
new annual certification.
---------------------------------------------------------------------------

    Item 6 also elicits a brief description of how the credit rating 
agency issues its credit ratings on the Internet or through another 
readily accessible means, for free or for a reasonable fee. The 
Commission will use this information to review whether the applicant is 
in the business of issuing credit ratings on the Internet or through 
another readily accessible means, for free or for a reasonable fee.\99\ 
The Rating Agency Act does not define ``readily accessible.'' The 
information about how an applicant issues credit ratings on the 
Internet or through another readily accessible means, for free or for a 
reasonable fee also will inform the public about where and, if 
applicable, the cost to access an NRSRO's credit ratings.
---------------------------------------------------------------------------

    \99\ Section 3(a)(61)(A) of the Exchange Act (15 U.S.C. 
78c(a)(61)(A)).
---------------------------------------------------------------------------

    Further, the Rating Agency Act does not define ``reasonable fee.'' 
In the proposing release, the Commission sought comment on whether it 
should define ``reasonable fee.'' In response, four commenters stated 
that the Commission should not in any way regulate the fees an NRSRO 
charges for its credit ratings.\100\ The Commission has determined not 
to define ``reasonable fee'' at this time in order to gain experience 
on the issue. Item 6 is designed to assist the Commission in gaining 
this experience.
---------------------------------------------------------------------------

    \100\ See letter dated March 12, 2007 from Cate Long, Multiple 
Markets (``MM Letter''); letter dated March 12, 2007 from Lawrence 
J. White, Professor of Economics, Stern School of Business (``White 
Letter''); Letter dated March 12, 2007 from Alex J. Pollack, 
Resident Fellow, American Enterprise Institute (``AEI Letter''); 
Gross Letter.
---------------------------------------------------------------------------

    One commenter stated that Item 6, as proposed, does not elicit 
information that would be helpful in understanding the fees charged for 
obtaining or accessing credit ratings.\101\ The Commission notes that, 
to the extent that several NRSROs indicate that they make their credit 
ratings available for free, the Commission will have assurance that 
regulatory users have ready access to NRSRO credit ratings. However, 
the Commission believes the form should elicit more information about 
fees so that the information will be disclosed to users of credit 
ratings. This will improve price transparency, which may lead to 
greater competition. Accordingly, the instructions for Item 6 and Item 
7 now provide that an applicant that charges a fee for accessing its 
credit ratings must describe the fee or include a fee schedule in the 
form.
---------------------------------------------------------------------------

    \101\ See Gross Letter.
---------------------------------------------------------------------------

    Finally, Item 6 requires the applicant to provide the QIB 
certifications mandated pursuant to Section 15E(a)(1)(B)(ix) of the 
Exchange Act.\102\ Under this provision, an applicant must submit a 
minimum of ten QIB certifications. An NRSRO will not be required to 
make the QIB certifications publicly available pursuant to Section 
15E(a)(3) of the Exchange Act \103\ and Rule 17g-1(i) thereunder or 
update them after registration.\104\ Sections 15E(a)(1)(C)(i), (ii), 
and (iii) further provide, respectively, that: (1) The certifying QIB 
must not be affiliated with the applicant; (2) the certification may 
address more than one of the categories of obligors identified in the 
definition of NRSRO; and (3) at least two of the certifications must 
address each category of obligor.\105\ Section 15E(a)(1)(C)(iv) 
provides that the QIB must state in the certification that it meets the 
definition of a ``QIB'' in Section 3(a)(64) of the Exchange Act \106\ 
and that the QIB has used the credit ratings of the applicant for at 
least three years immediately preceding the date of the application in 
the subject category or categories of obligors.\107\ The Senate report 
(``Senate Report'') accompanying the Rating Agency Act explained that 
the term ``used'' was intended to mean the QIB ``seriously considered 
the ratings in some of [its] investment decisions.'' \108\ The Senate 
Report further explained that ``a QIB whose analysts regularly read and 
consider [a credit rating agency's] ratings in the course of making 
investment decisions would have ``used'' them under the meaning of the 
bill.'' \109\ The required representation for the QIB certification is 
that the QIB ``has seriously considered the credit ratings of [the 
credit rating agency] in the course of making some of its investment 
decisions for at least the three years immediately preceding the date 
of this certification, in the following classes of credit ratings.'' In 
addition, as a measure designed to ensure the impartiality of the QIB's 
representation, the QIB must certify that it has not received 
compensation for providing the certification.
---------------------------------------------------------------------------

    \102\ 15 U.S.C. 78o-7(a)(1)(B)(ix).
    \103\ 15 U.S.C. 78o-7(a)(3).
    \104\ An applicant can request that this information be kept 
confidential to the extent permitted by law. See 17 CFR 200.80 and 
17 CFR 200.83.
    \105\ See 15 U.S.C. 78o-7(a)(1)(C)(i), (ii) and (iii), 
respectively.
    \106\ 15 U.S.C. 78c(a)(64).
    \107\ 15 U.S.C. 78o-7(a)(1)(C)(iv).
    \108\ See Report of the Senate Committee on Banking, Housing, 
and Urban Affairs to Accompany S. 3850, Credit Rating Agency Reform 
Act of 2006, S. Report No. 109-326, 109th Cong., 2d Sess. (Sept. 6, 
2006) (``Senate Report''). The Senate Report further explained that 
a QIB whose employees subscribe to or regularly receive the ratings 
but do not read them or, if they read them, rarely or never consider 
them in making their investment decisions would not be deemed to 
have `used' the ratings.''
    \109\ Id (emphasis added).
---------------------------------------------------------------------------

    The certification must be executed by a person duly authorized by 
the QIB to make the certification on behalf of the QIB. This is 
designed to ensure that the certification is that of the QIB and not an 
employee of the QIB who may have an interest (distinct from that of the 
QIB) in providing the certification to the applicant. The form of the 
certification now requires that the printed name and title of the 
person be provided under the signature. This will clarify the identity 
and level of responsibility of the person executing the certification.
    The Commission did not receive any comments on the form of the QIB 
certification and is adopting it substantially as proposed with the two 
modifications described above.
    Item 6 of proposed Form NRSRO also requires the applicant to 
indicate whether it is submitting the QIB certifications and, if so, 
how many certifications are being submitted or that the applicant is 
exempt from the requirement to provide the certifications. Under 
Section 15E(a)(1)(D) of the Exchange Act, a

[[Page 33573]]

credit rating agency is not required to submit the QIB certifications 
if it was identified as an NRSRO in a Commission staff no-action letter 
issued before August 2, 2006.\110\
---------------------------------------------------------------------------

    \110\ 15 U.S.C. 78o-7(a)(1)(D).
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting Item 6 with the 
modifications discussed above.
9. Item 7 (Classes of Credit Ratings Covered by Current Registration)
    As adopted, Item 7 requires an NRSRO to provide information about 
the classes of credit ratings for which the NRSRO is currently 
registered, the approximate number of credit ratings issued in each 
class as of the previous calendar year end, and the date the NRSRO 
first issued credit ratings in that class on a continuous basis. The 
NRSRO also must provide information about how the NRSRO makes its 
credit ratings readily accessible. Item 7 has been modified from the 
proposed form to make the information provided in the item less subject 
to change, which will reduce the frequency of having to furnish updated 
information. Specifically, as discussed above, the number of years the 
NRSRO has issued credit ratings in a particular class is now indicated 
by having the NRSRO provide the date it first issued credit ratings in 
that class. As proposed, the NRSRO would have had to provide the number 
of years it had issued credit ratings in that class, which would 
constantly change with the advance of time. Also, the number of credit 
ratings issued in a particular class is now as of the end of the 
previous calendar year. Therefore, this information will change once a 
year and only be required to be updated on an annual basis. The 
instructions to the Form provide that this update can be made with the 
annual certification and within the 90-day time period for providing 
the annual certification.
10. Item 8 (Potential Statutory Disqualifications)
    An applicant and NRSRO will be required to disclose, if applicable, 
if it or any person within its credit rating organization have been, or 
are, subject to certain legal judgments or orders, or regulatory 
findings. As explained in the proposing release, Section 
15E(a)(2)(C)(ii)(II) of the Exchange Act \111\ directs the Commission 
to deny a credit rating agency's application for registration as an 
NRSRO if the Commission finds that the applicant, if granted 
registration, would be subject to suspension or revocation of its 
registration under Section 15E(d) of the Exchange Act.\112\ Section 
15E(d) of the Exchange Act \113\ provides that the Commission, by 
order, shall censure, place limitations on the activities, functions, 
or operations of, suspend for a period not exceeding 12 months, or 
revoke the registration of an NRSRO, if the Commission finds that the 
NRSRO or a person associated with the NRSRO has committed or omitted 
any act, or is subject to an order or finding enumerated in Sections 
15(b)(4)(A), (D), (E), (G), or (H) of the Exchange Act,\114\ has been 
convicted of any offense specified in Section 15(b)(4)(B) of the 
Exchange Act,\115\ or is enjoined from any action, conduct, or practice 
specified in Section 15(b)(4)(C) of the Exchange Act.\116\ The 
Commission also can take these actions if the NRSRO or a person 
associated with the NRSRO has been convicted of any crime punishable by 
imprisonment for 1 or more years that is not described in Section 
15(b)(4)(B) of the Exchange Act \117\ or a substantially equivalent 
crime in a foreign court of competent jurisdiction, or if a person 
associated with the NRSRO is subject to any order of the Commission 
barring or suspending the right of the person to be associated with an 
NRSRO.\118\ Item 8 of Form NRSRO requires an applicant or NRSRO to 
answer whether the applicant or the NRSRO or any person within their 
credit rating organizations, is subject to these acts, convictions, or 
orders described in Section 15E(d) of the Exchange Act.\119\
---------------------------------------------------------------------------

    \111\ 15 U.S.C. 78o-7(a)(2)(C)(ii)(II).
    \112\ 15 U.S.C. 78o-7(d).
    \113\ Id.
    \114\ 15 U.S.C. 78o(b)(4)(A), (D), (E), (G) and (H).
    \115\ 15 U.S.C. 78o(b)(4).
    \116\ 15 U.S.C. 78o(b)(4)(C).
    \117\ 15 U.S.C. 78o(b)(4)(B).
    \118\ 15 U.S.C. 78o-7(d).
    \119\ Id.
---------------------------------------------------------------------------

    If an applicant answers ``yes'' to a question, the credit rating 
agency is required to provide additional information on a Disclosure 
Reporting Page (DRP) NRSRO as set forth in the instructions for Form 
NRSRO. An NRSRO will not be required to make the disclosure reporting 
pages publicly available pursuant to Section 15E(a)(3) of the Exchange 
Act \120\ and Rule 17g-1(i) thereunder.\121\ If an applicant answers 
``yes'' to a question in Item 8, the Commission will use the disclosure 
reporting pages to evaluate whether the applicant's registration could 
be granted in light of the disclosure. After registration, if an NRSRO 
answers ``yes'' to one of the questions, the Commission will use the 
disclosure reporting pages to evaluate pursuant to the process under 
Section 15E(d) of the Exchange Act whether it would be appropriate to 
issue an order censuring, placing limitations on the activities, 
functions, or operations of, suspending for a period not exceeding 12 
months, or revoking the registration of the NRSRO.\122\
---------------------------------------------------------------------------

    \120\ 15 U.S.C. 78o-7(a)(3).
    \121\ An applicant can request that this information be kept 
confidential to the extent permitted by law. See 17 CFR 200.80 and 
17 CFR 200.83.
    \122\ 15 U.S.C. 78o-7(d).
---------------------------------------------------------------------------

    Two commenters stated that Item 8, as proposed, was overly broad 
because, in asking about any person ``associated'' with the applicant 
and NRSRO, it reached employees in areas of a large conglomerate that 
performed functions wholly unrelated to credit rating services.\123\ 
The Commission notes that its authority under Sections 
15E(a)(2)(C)(ii)(II) \124\ and 15E(d) \125\ of the Exchange Act can be 
triggered by legal judgments and orders, and regulatory findings 
involving persons ``associated'' with the applicant and NRSRO. In 
considering these comments, the Commission evaluated when a disclosure 
would be more likely to trigger Commission action. The Commission 
concluded that it would involve disclosures relating to the credit 
rating agency and the persons directly involved in providing or 
supporting credit rating services. Therefore, to lessen the burden on 
applicants and NRSROs, the Commission believes it is appropriate to 
narrow the scope of the disclosure requirement to ``persons within the 
credit rating agency,'' which the instructions define as the credit 
rating agency, any credit rating affiliates of the credit rating agency 
identified in Item 3, and any partner, officer, director, branch 
manager, or employee of the credit rating agency or credit rating 
affiliates (or any person occupying a similar status or performing 
similar functions).
---------------------------------------------------------------------------

    \123\ See S&P Letter; Moody's Letter.
    \124\ 15 U.S.C. 78o-7(a)(2)(C)(ii)(II).
    \125\ 15 U.S.C. 78o-7(d).
---------------------------------------------------------------------------

    One commenter requested that the Commission clarify that the 
disclosures in Item 8 do not include disclosures relating to 
accusations or arrests.\126\ The Commission notes that the disclosures 
are triggered by the provisions of Section 15E(d) of the Exchange 
Act,\127\ which refers to convictions (not arrests or accusations). A 
second commenter suggested that the disclosure item not include the 
name of the individual.\128\ The Commission believes it has reduced 
this concern, in part, by narrowing the disclosure item to persons 
within the credit rating agency and by providing

[[Page 33574]]

that the disclosure reporting pages are not required to be made 
publicly available pursuant to Section 15E(a)(3) of the Exchange Act 
\129\ and Rule 17g-1(i).\130\ The Commission believes the disclosure of 
the name of a person providing or supporting credit ratings services 
will be important as these persons may seek to associate with another 
NRSRO if they are terminated from or leave the reporting NRSRO. The 
Commission also notes that the events triggering an Item 8 disclosure 
generally are matters of public record (e.g., convictions, regulatory 
orders) and, consequently, there may be a reduced expectation of 
confidentiality.
---------------------------------------------------------------------------

    \126\ See R&I Letter.
    \127\ 15 U.S.C. 78o-7(d).
    \128\ See A.M. Best Letter.
    \129\ 15 U.S.C. 78o-7(a)(3).
    \130\ An applicant can request that this information be kept 
confidential to the extent permitted by law. See 17 CFR 200.80 and 
17 CFR 200.83.
---------------------------------------------------------------------------

    Otherwise, Item 8 is being adopted substantially as proposed.
11. Exhibit 1 (Credit Ratings Performance Statistics)
    Section 15E(a)(1)(B)(i) of the Exchange Act requires that an 
application for registration as an NRSRO contain credit ratings 
performance measurement statistics over short-term, mid-term, and long-
term periods (as applicable).\131\ An applicant and NRSRO will provide 
this information in Exhibit 1 to Form NRSRO. The Exchange Act does not 
otherwise define or identify the particular credit rating performance 
statistics to be provided with the application. Credit rating agencies 
typically generate statistical reports showing historical default and 
downgrade rates within each credit rating notch or grade.\132\ These 
types of statistics are important indicators of the performance of a 
credit rating agency in terms of its ability to assess the 
creditworthiness of issuers and obligors and, consequently, will be 
useful to users of credit ratings in evaluating an NRSRO.
---------------------------------------------------------------------------

    \131\ 15 U.S.C. 78o-7(a)(1)(B)(i).
    \132\ The credit rating categories of a credit rating agency 
generally are represented by symbols, numbers or other designations 
that are used to distinguish the creditworthiness of the obligors, 
securities and money market instruments the credit rating agency 
rates. For example, some credit rating agencies use symbols such as 
AAA, AA, A, BBB, BB, B, CCC, and CC to distinguish the 
creditworthiness of corporate debt securities. AAA would be the 
highest rating and CC would be the lowest rating above the default 
or regulatory supervision of the issuer.
---------------------------------------------------------------------------

    The instructions to Form NRSRO provide that an applicant and NRSRO 
must include in the Exhibit definitions of the credit ratings (i.e., an 
explanation of each category and notch) and explanations of the 
performance measurement statistics, including the metrics used to 
derive the statistics. One commenter requested that the Commission 
clarify the instruction with respect to explaining ``the metrics used 
to derive the statistics.'' \133\ The intent is that the NRSRO explain 
in general terms how it calculates the default and downgrade rates. The 
Commission believes that requiring this information is necessary or 
appropriate in the public interest or for the protection of investors 
because it will assist users of credit ratings in understanding how the 
measurements were derived and in making comparisons with the 
measurement statistics of other NRSROs.\134\
---------------------------------------------------------------------------

    \133\ See DBRS Letter.
    \134\ Section 15E(a)(1)(B)(x) of the Exchange Act provides that 
the Commission can require additional information that it finds is 
necessary or appropriate in the public interest or for the 
protection of investors (15 U.S.C. 78o-7(a)(1)(B)(x)).
---------------------------------------------------------------------------

    The definitions of the categories and notches will assist the 
Commission in assessing whether the NRSRO's credit ratings, as a 
practical matter, can be used for certain Commission rules. For 
example, paragraph(c)(2)(vi)(F) of Exchange Act Rule 15c3-1 specifies 
lower haircuts for debt securities that are rated in one of the ``four 
highest rating categories'' of at least two NRSROs.\135\ This provision 
was designed based on the practice of many credit rating agencies to 
have at least eight categories for their debt securities with the top 
four commonly referred to as ``investment grade.'' If an NRSRO uses 
less than eight categories, the Commission will be required to evaluate 
whether, based on the NRSRO's definitions, securities included in the 
top four categories would be suitable for the lower haircuts specified 
in paragraph(c)(2)(vi)(F) of Rule 15c3-1.\136\
---------------------------------------------------------------------------

    \135\ 17 CFR 240.15c3-1(c)(2)(vi)(F).
    \136\ Id.
---------------------------------------------------------------------------

    The Commission requested comment on whether the performance 
measurement statistics should use standardized inputs, time horizons, 
and metrics to allow for greater comparability. This request elicited 
numerous comments.\137\ Three commenters supported the use of 
standardized measures because it would make it easier to compare 
NRSROs.\138\ A number of commenters opposed the use of standardized 
measures for several reasons, including that such measures would be 
impractical because credit rating agencies use different methodologies 
to determine credit ratings and different definitions of default and 
that the use of such measures could interfere with the methodologies 
for determining credit ratings.\139\ In light of the varying approaches 
cited in the comments, the Commission is not prepared to prescribe 
standard metrics at this time. The Commission intends to continue to 
consider this issue to determine the feasibility, as well as the 
potential benefits and limitations, of devising measurements that would 
allow reliable comparisons of performance between NRSROs. As adopted, 
the Exhibit requires NRSROs to describe how they derive their 
statistics in sufficient detail to allow users of credit ratings to 
understand the measures. This will provide users with some basis to 
compare different NRSROs even if the statistics are not derived from 
similar measures.
---------------------------------------------------------------------------

    \137\ See letter dated March 12, 2007 from Richard M. Whiting, 
Executive Director and General Counsel, Financial Services 
Roundtable (``FSR Letter''); letter dated March 12, 2007 from Herwig 
M. Langohr, Professor, INSEAD Business School, Patricia T. Langohr, 
Professor, ESSEC Business School (``Langohr Letter''); letter dated 
March 22, 2007 from George P. Miller, Executive Director, American 
Securitization Forum (``ASF Letter''); letter dated March 16, 2007 
from Makoto Utsumi, President & CEO, Ratings & Investment 
Information (``JCR 2nd Letter''); ICI Letter; Gross Letter; R&I 
Letter; MM Letter; White Letter; DBRS Letter; A.M. Best Letter; S&P 
Letter; AEI Letter; Moody's Letter.
    \138\ See Gross Letter; ICI Letter; JCR 2nd Letter.
    \139\ See, e.g., R&I Letter; A.M Best Letter; S&P Letter; 
Moody's Letter; ASF Letter.
---------------------------------------------------------------------------

    The Commission requested comment on whether other performance 
measurement statistics would be appropriate as an alternative, or in 
addition, to historical default and downgrade rates. For example, the 
Commission requested comment on whether Exhibit 1 should require 
measurement of the performance of a given credit rating by comparing or 
mapping it to the market value of the rated security or to extreme 
declines in the market value of the security after the rating. Although 
the Commission is not taking action in this regard at this time, the 
Commission intends to study these issues and consider possible future 
action.
    For these reasons, Exhibit 1 to Form NRSRO and the instructions for 
the Exhibit are being adopted substantially as proposed.
12. Exhibit 2 (Procedures and Methodologies for Determining Credit 
Ratings)
    Section 15E(a)(1)(B)(ii) of the Exchange Act requires that an 
application for registration as an NRSRO contain information regarding 
the procedures and methodologies used by the credit rating agency to 
determine credit ratings.\140\ An applicant and NRSRO will provide this 
information in Exhibit 1 to Form NRSRO. The Exchange Act does not 
otherwise define

[[Page 33575]]

or identify the procedures and methodologies that must be provided 
under this section.\141\ However, the definition of ``credit rating 
agency'' in Section 3(a)(61) of the Exchange Act provides that a 
``credit rating agency'' is an entity that, among other things, 
``employ[s] either a quantitative or qualitative model, or both, to 
determine credit ratings.'' \142\
---------------------------------------------------------------------------

    \140\ 15 U.S.C. 78o-7(a)(1)(B)(ii).
    \141\ See 15 U.S.C. 78a et seq.
    \142\ See particularly, Section 3(a)(61)(B) of the Exchange Act 
(15 U.S.C. 78c(a)(61)(B)).
---------------------------------------------------------------------------

    Credit rating agencies may establish procedures and methodologies 
for determining credit ratings in the following areas: The 
determination of whether to initiate a credit rating; the use of public 
and non-public sources of information to perform credit rating 
analysis, including information and analysis provided by third-party 
vendors; the use of quantitative and qualitative models and metrics to 
determine credit ratings; the interaction with the management of a 
rated obligor or issuer of rated securities; the establishment of the 
structure and voting process of committees that review or approve 
credit ratings; the notification of rated obligors or issuers of rated 
securities about credit rating decisions and for appeals of final or 
pending credit rating decisions; the monitoring, reviewing, and 
updating of credit ratings; and the withdrawal, or suspension of the 
maintenance, of a credit rating.
    The list identifies areas where a credit rating agency may 
establish procedures and methodologies for determining credit ratings. 
The applicability of certain areas to a particular credit rating agency 
will depend on whether it uses subjective qualitative analysis, purely 
quantitative models, or a combination of both.\143\ Consequently, a 
credit rating agency might not establish a procedure or methodology in 
a given area if doing so would not be relevant to how the credit rating 
agency determines credit ratings.
---------------------------------------------------------------------------

    \143\ See Section 3(a)(61) of the Exchange Act defining the term 
``credit rating agency'' (15 U.S.C. 78c(a)(61)).
---------------------------------------------------------------------------

    In addition, credit rating agencies that issue ``unsolicited'' 
credit ratings may establish procedures and methodologies in the areas 
described above that are unique for such ratings. Credit rating 
agencies that use a subscription fee based business model may only 
issue unsolicited ratings because that business model does not rely on 
fees charged issuers, obligors, and underwriters to determine specific 
credit ratings (issuers, obligors, and underwriters, however, may 
subscribe to receive the credit ratings of such credit rating 
agencies). The procedures and methodologies these credit rating 
agencies employ, in some respects, may be unique to this business 
model.
    Credit rating agencies that are paid by issuers, obligors, and 
underwriters to determine specific credit ratings sometimes also issue 
unsolicited credit ratings. This practice has led to concerns that 
unsolicited ratings may be used to coerce issuers and obligors into 
ultimately paying the credit rating agency to determine and maintain 
the credit rating. Consequently, credit rating agencies that rely on 
fees from issuers, obligors, and underwriters to determine specific 
credit ratings, but also issue unsolicited ratings, often establish 
procedures and methodologies for determining unsolicited credit ratings 
that are designed to address this concern and the fact that the issuer 
or obligor may not have participated in the determination of the credit 
rating (as is most often the case with a solicited credit rating).
    The Commission believes that the information about any procedures 
and methodologies established in the areas described above, including 
any with respect to unsolicited credit ratings, will be useful to users 
of credit ratings. The information will provide them with an 
understanding of the nature of the credit rating agency (i.e., a user 
of quantitative models, qualitative analysis, or a combination of both) 
and how the credit rating agency produces credit ratings. This will 
provide a basis for comparing NRSROs.
    Several commenters stated that the Exhibit should require that an 
applicant and NRSRO describe its procedures and methodologies rather 
than submit and disclose each actual procedure and methodology.\144\ 
These commenters pointed out that large credit rating agencies that 
issue multiple types of credit ratings generally have volumes of 
detailed procedures that credit analysts must follow in the course of 
determining a credit rating.\145\ They noted that disclosing all this 
information would be burdensome and could be difficult for users of 
credit ratings to parse.\146\ They also noted that some of the 
procedures and methodologies may involve the use of proprietary 
models.\147\
---------------------------------------------------------------------------

    \144\ See White Letter; DBRS Letter; A.M. Best Letter; Fitch 
Letter; Moody's Letter.
    \145\ See, e.g., DBRS Letter; A.M. Best Letter; Fitch Letter; 
Moody's Letter.
    \146\ Id.
    \147\ Id.
---------------------------------------------------------------------------

    The Commission agrees with these commenters that disclosing all the 
procedures could be burdensome and could result in an overload of 
information that would be less helpful to users of credit ratings. 
Therefore, the Commission has modified the instructions to require that 
the Exhibit contain a description of the procedures and methodologies 
(not the submission and disclosure of each actual procedure and 
methodology). The instructions provide that the description must be 
sufficiently detailed to provide users of credit ratings with an 
understanding of the processes the applicant or NRSRO employs to 
determine credit ratings.
    As discussed below, rather than have a credit rating agency submit 
its procedures and methodologies in Exhibit 2, the Commission is 
adopting a requirement in Rule 17g-2 that an NRSRO must document them 
internally. Moving this requirement from Exhibit 2 to the recordkeeping 
rule is designed to reduce the burden on NRSROs, while making these 
procedures and methodologies available to Commission examination staff. 
These records are important to the Commission's oversight. For example, 
Rule 17g-6 prohibits, among other things, an NRSRO from issuing or 
modifying or threatening to issue or modify a credit rating contrary to 
the NRSRO's established procedures and methodologies. The Commission's 
ability to enforce this prohibition will depend on the Commission staff 
being able to access an NRSRO's documented procedures and 
methodologies.\148\
---------------------------------------------------------------------------

    \148\ See letter dated March 12, 2007 from James A. Kaitz, 
President & CEO, Association for Financial Professionals (``AFP 
Letter'') stating the importance of monitoring whether an NRSRO 
adheres to its stated procedures and methodologies for determining 
credit ratings.
---------------------------------------------------------------------------

    Two commenters also suggested changes to the Commission's 
description of an ``unsolicited credit rating'' in the proposed 
instructions to Form NRSRO as being a credit rating that is not 
requested by the issuer or underwriter of the rated securities or the 
rated obligor.\149\ The commenters noted that issuers and obligors may 
consent to the issuance and participate in the determination of a 
credit rating even if they did not specifically request that the credit 
rating be issued. As discussed below, the Commission has eliminated the 
prohibition in Rule 17g-6 relating to unsolicited credit ratings, in 
part, because of difficulties with defining the term. Therefore, the 
Commission has removed the definition from the instructions to Exhibit 
2. The Commission wants to gain a better understanding through its 
examination function of how credit rating agencies define ``unsolicited 
credit ratings'' and

[[Page 33576]]

the practices they employ with respect to these ratings.
---------------------------------------------------------------------------

    \149\ See A.M. Best Letter; Moody's Letter.
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting Exhibit 2 and the 
instructions for the Exhibit with the modifications described above.
13. Exhibit 3 (Procedures To Prevent the Misuse of Material Non-Public 
Information)
    Section 15E(g)(1) of the Exchange Act \150\ requires an NRSRO to 
establish, maintain, and enforce written policies and procedures to 
prevent the misuse of material, nonpublic information in violation of 
the Exchange Act.\151\ Section 15E(g)(2) of the Exchange Act provides 
that the Commission shall adopt rules requiring an NRSRO to establish 
specific policies and procedures to prevent the misuse of material, 
nonpublic information.\152\ As discussed below, Rule 17g-4 requires an 
NRSRO's policies and procedures established pursuant to Section 
15E(g)(1) of the Exchange Act \153\ to include certain specific types 
of procedures.
---------------------------------------------------------------------------

    \150\ 15 U.S.C. 78o-7(g)(1).
    \151\ 15 U.S.C. 78a et seq.
    \152\ 15 U.S.C. 78o-7(g)(2).
    \153\ 15 U.S.C. 78o-7(g)(1).
---------------------------------------------------------------------------

    Section 15E(a)(1)(B)(iii) of the Exchange Act \154\ requires that 
an application for registration as an NRSRO contain information 
regarding policies or procedures adopted and implemented by the credit 
rating agency to prevent the misuse of material, nonpublic information 
in violation of Exchange Act \155\ provisions and rules. An applicant 
and NRSRO will provide this information in Exhibit 3 to Form NRSRO. 
Specifically, Exhibit 3 requires a copy of the policies and procedures 
to prevent the misuse of material, nonpublic information established 
pursuant to Section 15E(g) of the Exchange Act \156\ and Rule 17g-4.
---------------------------------------------------------------------------

    \154\ 15 U.S.C. 78o-7(a)(1)(B)(iii).
    \155\ 15 U.S.C. 78a et seq.
    \156\ 15 U.S.C. 78o-7(g).
---------------------------------------------------------------------------

    The Commission received two comments on this Exhibit, as 
proposed.\157\ One commenter stated that the policies and procedures 
should not have to be made publicly available because they may contain 
proprietary information and disclosing them could hinder their 
effectiveness.\158\ The Commission agrees that disclosing certain 
components of these policies and procedures could make it easier for 
persons to circumvent them. Therefore, the Commission has modified the 
instructions to provide that the applicant or NRSRO is not required to 
submit in the Exhibit any specific information in the policies and 
procedures that is proprietary or would diminish the effectiveness of 
the policies and procedures if such information is disclosed. The other 
commenter stated that the procedures should be disclosed on the NRSRO's 
Web site without further elaboration.\159\ The Commission notes that 
Section 15E(a)(3) of the Exchange Act \160\ and Rule 17g-1 thereunder 
require an NRSRO to make its Form NRSRO and Exhibits 1 through 9 
publicly available by posting them on its Web site, or through another 
comparable, readily accessible means.
---------------------------------------------------------------------------

    \157\ See letter dated March 12, 2007 from Ayal Rosenthal 
(``Rosenthal Letter''); R&I Letter.
    \158\ See R&I Letter.
    \159\ See Rosenthal Letter.
    \160\ 15 U.S.C. 78o-7(a)(3).
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting Exhibit 3 and the 
instructions for the Exhibit with the modifications described above.
14. Exhibit 4 (Organizational Information)
    Section 15E(a)(1)(B)(iv) of the Exchange Act requires that an 
application for registration as an NRSRO contain information regarding 
the organizational structure of the applicant.\161\ An applicant and 
NRSRO will provide this information in Exhibit 4 to Form NRSRO. The 
Exchange Act does not otherwise define or identify the specific type of 
organizational information that must be provided under Section 
15E(a)(1)(B)(iv) of the Exchange Act.\162\ Companies typically create, 
as applicable, an organizational chart showing ultimate and sub-holding 
companies, subsidiaries, and material affiliates; an organizational 
chart showing divisions, departments, and business units within the 
entity; and an organizational chart showing the management structure 
and senior management reporting lines within the entity. Users of 
credit ratings will benefit from this information and, consequently, 
the Commission proposed that it be provided in this Exhibit. One 
commenter disagreed that users of credit ratings would find the 
information helpful in assessing or understanding the NRSRO.\163\ For 
the reasons discussed below, the Commission continues to believe these 
three charts will be valuable to users of credit ratings and the 
Commission.
---------------------------------------------------------------------------

    \161\ 15 U.S.C. 78o-7(a)(1)(B)(iv).
    \162\ Id. See also, 15 U.S.C. 78a et seq.
    \163\ See MM Letter.
---------------------------------------------------------------------------

    The first required organizational chart will show the credit rating 
agency's ultimate and sub-holding companies, subsidiaries, and material 
affiliates, if applicable. This chart will reveal where potential 
conflicts of interest relating to the business activities of related 
companies might arise. Also, the fact that a credit rating agency has a 
holding company that potentially could provide financial support will 
be relevant to the Commission's evaluation of whether an applicant or 
NRSRO has adequate financial resources as required under the Exchange 
Act.\164\ One commenter requested that the Commission define the term 
``material affiliate.''\165\ At present, the Commission believes it is 
more appropriate to rely on the judgment of the credit rating agency to 
define its material affiliates, given that the size and complexity of 
NRSROs could vary widely.
---------------------------------------------------------------------------

    \164\ See Sections 15E(a)(2)(C) and 15E(d) of the Exchange Act 
(15 U.S.C. 78o-7(a)(2)(C) and (d)).
    \165\ See R&I Letter.
---------------------------------------------------------------------------

    The second organizational chart will show the credit rating 
agency's divisions, departments, and business units, if applicable. 
This information will assist users of credit ratings and the Commission 
in understanding where potential conflicts of interest relating to 
ancillary business activities might arise.
    The third organizational chart will show the credit rating agency's 
management structure and senior management reporting lines and include 
in the chart its designated compliance officer under Section 15E(j) of 
the Exchange Act.\166\ The Commission will benefit from this chart as 
it will assist in evaluating whether an applicant and NRSRO has 
adequate managerial resources as required under the Exchange Act.\167\ 
Users of credit ratings will be able to use this information to compare 
the managerial resources of different NRSROs.
---------------------------------------------------------------------------

    \166\ 15 U.S.C. 78o-7(j).
    \167\ See Sections 15E(a)(2)(C) and 15E(d) of the Exchange Act 
(15 U.S.C. 78o-7(a)(2)(C) and (d)).
---------------------------------------------------------------------------

    Including the compliance officer in the chart will assist the 
Commission and users of credit ratings in understanding the degree of 
the compliance officer's independence from the business managers.\168\ 
The compliance officer's reporting lines are relevant in assessing the 
integrity of the credit rating process of a particular NRSRO, since the 
officer is responsible for administering the credit rating agency's 
policies and procedures required by Sections 15E(g) and (h) of the 
Exchange Act \169\ and for ensuring the NRSRO's compliance with the 
securities laws and rules and regulations thereunder.\170\ In carrying

[[Page 33577]]

out these responsibilities, a compliance officer will be required to 
review activities overseen by senior business managers. The ability of 
the compliance officer to objectively review an area can be impacted by 
whether the officer reported to the senior manager responsible for the 
area. Thus, the relative independence of the compliance officer will be 
relevant in assessing the NRSRO's ability to ensure compliance with its 
policies and procedures.
---------------------------------------------------------------------------

    \168\ See Section 15E(a)(1)(B)(x) of the Exchange Act (15 U.S.C. 
78o-7(a)(1)(B)(x)).
    \169\ 15 U.S.C. 78o-7(g) and (h).
    \170\ Section 15E(j) of the Exchange Act (15 U.S.C. 78o-7(j)).
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting Exhibit 4 and the 
instructions for the Exhibit substantially as proposed.
15. Exhibit 5 (Code of Ethics)
    Section 15E(a)(1)(B)(v) of the Exchange Act requires that an 
application for registration as an NRSRO disclose whether the applicant 
has a code of ethics in effect or an explanation of why the applicant 
has not established a code of ethics.\171\ Exhibit 5 of Form NRSRO 
elicits this information by requiring an applicant and NRSRO to attach 
a copy of any established code of ethics or an explanation of why it 
does not have a code of ethics. The Commission believes the requirement 
to include a copy of any established code of ethics in the Exhibit is 
necessary or appropriate in the public interest or for the protection 
of investors. A statement that an NRSRO has a code of ethics but no 
further disclosure would not be particularly useful to users of credit 
ratings. They would not be able to review the code of ethics and use it 
as a means of comparing different NRSROs.
---------------------------------------------------------------------------

    \171\ 15 U.S.C. 78o-7(a)(1)(B)(v).
---------------------------------------------------------------------------

    The Exchange Act does not otherwise define or identify the ``code 
of ethics'' that should be provided under Section 15E(a)(1)(B)(v).\172\ 
The Commission believes each credit rating agency must have the 
flexibility to establish a code of ethics appropriate for its business 
model and organizational structure and, consequently, the Exhibit does 
not prescribe any specific elements that must be in the code of ethics, 
if any, furnished in this Exhibit.
---------------------------------------------------------------------------

    \172\ Id.
---------------------------------------------------------------------------

    The Commission received several comments on this Exhibit.\173\ Most 
addressed whether the Exhibit also should require the credit rating 
agency to disclose whether it complies with international principles 
and codes of conduct related to credit rating agencies.\174\ One 
commenter suggested that the Exhibit not refer to a code of ``ethics'' 
but rather to a code of ``conduct.''\175\ Another commenter requested 
that the Exhibit not require the credit rating agency to ``certify'' 
that it is complying with international principles and codes of conduct 
because some principles permit an entity to comply or explain.
---------------------------------------------------------------------------

    \173\ See letter dated March 12, 2007 from John Grout, Policy 
and Technical Director, The Association of Corporate Treasurers 
(``AST Letter''); Gross Letter; DBRS Letter; S&P Letter; Moody's 
Letter; Langohr Letter; JCR 2nd Letter.
    \174\ A number of these commenters endorsed a requirement that 
the credit rating agency disclose whether it has adopted a code of 
conduct consistent with the principles contained in the report: 
Statement of Principles Regarding the Activities of Credit Rating 
Agencies, Technical Committee, International Organization of 
Securities Commissions (``IOSCO'') (September 25, 2003). See also 
Code of Conduct Fundamentals for Credit Rating Agencies, Technical 
Committee of IOSCO (December 2004).
    \175\ See Moody's Letter.
---------------------------------------------------------------------------

    The Commission reiterates that Exhibit 5 does not prescribe any 
requirements that must be in an NRSRO's code of ethics and that Section 
15E(a)(1)(B)(v) of the Exchange Act does not require an NRSRO to have a 
code of ethics.\176\ An applicant or NRSRO can submit a statement of 
why it does not have a code of ethics.\177\ The Commission believes 
that the Exhibit should not require the inclusion of any particular 
type of code of conduct. It could be the case that the code of ethics 
provided by an applicant or NRSRO is part of a broader code of conduct. 
For the foregoing reasons, the Commission is adopting Exhibit 5 
substantially as proposed.
---------------------------------------------------------------------------

    \176\ 15 U.S.C. 78o-7(a)(1)(B)(v).
    \177\ Id.
---------------------------------------------------------------------------

16. Exhibit 6 (Conflicts of Interest)
    Section 15E(a)(1)(B)(vi) of the Exchange Act requires that an 
application for registration as an NRSRO contain information regarding 
any conflict of interest relating to the issuance of credit ratings by 
the applicant and NRSRO.\178\ The Exchange Act does not otherwise 
define or identify the types of conflicts of interest that should be 
disclosed under Section 15E(a)(1)(B)(vi) of the Exchange Act.\179\ 
Exhibit 6, as proposed, would have required an applicant and NRSRO to 
describe in general terms each type of conflict that arises, or may 
arise, from its business model and credit rating activities. Thus, if 
an NRSRO receives payment from issuers to rate their securities, the 
NRSRO would have been required to disclose that fact. It would not have 
had to make a disclosure each time it received payment from an issuer. 
The purpose of the proposed disclosure was to alert users of credit 
ratings to the NRSRO's business model (subscriber fee-based, issuer 
fee-based, or a combination of both), and to potential conflicts that 
arise from the business model.
---------------------------------------------------------------------------

    \178\ 15 U.S.C. 78o-7(a)(1)(B)(vi).
    \179\ Id, see also 15 U.S.C. 78a et seq.
---------------------------------------------------------------------------

    The Commission continues to believe that disclosing the types of 
conflicts that arise from an NRSRO's business model will assist the 
Commission in evaluating whether an applicant has sufficient financial 
and managerial resources to comply with the procedures for managing 
conflicts of interest required under Section 15E(h) of the Exchange 
Act,\180\ given the types of conflicts of interest identified by the 
applicant.\181\ The information also will be useful to users of credit 
ratings in assessing an NRSRO by, for example, comparing the types of 
conflicts disclosed by the entity in Exhibit 6 with the procedures for 
managing conflicts of interest disclosed by the entity in Exhibit 7.
---------------------------------------------------------------------------

    \180\ 15 U.S.C. 78o-7(h).
    \181\ See Section 15E(a)(2)(C) Exchange Act (15 U.S.C. 78o-
7(a)(2)(C)).
---------------------------------------------------------------------------

    Exhibit 6 of Form NRSRO, as adopted, requires an applicant and 
NRSRO to provide a list describing in general terms the types of 
conflicts of interest that arise from its business activities. The 
instructions to the Exhibit have been modified to include a list of 10 
different generic conflicts of interest that may apply to a credit 
rating agency based on its business model and activities. These 
conflicts were included in the proposed instructions as examples of 
conflicts. These are the types of conflicts that generally arise from 
the business of issuing credit ratings depending on the business model 
of the credit rating agency. The instructions further provide that the 
credit rating agency can use the descriptions provided in the 
instructions to identify an applicable conflict of interest and is not 
required to provide any further information. Thus, the credit rating 
agency can review each item on the list and determine whether it 
describes an applicable conflict. This modification is intended to make 
it simpler for the credit rating agency to create the Exhibit since it 
may rely on the language in the instructions to identify a conflict. A 
credit rating agency can choose to provide its own description of the 
conflict or further explanation to one of the descriptions in the 
instructions.
    Several commenters raised concerns with the Commission's 
identification as a potential conflict the fact that a subscriber may 
use the entity's credit ratings for regulatory purposes.\182\ They

[[Page 33578]]

argued that it would be impractical to determine how subscribers might 
be using their credit ratings.\183\ The Commission did not intend to 
require NRSROs to actively monitor how their subscribers were using 
their credit ratings. Rather, the intent is to require NRSROs to 
disclose that subscribers, while they do not pay to have a credit 
rating issued, may have an interest in a specific credit rating. 
Therefore, the fact that they compensate the NRSRO could give rise to a 
conflict of interest. The instructions now describe the conflict as the 
fact that subscribers may use the credit ratings for regulatory 
purposes. This means that any credit rating agency that charges 
subscribers to access its credit ratings will be required to identify 
this conflict. The credit rating agency is not required to determine 
whether, or how, the subscribers are using the credit ratings to comply 
with statutes and regulations. The purpose of the disclosure is to 
alert users of credit ratings to the fact that the NRSRO's business 
model includes charging subscribers to access its credit ratings and 
that a subscriber may have an interest in a particular credit rating. 
For similar reasons, the Commission eliminated a provision in the 
instructions requiring the identification of associated persons that 
use credit ratings for regulatory purposes as this would have required 
an applicant and NRSRO to monitor how another legal entity was using 
its credit ratings.
---------------------------------------------------------------------------

    \182\ See, e.g., DBRS Letter; S&P Letter.
    \183\ Id.
---------------------------------------------------------------------------

    A commenter noted that subscribers who manage investment portfolios 
also may have an interest in a particular credit rating.\184\ For 
example, such a subscriber may be limited to investing in debt 
securities that have investment grade credit ratings and, consequently, 
would be required to sell, perhaps at a loss, a debt security that is 
downgraded below investment grade. The Commission believes that, 
similar to regulatory users, this type of subscriber could raise a 
potential conflict of interest. Therefore, this type of conflict is 
specifically identified in the instructions to the Exhibit.
---------------------------------------------------------------------------

    \184\ See DBRS Letter.
---------------------------------------------------------------------------

    The instructions to the Exhibit, as proposed, also required an 
NRSRO to identify a person associated with the NRSRO that underwrites 
securities or money market instruments that are subject to a credit 
rating of the NRSRO. This type of conflict is identified in Section 
15E(h)(2)(D) of the Exchange Act.\185\ The concerns raised by 
commenters with respect to monitoring how subscribers use their credit 
ratings also apply in this context. For example, the provision, as 
proposed, could be interpreted to require an NRSRO to monitor whether 
any person associated with the NRSRO is an ``underwriter'' as that term 
is defined in Section 2(a)(11) of the Securities Act of 1933.\186\ The 
Commission believes this could impose a very difficult compliance 
standard in that it would involve continuous monitoring of the 
securities trading activities of associated persons and legal judgments 
as to whether they were acting as ``underwriters'' at any given moment.
---------------------------------------------------------------------------

    \185\ 15 U.S.C. 78o-7(h)(2)(D).
    \186\ 15 U.S.C. 77b(a)(11).
---------------------------------------------------------------------------

    At the same time, the Commission believes that where there is a 
potential affiliation between an NRSRO and a securities underwriter 
that it is necessary or appropriate in the public interest or for the 
protection of investors to require it to be disclosed in this Exhibit. 
Specifically, an affiliation between an NRSRO and a broker or dealer 
that is in the business of underwriting securities would raise concerns 
that the NRSRO might be influenced by the affiliation to issue 
favorable credit ratings for these securities. The Commission further 
believes that disclosing this type of affiliation does not present the 
concerns discussed above since most persons associated with an NRSRO 
likely are not broker-dealers in the business of underwriting 
securities. Therefore, the NRSRO should be able to identify those 
associated persons. Further, the requirement to identify these persons 
is based on being affiliated with such an underwriter that may 
underwrite securities rated by the NRSRO. Thus, the NRSRO will not need 
to actively monitor whether it currently has rated such securities and 
update the Exhibit each time this changes. Consequently, the 
requirement to identify persons associated with the NRSRO that 
underwrite securities rated by the NRSRO has been narrowed to a 
requirement to identify any person associated with the NRSRO that is a 
broker or dealer in the business of underwriting securities or money 
market instruments.
    Finally, the Commission notes that the Exhibit contains a catchall 
provision requiring the disclosure of any other material conflict of 
interest. Consequently, the additional conflict added to the 
instructions is expected to reduce the potential conflicts that must be 
disclosed under the catchall. With respect to the catchall, the 
instructions note that a ``material'' type of conflict will include one 
that the NRSRO has established specific policies and procedures to 
address.
    For these reasons, the Commission is adopting Exhibit 6 and the 
instructions for the Exhibit with the modifications described above.
17. Exhibit 7 (Procedures To Manage Conflicts)
    An applicant or NRSRO will be required to furnish in Exhibit 7 a 
copy of the written policies and procedures it establishes, maintains, 
and enforces to address and manage conflicts of interest pursuant to 
Section 15E(h) of the Exchange Act.\187\ Requiring inclusion of these 
policies and procedures in the Form is necessary or appropriate in the 
public interest or for the protection of investors.\188\ First, their 
disclosure will assist the Commission in monitoring whether an NRSRO is 
complying with Section 15E(h) of the Exchange Act.\189\ Second, their 
disclosure will assist the Commission in evaluating whether an 
applicant or NRSRO has adequate financial and managerial resources to 
materially comply with Section 15E(h) of the Exchange Act.\190\ Third, 
their disclosure will allow users of credit ratings to compare an 
NRSRO's policies and procedures for managing conflicts of interest with 
the types of conflicts disclosed in Exhibit 7.
---------------------------------------------------------------------------

    \187\ 15 U.S.C. 78o-7(h).
    \188\ See Section 15E(a)(1)(B)(x) of the Exchange Act (15 U.S.C. 
78o-7(a)(1)(B)(x)).
    \189\ 15 U.S.C. 78o-7(h).
    \190\ Id.
---------------------------------------------------------------------------

    One commenter stated that these policies and procedures should not 
have to be made publicly available because they may contain proprietary 
information and disclosing them could hinder their effectiveness.\191\ 
As with the Exhibit 3 policies and procedures, the Commission has 
modified the instructions for this Exhibit to provide that the 
applicant or NRSRO is not required to submit in the Exhibit any 
specific information in the policies and procedures that is proprietary 
or would diminish the effectiveness of the policies and procedures if 
such information were disclosed.
---------------------------------------------------------------------------

    \191\ See R&I Letter.
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting Exhibit 7 and the 
instructions for the Exhibit with the modification described above.
18. Exhibit 8 (Credit Analyst Information)
    Exhibit 8, as proposed, would have required an applicant and NRSRO 
to provide certain background information (e.g., employment history and 
education) with respect to each credit analyst and credit analyst 
supervisor.

[[Page 33579]]

Consistent with its reasons for proposing this request, the Commission 
believes that the ability of a credit rating agency to assess the 
creditworthiness of an issuer and obligor depends on the competence of 
the personnel responsible for determining the entity's credit ratings. 
Further, the Commission believes that information about the 
responsibilities, experience, and employment history of the credit 
analysts and supervisors is necessary or appropriate in the public 
interest or for the protection of investors. The information will 
assist users of credit ratings in assessing the competence of an 
NRSRO's credit analysts and, thereby, provide a means for users to 
compare NRSROs. This information also will assist the Commission in 
evaluating whether the applicant has adequate managerial resources to 
consistently produce credit ratings with integrity and to materially 
comply with its procedures and methodologies.\192\
---------------------------------------------------------------------------

    \192\ See Sections 15E(a)(2)(C) and (d) of the Exchange Act (15 
U.S.C. 78o-7(a)(2)(C) and (d)).
---------------------------------------------------------------------------

    The Commission received numerous comments on Exhibit 8 stating that 
the requirement to provide information on each credit analyst and 
credit analyst supervisor was unduly burdensome and unnecessary.\193\ 
Several commenters suggested, as an alternative, that the Exhibit 
require general information about the education, qualifications, and 
number of the credit analysts and their supervisors.\194\ After 
considering the comments and the potential burden associated with the 
proposed requirement, the Commission has modified the Exhibit to only 
require aggregate information about these employees. Consequently, the 
Exhibit, as adopted, requires the following information:
---------------------------------------------------------------------------

    \193\ See letter dated May 3, 2007 from Barron H. Putnam, Ph.D, 
Owner and Advisor, LACE Financial Corporation (``LACE Letter''); JCR 
Letter; R&I Letter; DBRS Letter; A.M. Best Letter; Fitch Letter; S&P 
Letter; AEI Letter; Moody's Letter.
    \194\ See, e.g., DBRS Letter; A.M. Best Letter; Fitch Letter; 
S&P Letter; Moody's Letter.
---------------------------------------------------------------------------

     The total number of credit analysts.
     The total number of credit analyst supervisors.
     A general description of the minimum required 
qualifications of the credit analysts, including education level and 
work experience (if applicable, distinguish between junior, mid, and 
senior level credit analysts).
     A general description of the minimum required 
qualifications of the credit analyst supervisors, including education 
level and work experience.
    The information about the total number of credit analysts and their 
supervisors will provide the Commission and users of credit ratings 
with an understanding of the human resources the credit rating agency 
devotes to determining credit ratings. This will assist the Commission 
in assessing the managerial resources of an applicant and NRSRO. The 
information about the qualifications of the credit analysts and their 
supervisors will be useful to users of credit ratings in assessing the 
competency of an NRSRO. The Commission believes this modification 
strikes an appropriate balance between reducing burden and requiring 
necessary information. Nonetheless, the Commission intends to monitor 
whether this aggregate approach to the credit analyst information is 
sufficient to apprise users of credit ratings of the qualifications of 
a given NRSRO's credit analysts.
    For these reasons, the Commission is adopting Exhibit 8 and the 
instructions for the Exhibit with the modifications described above.
19. Exhibit 9 (Designated Compliance Officer)
    As adopted, Exhibit 9 requires an applicant and NRSRO to provide 
certain background information on the entity's designated compliance 
officer. Section 15E(j) of the Exchange Act requires every NRSRO to 
designate an individual responsible for administering the policies and 
procedures of the credit rating agency to prevent the misuse of 
nonpublic information, to manage conflicts of interest, and to ensure 
compliance with the securities laws and the rules and regulations under 
those laws.\195\ The ability of the compliance officer to carry out 
these statutorily mandated responsibilities will depend, in part, on 
the officer's experience and qualifications.
---------------------------------------------------------------------------

    \195\ 15 U.S.C. 78o-7(j).
---------------------------------------------------------------------------

    The Commission continues to believe that requiring information 
about the experience and employment history of the designated 
compliance officer is necessary or appropriate in the public interest 
or for the protection of investors. It will assist the Commission in 
evaluating whether the applicant has adequate managerial resources to 
consistently produce credit ratings with integrity and to materially 
comply with its procedures and methodologies.\196\ It also will be 
useful to users of credit ratings because it would provide information 
regarding the resources an NRSRO devotes to ensuring, among other 
things, that credit ratings are determined in accordance with the 
procedures and methodologies the NRSRO makes public in Exhibit 2.
---------------------------------------------------------------------------

    \196\ See Sections 15E(a)(2)(C) and (d) of the Exchange Act (15 
U.S.C. 78o-7(a)(2)(C) and (d)).
---------------------------------------------------------------------------

    The Exhibit, as proposed, also required information about the 
compliance personnel responsible for assisting the compliance officer. 
Several commenters objected to this aspect of the Exhibit as being 
unduly burdensome, unnecessary, and intrusive.\197\ After considering 
the comments and the potential burden associated with the proposed 
requirement, the Commission has modified the Exhibit to eliminate the 
requirement to provide information about the persons that assist the 
compliance officer. As with the modifications to Exhibit 8, the 
Commission believes this modification to Exhibit 9 strikes an 
appropriate balance between reducing burden and requiring necessary 
information. Nonetheless, the Commission intends to monitor whether 
information about the designated compliance officer alone is sufficient 
to apprise users of credit ratings of how this statutorily required 
compliance function is being addressed by a given NRSRO.
---------------------------------------------------------------------------

    \197\ See, e.g., R&I Letter; DBRS Letter; A.M. Best Letter; 
Fitch Letter; S&P Letter; Moody's Letter.
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting Exhibit 9 and the 
instructions for the Exhibit with the modifications described above.
20. Exhibit 10 (List of Large Users of Credit Rating Services)
    Section 15E(a)(1)(B)(viii) of the Exchange Act requires that an 
application for registration as an NRSRO include, on a confidential 
basis,\198\ a list of the 20 largest issuers and subscribers that use 
the credit rating services provided by the credit rating agency by 
amount of net revenue received by the credit rating agency in the 
fiscal year immediately preceding the date of submission of the 
application.\199\ This information will be elicited in Exhibit 10 to 
Form NRSRO. An NRSRO will not be required to make this information 
publicly available pursuant to Section 15E(a)(3) of the Exchange Act 
\200\ and Rule 17g-1(i) thereunder or update the Exhibit after 
registration.\201\ An NRSRO will be required to update this information 
in an unaudited financial report that must be furnished to the 
Commission pursuant to Rule 17g-3.
---------------------------------------------------------------------------

    \198\ An applicant can request that the Commission keep this 
information confidential to the extent permitted by law. See 17 CFR 
200.80 and 17 CFR 200.83.
    \199\ 15 U.S.C. 78o-7(a)(1)(B)(viii).
    \200\ 15 U.S.C. 78o-7(a)(3).
    \201\ An applicant can request that this information be kept 
confidential to the extent permitted by law. See 17 CFR 200.80 and 
17 CFR 200.83.

---------------------------------------------------------------------------

[[Page 33580]]

    Exhibit 10 also requires that an applicant disclose in the list 
large obligors (i.e., persons who are rated as an entity as opposed to 
having their securities rated) and underwriters if they are determined 
to have provided at least as much net revenue as the 20th largest 
issuer or subscriber. Consequently, a credit rating agency will be 
required to identify the 20 largest issuers and subscribers as required 
by Section 15E(a)(1)(B)(viii) of the Exchange Act \202\ and include in 
the list any obligor and underwriter that meets the above criteria.
---------------------------------------------------------------------------

    \202\ Id.
---------------------------------------------------------------------------

    The Commission believes that including large obligors and 
underwriters in the list of the 20 largest issuers and subscribers is 
necessary or appropriate in the public interest or for the protection 
of investors. The information will help identify persons that could 
potentially have undue influence on an NRSRO given the amount of 
revenue the person provides the NRSRO. Obligors and securities 
underwriters may have as much of an interest in potentially influencing 
a credit rating as issuers and subscribers. One commenter suggested 
that the list of 20 large clients be determined from the pool of 
issuers, subscribers, obligors, and underwriters, rather than from only 
issuers and subscribers, with obligors or underwriters being added only 
to the extent they meet the above criteria.\203\ In this case, the list 
would never exceed 20 persons. The Commission notes, however, that the 
statute clearly refers to the 20 largest ``issuers and subscribers'' 
and not to obligors or underwriters.\204\ Therefore, this provision of 
the Exhibit is being adopted as proposed.
---------------------------------------------------------------------------

    \203\ See R&I Letter.
    \204\ See 15 U.S.C. 78o-7(a)(1)(B)(viii).
---------------------------------------------------------------------------

    Section 15E(a)(1)(B)(viii) of the Exchange Act limits the persons 
required to be included in the list to users of the ``credit rating 
services'' of the applicant and NRSRO.\205\ The Exchange Act \206\ does 
not define the term ``credit rating services.'' The Commission proposed 
to interpret this term to mean any of the following: Rating an obligor 
(regardless of whether the obligor or any other person paid for the 
credit rating); rating an issuer's securities or money market 
instruments (regardless of whether the issuer, underwriter, or any 
other person paid for the credit rating); and providing credit ratings 
to a subscriber. The intent of this proposed interpretation is to 
include--along with persons that pay for credit ratings and 
subscriptions--persons that are rated, or whose securities or money 
market instruments are rated, but that did not pay for the credit 
rating. Even though these persons may not have paid for the credit 
rating, they potentially could have undue influence on the credit 
rating agency if they provide substantial net revenue for other 
services or products.
---------------------------------------------------------------------------

    \205\ Id.
    \206\ 15 U.S.C. 78a et seq.
---------------------------------------------------------------------------

    One commenter suggested expanding the definition to include 
providing credit ratings data and analysis to subscribers.\207\ The 
Commission agrees that the meaning of ``subscribers'' should include 
persons who pay for credit ratings data and the analysis behind credit 
ratings because it may be difficult to separate these subscribers from 
other subscribers. Additionally, the Commission notes that credit 
rating agencies that make their credit ratings publicly available for 
free may offer subscriptions to receive feeds of the credit ratings or 
to receive more reports detailing the analysis behind the credit 
ratings. Consequently, the Commission is interpreting the term ``credit 
rating services'' to mean any of the following: Rating an obligor 
(regardless of whether the obligor or any other person paid for the 
credit rating); rating an issuer's securities or money market 
instruments (regardless of whether the issuer, underwriter, or any 
other person paid for the credit rating); and providing credit ratings, 
credit ratings data, or credit ratings analysis to a subscriber.
---------------------------------------------------------------------------

    \207\ See DBRS Letter.
---------------------------------------------------------------------------

    Section 15E(a)(1)(B)(viii) of the Exchange Act provides that the 
determination of the 20 largest issuers and subscribers is to be based 
on ``net revenue'' received from the issuer or subscriber.\208\ The 
Exchange Act \209\ does not define the term ``net revenue.'' The 
Commission proposed to interpret the term ``net revenue'' for the 
purposes of Section 15E(a)(1)(B)(viii) of the Exchange Act \210\ to 
mean all fees, sales proceeds, commissions, and other revenue received 
by the applicant and its affiliates for any type of service or product, 
regardless of whether related to credit ratings, and net of any fees, 
sales proceeds, rebates, commissions, and other monies paid to the 
customer by the credit rating agency and its affiliates.
---------------------------------------------------------------------------

    \208\ 15 U.S.C. 78o-7(a)(1)(B)(viii).
    \209\ 15 U.S.C. 78a et seq.
    \210\ 15 U.S.C. 78o-7(a)(1)(B)(viii).
---------------------------------------------------------------------------

    The Commission received several comments suggesting that this 
interpretation be narrowed in certain ways to make it more practical to 
employ in determining the large users of a credit rating agency's 
services.\211\ Commenters stated that tracking revenues received by 
affiliates of the credit rating agency would be difficult.\212\ Several 
commenters also stated that payables used to determine the ``net 
revenue'' should not include, for example, monies paid to vendors for 
ordinary course goods and services such as utility bills.\213\ A 
commenter also sought clarification on how to realize revenues (e.g., 
cash receipts, accrued receivables) for purposes of this Exhibit.
---------------------------------------------------------------------------

    \211\ See Gross Letter; Fitch Letter; S&P Letter; Moody's 
Letter.
    \212\ See, e.g., Fitch Letter; S&P Letter; Moody's Letter.
    \213\ See, e.g., Gross Letter; Moody's Letter.
---------------------------------------------------------------------------

    The Commission agrees with these commenters that the proposed 
definition of ``net revenues'' created some practical difficulties in 
determining the list required in Exhibit 10. Therefore, the Commission 
is refining the interpretation to make the calculation of ``net 
revenues'' easier to compute but also more focused. Specifically, the 
Commission interprets ``net revenues'' to mean revenue earned by the 
applicant or NRSRO for any type of service or product, regardless of 
whether related to credit rating services, and net of any rebates and 
allowances paid or owed to the person by the applicant or NRSRO. This 
definition excludes revenues received by affiliates that are not part 
of the credit rating organization. Also the intent in describing the 
netting payables as ``rebates or allowances'' is to limit them to items 
that directly reduce a payable on the revenue side and to exclude 
unrelated payables (e.g., payables for utility bills). Finally, by 
using the term ``revenue earned'' the Commission intends that the 
applicant and NRSRO apply its standard accounting convention for 
recognizing revenue. The Commission is incorporating these 
interpretations into the instructions for Exhibit 10 and, as discussed 
below, Rule 17g-3.
    The Commission notes that one commenter stated that the Exhibit 
requires public disclosure and that such disclosure is unnecessary 
because credit rating agencies establish barriers between credit 
analysts and the business units.\214\ In response, the Commission notes 
that, as discussed above, an NRSRO is not required to make this 
information publicly available under Rule 17g-1(i). The information is 
intended to be used by the Commission to identify persons that could 
potentially exert undue influence on an NRSRO. The Commission further 
notes

[[Page 33581]]

that Congress specifically prescribed that an applicant and NRSRO 
provide the information with respect to the 20 largest issuers and 
subscribers in terms of net revenues.\215\
---------------------------------------------------------------------------

    \214\ See FSR Letter.
    \215\ 15 U.S.C. 78o-7(a)(1)(B)(viii).
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting Exhibit 10 and the 
instructions for the Exhibit with the modifications described above.
21. Exhibit 11 (Audited Financial Statements)
    As adopted, Exhibit 11 requires an applicant to furnish audited 
financial statements for the past three fiscal or calendar years 
immediately preceding the date of the application. An NRSRO will not be 
required to make this information publicly available pursuant to 
Section 15E(a)(3) of the Exchange Act \216\ and Rule 17g-1(i) 
thereunder or update the Exhibit after registration.\217\ An NRSRO will 
be required to provide audited financial statements to the Commission 
annually under Rule 17g-3.
---------------------------------------------------------------------------

    \216\ 15 U.S.C. 78o-7(a)(3).
    \217\ An applicant can request that this information be kept 
confidential to the extent permitted by law. See 17 CFR 200.80 and 
17 CFR 200.83.
---------------------------------------------------------------------------

    The Commission continues to believe this financial information is 
necessary or appropriate in the public interest or for the protection 
of investors because it will assist the Commission in making the 
finding required by Section 15E(a)(2)(C) of the Exchange Act.\218\ This 
section directs the Commission to grant a credit rating agency's 
application for registration as an NRSRO unless, among other things, 
the Commission finds that the applicant does not have adequate 
financial and managerial resources to consistently issue ratings with 
integrity and to materially comply with its procedures and 
methodologies disclosed pursuant to Section 15E(1)(B) of the Exchange 
Act and established pursuant to the Sections 15E(g), (h), (i) and (j) 
of the Exchange Act.\219\ The financial statements will provide the 
Commission with information as to the applicant's net worth and income, 
which will assist the Commission in determining whether the applicant 
has sufficient financial resources. Financial statements for three 
years will assist the Commission in reviewing whether the applicant has 
been in the business of issuing credit ratings for the three years 
immediately preceding the date of its application for 
registration.\220\ The information also will alert the Commission to a 
significant downward trend in the applicant's financial condition, 
which could be relevant to whether it has adequate financial resources.
---------------------------------------------------------------------------

    \218\ See 15 U.S.C. 78o-7(a)(2)(C).
    \219\ See 15 U.S.C. 78o-7(a)(2)(C)(ii)(I).
    \220\ An applicant must have been in the business of issuing 
credit ratings for the three years preceding the application to be 
eligible for registration with the Commission as an NRSRO. See 
Section 3(a)(62)(A) of the Exchange Act (15 U.S.C. 78c(a)(62)(A)).
---------------------------------------------------------------------------

    The requirement that the financial statements be audited will 
provide the Commission with independent verification of the information 
in the statements. However, the Commission anticipates that some 
applicants may not have been audited in the past. Consequently, the 
instructions to the Exhibit provide that in this case the applicant may 
provide an audited financial statement for the fiscal year immediately 
preceding the date of the application. The prior years can be covered 
by unaudited financial statements. The instructions also provide that 
the applicant must attach a statement by a duly authorized person that 
the unaudited financial statements present fairly, in all material 
respects, the financial condition, results of operations, and the cash 
flows of the applicant. This will provide a level of assurance that the 
information in the financial statements has been reviewed and verified 
by the applicant.
    Finally, the Commission anticipates that some applicants will be 
subsidiaries of holding companies. In this case, the applicant may 
provide audited consolidated financial statements of the parent 
company. Consolidated financial statements will provide information on 
the financial strength of the credit rating agency's parent. The parent 
is in a position to support the credit rating agency and, consequently, 
its financial condition may be indicative of the financial resources of 
the credit rating agency. Further, the information on revenues elicited 
in Exhibit 12 will augment the financial statements by providing 
information specific to the credit rating agency.
    Several commenters sought clarification on whether the financial 
statements provided in Exhibit 11 must be prepared in accordance with 
Regulation S-X.\221\ The Commission's intent with respect to Exhibit 11 
is that applicants, to the extent possible, will be able to provide 
financial statements that have already been prepared for other reasons.
---------------------------------------------------------------------------

    \221\ See DBRS Letter; Fitch Letter; Moody's Letter.
---------------------------------------------------------------------------

    Two commenters also requested that the proposed rule be modified to 
permit an NRSRO to furnish a tax return prepared by an accountant in 
lieu of audited financial statements.\222\ The Commission believes a 
tax return will not provide sufficient detail about an applicant's 
financial condition. For example, it would not provide the information 
that can be derived from a balance sheet, an income statement and 
statement of cash flows, and a statement of changes in ownership 
equity. Moreover, as indicated above, the Commission believes it is 
important to have an auditor provide independent verification that all 
this information is presented fairly, in all material respects.
---------------------------------------------------------------------------

    \222\ See Letter dated March 12, 2007 from Sean Egan, President, 
Egan-Jones Ratings Company (``EJR Letter''); LACE Letter.
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting Exhibit 11 and the 
instructions for the Exhibit with the modifications described above.
22. Exhibit 12 (Revenues)
    As adopted, Exhibit 12 requires an applicant to provide information 
as to the amount of revenue generated from various credit rating 
services and a separate computation of total revenue from all other 
services. The instructions provide that this information be for the 
most recently completed fiscal or calendar year and is not required to 
be audited. An NRSRO will not be required to make this information 
publicly available pursuant to Section 15E(a)(3) of the Exchange Act 
\223\ and Rule 17g-1(i) thereunder or update the Exhibit after 
registration.\224\ An NRSRO will be required to update this information 
in an unaudited financial report furnished to the Commission under Rule 
17g-3.
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    \223\ 15 U.S.C. 78o-7(a)(3).
    \224\ An applicant can request that this information be kept 
confidential to the extent permitted by law. See 17 CFR 200.80 and 
17 CFR 200.83.
---------------------------------------------------------------------------

    Two commenters stated that the Exhibit should be eliminated because 
it was unnecessary given the submission of financial statements in 
Exhibit 11.\225\ The Commission continues to believe that this 
information is necessary or appropriate in the public interest or for 
the protection of investors. It will assist the Commission in making 
the finding with respect to adequate financial resources required by 
Section 15E(a)(2)(C) of the Exchange Act \226\ by providing detail as 
to the revenues generated by different types of credit rating services. 
Financial statements alone may not separate out or itemize revenues 
earned from credit rating services as opposed to other services. For 
example, an applicant that has earned less revenue from credit rating 
services than its total credit analyst compensation may not be able to

[[Page 33582]]

continue to support this business line at levels consistent with the 
statutory mandate.
---------------------------------------------------------------------------

    \225\ See S&P Letter; AEI Letter.
    \226\ See 15 U.S.C. 78o-7(a)(2)(C).
---------------------------------------------------------------------------

    One commenter stated that the determination of the revenue amounts 
should be made using a ``net revenue'' definition that permits 
flexibility in terms of how revenue is recognized.\227\ As with Exhibit 
10 and Rule 17g-3, the Commission intends that the credit rating agency 
apply its standard accounting convention for recognizing revenue as 
this will make revenue calculations consistent across the various 
financial reports required in Form NRSRO and Rule 17g-3.
---------------------------------------------------------------------------

    \227\ See Moody's Letter.
---------------------------------------------------------------------------

    Another commenter, with respect to Rule 17g-3, requested the 
elimination of a requirement to separately report revenues from 
determining private credit ratings (i.e., credit ratings that are not 
made readily accessible to the public).\228\ The commenter stated that 
it would be difficult to separate private ratings revenue from public 
ratings revenue. In an effort to reduce burden, the Commission has 
eliminated the requirement to separately itemize revenue from private 
ratings. The private ratings revenue must be included in the revenue 
item for determining or maintaining credit ratings.
---------------------------------------------------------------------------

    \228\ See Fitch Letter.
---------------------------------------------------------------------------

    Two commenters disagreed on the information that should be included 
in the revenue item relating to subscribers.\229\ One commenter stated 
that the item should include revenue from subscribers to an applicant's 
credit analysis in addition to credit ratings subscribers.\230\ The 
other commenter stated that the item should only apply to credit 
ratings subscribers.\231\ The Commission intends the Exhibit to include 
both types of subscribers. The Commission believes separating out 
revenues from these two types of subscribers could be difficult in that 
some credit rating agencies may offer subscriptions that include access 
to credit ratings and credit analysis. Furthermore, some credit rating 
agencies make their credit ratings available for free but charge 
subscribers for credit ratings data and credit analysis. The Commission 
believes there is no reason to distinguish between a subscriber to 
credit ratings and a subscriber to credit ratings data and analysis in 
this context.
---------------------------------------------------------------------------

    \229\ See Gross Letter; R&I Letter.
    \230\ See Gross Letter.
    \231\ See R&I Letter.
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting Exhibit 12 and the 
instructions for the Exhibit with the modifications described above.
23. Exhibit 13 (Analyst Compensation)
    As adopted, Exhibit 13 will require an applicant to disclose to the 
Commission the amount of total aggregate annual compensation paid to 
its credit analysts and the median compensation. The instructions 
provide that the information must be for the most recently completed 
fiscal or calendar year and will not have to be audited. An NRSRO will 
not be required to make this information publicly available pursuant to 
Section 15E(a)(3) of the Exchange Act \232\ and Rule 17g-1(i) 
thereunder or update the Exhibit after registration.\233\ An NRSRO will 
be required to update this information in a financial report furnished 
to the Commission under Rule 17g-3.
---------------------------------------------------------------------------

    \232\ 15 U.S.C. 78o-7(a)(3).
    \233\ An applicant can request that this information be kept 
confidential to the extent permitted by law. See 17 CFR 200.80 and 
17 CFR 200.83.
---------------------------------------------------------------------------

    One commenter stated that the information may not be necessary 
given the different sizes and business models of credit rating 
agencies.\234\ The Commission continues to believe this compensation 
information is necessary or appropriate in the public interest or for 
the protection of investors. It will assist the Commission in making 
the finding with respect to adequate financial resources required by 
Section 15E(a)(2)(C) of the Exchange Act.\235\ Similar to the revenue 
information, this information will augment the financial statements 
that are required under Exhibit 11 because it provides detail on the 
expenses necessary to retain the credit rating agency's credit 
analysts. The Commission will compare this information with the 
revenues earned by the applicant for credit ratings services to 
evaluate an applicant's financial condition.
---------------------------------------------------------------------------

    \234\ See AEI Letter.
    \235\ See 15 U.S.C. 78o-7(a)(2)(C).
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting Exhibit 13 and the 
instructions for the Exhibit with the modifications described above.

C. Rule 17g-2--Recordkeeping

    The Rating Agency Act amended Section 17(a)(1) of the Exchange Act 
to add NRSROs to the list of entities required to make and keep such 
records, and make and disseminate such reports, as the Commission 
prescribes by rule as necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
Exchange Act.\236\ The inclusion of NRSROs on the list also provides 
the Commission with authority under Section 17(b)(1) of the Exchange 
Act to examine all the records of an NRSRO.\237\
---------------------------------------------------------------------------

    \236\ See Section 5 of the Rating Agency Act and 15 U.S.C 
78q(a)(1).
    \237\ See 15 U.S.C 78q(b)(1).
---------------------------------------------------------------------------

    The Commission is implementing this rulemaking authority through 
Rule 17g-2. This rule requires an NRSRO to make and retain certain 
records relating to its business and to retain certain other business 
records made in the normal course of business operations. The rule also 
prescribes the time periods and manner in which all these records will 
be required to be retained.
    Several commenters stated that Rule 17g-2 as proposed was unduly 
burdensome or onerous.\238\ The Commission believes the rule is 
necessary or appropriate in the public interest or for the protection 
of investors and narrowly tailored to achieve its purpose.\239\ The 
Commission designed the rule based on its experience with recordkeeping 
rules for other regulated entities.\240\ These other books and records 
rules have proven integral to the Commission's investor protection 
function because the preserved records are the primary means of 
monitoring compliance with applicable securities laws.\241\ Rule 17g-2 
is designed to ensure that an NRSRO makes and retains records that will 
assist the Commission in monitoring, through its examination authority, 
whether an NRSRO is complying with the provisions of Section 15E of the 
Exchange Act \242\ and the rules thereunder. For example, examiners 
will use the records to review whether an NRSRO is following its 
disclosed procedures and methodologies for determining credit ratings, 
its disclosed policies and procedures for preventing the misuse of 
material nonpublic

[[Page 33583]]

information, and managing conflicts of interest, and whether it is 
complying with Rules 17g-4, 17g-5, and 17g-6 discussed below.
---------------------------------------------------------------------------

    \238\ See, e.g., FSR Letter; AEI Letter.
    \239\ Section 15E(c)(2) of the Exchange Act (15 U.S.C. 78o-
7(c)(2)) requires that the Commission's rules under the Rating 
Agency Act be narrowly tailored.
    \240\ See, e.g., 17 CFR 240.17a-3 and 17a-4 (broker-dealers); 17 
CFR 275.204-2 (investment advisers); 17 CFR 240.17Ad-6 and 17Ad-7 
(transfer agents).
    \241\ See Electronic Storage of Broker-Dealer Records, Exchange 
Act Release No. 47806 (May 7, 2003), 68 FR 25281 (May 12, 2003); see 
also Commission order in Matter of Deutsche Bank Securities, Inc. et 
al., Exchange Act Release No. 46937 (December 3, 2002) (``The 
recordkeeping rules are `a keystone of the surveillance of broker-
dealers' '') (citations omitted); Commission order in Matter of J.P. 
Morgan Securities Inc., Exchange Act Release No. 51200 (February 14, 
2005); Electronic Recordkeeping by Investment Companies and 
Investment Advisers, Investment Company Act Release No. 24991 (May 
24, 2001) (``The recordkeeping requirements are a key part of the 
Commission's regulatory program for funds and advisers, as they 
allow [the Commission] to monitor fund and adviser operations, and 
to evaluate their compliance with federal securities laws.'').
    \242\ 15 U.S.C. 78o-7.
---------------------------------------------------------------------------

    Nonetheless, the Commission is adopting Rule 17g-2 with 
modifications to address issues commenters raised, to reduce burden, 
and to enhance recordkeeping requirements with respect to the issuance 
of credit ratings on certain asset-backed and mortgage-backed 
securities transactions. As a preliminary matter, the Commission notes 
that several commenters raised concerns with how examiners would use 
the books and records required under Rule 17g-2.\243\ One commenter 
requested that the Commission clarify that examiners would not use 
their inspection of records to second-guess credit rating 
opinions.\244\ The Commission does not intend that Rule 17g-2 be used 
as a means to substitute the Commission's judgment for that of an NRSRO 
with respect to the NRSRO's credit rating opinion.
---------------------------------------------------------------------------

    \243\ See DBRS Letter; Langohr Letter.
    \244\ See DBRS Letter.
---------------------------------------------------------------------------

    Further, Section 15E(c)(2) of the Exchange Act provides that the 
Commission may not ``regulate the substance of credit ratings or the 
procedures and methodologies by which an NRSRO determines credit 
ratings.'' \245\ The purpose of the recordkeeping requirements in Rule 
17g-2 is to allow examiners to review whether an NRSRO is following its 
stated procedures and methodologies and otherwise complying with 
Section 15E of the Exchange Act \246\ and the rules thereunder. It is 
important that users of credit ratings be given the opportunity to 
understand how a specific NRSRO determines its credit ratings. 
Consequently, Sections 15E(a)(1)(B)(ii) and 15E(a)(3) of the Exchange 
Act require an NRSRO to make this information publicly available.\247\ 
The Commission's role is to examine whether an NRSRO has accurately 
disclosed this information so that users of credit ratings can assess 
its credit rating procedures and methodologies. The Commission's role 
also is to examine whether an NRSRO adheres to its credit rating 
procedures and methodologies.
---------------------------------------------------------------------------

    \245\ 15 U.S.C. 78o-7(c)(2).
    \246\ 15 U.S.C. 78o-7.
    \247\ 15 U.S.C. 78o-7(a)(1)(B)(ii) and 15 U.S.C. 78o-7(a)(3).
---------------------------------------------------------------------------

    A second commenter raised the concern that using records to examine 
whether an NRSRO has accurately disclosed information about how it 
determines credit ratings would result in the Commission's tacit 
endorsement of the credit ratings.\248\ The Commission reiterates that 
the purpose of examining these records is to review whether an NRSRO 
has accurately disclosed information about, and adheres to, the 
procedures and methodologies it uses to determine credit ratings. As 
noted above, the Commission cannot ``regulate the substance of credit 
ratings or the procedures and methodologies by which an NRSRO 
determines credit ratings.'' \249\ Users of credit ratings should not 
view the fact that the Commission has examined whether an NRSRO has 
accurately disclosed information about, and adheres to, its credit 
rating procedures and methodologies as an endorsement of the credit 
ratings or the procedures and methodologies used to determine the 
credit ratings. Users of credit ratings must evaluate a given NRSRO's 
procedures and methodologies for themselves and reach their own 
conclusions as to the quality of the procedures and methodologies. The 
Commission's role is limited to reviewing whether the information 
disclosed by an NRSRO is consistent with how the NRSRO conducts its 
credit rating activities. The Commission also notes that Section 15E(f) 
of the Exchange Act bars an NRSRO from representing that it has been 
``designated, sponsored, recommended, or approved, or that [its] 
abilities or qualifications. * * * have in any respect been passed 
upon, by the United States, or any agency, officer, or employee 
thereof.'' \250\
---------------------------------------------------------------------------

    \248\ See Langohr Letter.
    \249\ 15 U.S.C. 78o-7(c)(2).
    \250\ 15 U.S.C. 78o-7(f).
---------------------------------------------------------------------------

    Finally, another commenter stated that the recordkeeping rule 
should be principles based and permit an NRSRO to implement a 
recordkeeping system appropriate for its organizational structure and 
business model.\251\ The Commission does not intend that Rule 17g-2 
require a specific form of record or recordkeeping system. An NRSRO 
will have the flexibility to implement a recordkeeping system that 
captures the records required in Rule 17g-2 in a manner that conforms 
to the NRSRO's internal processes. At the same time, as noted above, 
Rule 17g-2 is designed to ensure that an NRSRO makes and retains 
records that will assist the Commission in monitoring, through its 
examination authority, whether an NRSRO is complying with the 
provisions of Section 15E of the Exchange Act \252\ and the rules 
thereunder. The Commission believes that a principles based 
recordkeeping rule would be difficult to administer. It could lead to 
inconsistent recordkeeping by NRSROs and also create uncertainty for 
NRSROs and Commission examiners as to the records that must be 
retained. The Commission believes the better approach is to prescribe 
certain records that must be made and retained at a minimum to provide 
for consistent recordkeeping requirements across all NRSROs.
---------------------------------------------------------------------------

    \251\ See Moody's Letter.
    \252\ 15 U.S.C. 78o-7.
---------------------------------------------------------------------------

1. Paragraph (a) of Rule 17g-2
    As adopted, paragraph (a) of Rule 17g-2 requires an NRSRO to make 
and retain certain books and records. The records required under 
paragraph (a) must be complete and current and not contain inaccurate 
information.\253\ With respect to the specific records required under 
paragraph (a), the Commission has made several modifications in light 
of comments that will ease the recordkeeping burden. The Commission 
believes the records required in this paragraph are necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the Exchange Act. As described below, they 
will assist the Commission in monitoring whether an NRSRO is complying 
with Section 15E of the Exchange Act and the rules thereunder.\254\
---------------------------------------------------------------------------

    \253\ See, e.g., In the Matter of SG Cowens Securities 
Corporation, Exchange Act Release No. 48335 (August 14, 2003) 
(``Implicit in the Commission's recordkeeping rules is the 
requirement that information in a required book or record be 
accurate.'').
    \254\ See 15 U.S.C. 78q(a)(1).
---------------------------------------------------------------------------

a. Paragraph (a)(1) of Rule 17g-2
    As adopted, paragraph (a)(1) of Rule 17g-2 requires an NRSRO to 
make records of original entry into an NRSRO's accounting system, and 
records reflecting entries to and balances in all general ledger 
accounts of the NRSRO for each fiscal year. Rule 17g-2, as proposed, 
contained a similar provision. The Commission believes these 
fundamental business records are necessary for the preparation of the 
financial reports required to be prepared under Rule 17g-3. In 
addition, they will assist Commission examiners in reviewing the 
financial resources of an NRSRO and its revenue sources. The latter 
information will be important in identifying customers that provide an 
NRSRO with significant revenues and, consequently, could be in a 
position to exercise undue influence over a credit rating decision.
    One commenter stated that, while it already maintains these types 
of records, the requirement to make them

[[Page 33584]]

should be eliminated because the information in the Rule 17g-3 
financial reports will be sufficient.\255\ The Commission believes it 
is important that an NRSRO make and retain these records. They will 
provide Commission examiners with the source information that feeds 
into the Rule 17g-3 financial reports. Further, those financial reports 
are a snap shot of the NRSRO's financial condition as of its fiscal 
year end. These records will provide examiners with current financial 
information as of the time of their exam. For these reasons, the 
Commission is adopting paragraph (a)(1) of Rule 17g-2 substantially as 
proposed.
---------------------------------------------------------------------------

    \255\ See Fitch Letter.
---------------------------------------------------------------------------

b. Paragraph (a)(2) of Rule 17g-2
    As adopted, paragraph (a)(2) of Rule 17g-2 requires an NRSRO to 
make the following records with respect to each of the NRSRO's current 
credit ratings, as applicable: The identity of any credit analyst(s) 
that participated in the determination of the credit rating; the 
identity of the person(s) who approved the credit rating before it was 
issued; whether the credit rating was solicited or unsolicited; and the 
date the credit rating action was taken. This information will assist 
the Commission in monitoring whether the NRSRO is following its 
procedures and methodologies for determining credit ratings and whether 
the NRSRO is complying with procedures designed to prevent the misuse 
of material nonpublic information. For example, if questions arise 
about a particular credit rating, the record will provide the 
Commission staff with the names of the credit analysts that 
participated in determining the credit rating and the persons that 
approved the credit rating. This will identify for the Commission staff 
the persons with the best information as to how the credit rating was 
determined.
    Rule 17g-2, as proposed, also would have required a record 
identifying the procedures and methodologies used to determine the 
credit rating and the method by which the credit rating was made 
publicly available. The Commission has eliminated these requirements to 
reduce recordkeeping burden and because Commission examiners can 
ascertain the information through a less burdensome requirement.\256\ 
Under paragraph (a)(6) of Rule 17g-2, an NRSRO is required to 
separately document the procedures and methodologies it uses to 
determine credit ratings. The Commission examination staff will be able 
to refer to these records to understand how specific types of credit 
ratings are determined by the NRSRO. Therefore, examiners will not need 
an individual record identifying the methodology used to determine each 
credit rating. For similar reasons, the Commission has eliminated the 
proposed requirement to make a record of the method by which each 
credit rating was made readily accessible. An NRSRO must disclose in 
Form NRSRO how it makes its credit ratings readily accessible. 
Commission examiners can review this disclosure to understand how a 
specific credit rating was made readily accessible.
---------------------------------------------------------------------------

    \256\ Several commenters requested that the Commission eliminate 
the requirement to make a record identifying the procedures and 
methodologies used to determine the credit rating. See DBRS Letter; 
Fitch Letter; Moody's Letter; Langohr Letter. These commenters 
argued, among other things, that the requirement interfered with the 
process of determining credit ratings, was not consistent with 
normal practice, and was burdensome. Id.
---------------------------------------------------------------------------

    The Commission notes, however, that if an NRSRO materially diverges 
from its stated methodology for determining a specific type of credit 
rating or for making credit ratings readily accessible, it may violate 
the requirements to disclose in Form NRSRO information about credit 
ratings methodologies and how credit ratings are made readily 
accessible and, in the former case, the requirement in paragraph (a)(6) 
to document the procedures and methodologies for determining credit 
ratings. Consequently, an NRSRO must include in its documented 
procedures any alternative methodologies for determining a specific 
type of credit rating and when such alternatives may be used by a 
credit analyst.
    Finally, consistent with changes to Form NRSRO discussed above, the 
final rule changes the requirement proposed in Rule 17g-2(a)(2) to 
identify the credit analysts ``who determined'' the credit rating to 
credit analysts ``who participated in determining'' the credit rating. 
In all other respects, the Commission is adopting paragraph (a)(2) of 
Rule 17g-2 substantially as proposed.
c. Paragraph (a)(3) of Rule 17g-2
    As adopted, paragraph (a)(3) of Rule 17g-2 requires an NRSRO to 
make an account record for each person (for example, an obligor, 
issuer, underwriter, or other user) that has paid for the issuance or 
maintenance of a credit rating indicating the identity and address of 
the person and the credit ratings determined or maintained for the 
person. This information will assist the Commission in monitoring 
whether the NRSRO is complying with procedures for addressing and 
managing conflicts of interest as well as complying with the 
requirements in Rule 17g-5 prohibiting certain conflicts of interest. 
For example, examiners can use this record to identify persons that 
have paid the NRSRO for a significant number of credit ratings (e.g., a 
regular sponsor of structured products). These persons, given the large 
volume of business they provide the NRSRO, may be in a position to 
exert inappropriate influence on the NRSRO to issue favorable credit 
ratings.
    One commenter pointed out that by using the term ``solicits'' the 
rule could be construed to require a record of each person that asks 
the NRSRO to issue a credit rating, regardless of whether the person 
ultimately pays for the credit rating or the NRSRO ultimately issues 
the credit rating.\257\ The Commission agrees that the rule text, as 
proposed, contained a degree of ambiguity. Further, the Commission 
believes it could be difficult and unduly burdensome to create a record 
of each person who approaches the NRSRO about having a credit rating 
issued. For example, some contacts between the NRSRO and a person may 
never progress beyond initial inquiries. For these reasons, the 
Commission modified the rule to clarify that the requirement is limited 
to persons who pay for credit ratings that are issued publicly.
---------------------------------------------------------------------------

    \257\ See Fitch Letter.
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    The Commission also modified paragraph (a)(3) of Rule 17g-2 by 
eliminating the requirement to provide the customer's ``principal'' 
address. The term ``principal address'' has a legal meaning in some 
contexts and, accordingly, could unduly complicate the process of 
creating the record. The rule now requires the customer's ``address'' 
without regard to whether it is the principal address. In all other 
respects, the Commission is adopting paragraph (a)(3) of Rule 17g-2 
substantially as proposed.
d. Paragraph (a)(4) of Rule 17g-2
    As adopted, paragraph (a)(4) of Rule 17g-2 requires an NRSRO to 
make an account record for each subscriber to the credit ratings and/or 
credit analysis reports of the NRSRO indicating the identity and 
address of the subscriber. This information will assist the Commission 
in monitoring whether the NRSRO was complying with its procedures for 
addressing and managing conflicts of interest and the handling of 
material, nonpublic information as well as complying with the 
requirements in Rule 17g-5 prohibiting certain conflicts of interest. 
The Commission did not receive any comments on this provision.

[[Page 33585]]

For the reasons discussed above with respect to paragraph (a)(3) of 
Rule 17g-2, the Commission has modified the provision to eliminate the 
reference to a customer's ``principal'' address. In all other respects, 
the Commission is adopting paragraph (a)(4) of Rule 17g-2 substantially 
as proposed.
e. Paragraph (a)(5) of Rule 17g-2
    As adopted, paragraph (a)(5) of Rule 17g-2 requires an NRSRO to 
make a record listing the general types of services and products 
offered by the NRSRO. This record will provide the Commission with 
details of the ancillary business activities of the NRSRO and, 
therefore, will be useful in identifying potential conflicts of 
interest that arise from such activities. Commission examiners then 
will be able to review whether the NRSRO has implemented procedures to 
manage these potential conflicts.
    One commenter pointed out that the rule text as proposed could be 
construed to require a record each time the NRSRO made an offer to 
provide a service to a customer.\258\ This was not the intent of the 
proposed requirement. Rather, it was to require a record listing the 
general types of services the NRSRO offers. The record is designed to 
provide Commission examiners with a way to quickly understand the 
NRSRO's business model based on the types of services and products it 
provides to persons. The record does not require an entry for each 
offer to a person or transaction with a person. The final rule has been 
modified to clarify that the provision only requires a list of the 
types of services offered by the NRSRO. In all other respects, the 
Commission is adopting paragraph (a)(5) of Rule 17g-2 substantially as 
proposed.
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    \258\ See Fitch Letter.
---------------------------------------------------------------------------

f. Paragraph (a)(6) of Rule 17g-2
    As adopted, paragraph (a)(6) of Rule 17g-2 requires an NRSRO to 
make a record documenting the established procedures and methodologies 
used by the NRSRO to determine credit ratings. This provision is being 
added to Rule 17g-2 in response to comments regarding Exhibit 2 to Form 
NRSRO, which, as proposed, required an NRSRO to attach the procedures 
and methodologies to the Form and make them publicly available after 
registration. As discussed above, Exhibit 2 has been modified so that 
it now requires a description of the procedures and methodologies as 
opposed to each procedure and methodology. The intent is to require 
sufficient information in Exhibit 2 to allow users of credit ratings to 
develop an understanding of how the NRSRO determines credit ratings 
without imposing the burden of making a voluminous submission to the 
Commission and public disclosure. It also is designed to avoid the 
public disclosure of proprietary information.
    Accordingly, rather than require these procedures and methodologies 
to be attached to Form NRSRO and disclosed publicly, the Commission is 
requiring that they be documented internally. This will permit 
Commission examiners to review the procedures and methodologies in 
order to review whether the NRSRO has disclosed sufficient information 
about them in Form NRSRO to permit users of credit ratings to 
understand how the NRSRO determines credit ratings. It also will permit 
Commission examiners to review whether the NRSRO is adhering to its 
procedures and methodologies and complying with other rules.\259\ For 
example, Rule 17g-6 prohibits, among other things, an NRSRO from 
issuing or modifying, or threatening to issue or modify, a credit 
rating contrary to the NRSRO's established procedures and 
methodologies. The Commission's ability to enforce this prohibition 
will depend in part on the NRSRO having fully documented its procedures 
and methodologies. As discussed below, these records also will be an 
important means for the Commission to gain a better understanding of 
the procedures and methodologies used by credit rating agencies to 
treat the credit ratings of other credit rating agencies when 
determining the overall credit rating for securities or money market 
instruments issued by asset pools or as part of any asset-backed or 
mortgage-backed securities transactions (``structured products'').
---------------------------------------------------------------------------

    \259\ See AFP Letter.
---------------------------------------------------------------------------

    As noted above, to the extent a credit rating agency permits credit 
analysts to diverge from the procedures or methodologies it has 
established, the NRSRO must document the circumstances under which such 
a divergence will be permitted and the alternative procedure or 
methodology that must be used. In effect, documenting the divergence in 
this manner will make it part of the NRSRO's established procedures and 
methodologies and, therefore, the NRSRO will be adhering to the 
requirements of paragraph (a)(6) of Rule 17g-2. Failing to document 
when the divergence will be permitted or required will expose the NRSRO 
to potential violations of Rules 17g-1, 17g-2, and 17g-6.
    For the foregoing reasons and the reasons discussed with respect to 
Exhibit 2 of Form NRSRO, the Commission is eliminating the requirement 
that an NRSRO attach to Form NRSRO and make publicly available its 
procedures and methodologies for determining credit ratings. Instead, 
the Commission is adopting paragraph (a)(6) of Rule 17g-2 to require 
that the procedures and methodologies be documented internally.
g. Paragraph (a)(7) of Rule 17g-2
    As adopted, paragraph (a)(7) of Rule 17g-2 requires an NRSRO to 
make a record that lists each security and its corresponding credit 
rating issued by an asset pool or as part of any asset-backed or 
mortgage-backed securities transaction where the NRSRO in determining 
the credit rating for the security treats assets within such pool or as 
a part of such transaction that are not subject to a credit rating of 
the NRSRO by one or more of four ways specified in the rule to 
determine a credit rating for the security. This provision was not 
proposed but is being added because of modifications to paragraph 
(a)(4) of Rule 17g-6, which prohibits anti-competitive practices 
relating to determining credit ratings for structured products. As 
discussed below with respect to paragraph (a)(4) of Rule 17g-6, the 
Commission believes this provision is necessary or appropriate in the 
public interest or for the protection of investors because it will 
assist the Commission in monitoring practices in the structured product 
area that many commenters believe are anti-competitive.
2. Paragraph (b) of Rule 17g-2
    As adopted, paragraph (b) of Rule 17g-2 requires an NRSRO to retain 
certain records (excluding drafts of documents) that relate to its 
business as a credit rating agency.\260\ The records required to be 
retained in paragraph (b) of Rule 17g-2 are those an NRSRO makes or 
receives as a matter of business practice but are not records an NRSRO 
is required to make. The Commission believes the records required to be 
retained under paragraph (b) are necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of

[[Page 33586]]

the Exchange Act because, as described below, they will assist the 
Commission in monitoring whether an NRSRO is complying with Section 15E 
of the Exchange Act \261\ and the rules thereunder.
---------------------------------------------------------------------------

    \260\ As discussed below, several commenters sought 
clarification as to whether the record retention requirements in 
paragraph (b) of Rule 17g-2, as proposed, would apply to drafts of 
documents. The Commission did not intend these requirements to apply 
to drafts and has added language the introductory text of paragraph 
(b) of Rule 17g-2 excluding drafts of documents.
    \261\ 15 U.S.C. 78o-7.
---------------------------------------------------------------------------

    Since these records are not required to be made, an NRSRO will not 
have to update them. Rather, the NRSRO is required to retain the 
original record in an unaltered form or a true copy of the original 
record for the prescribed retention period. The Commission notes, 
however, that, under Section 15E(b)(1) of the Exchange Act,\262\ an 
NRSRO must update, as provided in that section, certain information in 
the Forms and Exhibits that are required to be retained under paragraph 
(b)(9) of Rule 17g-2 (discussed below).
---------------------------------------------------------------------------

    \262\ See 15 U.S.C. 78o-7(b)(1).
---------------------------------------------------------------------------

a. Paragraph (b)(1) of Rule 17g-2
    As adopted, paragraph (b)(1) of Rule 17g-2 requires an NRSRO to 
retain all significant records underlying the information included in 
the NRSRO's annual financial reports required pursuant to Rule 17g-3. 
This includes bank statements, bills payable and receivable, trial 
balances, and records relating to the determination of the largest 
customers. These records will assist Commission examiners in 
understanding and reviewing the basis of information provided in the 
financial reports the NRSRO will be required to annually furnish to the 
Commission. For example, examiners can use the records relating to the 
list of the largest customers to review whether the NRSRO has 
identified such customers in accordance with Rule 17g-3.
    The Commission received one comment on this provision.\263\ The 
commenter stated that, while it retains these records, the requirement 
should be eliminated because the financial reports required in Rule 
17g-3 provide sufficient information in these areas. Similar to the 
records required in paragraph (a)(1) of Rule 17g-2, the Commission 
believes it is important that an NRSRO retain these records. They will 
provide Commission examiners with the source information that feeds 
into the Rule 17g-3 financial reports. Further, as noted above, those 
financial reports are a snap shot of the NRSRO's financial condition as 
of its fiscal year end. These records will provide examiners with 
current information as of the time of their exam. For these reasons, 
the Commission is adopting paragraph (b)(1) of Rule 17g-2 substantially 
as proposed.
---------------------------------------------------------------------------

    \263\ See Fitch Letter.
---------------------------------------------------------------------------

b. Paragraph (b)(2) of Rule 17g-2
    As adopted paragraph (b)(2) of Rule 17g-2 requires an NRSRO to 
retain internal records, including nonpublic information and work 
papers, used to form the basis of a credit rating. These records will 
include, for example, notes of conversations with the management of an 
issuer or obligor that was the subject of the credit rating and the 
inputs and raw results of a quantitative model used to determine the 
credit rating. The retention of this information, and other internal 
records used to determine a credit rating, will assist the Commission 
in reviewing whether an NRSRO is adhering to its established procedures 
and methodologies for determining credit ratings and for preventing the 
misuse of material nonpublic information. It also will assist the 
Commission in gaining a better understanding of the practices used by 
credit rating agencies to incorporate the credit ratings of other 
credit rating agencies into the overall credit rating of a structured 
product.
    The Commission received several comments on the rule text in this 
paragraph as proposed.\264\ The comments generally were similar in that 
they sought clarification that the provision does not require the 
retention of every record that somehow relates to the credit 
rating.\265\ In response, the Commission notes that it did not intend 
the rule to be interpreted that broadly. The provision only applies to 
internal records and documents that are used to form the basis of the 
credit rating. The provision explicitly excludes publicly available 
information and the introductory text to paragraph (b) of Rule 17g-2 
excludes drafts of documents from its provisions. The rule does not 
require an NRSRO to retain internal documents that a credit analyst 
reviews but that do not factor into the determination of the credit 
rating. For the foregoing reasons, the Commission is adopting paragraph 
(b)(2) of Rule 17g-2 substantially as proposed.
---------------------------------------------------------------------------

    \264\ See S&P Letter; DBRS Letter; Fitch Letter; Moody's Letter.
    \265\ Id.
---------------------------------------------------------------------------

c. Paragraph (b)(3) of Rule 17g-2
    As adopted, paragraph (b)(3) of Rule 17g-2 requires an NRSRO to 
retain credit analysis reports, credit assessment reports, and private 
credit rating reports and internal records, including nonpublic 
information and work papers, used to form the basis for the opinions 
expressed in these reports. These reports--which credit rating agencies 
commonly create and sell as an ancillary service to the issuance of 
credit ratings--generally provide a detailed analysis of the 
information and assumptions underlying a credit rating. In developing 
these reports, the credit analyst may receive material nonpublic 
information about an issuer or obligor. For example, an issuer may 
request a private credit rating report to understand how a contemplated 
transaction would impact the current publicly available credit rating 
of its debt securities. Consequently, the retention of these reports 
and internal records used to form the basis of the reports will assist 
the Commission in monitoring whether the NRSRO is complying with its 
policies and procedures for preventing the misuse of material nonpublic 
information.
    The Commission received several comments on the rule text of this 
paragraph as proposed.\266\ Similar to the comments regarding paragraph 
(b)(2) of Rule 17g-2, the comments sought clarification that the 
provision does not require the retention of every potentially relevant 
record such as records that do not contain information that the credit 
analysis used to form the basis of conclusions in the report.\267\ In 
response to these comments, the Commission notes that it does not 
intend the rule to be interpreted to apply to internal documents that a 
credit analyst reviews but that do not factor into the conclusions in 
the final report. Further, the provision explicitly excludes publicly 
available information and the introductory text to paragraph (b) of 
Rule 17g-2 excludes drafts of documents from its provisions. 
Consequently, the Commission is adopting paragraph (b)(3) of Rule 17g-2 
substantially as proposed.
---------------------------------------------------------------------------

    \266\ See Letter dated March 8, 2007 from John B. Rutherfurd, 
Jr. (``Rutherfurd Letter''); DBRS Letter; Fitch Letter; Moody's 
Letter; S&P Letter.
    \267\Id.
---------------------------------------------------------------------------

d. Paragraph (b)(4) of Rule 17g-2
    As adopted, paragraph (b)(4) of Rule 17g-2 requires an NRSRO to 
retain compliance reports and compliance exception reports. The 
retention of these reports will identify activities of the NRSRO that 
its designated compliance officer had determined raised, or did not 
raise, compliance and control issues. Commission examiners will then be 
able to review how the NRSRO addressed the compliance issues. This can 
lead to more focused examinations, which also will decrease the burden 
on the NRSRO. The reports also will provide information as to whether 
the NRSRO is

[[Page 33587]]

complying with its established methodologies, procedures, and policies.
    The Commission received two comments on this provision.\268\ One 
commenter stated that it should be narrowed to exclude compliance 
reports that do not find any deficiencies.\269\ The commenter stated 
that Commission examiners might use reports that do not contain 
deficiencies to second-guess the designated compliance officer.\270\ As 
noted above, compliance reports that do not contain deficiencies will 
be useful to examiners in terms of focusing exams. This commenter also 
stated that the provision should not apply to whistleblower reports. 
The Commission understands the concern that including whistleblower 
reports with the provision's scope could have a chilling effect on an 
employee's willingness to report violations, particularly in smaller 
organizations. For the purposes of this rule, the Commission does not 
view a whistleblower report as a final compliance report or a 
compliance exception report. It is an allegation made by someone within 
the organization about inappropriate or unlawful conduct. However, any 
final report of the NRSRO's compliance officer resulting from the 
allegations or disclosures contained in the report of a whistleblower 
will be a compliance report subject to this provision. The compliance 
officer's final compliance report on the matter can be drafted in a 
manner to protect the whistleblower by not identifying the person.
---------------------------------------------------------------------------

    \268\ See DBRS Letter; Moody's Letter.
    \269\See DBRS Letter.
    \270\Id.
---------------------------------------------------------------------------

    The other commenter stated that the Commission should clarify that 
the rule does not require the retention of draft reports.\271\ In 
response, the Commission notes, as discussed above, that it did not 
intend the rule to be interpreted to require the retention of draft 
reports and other interim work product. The Commission has clarified 
this by adding introductory text to paragraph (b) of Rule 17g-2 that 
excludes drafts of documents from its provisions. For the foregoing 
reasons, the Commission is adopting paragraph (b)(4) of Rule 17g-2 
substantially as proposed.
---------------------------------------------------------------------------

    \271\See Moody's Letter.
---------------------------------------------------------------------------

e. Paragraph (b)(5) of Rule 17g-2
    As adopted, paragraph (b)(5) of Rule 17g-2 requires an NRSRO to 
retain internal audit plans, internal audit reports, documents relating 
to internal audit follow-up measures, and all records identified by its 
internal auditors as necessary to perform the audit of an activity that 
relates to its business as a credit rating agency. The retention of 
these records will identify activities of the NRSRO that its internal 
auditors had determined raised, or did not raise, compliance or control 
issues. They also will assist the Commission in reviewing whether the 
NRSRO is complying with its established methods, procedures, and 
policies.
    The Commission received two comments on this provision.\272\ The 
first commenter requested that the provision be deleted because it 
would chill NRSROs from establishing robust internal audit 
departments.\273\ The Commission continues to believe these are 
important records that will assist the Commission examination staff in 
understanding a given NRSRO's internal operations and activities. As 
noted above, one of the Commission's oversight roles is to review 
whether an NRSRO is accurately disclosing information about, and 
adhering to, its procedures and methodologies for determining credit 
ratings. Reports of an NRSRO's internal auditors can provide highly 
useful information to assist the Commission in performing this 
regulatory function. The Commission notes that the provision requires 
an NRSRO to maintain internal audit records for three years. This 
retention period is designed to provide Commission examiners with the 
opportunity to review them. Finally, the Commission staff's experience 
with reviewing supervised entities such as broker-dealers and broker-
dealer holding companies has not indicated that having access to 
internal audit reports chills the robust functioning of their internal 
audit departments.
---------------------------------------------------------------------------

    \272\See DBRS Letter; Moody's Letter.
    \273\ See DBRS Letter.
---------------------------------------------------------------------------

    The second commenter requested that the Commission clarify that the 
provision only requires the retention of final internal audit reports 
and not interim work product.\274\ In response, the Commission notes 
that it does not intend the provisions to apply to drafts of internal 
audit records and, as noted above, has added introductory text to 
paragraph (b) of Rule 17g-2 that excludes drafts of documents from its 
provisions. The commenter also requested that the provision permit an 
NRSRO to tailor its internal audit records to its business plan.\275\ 
In response, the Commission notes that the provision only requires an 
NRSRO to retain internal audit records. It does not specify the types 
of audit records that must be made. An NRSRO is free to establish an 
internal audit process that is tailored to its business model. Finally, 
this commenter requested that the Commission clarify that the provision 
does not require an NRSRO that is a public company to retain financial 
reporting internal auditing reports beyond those required under the 
Exchange Act.\276\ The Commission notes that Rule 17g-2 requires an 
NRSRO to retain internal audit reports that relate to its business as a 
credit rating agency. The NRSRO must determine whether an internal 
audit report created under a statutory or regulatory requirement is one 
that relates to its credit rating business and, therefore, must be 
retained under this provision.
---------------------------------------------------------------------------

    \274\ See Moody's Letter.
    \275\ Id.
    \276\ Id.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission is adopting paragraph 
(b)(5) of Rule 17g-2 substantially as proposed.
f. Paragraph (b)(6) of Rule 17g-2
    As adopted, paragraph (b)(6) of Rule 17g-2 requires an NRSRO to 
retain copies of marketing materials that are published or otherwise 
made available to persons that are not associated with the NRSRO. 
Section 15E(f) of the Exchange Act prohibits an NRSRO from representing 
that it has been designated, recommended, or approved, or that its 
abilities or qualifications have been passed upon by any federal agency 
or officer.\277\ The retention of marketing materials will assist the 
Commission in reviewing whether the NRSRO is complying with this 
statutory provision.
---------------------------------------------------------------------------

    \277\ 15 U.S.C. 78o-7(f).
---------------------------------------------------------------------------

    The Commission received two comments on the provision.\278\ One 
commenter sought clarification that it does not apply to internal 
documents of the marketing department.\279\ The second commenter 
requested that the Commission provide guidance on the meaning of 
``marketing materials.'' \280\ The Commission intended that the 
provision only apply to materials that are actually used to market the 
NRSRO's credit rating services. The Commission has modified the rule 
text to clarify that the requirement only applies to marketing 
materials that are published or otherwise made available to persons who 
are not associated with the NRSRO. The Commission does not intend that 
the provision be interpreted to apply to records that are used by the 
marketing department for internal purposes. This modification is 
designed to provide greater clarity on the marketing materials that 
must be retained. In

[[Page 33588]]

response to the second commenter, the Commission notes that marketing 
materials, generally, will include any written documents that an NRSRO 
publishes or provides to persons that explain or describe its credit 
rating services and are designed to induce persons to purchase the 
services.
---------------------------------------------------------------------------

    \278\ See R&I Letter; DBRS Letter.
    \279\ See R&I Letter.
    \280\ See DBRS Letter.
---------------------------------------------------------------------------

    In all other respects, the Commission is adopting paragraph (b)(6) 
of Rule 17g-2 substantially as proposed.
g. Paragraph (b)(7) of Rule 17g-2
    As adopted, paragraph (b)(7) of Rule 17g-2 requires an NRSRO to 
retain external and internal communications, including electronic 
communications, received and sent by the nationally recognized 
statistical rating organization and its employees that relate to 
initiating, determining, maintaining, changing, or withdrawing a credit 
rating. The Commission received several comments on the proposed rule 
text of the paragraph.\281\ The commenters all stated generally that 
the requirement was overbroad and should be narrowed.\282\ One 
suggested that it only require external communications.\283\ Two 
suggested it only require communications used by a credit analyst to 
form the basis of a credit rating.\284\ Another commenter suggested the 
provision should have a materiality threshold.\285\
---------------------------------------------------------------------------

    \281\ See ASF Letter; Rutherfurd Letter; DBRS Letter; Fitch 
Letter; S&P Letter.
    \282\ Id.
    \283\ See DBRS Letter.
    \284\ See Rutherfurd Letter; S&P Letter.
    \285\ See Fitch Letter.
---------------------------------------------------------------------------

    In response to these comments, the Commission notes that the 
retention of written communications has played an important role in 
assisting the Commission in identifying legal violations and compliance 
issues with respect to other regulated entities.\286\ The Commission 
believes that internal communications will play an important role in 
assisting the Commission in identifying legal violations and compliance 
issues in its oversight of NRSROs. For example, paragraph (a)(4) of 
Rule 17g-6 prohibits certain practices if they are undertaken with 
anti-competitive intent. The ability of the Commission to prove intent 
will be difficult absent communications that demonstrate why an NRSRO 
engaged in a particular act. Further, the Commission believes that 
narrowing the provision to communications used by a credit analyst to 
form the basis of a credit rating would carve out highly relevant 
communications, including communications that could be relevant to 
compliance with Rule 17g-4 (nonpublic information), Rule 17g-5 
(conflicts of interest), and, as noted above, Rule 17g-6 (prohibited 
practices). Finally, the Commission believes that a materiality 
threshold would be very difficult to comply with and enforce. The 
degree of materiality of a communication viewed in isolation may not be 
apparent. In some cases, a seemingly innocuous communication may in 
fact be highly material when placed in the context of related events 
and other communications.
---------------------------------------------------------------------------

    \286\ See, e.g., Commission complaint in Commission v. Citigroup 
Global Markets Inc., 03 CV 2945 (WHP) (S.D.N.Y.) (April 28, 2003); 
Commission complaint in Commission v. Merrill, Lynch, Pierce, Fenner 
& Smith, 03 CV 2941 (WHP) (S.D.N.Y.) (April 28, 2003); Commission 
Order in Matter of Columbia Management Advisers, Inc. and Columbia 
Funds Distributor, Inc., Securities Act Release No. 8534 (February 
9, 2005).
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission is adopting paragraph 
(b)(7) of Rule 17g-2 substantially as proposed.
h. Paragraph (b)(8) of Rule 17g-2
    As adopted, paragraph (b)(8) of Rule 17g-2 requires an NRSRO to 
retain internal documents that contain information, analysis, or 
statistics that were used to develop a procedure or methodology to 
treat the credit ratings of another NRSRO for the purpose of 
determining a credit rating of a security or money market instrument 
issued by an asset pool or as part of any asset-backed or mortgage-
backed securities transaction.\287\ This provision was not proposed but 
is being added because of modifications to paragraph (a)(4) of Rule 
17g-6, which prohibits anti-competitive practices relating to 
determining credit ratings for structured products. As discussed below 
with respect to paragraph (a)(4) of Rule 17g-6, the Commission believes 
this provision is necessary or appropriate in the public interest or 
for the protection of investors because it will assist the Commission 
in monitoring practices in the structured product area that many 
commenters believe are anti-competitive.
---------------------------------------------------------------------------

    \287\ As proposed, paragraph (b)(8) required an NRSRO to retain 
a record required to be made under paragraph (b) of proposed Rule 
17g-6. The record required under paragraph (b) of proposed Rule 17g-
6 would have documented when an NRSRO refused to issue or withdrew a 
credit rating for a security or money market instrument issued by an 
asset pool or as part of any asset-backed or mortgage backed 
securities transaction. This proposed provision in Rule 17g-6 has 
been eliminated and, therefore, the requirement to retain this 
record in Rule 17g-2 also has been eliminated.
---------------------------------------------------------------------------

i. Paragraph (b)(9) of Rule 17g-2
    As adopted, paragraph (b)(9) of Rule 17g-2 requires an NRSRO to 
retain for each security identified in the record required under 
paragraph (a)(7) of Rule 17g-2, any document that contains a 
description of how any assets within such pool or as a part of such 
transaction not rated by the NRSRO but rated by another NRSRO were 
treated for the purpose of determining the credit rating of the 
security. This provision was not proposed but is being added because of 
modifications to paragraph (a)(4) of Rule 17g-6, which prohibits anti-
competitive practices relating to determining credit ratings for 
structured products. As discussed below with respect to paragraph 
(a)(4) of Rule 17g-6, the Commission believes this provision is 
necessary or appropriate in the public interest or for the protection 
of investors because it will assist the Commission in monitoring 
practices in the structured product area that many commenters believe 
are anti-competitive.
j. Paragraph (b)(10) of Rule 17g-2
    As adopted, paragraph (b)(10) of Rule 17g-2 requires an NRSRO to 
retain Form NRSROs (including Exhibits and accompanying information and 
documents) submitted to the Commission. This provision will make the 
Forms and Exhibits subject to the retention and production requirements 
in Rule 17g-2. For example, NRSROs will be required to retain them in a 
manner that makes them easily accessible to the NRSRO's principal 
office. This will assist Commission examiners, particularly examiners 
in regional offices, in accessing the records on site during an 
examination.
    The Commission did not receive any comments on the proposed rule 
text in this paragraph (proposed as paragraph (b)(9)) and is adopting 
it substantially as proposed.
3. Paragraph (c) of Rule 17g-2
    As adopted, paragraph (c) of Rule 17g-2 requires an NRSRO to retain 
the records identified in paragraphs (a) and (b) for three years after 
the date the record is made or received. The Commission believes the 
three-year retention period is necessary or appropriate in the public 
interest or for the protection of investors because it is designed to 
ensure that the records are preserved for at least one internal audit 
or Commission exam cycle.
    The proposed rule, however, articulated different retention periods 
for the records identified in paragraphs (a)(2) and (a)(3); namely, for 
three years after the NRSRO's business relationship with the person 
ended. The Commission received a number of comments on this proposed 
retention period all of which stated that it was either too long or

[[Page 33589]]

unclear.\288\ The Commission believes there has been some confusion 
regarding the retention requirement for these records. The proposed 
rule was designed so that an NRSRO would retain the last version of an 
account record for three years after the account was closed. The 
Commission believes the simpler and clarified text in the adopted 
version of the rule is designed to ensure this record is retained for 
this period.
---------------------------------------------------------------------------

    \288\ See Gross Letter; Rutherfurd Letter; R&I Letter; DBRS 
Letter; Fitch Letter; S&P Letter; Moody's Letter; LACE Letter.
---------------------------------------------------------------------------

    In other respects, paragraph (c) of Rule 17g-2 is being adopted 
substantially as proposed.
4. Paragraph (d) of Rule 17g-2
    As adopted, paragraph (d) of Rule 17g-2 requires an NRSRO to 
maintain an original, or a true and complete copy of the original, of 
each record required to be retained pursuant to paragraphs (a) and (b) 
of Rule 17g-2 in a manner that, for the applicable retention period 
specified in paragraph (c) of Rule 17g-2, makes the original record or 
copy easily accessible to the principal office of the NRSRO and to any 
other office that conducted activities causing the record to be made or 
received. The Commission believes this rule is necessary or appropriate 
in the public interest or for the protection of investors because it is 
designed to facilitate Commission examination of the NRSRO and to avoid 
delays in obtaining the records during an on-site examination. The rule 
does not specify the format in which the records must be retained. 
Consequently, NRSROs may retain them in, for example, paper form, on 
microfilm or microfiche, or electronically.
    The Commission did not receive any comments on this provision and 
is adopting it substantially as proposed.
5. Paragraph (e) of Rule 17g-2
    As adopted, paragraph (e) of Rule 17g-2 provides that an NRSRO can 
use the services of a third-party record custodian to make and retain 
the records identified in paragraphs (a) and (b), provided the NRSRO 
furnishes the Commission with a written undertaking of the custodian. 
The rule prescribes the form of the undertaking; namely, that the 
third-party must represent that the records are the exclusive property 
of the NRSRO, will be produced promptly to the NRSRO or the Commission 
or its representatives at the request of the NRSRO, and will be 
available for inspection by the Commission or its representatives. The 
rule also provides that an NRSRO remains responsible for complying with 
the Commission's books and records rules, notwithstanding the fact that 
a third-party is making and/or storing them. The Commission believes 
this rule is necessary or appropriate in the public interest or for the 
protection of investors because it is designed to ensure that storing 
the records with a third-party does not make them less accessible than 
records stored at an NRSRO's offices.
    The Commission received three comments on this provision.\289\ One 
commenter stated that the form of the undertaking could conflict with 
certain foreign business practices and, therefore, suggested that the 
NRSRO be required to provide the undertaking.\290\ The Commission 
notes, however, that the undertaking is designed to ensure that a 
third-party custodian is under a direct obligation to produce the 
records to the Commission and its representatives. An NRSRO already is 
obligated under Section 17(b)(1) of the Exchange Act and Rule 17g-2 to 
produce these records.\291\ This obligation is in no way diminished 
because a third-party custodian is holding the records. The undertaking 
establishes a direct obligation on the third-party to produce the 
records to the Commission and its representatives. This direct 
obligation will be particularly important in situations where the NRSRO 
is unable or unwilling to request that the third-party produce the 
records.
---------------------------------------------------------------------------

    \289\ See R&I Letter; Fitch Letter; LACE Letter.
    \290\ See R&I Letter.
    \291\ 15 U.S.C. 78q(b)(1).
---------------------------------------------------------------------------

    The second commenter requested that the form of the undertaking be 
modified in a manner that would obligate the third-party to only comply 
with ``reasonable'' requests for records and only to the extent that 
producing the records was permitted by local law.\292\ While the 
Commission is not codifying this suggestion into the rule, the 
Commission and its representatives make every effort to work with 
regulated entities on the scope and timing of record requests to lessen 
the burden and establish a production schedule that is practicable, 
given the circumstances.
---------------------------------------------------------------------------

    \292\ See Fitch Letter.
---------------------------------------------------------------------------

    The final commenter stated that an NRSRO should not be required to 
use a third-party to store its records.\293\ The Commission notes that 
the rule does not require an NRSRO to use a third-party custodian to 
store its records. Rather, it provides the option for an NRSRO to use a 
third-party record custodian.
---------------------------------------------------------------------------

    \293\ See LACE Letter.
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting paragraph (e) of Rule 
17g-2 substantially as proposed.
6. Paragraph (f) of Rule 17g-2
    As adopted, paragraph (f) of Rule 17g-2 requires an NRSRO to 
promptly furnish the Commission or its representatives with legible, 
complete, and current copies, and, if specifically requested English 
translations, of those records of the NRSRO required to be retained 
under Rule 17g-2, or any other records of the NRSRO subject to 
examination under Section 17(b) of the Exchange Act \294\ that are 
requested by the Commission or its representatives. As discussed in the 
next section, the proposed rule has been modified to incorporate a 
provision that the produced records be translated if necessary. The 
Commission believes this rule is necessary or appropriate in the public 
interest or for the protection of investors because it is designed to 
facilitate Commission examinations of NRSROs.
---------------------------------------------------------------------------

    \294\ See 15 U.S.C 78q(b).
---------------------------------------------------------------------------

    The Commission received one comment on the provision.\295\ 
Specifically, the commenter stated that the provision should not 
require an NRSRO to produce compliance and audit reports because doing 
so could adversely impact deliberations related to these functions and 
chill whistleblowers. The Commission explained above how the retention 
of compliance and audit reports under paragraphs (b)(4) and (b)(5) of 
Rule 17g-2, respectively, will assist Commission examiners in reviewing 
NRSROs. However, the retention of these records without the 
corresponding requirement to produce them would prevent the Commission 
and its examiners from using the records for these purposes. Therefore, 
the Commission believes they must be produced upon request to the 
Commission and its representatives.
---------------------------------------------------------------------------

    \295\ See Moody's Letter.
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting the provisions in 
paragraph (f) of Rule 17g-2 substantially as proposed.
7. Non-Resident NRSROs
    Rule 17g-2, as proposed, contained provisions in two paragraphs 
(paragraphs (f) and (h)) designed to address the fact that credit 
rating agencies not located in the U.S. may become NRSROs. After 
consideration of the comments and for the reasons discussed below, the 
Commission is eliminating these provisions from Rule 17g-2, as adopted, 
except for the provision concerning translating records.

[[Page 33590]]

    Paragraph (f) of proposed Rule 17g-2 would have required that a 
non-resident NRSRO must undertake to send books and records to the 
Commission and its representatives upon request. The undertaking would 
have been required to be attached to an initial application for 
registration as an NRSRO. The Commission explained in the proposing 
release that the undertaking was designed to provide a mechanism for 
the Commission examination staff to inspect records maintained overseas 
without having to travel to the location. In addition, because some 
non-resident NRSROs may maintain original records in a language other 
than English, the proposed undertaking would have required a 
translation if the Commission requested it.
    The Commission received four comments on the proposed rule text in 
this paragraph.\296\ Generally, the commenters objected to various 
representations in the form of the non-resident undertaking \297\ or to 
the requirement to provide the undertaking altogether.\298\ After 
considering the comments, the Commission believes the requirement for 
non-resident NRSROs to provide a special undertaking is unnecessary. As 
NRSROs, they are subject to the production requirements of Section 
17(b) of the Exchange Act \299\ and Rule 17g-2(f). Therefore, the 
Commission and its representatives will not require the non-resident 
undertaking to compel a foreign NRSRO to produce the records. Moreover, 
Rule 17g-2(f), as adopted, requires the records to be ``furnished'' to 
the Commission. Thus, an NRSRO located outside the U.S. is required to 
send the records to the Commission upon request.
---------------------------------------------------------------------------

    \296\ See AEI Letter; R&I Letter; DBRS Letter; Fitch Letter.
    \297\ See, e.g., DBRS Letter.
    \298\ See AEI Letter.
    \299\ See 15 U.S.C 78q(b).
---------------------------------------------------------------------------

    However, the Commission continues to believe that the 
representation in the proposed undertaking to provide translated 
records is necessary or appropriate in the public interest or for the 
protection of investors. Providing un-translated records to the 
Commission could significantly delay and hinder its oversight function. 
Consequently, this provision has been moved into the provisions of 
paragraph (f) of Rule 17g-2. In all other respects, the provisions of 
paragraph (f) of proposed Rule 17g-2 have been eliminated from the 
final rule.
    The provisions of paragraph (h) of proposed Rule 17g-2 would have 
defined the term non-resident rating organization for the purpose of 
specifying the type of NRSRO that would have been required to provide 
the non-resident undertaking. The definition is no longer necessary and 
has been eliminated from the adopted rule.
    For these reasons, the Commission is eliminating the provisions in 
Rule 17g-2 relating to non-resident NRSROs except for the provision 
concerning the translation of records.

D. Rule 17g-3--Annual Financial Reports

    Section 15E(k) of the Exchange Act requires an NRSRO to furnish to 
the Commission, on a confidential basis \300\ and at intervals 
determined by the Commission, such financial statements and information 
concerning its financial condition as the Commission, by rule, may 
prescribe as necessary or appropriate in the public interest or for the 
protection of investors.\301\ The statute also provides that the 
Commission may, by rule, require that the financial statements be 
certified by an independent public accountant.\302\ Rule 17g-3 requires 
an NRSRO to furnish the Commission on an annual basis certain financial 
reports. The furnishing of these reports will serve two important 
functions in the NRSRO regulatory program.
---------------------------------------------------------------------------

    \300\ An applicant can request that the Commission keep this 
information confidential. See 17 CFR 200.80 and 17 CFR 200.83.
    \301\ 15 U.S.C. 78o-7(k).
    \302\ Id.
---------------------------------------------------------------------------

    First, Section 15E(d) of the Exchange Act provides that the 
Commission shall, by order, censure, place limitations on the 
activities, functions or operations of, suspend for a period not 
exceeding 12 months, or revoke the registration of an NRSRO if, among 
other things, the NRSRO fails to maintain adequate financial and 
managerial resources to consistently produce credit ratings with 
integrity.\303\ The financial reports will assist the Commission in 
monitoring the NRSRO's financial resources and the resources it commits 
to management to evaluate whether the Commission must take action under 
Section 15E(d) of the Exchange Act.\304\
---------------------------------------------------------------------------

    \303\ 15 U.S.C. 78o-7(d).
    \304\ Id.
---------------------------------------------------------------------------

    Second, Section 15E(b)(1) of the Exchange Act requires an NRSRO to 
promptly amend its application for registration, as prescribed in that 
section, if any information or document provided in the application 
becomes materially inaccurate.\305\ Form NRSRO requires the following 
financial information: a list of large customers in terms of net 
revenues; audited financial statements; information about revenues; and 
information about credit analyst compensation. This information is 
required to be as of, or for, the NRSRO's previous fiscal year. 
Accordingly, the information only will become materially inaccurate 
and, therefore, be required to be updated on an annual basis. In 
addition, the information will be submitted with Form NRSRO on a 
confidential basis to the extent permitted by law \306\ and will not 
have to be made publicly available pursuant to Section 15E(a)(3) of the 
Exchange Act \307\ and Rule 17g-1(i) thereunder. Therefore, because the 
information only will be disclosed to the Commission, it is more 
appropriate to require that it be updated through the Commission's 
authority under Section 15E(k) of the Exchange Act and Rule 17g-3 
thereunder than through annual furnishings of Form NRSRO.\308\
---------------------------------------------------------------------------

    \305\ 15 U.S.C. 78o-7(b)(1).
    \306\ An applicant can request that the Commission keep this 
information confidential. See 17 CFR 200.80 and 17 CFR 200.83.
    \307\ 15 U.S.C. 78o-7(a)(3).
    \308\ The Commission notes that some NRSROs may have fiscal year 
ends that are not on December 31. Therefore, if the Commission 
required that this financial information be updated through 
furnishing Form NRSROs, these entities would not be able to furnish 
the update with their annual certifications, which--pursuant to 
Section 15E(b)(2) of the Exchange Act (15 U.S.C. 78o-7(b)(2))--must 
be furnished on a calendar year basis.
---------------------------------------------------------------------------

    After consideration of the comments, Rule 17g-3 has been modified 
in several ways. In particular, the rule has been restructured to 
prescribe that the audit requirement only applies to the financial 
statements. The proposed schedules to the financial statements are now 
separate financial reports that are not required to be audited. For the 
reasons discussed above and below, the Commission believes Rule 17g-3, 
as modified, is necessary or appropriate in the public interest or for 
the protection of investors.\309\
---------------------------------------------------------------------------

    \309\ See 15 U.S.C. 78o-7(k).
---------------------------------------------------------------------------

1. Paragraph (a) to Rule 17g-3
    As adopted, paragraph (a) of Rule 17g-3 requires an NRSRO to 
annually furnish the Commission four, or in some cases five, financial 
reports. The reports must be furnished not more than 90 days after the 
end of the NRSRO's fiscal year and the information in the reports must 
be as of the most recently ended fiscal year. The reports will consist 
substantially of the same information that would have been in the 
financial statements and schedules required under Rule 17g-3, as 
proposed. The Commission received numerous comments requesting that the 
proposed schedules to the audited financial

[[Page 33591]]

statements not be subject to the audit requirement.\310\ The comments 
stated generally that obtaining an audit of the information in the 
proposed schedules would be difficult and unduly expensive. After 
consideration of these comments, the Commission has modified Rule 17g-3 
to eliminate the requirement that the information that would have been 
provided in the schedules be audited. This will lessen the burden of 
preparing the information for submission to the Commission. Moreover, 
Rule 17g-3 no longer requires that this information be submitted in 
schedules to the NRSRO's financial statements. Instead, the information 
must be furnished in separate financial reports. This is intended to 
clarify that the independent auditor that certifies the NRSRO's 
financial statements is not required to include the other unaudited 
financial reports in the opinion covering the financial statements.
---------------------------------------------------------------------------

    \310\ See DBRS Letter; A.M. Best Letter; Fitch Letter; AEI 
Letter; Moody's Letter.
---------------------------------------------------------------------------

    As noted above, Rule 17g-3 requires that the financial reports be 
furnished within 90 days after the end of the NRSRO's fiscal year. One 
commenter requested that the period be lengthened to 120 days for non-
resident NRSROs.\311\ The Commission notes that paragraph (c) of Rule 
17g-3 provides a mechanism for an NRSRO to seek an extension of the 
time to furnish the financial reports. An NRSRO that cannot provide its 
financial reports within 90 days will be able to request an extension 
under this provision. Therefore, the Commission does not believe it is 
necessary to create a different standard for non-resident NRSROs, 
particularly since Rule 17g-3 has been modified to make the preparation 
of the financial reports less burdensome.
---------------------------------------------------------------------------

    \311\ See R&I Letter.
---------------------------------------------------------------------------

a. Paragraph (a)(1): Audited Financial Statements
    The first report, required under paragraph (a)(1) of Rule 17g-3, 
must contain audited financial statements of the NRSRO. Rule 17g-3, as 
proposed, also required the submission of audited financial statements 
and, as noted above, certain schedules to the financial statements. The 
schedules are now separate financial reports that are not required to 
be audited. Two commenters stated that an NRSRO that is a separately 
identifiable department or division of a public company should be 
permitted to furnish audited financial statements of its parent.\312\ 
As noted above with respect to Exhibit 11, the Commission believes 
that, in this case, the financial statements of the parent provide 
information from which it can assess the financial resources of the 
NRSRO. The Commission believes, however, that certain financial 
information about the NRSRO must be furnished as well. For these 
reasons, the rule has been modified to permit an NRSRO to furnish 
audited consolidated financial statements of its parent; however, the 
NRSRO also will have to furnish unaudited consolidating financial 
statements under paragraph (a)(2) of Rule 17g-3 discussed below.
---------------------------------------------------------------------------

    \312\ See S&P Letter; Moody's Letter.
---------------------------------------------------------------------------

    The audited financial statements must include a balance sheet, an 
income statement and statement of cash flows, and a statement of 
changes in ownership equity. They must be prepared in accordance with 
generally accepted accounting principles in the jurisdiction where the 
NRSRO or its parent is incorporated, organized, or has its principal 
office. Finally, the audited financial statements must be certified by 
an accountant who is qualified and independent in accordance with 17 
CFR 240.210.2-01(a), (b), and (c)(1), (2), (3), (4), (5) and (8). In 
addition, the accountant must give an opinion on the financial 
statements in accordance with 17 CFR 210.2-02(a), (b), (c) and (d). The 
first financial report is how an NRSRO will update the information 
initially provided in Exhibit 11 of Form NRSRO.
    The requirement to have the financial statements audited will 
provide the Commission with an independent verification that the 
information in them is presented fairly, in all material respects. The 
Commission received numerous comments on these audit requirements. 
Several commenters stated that non-resident NRSROs should be permitted 
to provide financial statements prepared in accordance with generally 
accepted accounting principles of the jurisdiction where the NRSRO is 
incorporated or has its principal place of business.\313\ The 
commenters stated that preparing them according U.S. generally accepted 
accounting principles could be very expensive.\314\ Similarly, several 
commenters stated that complying with certain provisions of Regulation 
S-X (17 CFR 210.1-01--12-29) would be unduly burdensome for non-
resident NRSROs and non-reporting companies.\315\
---------------------------------------------------------------------------

    \313\ See Letter dated March 12, 2007 from Makoto Utsumi, 
President & CEO, Japan Credit Rating Agency, Ltd. (``JCR Letter''); 
R&I Letter; DBRS Letter.
    \314\ Id.
    \315\ See JCR Letter; R&I Letter; DBRS Letter; Fitch Letter.
---------------------------------------------------------------------------

    The Commission notes that the financial statements will be prepared 
to assist the Commission in carrying out its oversight responsibilities 
with respect to monitoring the financial resources of NRSROs and not as 
a disclosure item for public consumption. The Commission staff will 
have the opportunity to discuss the financial statements with a non-
resident NRSRO to gain an understanding of any material divergences 
from U.S. generally accepted accounting principles. Accordingly, the 
Commission believes that it is appropriate to permit the financial 
statements to be prepared in accordance with generally accepted 
accounting principles in the jurisdiction where the NRSRO or its parent 
is incorporated, organized, or has its principal office. This will 
lessen the burden for non-resident NRSROs and still provide the 
Commission with the financial information necessary to carry out its 
oversight responsibilities.
    For these reasons, the Commission also agrees that applying many 
provisions of Regulation S-X would be unnecessary and, therefore, has 
eliminated most of this requirement from the rule. The Commission does 
believe that certain provisions of Regulation S-X relating to the 
qualifications and independence of the auditor and the auditor's 
attestation and the scope of the auditor's opinion are appropriate for 
all NRSROs, including non-residents and non-public companies. 
Consequently, Rule 17g-2, as adopted, eliminates the proposed 
requirement to comply with all the provisions of Regulation S-X. 
Instead, the rule requires the auditor to be qualified and independent 
in accordance with 17 CFR 240.210.2-01(a), (b), and (c)(1), (2), (3), 
(4), (5) and (8).\316\ These provisions are designed to ensure that 
auditors are independent of their audit clients.\317\ In addition, the 
accountant must give an opinion on the financial statements in 
accordance with 17 CFR 210.2-02(a), (b), (c) and (d). The retained 
provisions of Regulation S-X are appropriate for any audit as they 
relate to general standards of competence, independence, and audit work 
and are not specifically designed for public companies. Accordingly, 
the audited financial statements in Rule 17g-3 must be prepared in 
accordance with them.
---------------------------------------------------------------------------

    \316\ The Commission notes NRSROs that furnish consolidated 
audited financial statements of parents that are public companies 
should furnish those statements as they are prepared in accordance 
with all applicable reporting requirements for public companies, 
which may include adhering to all provisions of Regulation S-X.
    \317\ See Final Rule: Strengthening the Commission's Rules 
Regarding Auditor Independence, Securities Act Release No. 8183 
(January 28, 2003), 68 FR 6005 (February 5, 2003).

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[[Page 33592]]

    As noted with respect to Exhibit 11, two commenters also requested 
that the proposed rule be modified to permit an NRSRO to furnish a tax 
return prepared by an accountant in lieu of audited financial 
statements.\318\ One of the commenters suggested that this lesser 
requirement only apply to smaller entities (less than $5 to $10 million 
in asset size) and could be augmented with a requirement to include 
with the tax return a balance sheet and income statement signed by an 
accountant.\319\
---------------------------------------------------------------------------

    \318\ See EJR Letter; LACE Letter.
    \319\ See LACE Letter.
---------------------------------------------------------------------------

    As discussed with respect to Exhibit 11, the Commission does not 
believe a tax return will provide sufficient information. Further, the 
Commission notes that the financial responsibility rules for broker-
dealers require audited financial statements for small broker-dealers 
with a minimum capital requirement of $5,000.\320\ The accountants 
performing an audit of a small NRSRO will tailor the audit and audit 
report to the size and complexity of the entity's business. This will 
keep costs for smaller NRSROs lower. This is especially true in light 
of the changes discussed above with respect to eliminating requirements 
with respect to Regulation S-X and the proposed requirement that the 
information proposed for the schedules be audited. Moreover, in 
response to the second commenter, it is unclear to the Commission in 
what capacity an accountant would sign financial statements short of 
performing an audit of them. For the purposes of Rule 17g-3, the 
Commission believes that the only appropriate review of the financial 
statements is an audit by an independent accountant. The audit, as 
noted above, is designed to provide a reasonable level of assurance 
that the financial statements are free of material misstatement.
---------------------------------------------------------------------------

    \320\ See 17 CFR 240.17a-5.
---------------------------------------------------------------------------

    The Commission believes that the annual audit will be integral to 
its ability to effectively monitor the financial resources of an NRSRO 
as required under Section 15E(d) of the Exchange Act, since it provides 
an independent verification of an NRSRO's financial condition. For 
these reasons, Rule 17g-3, as adopted, requires audited financial 
statements on an annual basis.\321\
---------------------------------------------------------------------------

    \321\ 15 U.S.C. 78o-7(d).
---------------------------------------------------------------------------

    Finally, one commenter suggested that the requirement that the 
audited financial statements be ``certified'' by the accountant is 
inconsistent with accounting practice because financial statements are 
either ``audited'' or ``certified.'' \322\ The Commission notes that 
the authority to require that an auditor ``certify'' the audited 
financial statements is set forth in Section 15E(k) of the Exchange 
Act.\323\ Moreover, this provision is consistent with other Commission 
financial reporting requirements.\324\ Consequently, the final rule 
retains the provision.
---------------------------------------------------------------------------

    \322\ See DBRS Letter.
    \323\ 15 U.S.C. 78o-7(k).
    \324\ See, e.g., Section 13(a) of the Exchange Act (15 U.S.C. 
78m(a)) and the rules thereunder; Section 17 of the Exchange Act (15 
U.S.C. 78q).
---------------------------------------------------------------------------

b. Paragraph (a)(2): Consolidating Financial Statements
    As adopted, paragraph (a)(2) of Rule 17g-3 requires an NRSRO 
furnishing audited consolidated financial statements of its parent to 
furnish a second report containing unaudited consolidating financial 
statements of its parent that include the NRSRO. This will provide the 
Commission with information about the financial condition of the NRSRO 
as distinct from the financial condition of its parent. One commenter 
requested that this information not be subject to the audit requirement 
if the audited consolidated statements include operating segment 
reporting in accordance with Regulation S-X.\325\ As noted above, this 
financial report is not required to be audited.
---------------------------------------------------------------------------

    \325\ See Moody's Letter.
---------------------------------------------------------------------------

c. Paragraph (a)(3): Revenue Information
    The third report, required under paragraph (a)(3) of Rule 17g-3, 
must contain the following unaudited information about the NRSRO's 
revenues: (1) Revenue from determining and maintaining credit ratings; 
(2) revenue from subscribers; (3) revenue from granting licenses or 
rights to publish credit ratings; and (4) revenue from all other 
services and products offered by the NRSRO. This financial report will 
be how an NRSRO updates the information initially provided in Exhibit 
12 to Form NRSRO. This information would have been required in the 
first schedule to the financial statements required under Rule 17g-3, 
as proposed.
    This information will augment the audited financial statements by 
providing detail as to the revenues generated specifically from credit 
rating services. The revenue information will assist the Commission in 
monitoring whether an NRSRO maintains adequate financial resources to 
consistently produce credit ratings with integrity.\326\ As discussed 
with respect to Exhibit 12, one commenter requested the elimination of 
a requirement in the proposed rule to separately report revenues from 
determining private credit ratings (i.e., credit ratings that are not 
made readily accessible to the public).\327\ The commenter stated that 
it would be difficult to separate private ratings revenue from public 
ratings revenue. The Commission agrees and the requirement to 
separately itemize private ratings revenue has been eliminated. This 
revenue must be included in the revenue item for determining or 
maintaining credit ratings.
---------------------------------------------------------------------------

    \326\ 15 U.S.C. 78o-7(d).
    \327\ See Fitch Letter.
---------------------------------------------------------------------------

    The Commission is adopting this provision with the modifications 
discussed above.
d. Paragraph (a)(4): Credit Analyst Compensation
    The fourth report, required under paragraph (a)(4) of Rule 17g-3, 
must contain the total aggregate and median annual compensation of the 
NRSRO's credit analysts. The information in this report is not required 
to be audited. This financial report will be how an NRSRO updates the 
information initially provided in Exhibit 13 to Form NRSRO. This 
information would have been required in the second schedule to the 
financial statements required under Rule 17g-3, as proposed.
    The information on analyst compensation will augment the audited 
financial statements by providing detail as to expenses necessary to 
retain the credit rating agency's credit analysts. This information 
collectively will assist the Commission in monitoring whether an NRSRO 
maintains adequate financial resources to consistently produce credit 
ratings with integrity.\328\ As discussed with respect to Exhibit 13, 
one commenter requested that the Commission clarify how an NRSRO should 
treat deferred compensation.\329\ The Commission believes an NRSRO 
should have the flexibility to include or exclude deferred compensation 
in making the calculation. If deferred compensation is excluded, the 
rule requires the NRSRO to make a note of that fact in the financial 
report. The Commission also believes that an NRSRO must be consistent 
in its approach of either including or excluding deferred compensation.
---------------------------------------------------------------------------

    \328\ 15 U.S.C. 78o-7(d).
    \329\ See Fitch Letter.
---------------------------------------------------------------------------

    The Commission is adopting this provision with the modifications 
discussed above.

[[Page 33593]]

e. Paragraph (a)(5): List of Large Customers
    The fifth report, required under paragraph (a)(5) of Rule 17g-3, 
must contain a list of the NRSRO's 20 largest issuer and subscriber 
customers in terms of net revenue earned from the customers and, 
include in the list, any obligor or underwriter customers that are as 
large as or larger than the 20th largest issuer or subscriber customer. 
The information in this report is not required to be audited. This 
financial report will be the mechanism that an NRSRO uses to update the 
information initially provided in Exhibit 10 to Form NRSRO. This 
information would have been required in the third schedule to the 
financial statements required under Rule 17g-3, as proposed.
    The largest customers will be determined applying the same 
definitions of ``net revenues'' and ``credit rating services'' used for 
Exhibit 10, including the changes to those definitions discussed above 
with respect to Exhibit 10. In addition, just as with Exhibit 10, 
obligor and underwriter customers must be added to the list to the 
extent they are as large as, or larger than, the 20th largest issuer or 
subscriber customer.
    The list will assist the Commission in identifying conflicts 
arising from any influence a person may have on the NRSRO given the 
amount of revenue the person provides the credit rating agency.
2. Paragraph (b) of Rule 17g-3
    Paragraph (b) of Rule 17g-3 requires that the NRSRO attach to each 
financial report provided under paragraph (a) a statement by a duly 
authorized person of the NRSRO that the information in the report 
presents fairly, in all material respects and as applicable, the 
financial condition, results of operations, income, cash flows, 
revenues, and analyst compensation of the NRSRO. This information will 
provide a level of assurance that the information in the financial 
reports has been reviewed by the NRSRO. Further, the requirement 
parallels Commission Rule 17a-5(e)(2), which requires a duly authorized 
officer of a broker-dealer (or, in the case of a general partnership, 
the general partner) to attach an oath or affirmation stating the 
financial statements and schedules required under that rule are true 
and correct.\330\ This requirement was proposed in paragraph (c) of 
Rule 17g-3.
---------------------------------------------------------------------------

    \330\ 17 CFR 240.17a-5(e)(2).
---------------------------------------------------------------------------

    One commenter suggested that the Commission eliminate this 
requirement because it was unnecessary given the NRSRO's legal exposure 
for furnishing an inaccurate report.\331\ The commenter stated that the 
requirement could dissuade a credit rating agency from registering with 
the Commission. The Commission believes it is important that a person 
within the NRSRO be responsible for reviewing the information in the 
financial reports and stating that they are a fair representation of 
its financial condition, results of operations, income, cash flows, 
revenues, and analyst compensation. This provision is designed to 
enhance the accuracy of these reports insomuch as the individual within 
the NRSRO will perform some level of due diligence before executing the 
statements. Moreover, since only the information in the first financial 
report will be audited, the Commission believes a person within the 
NRSRO must be responsible for the information in all the reports. For 
these reasons, the Commission is retaining the requirement in the final 
rule.
---------------------------------------------------------------------------

    \331\ See A.M. Best Letter.
---------------------------------------------------------------------------

3. Paragraph (c) of Rule 17g-3
    Paragraph (c) of Rule 17g-3 provides that the Commission may grant 
an extension of time or exemption from any requirements in the rule 
either unconditionally or on specified terms and conditions on the 
written request of an NRSRO, if the Commission finds that such 
extension or exemption is necessary or appropriate in the public 
interest, and is consistent with the protection of investors. This 
provision was proposed in paragraph (d) of Rule 17g-3. The Commission 
did not receive any comments on this provision and is adopting it 
substantially as proposed.

E. Rule 17g-4--Procedures To Prevent the Misuse of Material, Nonpublic 
Information

    Rule 17g-4 will require an NRSRO to establish procedures to address 
three areas where material, nonpublic information could be 
inappropriately disclosed or used. Section 15E(g)(1) of the Exchange 
Act \332\ requires an NRSRO to establish, maintain, and enforce written 
policies and procedures reasonably designed to prevent the misuse of 
material, nonpublic information in violation of the Exchange Act.\333\ 
Section 15E(g)(2) of the Exchange Act provides that the Commission 
shall adopt rules requiring an NRSRO to establish specific policies and 
procedures reasonably designed to prevent the misuse of material, 
nonpublic information.\334\
---------------------------------------------------------------------------

    \332\ 15 U.S.C. 78o-7(g)(1).
    \333\ 15 U.S.C. 78a et seq.
    \334\ 15 U.S.C. 78o-7(g)(2).
---------------------------------------------------------------------------

1. Paragraph (a)(1) of Rule 17g-4
    Paragraph (a)(1) of Rule 17g-4 requires procedures reasonably 
designed to prevent the inappropriate dissemination within and outside 
the NRSRO of material nonpublic information obtained for the purpose of 
developing a credit rating. Some credit rating agencies, as part of 
their analysis, contact senior management of the obligors and issuers 
subject to their credit ratings. In the course of these contacts, an 
issuer or obligor may provide the credit rating agency with nonpublic 
information including contemplated business transactions or estimated 
financial projections.\335\ Credit rating agencies have commented that 
this confidential information greatly assists them in issuing credible 
and reliable ratings.\336\ In fact, the Commission's Regulation FD, 
which governs the disclosure of material, nonpublic information by 
issuers, contains an exception that permits issuers to intentionally 
disclose such information to a credit rating agency without making a 
simultaneous public disclosure of the information.\337\ The selective 
disclosure to the credit rating agency, however, must be solely for the 
purpose of developing a publicly available credit rating.\338\
---------------------------------------------------------------------------

    \335\ See Proposed Rule: Definition of Nationally Recognized 
Statistical Rating Organization, Securities Act Release No. 8570 
(April 19, 2005), 70 FR 21306 (April 25, 2005).
    \336\ Id.
    \337\ See 17 CFR 243.100.
    \338\ 17 CFR 243.100(b)(2)(iii).
---------------------------------------------------------------------------

    One concern that has been raised in the past is that subscribers to 
a credit rating agency's more detailed credit reports also may be 
granted direct access to the credit analysts.\339\ If the credit 
analyst is in possession of material, nonpublic information, there is a 
risk the information may be inappropriately disclosed to the subscriber 
during the course of communications with the credit analyst.\340\
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    \339\ See Commission 2003 CRA Report and Commission 2003 Concept 
Release, Securities Act Release No. 8236 (June 4, 2003), 68 FR 35258 
(June 12, 2003), noting the concern raised by some that subscribers 
may have preferential access to credit analysts and, as a result, 
may inappropriately learn material nonpublic information in the 
possession of a credit analyst.
    \340\ Id.
---------------------------------------------------------------------------

    The rule does not prescribe specific procedures that must be 
established. Therefore, NRSROs will have flexibility to develop 
procedures tailored to their organizational structures and business

[[Page 33594]]

models. An NRSRO may have procedures requiring credit analysts to 
receive training in the laws governing the misuse of material, 
nonpublic information; defining the persons within the NRSRO with whom 
the credit analyst can share the information; prohibiting the credit 
analyst from disclosing the information to any other persons; and 
requiring the credit analyst to take steps to safeguard documents 
containing the information. An NRSRO that does not use management 
contacts as part of its methodology for determining credit ratings may 
prohibit credit analysts from contacting rated issuers or obligors.
    The Commission received one comment on this provision.\341\ The 
commenter stated that an NRSRO should be permitted to disclose 
material, nonpublic information in aggregate form (e.g., through usage 
in models) in a manner that does not identify individual issuers.\342\ 
The Commission notes, however, that the rule, by itself, does not 
expressly prohibit any types of disclosures. As discussed above, 
Section 15E(g)(1) of the Exchange Act \343\ requires an NRSRO to 
establish, maintain, and enforce written policies and procedures to 
prevent the misuse of material, nonpublic information in violation of 
the Exchange Act and the rules thereunder.\344\ Rule 17g-4 requires an 
NRSRO to address the inappropriate disclosure of material, nonpublic 
information when establishing these procedures required by statute.
---------------------------------------------------------------------------

    \341\ See S&P Letter.
    \342\ Id.
    \343\ 15 U.S.C. 78o-7(g)(1).
    \344\ 15 U.S.C. 78a et seq.
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting paragraph (a)(1) of 
Rule 17g-4 substantially as proposed.
2. Paragraph (a)(2) of Rule 17g-4
    Paragraph (a)(2) of Rule 17g-4 requires procedures reasonably 
designed to prevent a person within the NRSRO from purchasing, selling, 
or otherwise benefiting from any transaction in securities or money 
market instruments when the person is aware of material, nonpublic 
information obtained for the purpose of developing a credit rating. 
This provision requires an NRSRO to address the risk that individuals 
in possession of material, nonpublic information about an issuer or 
obligor may trade securities or money market instruments on the 
information.\345\
---------------------------------------------------------------------------

    \345\ See, e.g., Commission complaint in Commission v. Rick A. 
Marano, William Marano and Carl Loizzi, 04 CV 5828 (Judge Kimba 
Wood) (S.D.N.Y.); see also Commission Litigation Release No. 18799 
(July 27, 2004).
---------------------------------------------------------------------------

    As with paragraph (a), the provision does not prescribe specific 
procedures that must be established. An NRSRO may have policies 
prohibiting persons within the NRSRO from purchasing or selling a 
security or money market instrument that is subject to a pending credit 
rating action; requiring persons within the NRSRO to obtain pre-
approval before purchasing or selling a security or money market 
instrument; or requiring persons within the NRSRO to be notified of 
securities or money market instruments that are on a ``do not trade'' 
list.
    The Commission made three modifications to the provision, as 
proposed, to address comments. The Commission believes the commenters 
identified areas where the provision could cause some practical 
difficulties in designing procedures. The changes are designed to 
remove these impediments.
    First, the Commission deleted a reference in the provision to 
members of the household of an NRSRO employee. This change was made in 
response to a comment that it would be difficult to design procedures 
addressing the trading activities of household members since a 
household may include persons that the employee has no influence over, 
such as roommates.\346\ The commenter further noted that procedures 
designed to prevent an employee ``from otherwise benefiting'' from the 
use of material non-public information would cover an employee's 
immediate family members.\347\
---------------------------------------------------------------------------

    \346\ See S&P Letter.
    \347\ Id.
---------------------------------------------------------------------------

    Second, the Commission replaced a reference in the provision to an 
employee ``possess[ing]'' or having ``access'' to material, non-public 
information. The provision, as adopted, refers to an employee being 
``aware'' of material, nonpublic information. This change was made in 
response to a comment that having ``access'' to material, nonpublic 
information could be interpreted very broadly, which would make 
designing procedures to address the issue difficult.\348\ The commenter 
also noted that Commission Rule 10b5-1, which concerns trading on the 
basis of material, nonpublic information in insider trading cases, 
refers to being ``aware'' of material, nonpublic information.\349\
---------------------------------------------------------------------------

    \348\ See Moody's Letter.
    \349\ See 17 CFR 240.10b5-1.
---------------------------------------------------------------------------

    The third modification narrowed the scope of the provision to 
``persons within'' the NRSRO. As proposed, the provision would have 
required procedures designed to prevent persons ``associated'' with the 
NRSRO from trading on material, nonpublic information. A commenter 
stated that this made the provision overly broad since the definition 
of persons ``associated'' with an NRSRO in Section 3(a)(63) of the 
Exchange Act includes employees of affiliates engaged in activities 
wholly unrelated to credit rating services.\350\ Similar to Item 8 of 
Form NRSRO (statutory disclosures) and, as discussed next, Rule 17g-5, 
the Commission is narrowing the scope of this provision to persons 
``within'' the NRSRO. Paragraph (b) of Rule 17g-4 defines a person 
``within'' the NRSRO to mean the NRSRO, its credit rating affiliates 
identified on Form NRSRO, and any partner, officer, director, branch 
manager, and employee of the NRSRO or its credit rating affiliates (or 
any person occupying a similar status or performing similar functions).
---------------------------------------------------------------------------

    \350\ See Moody's Letter.
---------------------------------------------------------------------------

    Finally, a commenter stated that the provision should not apply to 
indirect trading in securities such as through transactions in mutual 
funds.\351\ The Commission notes that the rule by itself does not 
expressly prohibit any types of transactions. As discussed above, 
Section 15E(g)(1) of the Exchange Act \352\ requires an NRSRO to 
establish, maintain, and enforce written policies and procedures to 
prevent the misuse of material, nonpublic information in violation of 
the Exchange Act and the rules thereunder.\353\ Rule 17g-4 requires an 
NRSRO to address the inappropriate use of material, nonpublic 
information when establishing these procedures required by statute.
---------------------------------------------------------------------------

    \351\ See Moody's Letter.
    \352\ 15 U.S.C. 78o-7(g)(1).
    \353\ 15 U.S.C. 78a et seq.
---------------------------------------------------------------------------

    For these reasons, paragraph (a)(2) of Rule 17g-4 is being adopted 
with the modifications described above.
3. Paragraph (a)(3) of Rule 17g-4
    Paragraph (a)(3) of Rule 17g-4 requires procedures reasonably 
designed to prevent the inappropriate dissemination within and outside 
the NRSRO of a credit rating action before issuing the credit rating on 
the Internet or through another readily accessible means. This 
provision recognizes that a credit rating action of an NRSRO may be 
material, nonpublic information. Consequently, an NRSRO must have 
policies designed to ensure that its pending credit rating actions are 
not selectively disclosed before the credit rating is issued on the 
Internet or

[[Page 33595]]

through another readily accessible means.
    As with paragraphs (a)(1) and (a)(2), paragraph (a)(3) does not 
prescribe specific procedures. However, as applicable to the business 
model of the NRSRO, these policies may include procedures designed to 
ensure that a credit rating action is issued in a way that makes it 
readily accessible to the market place, such as posting the credit 
rating or an announcement of the credit rating action on the NRSRO's 
Web site or through a news or information service used by market 
participants or by making it available to all subscribers 
simultaneously. The policies also may include procedures prohibiting 
credit analysts from selectively disclosing the pending action to 
persons outside the NRSRO and to persons inside the NRSRO who do not 
need to know of the pending action.
    At the same time, some credit rating agencies, as part of their 
methodologies for determining credit ratings, will discuss a proposed 
credit rating action with the management of the issuer or obligor being 
rated to solicit their views or provide an opportunity to appeal the 
decision. NRSROs engaging in this practice must have procedures 
reasonably designed to ensure that the discussions with the issuer or 
obligor do not lead to the selective disclosure of the information to 
persons other than those persons within the issuer or obligor who are 
authorized to receive the information.
    For these reasons, the Commission is adopting paragraph (a)(3) of 
Rule 17g-4 substantially as proposed.
4. Paragraph (b) of Rule 17g-4
    As discussed above with respect to paragraph (a)(2) of Rule 17g-4, 
paragraph (b) of Rule 17g-4 contains the definition of a person 
``within'' the NRSRO. The definition narrows the scope of the paragraph 
(a)(2) to persons involved in credit rating activities.

F. Proposed Rule 17g-5--Management of Conflicts of Interest

    Section 15E(h)(1) of the Exchange Act requires an NRSRO to 
establish, maintain, and enforce policies and procedures reasonably 
designed, taking into consideration the nature of its business, to 
address and manage conflicts of interest.\354\ Section 15E(h)(2) of the 
Exchange Act requires the Commission to adopt rules to prohibit or 
require the management and disclosure of conflicts of interest relating 
to the issuance of credit ratings.\355\ The statute also identifies 
certain types of conflicts relating to the issuance of credit ratings 
that the Commission may include in its rules.\356\ It also contains a 
catchall provision for any other potential conflict of interest the 
Commission deems is necessary or appropriate in the public interest or 
for the protection of investors to include in its rules.\357\ Rule 17g-
5 implements these statutory provisions by prohibiting the conflicts 
identified in the statute and certain additional conflicts either 
outright or if the NRSRO has not disclosed them and established 
policies and procedures to manage them.
---------------------------------------------------------------------------

    \354\ 15 U.S.C. 78o-7(h)(1).
    \355\ 15 U.S.C. 78o-7(h)(2).
    \356\ See 15 U.S.C. 78o-7(h)(2)(A)-(D).
    \357\ See 15 U.S.C. 78o-7(h)(2)(E).
---------------------------------------------------------------------------

1. Paragraph (a) of Rule 17g-5
    Paragraph (a) of Rule 17g-5 prohibits a person within an NRSRO from 
having a conflict of interest relating to the issuance of a credit 
rating that is identified in paragraph (b) of the rule unless the NRSRO 
has disclosed the type of conflict of interest in compliance with Rule 
17g-1 (i.e., in Exhibit 6 to Form NRSRO) and has implemented policies 
and procedures to address and manage the type of conflict of interest 
in accordance with Section 15E(h)(1) of the Exchange Act.\358\ 
Paragraph (d) of Rule 17g-5 defines a person within an NRSRO. The 
Commission believes that these prohibitions are appropriate in the 
public interest and for the protection of investors because they are 
designed to ensure that users of credit ratings are made aware of the 
potential conflicts of interest that arise from an NRSRO's business 
activities and that an NRSRO establishes policies and procedures for 
managing the specific conflicts it identifies.
---------------------------------------------------------------------------

    \358\ 15 U.S.C. 78o-7(h)(1).
---------------------------------------------------------------------------

    This provision, as proposed, would have made it ``unlawful'' for an 
NRSRO to have a conflict in these circumstances. As adopted, paragraph 
(a) ``prohibits'' an NRSRO from having the conflict. The Commission 
adopted this change to make the rule text more consistent with the 
Section 15E(h)(2) of the Exchange Act, which provides the Commission 
with authority to ``prohibit, or require the management and disclosure 
of'' conflicts of interest.\359\
---------------------------------------------------------------------------

    \359\ 15 U.S.C. 78o-7(h)(2); see also R&I Letter.
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting paragraph (a) of Rule 
17g-5 substantially as proposed with the modification described above.
2. Paragraph (b) of Rule 17g-5
    The types of conflicts identified in paragraph (b) of Rule 17g-5 
are the same conflicts listed in the instructions to Exhibit 6 of Form 
NRSRO.\360\ These are the types of conflicts that commonly arise from 
the business of providing credit rating services. Prohibiting these 
types of conflicts outright may adversely impact the ability of an 
NRSRO to operate as a credit rating agency. Nonetheless, the conflicts 
must be managed through policies and procedures and disclosed so that 
users of the credit ratings can assess whether the conflict impacts the 
NRSRO's judgment.
---------------------------------------------------------------------------

    \360\ See DBRS Letter proposing that the conflicts identified in 
Exhibit 6 and Rule 17g-5 better track one another.
---------------------------------------------------------------------------

    Paragraph (b), as adopted, has been restructured from the proposed 
version of the rule. For example, certain conflicts are now identified 
in separate paragraphs as opposed to a single paragraph.\361\ The 
Commission's intent is to provide greater clarity to the descriptions 
of the types of conflicts and, as noted above, to have them track the 
conflicts described in Exhibit 6 to Form NRSRO. As discussed below, the 
conflicts identified in paragraph (b) of Rule 17g-5 are substantially 
the same conflicts identified in the paragraph as proposed; though they 
have been refined to address comments. The one exception is the 
conflict identified in paragraph (b)(5) of Rule 17g-5, which--as 
discussed below--the Commission added in response to a comment 
identifying it as a potential conflict.
---------------------------------------------------------------------------

    \361\ For example, the conflicts identified in paragraphs 
(b)(1), (2) and (3) were all identified in paragraph (b)(1) of the 
proposed rule.
---------------------------------------------------------------------------

a. Paragraph (b)(1) Rule 17g-5
    The conflict identified in paragraph (b)(1) of Rule 17g-5 involves 
being paid by an issuer or underwriter to determine credit ratings with 
respect to securities or money market instruments they issue or 
underwrite. The Commission believes the inclusion of this conflict in 
the rule is necessary or appropriate in the public interest or for the 
protection of investors. The concern is that an NRSRO may be influenced 
to issue a more favorable credit rating than warranted in order to 
obtain or retain the business of the issuer or underwriter. The 
Commission did not receive any comments on prohibiting this type of 
conflict unless it is disclosed and managed as required pursuant to 
Section 15E of the Exchange Act \362\ and Rule 17g-1 and is adopting 
the requirement substantially as proposed.
---------------------------------------------------------------------------

    \362\ 15 U.S.C. 78o-7.

---------------------------------------------------------------------------

[[Page 33596]]

b. Paragraph (b)(2) of Rule 17g-5
    The conflict identified in paragraph (b)(2) of Rule 17g-5 involves 
being paid by an obligor to determine a credit rating of the obligor as 
an entity. This conflict is identified in Section 15E(h)(2)(A) of the 
Exchange Act.\363\ This business practice raises the same concerns as 
being paid by an issuer or underwriter to determine a credit rating on 
a security or money market instrument. The Commission did not receive 
any comments on prohibiting this type of conflict unless it is 
disclosed and managed as required pursuant to Section 15E of the 
Exchange Act \364\ and Rule 17g-1 and is adopting the requirement 
substantially as proposed.
---------------------------------------------------------------------------

    \363\ 15 U.S.C. 78o-7(h)(2)(A).
    \364\ 15 U.S.C. 78o-7.
---------------------------------------------------------------------------

c. Paragraph (b)(3) of Rule 17g-5
    The conflict identified in paragraph (b)(3) of Rule 17g-5 involves 
being paid by issuers, underwriters, or obligors for ancillary services 
when they also have paid for a credit rating. This conflict as it 
relates to obligors is identified in Section 15E(h)(2)(B) of the 
Exchange Act.\365\ The Commission believes the inclusion of this 
conflict in the rule as it relates to issuers and underwriters is 
necessary or appropriate in the public interest or for the protection 
of investors. The concern with respect to all of these types of 
entities is that the NRSRO may issue a more favorable than warranted 
credit rating in order to obtain business from them for the ancillary 
services.\366\ The Commission did not receive any comments on the 
requirement that this type of conflict be prohibited unless it is 
disclosed and managed as required pursuant to Section 15E of the 
Exchange Act \367\ and Rule 17g-1 and is adopting the requirement 
substantially as proposed.
---------------------------------------------------------------------------

    \365\ 15 U.S.C. 78o-7(h)(2)(B).
    \366\ See Commission 2003 CRA Report noting concerns of some 
that conflicts in this area could become much greater if these 
ancillary services were to become a substantial portion of an 
NRSRO's business. See also Commission 2003 CRA Concept Release, 
Securities Act Release No. 8236 (June 4, 2003), 68 FR 35258 (June 
12, 2003), noting concerns of some that greater concerns about 
conflicts of interest that arise when a credit rating agency offers 
consulting or other advisory services to issuers it rates.
    \367\ 15 U.S.C. 78o-7.
---------------------------------------------------------------------------

d. Paragraph (b)(4) of Rule 17g-5
    The conflict identified in paragraph (b)(4) of Rule 17g-5 involves 
being paid by subscribers for access to credit ratings and for other 
credit ratings services where such subscribers may use the credit 
ratings to comply with, and obtain benefits or relief under, statutes 
and regulations using the term ``nationally recognized statistical 
rating organization.'' The Commission believes the inclusion of this 
conflict in the rule is necessary or appropriate in the public interest 
or for the protection of investors. The concern is that a subscriber 
potentially could be subject to one or more of these statutes and 
regulations and, consequently, benefit depending on how the NRSRO rates 
the subscriber, or securities held or issued by the subscriber. A 
broker-dealer subscriber holding debt securities is able to apply lower 
haircuts when computing its net capital under Exchange Act Rule 15c3-1 
if the securities are rated investment grade by two NRSROs.\368\ 
Broker-dealers frequently subscribe to receive credit analysis or other 
services from credit rating agencies.
---------------------------------------------------------------------------

    \368\ See 17 CFR 240.15c3-1(c)(2)(vi)(E), (F), and (H).
---------------------------------------------------------------------------

    As noted with respect to Exhibit 6 to Form NRSRO, several 
commenters raised a concern with the identification of this conflict 
because, as proposed, it could have been construed to require an NRSRO 
to affirmatively ascertain whether, and how, its subscribers were using 
its credit ratings.\369\ For this reason, the Commission has modified 
the description in Exhibit 6 and Rule 17g-5 to make it generally 
applicable to any subscriber, since any subscriber potentially could be 
a user of credit ratings for regulatory purposes. Consequently, an 
NRSRO that has subscribers will be required to make the disclosure in 
Exhibit 6 and have a policy and procedure to address the conflict.
---------------------------------------------------------------------------

    \369\ See DBRS Letter; S&P Letter; Moody's Letter.
---------------------------------------------------------------------------

    The Commission notes, however, that Rule 17g-5 does not prescribe 
any specific policies and procedures to address conflicts of interest. 
The Commission does not expect that an NRSRO will be required to 
affirmatively ascertain whether, and how, its subscribers were using 
its credit ratings to manage this conflict. General policies and 
procedures designed to keep persons within the NRSRO who participate in 
the determination of credit ratings free of the undue influence of all 
persons who pay the NRSRO for credit rating services (e.g., issuers, 
underwriters, obligors, and subscribers) will be a way of addressing 
this conflict.
    For these reasons, the Commission is adopting the requirement with 
the modifications discussed above.
e. Paragraph (b)(5) of Rule 17g-5
    The conflict identified in paragraph (b)(5) of Rule 17g-5 involves 
being paid by subscribers that also may own investments or have entered 
into transactions that could be favorably or adversely impacted by a 
credit rating issued by the nationally recognized statistical rating 
organization. As discussed with respect to Exhibit 6, this conflict was 
added in response to a commenter who pointed out that subscribers who 
manage investment portfolios also may have interests in a particular 
credit rating.\370\ The Commission believes the inclusion of this 
conflict in the rule is necessary or appropriate in the public interest 
or for the protection of investors. The Commission believes the 
commenter identified a conflict that should be disclosed and managed 
because certain large investors that may derive benefits from the 
issuance of a particular credit rating could provide a credit rating 
agency with substantial revenues for credit rating services. As with 
potential regulatory users, the Commission does not expect that an 
NRSRO will be required to affirmatively ascertain how the investment 
portfolios of its subscribers would be impacted by a pending credit 
rating. General policies and procedures designed to keep persons within 
the NRSRO who participate in the determination of credit ratings free 
of the undue influence of clients will be a way of addressing this 
conflict.
---------------------------------------------------------------------------

    \370\ See DBRS Letter.
---------------------------------------------------------------------------

    For these reasons, the Commission is adding this conflict to the 
conflicts identified in paragraph (b) of Rule 17g-5.
f. Paragraph (b)(6) of Rule 17g-5
    The conflict identified in paragraph (b)(6) of Rule 17g-5 involves 
allowing persons within the NRSRO to own directly securities or money 
market instruments of, or having any other direct ownership interests 
in, issuers or obligors subject to a credit rating determined by the 
NRSRO.\371\ This conflict as it relates to obligors is identified in 
Section 15E(h)(2)(C) of the Exchange Act.\372\ The Commission believes 
the inclusion of this conflict in the rule as it relates to issuers is 
necessary or appropriate in the public interest or for the protection 
of

[[Page 33597]]

investors. The concern is that allowing persons within the NRSRO, even 
if they are not directly involved in determining the credit rating, to 
own securities of an issuer or obligor subject to a credit rating could 
lead to situations where they seek to influence a credit analyst to 
issue a credit rating favorable to their trading position.\373\ For 
example, a manager or supervisor may be in a position to exert undue 
influence on a credit analyst.
---------------------------------------------------------------------------

    \371\ See Proposed Rule: Definition of Nationally Recognized 
Statistical Rating Organization, Securities Act Release No. 8570 
(April 19, 2005), 70 FR 21306 (April 25, 2005), which noted that 
conflicts may arise when a person associated with a credit rating 
agency also is associated with, or has an interest in, an issuer 
that is being rated.
    \372\ 15 U.S.C. 78o-7(h)(2)(C).
    \373\ As discussed below, the NRSRO and a person within the 
NRSRO who participated in the determination of a credit rating is 
prohibited from having this conflict under paragraph (c) of Rule 
17g-5.
---------------------------------------------------------------------------

    The Commission, however, does not believe this conflict should be 
prohibited for employees that have no involvement in determining or 
approving the credit rating. They should be able to own securities or 
money market instruments of an issuer or obligor subject to a credit 
rating issued by the NRSRO, provided the practice is disclosed and 
managed.\374\ A prohibition against owning any rated securities may be 
a particular hardship for the employees of an NRSRO that issues credit 
ratings with respect to most public companies.
---------------------------------------------------------------------------

    \374\ Cf. 17 CFR 275.204A-1(e)(1) (defining ``access person'' 
for purposes of requiring investment advisers to establish 
procedures requiring access persons to report their personal 
securities holdings).
---------------------------------------------------------------------------

    The Commission has modified the description of the conflict so it 
now involves ``allowing'' persons within the NRSRO to have these 
ownership interests. This is intended to clarify that the conflict does 
not arise only when these persons actually have such an ownership 
interest. This distinction is intended to simplify the rule. 
Specifically, as proposed, the rule could have been construed as 
requiring an NRSRO to affirmatively determine if, and when, an employee 
purchased a rated security. The rule, as adopted, only requires the 
NRSRO to disclose that it allows persons within the NRSRO to have these 
direct ownership interests in rated securities.
    Finally, two commenters noted that indirect ownership of rated 
securities--such as through mutual funds and blind trusts--should not 
be within the scope of the provision.\375\ The Commission believes that 
indirect ownership of rated securities by employees does not present 
the same concerns as direct ownership, since an indirect ownership 
interest implies the investor does not have control over the decision 
to purchase or sell a specific security. Therefore, the provision 
specifically references ``direct'' ownership. The Commission also 
believes that an NRSRO must have flexibility to define through its 
policies and procedures when an ownership interest would not be 
``direct'' for the purposes of this provision.
---------------------------------------------------------------------------

    \375\ See, e.g., S&P Letter; JCR 2nd Letter.
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting the requirement with 
the modifications described above.
g. Paragraph (b)(7) of Rule 17g-5
    The conflict identified in paragraph (b)(7) of Rule 17g-5 involves 
allowing persons within the NRSRO to have a business relationship that 
is more than an ordinary course business relationship with an issuer or 
obligor subject to a credit rating determined by the NRSRO. This 
conflict as it relates to obligors is identified in Section 
15E(h)(2)(C) of the Exchange Act.\376\ The Commission believes the 
inclusion of this conflict in the rule as it relates to issuers is 
necessary or appropriate in the public interest or for the protection 
of investors. The concern is that persons within the NRSRO having these 
types of business relationships may be influenced to determine a 
favorable credit rating for the entity based on the business 
relationship or exert improper influence on credit analysts to 
determine a favorable credit rating. The Commission believes an NRSRO 
should be required to disclose that it allows these types of 
relationships and be required to have policies and procedures to manage 
them. Otherwise, the conflicts should be prohibited.
---------------------------------------------------------------------------

    \376\ 15 U.S.C. 78o-7(h)(2)(C).
---------------------------------------------------------------------------

    The Commission notes that in the case of a credit analyst it may be 
difficult to remain impartial with respect to an issuer or obligor 
where the credit analyst has a non-ordinary course business 
relationship with the entity. For example, in the case where the issuer 
or obligor extends a loan to the credit analyst that has an interest 
rate far below market rates. However, the Commission believes that 
NRSROs should have flexibility in designing policies and procedures to 
address these types of conflicts, in part, because of the difficulty of 
defining when a business relationship creates too much potential for a 
loss of impartiality on behalf of the credit analyst or person within 
the NRSRO. Consequently, the Commission is not prohibiting these 
conflicts outright.
    The Commission is modifying the provision to clarify that it does 
not apply to ordinary course business relationships such as arms length 
mortgage loans and bank and credit card accounts. Commenters stated 
that these types of business relationships do not raise conflict of 
interest concerns.\377\ The Commission agrees that, for example, a 
credit analyst likely would not be influenced to issue a favorable 
credit rating simply because the analyst has a bank account at the 
rated entity. Examples of a non-ordinary course business relationship 
would be an employee entering into a joint business venture with a 
rated obligor or, as noted above, obtaining a loan from an obligor with 
an interest rate far below market rates.
---------------------------------------------------------------------------

    \377\ See, e.g., Moody's Letter.
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting the requirement with 
the modifications discussed above.
h. Paragraph (b)(8) of Rule 17g-5
    The conflict identified in paragraph (b)(8) of Rule 17g-5 involves 
having a person associated with the NRSRO that is a broker or dealer 
engaged in the business of underwriting securities or money market 
instruments. This type of conflict is identified in Section 
15E(h)(2)(D) of the Exchange Act.\378\ The Commission believes the 
inclusion of this conflict in the rule is necessary or appropriate in 
the public interest or for the protection of investors. As the 
Commission discussed with respect to Exhibit 6 of Form NRSRO, an 
affiliation with a broker or dealer that is in the business of 
underwriting securities would raise concerns that the NRSRO might be 
influenced by the affiliation to issue favorable credit ratings for 
these securities.
---------------------------------------------------------------------------

    \378\ 15 U.S.C. 78o-7(h)(2)(D).
---------------------------------------------------------------------------

    This requirement was in paragraph (b)(5) of Rule 17g-5, as 
proposed. However, the conflict identified was broader in that it 
referred to ``having any * * * affiliation with * * * an underwriter of 
securities or money market instruments rated by the [NRSRO].'' As 
discussed with respect to Exhibit 6, the Commission has narrowed the 
description of the conflict to address concerns that the requirement, 
as proposed, could have created a difficult compliance standard by 
requiring an NRSRO to monitor whether any person associated with the 
NRSRO is an ``underwriter'' as that term is defined in Section 2(a)(11) 
of the Securities Act of 1933.\379\
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    \379\ 15 U.S.C. 77b(a)(11).
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting the requirement with 
the modifications discussed above.
i. Paragraph (b)(9) of Rule 17g-5
    The conflict referred to in paragraph (b)(9) of Rule 17g-5 is any 
other type of conflict that the NRSRO identifies on Form NRSRO in 
compliance with

[[Page 33598]]

Section 15E(a)(1)(B)(vi) of the Exchange Act \380\ and Rule 17g-1. The 
Commission believes the inclusion of this provision is necessary or 
appropriate in the public interest or for the protection of investors. 
This catchall provision will capture conflicts not specifically listed 
in the instructions for Exhibit 6 and Rule 17g-5 that the NRSRO has 
identified on Exhibit 6 to Form NRSRO as arising from its business 
activities.\381\ The Commission did not receive any comments on the 
proposal that this type of conflict be prohibited unless it is 
disclosed and managed as required pursuant to Section 15E of the 
Exchange Act \382\ and Rule 17g-1 and is adopting the requirement 
substantially as proposed.
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    \380\ 15 U.S.C. 78o-7(a)(1)(B)(vi).
    \381\ See 15 U.S.C. 78o-7(h)(2)(E).
    \382\ 15 U.S.C. 78o-7.
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3. Paragraph (c) of Rule 17g-5
    Section 15E(h)(2) of the Exchange Act requires the Commission to 
adopt rules to prohibit or require the management and disclosure of 
conflicts of interest relating to the issuance of credit ratings.\383\ 
Paragraph (c) of proposed Rule 17g-5 specifically prohibits outright 
four types of conflicts of interest. The Commission believes 
prohibiting these conflicts is necessary or appropriate in the public 
interest or for the protection of investors. These are conflicts that 
are not a necessary consequence of how credit rating agencies operate. 
They would be difficult to manage given the risk that they could cause 
undue influence. Therefore, the Commission is prohibiting them; rather 
than requiring they be disclosed and managed. Nonetheless, the 
Commission intends to monitor how the prohibitions operate in practice 
and, if it appears a prohibition is interfering inappropriately, the 
Commission will re-evaluate whether it should be subject to disclosure 
and management (rather than prohibited).\384\
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    \383\ 15 U.S.C. 78o-7(h)(2).
    \384\ See, e.g., S&P Letter stating that all the conflicts 
identified in paragraph (c) of Rule 17g-5 should not be prohibited 
as they can be managed.
---------------------------------------------------------------------------

a. Paragraph (c)(1) of Rule 17g-5
    As adopted, paragraph (c)(1) prohibits an NRSRO from having a 
conflict relating to the issuance of a credit rating where the person 
soliciting the credit rating was the source of 10% or more of the total 
net revenue of the NRSRO during the most recently ended fiscal 
year.\385\ Such a person will be in a position to exercise substantial 
influence on the NRSRO.\386\ Consequently, it will be difficult for the 
NRSRO to remain impartial, given the impact on the NRSRO's income if 
the person withdrew its business. Given the Commission's understanding 
that fees from a single entity generally compose a very small 
percentage of the revenues of entities currently identified as NRSROs, 
the Commission believes that a 10% threshold is a reasonable threshold 
for registered NRSROs.\387\
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    \385\ The determination of ``net revenue'' is same as the 
determination of net revenue for purposes of Form NRSRO and Rule 
17g-3.
    \386\ As noted in the Commission 2003 CRA Report, some 
participants in the Commission 2002 CRA Hearings expressed concern 
that ancillary services could become much greater in the future and 
suggestions were made that their percentage contribution to total 
revenue be capped.
    \387\ As noted in the Commission 2003 CRA Report, fees from any 
single issuer typically comprise a very small percentage, less than 
1%, of an NRSRO's total revenue.
---------------------------------------------------------------------------

    Several commenters stated that this conflict should not be 
prohibited but rather subject to procedures to manage it.\388\ One 
commenter, while not requesting that the proposal be changed, noted 
that in an atypical circumstance such as issuing credit ratings for 
structured products sponsored by a large client an NRSRO may be 
required to request a waiver of the prohibition.\389\ Another commenter 
also mentioned structured product sponsors as clients that potentially 
could approach the 10% revenue threshold and, therefore, that exemptive 
relief may be appropriate in such circumstances.\390\ The Commission 
continues to believe that 10% of net revenues is a very high threshold. 
Moreover, the definition of net revenues has been narrowed to exclude 
revenues earned by affiliates that are not persons within the NRSRO. 
Therefore, the threshold will be higher than that proposed for NRSROs 
with affiliates engaged in activities unrelated to credit ratings. 
Consequently, the Commission does not believe the conflict should be 
subject to a requirement that it be managed (rather than prohibited).
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    \388\ See R&I Letter; Fitch Letter; S&P Letter; AEI Letter; 
Langohr Letter; AST Letter; ASF Letter.
    \389\ See LACE Letter.
    \390\ See R&I Letter.
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    Nonetheless, as noted above, the Commission intends to monitor how 
the prohibition operates in practice, particularly with respect to 
structured products. The intent behind all the prohibitions in 
paragraph (c) is not to prohibit a business practice that is a normal 
part of an NRSRO's activities. Rather, the intent is to prohibit 
conflicts that are not a necessary consequence of providing credit 
rating services. If the prohibition in paragraph (c)(1) interferes with 
how NRSROs as a matter of course deal with structured product sponsors, 
the Commission will evaluate whether the rule should be modified to 
accommodate this business practice or whether--as suggested by the 
commenter--an exemption would be appropriate.
    For these reasons, the Commission is adopting the prohibition 
substantially as proposed.
b. Paragraph (c)(2) of Rule 17g-5
    As adopted, paragraph (c)(2) prohibits an NRSRO from having a 
conflict relating to the issuance of a credit rating with respect to a 
person (excluding a sovereign governments nation or an agency of a 
sovereign nation) where the nationally recognized statistical rating 
organization, a credit analyst who participated in determining the 
credit rating, or a person responsible for approving the credit rating, 
directly owns securities of, or has any other direct ownership interest 
in, the rated person. This conflict as it relates to obligors is 
identified in Section 15E(h)(2)(C) of the Exchange Act.\391\ The 
Commission believes prohibiting these conflicts, including with respect 
to issuers, is necessary or appropriate in the public interest or for 
the protection of investors. An NRSRO and persons within the NRSRO that 
participate in the credit rating should not have a direct financial 
interest in the issuer or obligor subject to the credit rating. It will 
be difficult for these persons to remain impartial and issue an 
objective credit rating in this circumstance.\392\
---------------------------------------------------------------------------

    \391\ 15 U.S.C. 78o-7(h)(2)(C).
    \392\ The Senate Report notes that rating agencies argue that 
although the pay-for-rating business model presents inherent 
conflicts of interest, the conflict is effectively managed inasmuch 
as credit analysts do not benefit financially from any of their 
ratings decisions. The Senate Report further notes that credit 
analysts are not permitted to own any of the securities they follow.
---------------------------------------------------------------------------

    As with the provision in paragraph (b)(6) of Rule 17g-5, the 
Commission has narrowed the scope of this provision to ``direct'' 
ownership interests. These persons will be permitted to have indirect 
ownership interests, for example, through mutual funds or blind trusts. 
The prohibition also excludes from its scope ownership of securities 
issued by a sovereign government or an agency of a sovereign 
government. The Commission added this exclusion in response to a 
comment that sovereign government and agency securities may be held as 
cash equivalents.\393\ Further, the Commission believes for many of 
these securities it would be difficult to influence their market price 
through the issuance of a credit rating. Therefore, a prohibition on a 
credit analyst owning securities of sovereign governments the

[[Page 33599]]

analyst rates is not necessary. The Commission notes that this 
ownership interest is subject to the requirements of paragraphs (a) and 
(b)(6) of Rule 17g-5. Consequently, it will be required to be addressed 
in the procedures for managing the conflicts that arise from direct 
ownership of rated securities.
---------------------------------------------------------------------------

    \393\ See S&P Letter.
---------------------------------------------------------------------------

    For the reasons, the Commission is adopting the prohibition with 
the modifications discussed above.
c. Paragraph (c)(3) of Rule 17g-5
    Paragraph (c)(3) prohibits an NRSRO from having a conflict relating 
to the issuance of a credit rating where the rated entity is a person 
associated with the NRSRO (i.e., a company directly or indirectly 
controlling, controlled by, or under common control with, the 
NRSRO).\394\ This conflict as it relates to obligors is identified in 
Section 15E(h)(2)(C) of the Exchange Act.\395\ The Commission believes 
prohibiting this conflict, including with respect to issuers, is 
necessary or appropriate in the public interest or for the protection 
of investors. The Commission believes that it is appropriate to 
prohibit such conflicts because of the degree of difficulty the 
Commission foresees in maintaining an appropriate level of 
impartiality, when issuing a credit rating with respect to an 
affiliated entity.
---------------------------------------------------------------------------

    \394\ See Section 3(a)(63) of the Exchange Act (15 U.S.C. 
78c(a)(63)) defining ``person associated with an NRSRO.''
    \395\ 15 U.S.C. 78o-7(h)(2)(C).
---------------------------------------------------------------------------

    Two commenters stated that this conflict can be managed and should 
not be prohibited.\396\ The Commission believes that for a credit 
analyst to determine a credit rating for the company where the analyst 
works or an affiliate of that company would place the analyst in an 
untenable position. Moreover, the Commission does not believe there 
will be a need for such a credit rating as long as other NRSROs are 
available to determine credit ratings for these companies. The 
Commission will entertain requests for exemptive relief from this 
prohibition where appropriate, such as if circumstances develop to a 
point where an NRSRO or its affiliate requires a public credit rating 
and cannot obtain one from another NRSRO. For these reasons, the 
Commission is adopting this prohibition substantially as proposed.
---------------------------------------------------------------------------

    \396\ See Moody's Letter; S&P Letter.
---------------------------------------------------------------------------

d. Paragraph (c)(4) of Rule 17g-5
    Paragraph (c)(4) prohibits an NRSRO from having a conflict relating 
to the issuance of a credit rating where the credit analyst who 
participated in determining the credit rating, or a person responsible 
for approving the credit rating, also is an officer or director of the 
person that is the subject of the credit rating.\397\ This conflict as 
it relates to obligors is identified in Section 15E(h)(2)(C) of the 
Exchange Act.\398\ The Commission believes prohibiting this conflict, 
including with respect to issuers, is necessary or appropriate in the 
public interest or for the protection of investors. The Commission 
believes that an NRSRO or person associated with the NRSRO having such 
a position will have difficulty remaining objective in these 
circumstances.
---------------------------------------------------------------------------

    \397\ Cf. Rule 2711 of the National Association of Securities 
Dealers, Inc. (``NASD'') allowing a securities research analyst to 
be an officer or director of a subject company if proper disclosure 
is made.
    \398\ 15 U.S.C. 78o-7(h)(2)(C).
---------------------------------------------------------------------------

    The Commission did not receive any comments on this specific 
prohibition and is adopting it substantially as proposed.

F. Rule 17g-6--Prohibited Unfair, Coercive, or Abusive Practices

    Section 15E(i)(1) of the Exchange Act \399\ provides that the 
Commission shall adopt rules prohibiting any act or practice by an 
NRSRO that the Commission determines is unfair, abusive, or coercive, 
including certain acts and practices set forth in paragraphs (i)(1)(A)-
(C) of Section 15E of the Exchange Act.\400\ In explaining this 
statutory provision, the Senate Report stated that ``the Commission, as 
a threshold consideration, must determine that the practices subject to 
prohibition under this section are unfair, coercive or abusive before 
adopting rules prohibiting such practices.''
---------------------------------------------------------------------------

    \399\ 15 U.S.C. 78o-7(i)(1).
    \400\ 15 U.S.C. 78o-7(i)(1)(A), (B) and (C).

    In the proposing release, the Commission made a preliminary 
determination that the acts and practices described in paragraphs 
(i)(1)(A)-(C) of Section 15E of the Exchange Act \401\ would be unfair, 
coercive, or abusive. Consequently, the Commission proposed that they 
be prohibited through provisions in paragraphs (a)(1) through (a)(4) of 
Rule 17g-6, with one conditional exception. The Commission also made a 
preliminary determination in the proposing release that using an 
unsolicited credit rating to pressure an issuer or obligor into paying 
for the rating or another service would be unfair, coercive, or 
abusive. Consequently, the Commission proposed to use its authority 
under Section 15E(i)(1) of the Exchange Act \402\ to prohibit such act 
and practice through the provisions in paragraph (a)(5) of Rule 17g-
6.\403\
---------------------------------------------------------------------------

    \401\ Id.
    \402\ 15 U.S.C. 78o-7(i)(1).
    \403\ See Commission 2003 CRA Report, which noted that some 
participants in the Commission 2002 CRA Hearings questioned the 
appropriateness of unsolicited credit ratings because they could 
used to engage in ``strong-arm'' tactics to induce payment for a 
credit rating the issuer did not request.
---------------------------------------------------------------------------

1. Paragraph (a)(1) of Rule 17g-6
    Section 15E(i)(1)(A) of the Exchange Act provides that the 
Commission shall prohibit the following practice if the Commission 
determines it is unfair, coercive, or abusive:

    Conditioning or threatening to condition the issuance of a 
credit rating on the purchase by the obligor or an affiliate thereof 
of other services or products, including pre-credit rating 
assessment products of the nationally recognized statistical rating 
organization or any person associated with such nationally 
recognized statistical rating organization[.] \404\

    \404\ 15 U.S.C. 78o-7(i)(1)(A).
---------------------------------------------------------------------------

In the proposing release, the Commission preliminarily determined that 
this practice would be unfair, coercive, or abusive. Consequently, the 
Commission proposed to prohibit it in paragraph (a)(1) of Rule 17g-6. 
Specifically, this paragraph, as proposed, would have prohibited an 
NRSRO from conditioning or threatening to condition the issuance of a 
credit rating on the purchase of other products or services, including 
pre-credit rating assessment products.\405\
---------------------------------------------------------------------------

    \405\ See Commission 2003 CRA Report, which noted that some 
participants in the Commission's 2002 CRA Hearings worried that 
issuers could be unduly pressured to purchase advisory services, 
particularly in cases where they were solicited by the credit rating 
analyst.

    Credit ratings play an important role in the financial markets. 
Market participants use them in making financial decisions on whether 
to buy or sell debt securities and extend credit to rated entities. 
Moreover, credit ratings of NRSROs are used in federal and state laws 
and regulations to establish limits or confer exemptions or privileges. 
Consequently, an entity may benefit from having an NRSRO credit rating 
because the credit rating makes its securities more marketable; or the 
credit rating qualifies the entity for an exemption or privilege or 
makes holding the entity's debt securities or transacting with the 
entity more attractive to other regulated entities. An NRSRO could 
abuse this incentive by using it to coerce an issuer or obligor to 
purchase services from the NRSRO or its affiliates.

[[Page 33600]]

    The Commission did not receive any comments objecting to its 
preliminary determination that this practice would be unfair, coercive, 
or abusive. The Commission has determined this practice would be 
unfair, coercive, or abusive and, consequently, is adopting paragraph 
(a)(1) of Rule 17g-6 substantially as proposed in order to prohibit it.
    One commenter did state that there are certain circumstances where 
it would not be unfair, coercive, or abusive to condition the 
determination of a credit rating on a security on further analysis of 
the issuer.\406\ Specifically, the commenter stated that to determine a 
credit rating for a subordinated debt security, a credit rating agency 
may be required to analyze the overall capital structure of the issuer 
and determine credit ratings for the issuer as an entity and for its 
senior debt.\407\ The commenter requested that the rule text in 
paragraph (a)(1) of proposed Rule 17g-6 be amended to clarify that this 
specific practice is not prohibited.\408\
---------------------------------------------------------------------------

    \406\ See Moody's Letter.
    \407\ Id.
    \408\ Id.
---------------------------------------------------------------------------

    The Commission believes that the rule text as proposed and as 
adopted would not prohibit this specific practice. The prohibition 
applies to conditioning a credit rating on the purchase of ``other'' 
services of the credit rating agency. In the situation described above, 
the requirement to analyze the capital structure of the issuer and the 
creditworthiness of its senior debt is part of the process of 
determining the credit rating on the subordinated debt. Therefore, the 
Commission views this as all part of one service and not three 
different services.
    For these reasons, the Commission is adopting the prohibition 
substantially as proposed.
2. Paragraphs (a)(2) and (a)(3) of Rule 17g-6
    Section 15E(i)(1)(C) of the Exchange Act provides that the 
Commission shall prohibit the following practices if the Commission 
determines they are unfair, coercive, or abusive:

    Modifying or threatening to modify a credit rating or otherwise 
departing from systematic procedures and methodologies in 
determining credit ratings, based on whether the obligor, or an 
affiliate of the obligor, purchases or will purchase the credit 
rating or any other service or product of the nationally recognized 
statistical rating organization or any person associated with such 
organization.\409\

    \409\ 15 U.S.C. 78o-7(i)(1)(C).
---------------------------------------------------------------------------

In the proposing release, the Commission preliminarily determined that 
these practices would be unfair, coercive, or abusive. Consequently, 
the Commission proposed to prohibit them through paragraphs (a)(2) and 
(a)(3) of proposed Rule 17g-6. The Commission did not receive any 
comments objecting to its preliminary determination that these 
practices are unfair, coercive, or abusive. The Commission has 
determined they are unfair, coercive, or abusive for the reasons 
discussed below and, consequently, is adopting paragraphs (a)(2) and 
(a)(3) of Rule 17g-6 substantially as proposed in order to prohibit 
them.
    As adopted, paragraph (a)(2) prohibits an NRSRO from issuing, or 
offering or threatening to issue, a credit rating that is not 
determined in accordance with the NRSRO's established procedures for 
determining credit ratings based on whether the rated person purchases 
or will purchase the credit rating or another product or service.\410\ 
Under this provision, an NRSRO is prohibited from issuing or 
threatening to issue a credit rating that is lower than would result 
from using its methodology for determining credit ratings based on 
whether the issuer or obligor pays for the credit rating or any other 
service or product of the NRSRO and its affiliates. The NRSRO also will 
be prohibited from issuing or promising to issue a higher credit rating 
in these circumstances.\411\
---------------------------------------------------------------------------

    \410\ Paragraph (a)(2) of Rule 17g-6.
    \411\ Presumably, an issuer or obligor would not agree to 
compensate an NRSRO for a credit rating that was lower than would 
result from applying the NRSRO's methodologies. Nonetheless, if an 
NRSRO agreed to issue a lower than warranted credit rating in return 
for compensation, the NRSRO would violate paragraph (a)(2) as well.
---------------------------------------------------------------------------

    The practice prohibited in this paragraph is distinguishable from 
the practice prohibited in Paragraph (a)(1) of Rule 17g-6. Paragraph 
(a)(1) addresses the situation where an NRSRO conditions the issuance 
of a credit rating on the purchase of another service or product. 
Paragraph (a)(2) addresses the situation where an NRSRO conditions the 
opinion reached in the credit rating on the purchase of the credit 
rating or another service or product.\412\ Thus, unlike paragraph 
(a)(1), an NRSRO will violate paragraph (a)(2) if it conditions the 
issuance of the credit rating on the obligor or issuer paying for the 
credit rating. This is because the NRSRO will not be agreeing to 
determine a credit rating that reflected the NRSRO's assessment of the 
creditworthiness of the issuer or obligor as determined by its 
methodologies. Rather, the NRSRO will be agreeing to skew the credit 
rating higher based on the issuer or obligor agreeing to pay for it.
---------------------------------------------------------------------------

    \412\ See Commission 2003 CRA Report, which noted that some 
participants in the Commission 2002 CRA Hearings believed that, even 
if the purchase of ancillary services did not impact the credit 
rating decision, issuers may be pressured into using the services 
out of fear that their failure to do so may adversely impact their 
credit rating.
---------------------------------------------------------------------------

    Paragraph (a)(3) Rule 17g-6 prohibits an NRSRO from modifying, or 
offering or threatening to modify, a credit rating in a manner contrary 
to its procedures for modifying a credit rating based on whether the 
rated person, or an affiliate of the rated person, purchases or will 
purchase the credit rating or any other service or product of the NRSRO 
and its affiliates. The prohibition in paragraph (a)(2) of Rule 17g-6 
applies to threats or promises with respect to the issuance of a credit 
rating. Paragraph (a)(3) extends this prohibition to threats or 
promises with respect to changing an existing credit rating.\413\
---------------------------------------------------------------------------

    \413\ As noted above, the prohibitions in paragraphs (a)(2) and 
(a)(3) Rule 17g-6 are being adopted pursuant to authority in Section 
15E(i)(1)(C) of the Exchange Act (15 U.S.C. 78o-7(i)(1)(C)).
---------------------------------------------------------------------------

    The Commission believes these practices are unfair, coercive, or 
abusive because an entity's cost of credit and, in some cases, ability 
to obtain credit, generally depends on its credit rating. Entities with 
lower credit ratings must pay higher interest rates to borrow funds or 
issue debt. In some cases, a low credit rating could block an entity's 
access to credit. Thus, it is in a borrower's economic interest to have 
a high credit rating. This creates the potential for an NRSRO to have 
inappropriate leverage over an issuer or obligor.
    An NRSRO could use this leverage to obtain business by threatening 
to issue or modify a credit rating in a manner that results in a lower 
credit rating than would have resulted from using its established 
methodologies. The NRSRO also could issue a lower credit rating or 
lower an existing rating to punish an issuer or obligor for not 
purchasing the credit rating or another service or product of the NRSRO 
and its affiliates. Conversely, the NRSRO could promise to issue or 
modify a credit rating in a manner that results in a higher credit 
rating than would have resulted from using its established 
methodologies as a reward for purchasing the credit rating or other 
services or products. Paragraphs (a)(2) and (3) of Rule 17g-6 are 
designed to provide a check on the potential inappropriate influence an 
NRSRO may have over issuers and obligors by prohibiting an NRSRO from 
using this leverage to coerce an issuer or obligor into purchasing a 
credit rating or other services and products of the NRSRO and its 
affiliates.

[[Page 33601]]

    The Commission further notes that these practices could result in 
credit ratings that mislead the marketplace and undermine the 
regulatory use of NRSRO credit ratings. An NRSRO that follows through 
on a threat to issue a low credit rating or promise to issue a high 
credit rating will be issuing a credit rating that does not accurately 
reflect the credit rating agency's true assessment of the 
creditworthiness of the issuer or obligor. The credibility and 
reliability of an NRSRO and its credit ratings depends on the NRSRO 
developing and implementing sound methodologies for determining credit 
ratings and following those methodologies. The fact that an issuer or 
obligor agrees or refuses to purchase a credit rating or other service 
or product from the NRSRO and its affiliates should have no bearing on 
the NRSRO's credit assessment of the issuer or obligor.\414\
---------------------------------------------------------------------------

    \414\ The Commission is mindful of the limitation in Section 
15E(c)(2) of the Exchange Act that the rules the Commission adopts 
under the Exchange Act not regulate the substance of credit ratings 
(15 U.S.C. 78o-7(c)(2)). The Commission does not believe that this 
prohibition will interfere with the process by which an NRSRO 
assesses the creditworthiness of a security, money market 
instrument, or obligor. An issuer's or obligor's agreement or 
refusal to pay the NRSRO or its affiliate for a service or product 
is, of itself, not relevant to a credit assessment of the issuer or 
obligor. Moreover, this is a practice that Congress specifically 
identified in Section 15E(i)(1)(C) of the Exchange Act as 
potentially unfair, coercive, or abusive (15 U.S.C. 78o-7(i)(1)(C)).
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting the prohibition 
substantially as proposed.
3. Paragraph (a)(4) of Rule 17g-6
    Section 15E(i)(1)(B) of the Exchange Act provides that the 
Commission by rule shall prohibit any act or practice the Commission 
determines to be unfair, coercive, or abusive relating to:

    Lowering or threatening to lower a credit rating on, or refusing 
to rate, securities or money market instruments issued by an asset 
pool or as part of any asset-backed or mortgage-backed securities 
transaction, unless a portion of the assets within such pool or part 
of such transaction, as applicable, also is rated by the nationally 
recognized statistical rating organization[.] \415\
---------------------------------------------------------------------------

    \415\ 15 U.S.C. 78o-7(i)(1)(B).
---------------------------------------------------------------------------

    In explaining this statutory provisions, the Senate Report stated 
that ``there may be instances when a rating agency may refuse to rate 
securities or money market instruments for reasons that are not 
intended to be anti-competitive.'' The Senate Report further stated 
that ``the Commission * * * should prohibit only those ratings refusals 
that occur as part of unfair, coercive or abusive conduct.''
a. Structured Product Credit Rating Practices
    Two of the current NRSROs--Fitch and DBRS--believe two other 
NRSROs--S&P and Moody's engage in anti-competitive practices in the 
area of determining credit ratings for structured products and, 
consequently, these practices should be found by the Commission to be 
unfair, coercive, or abusive.\416\ These practices relate to instances 
where the credit rating agency has not rated particular securities that 
have been rated by another credit rating agency and that underlie a 
structured product. S&P and Moody's believe their practices are 
necessary to determine a credible credit rating.\417\
---------------------------------------------------------------------------

    \416\ See DBRS Letter; Fitch Letter; letter dated April 11, 2007 
from Charles D. Brown, General Counsel, Fitch Ratings (``Fitch 2nd 
Letter'').
    \417\ See letter dated March 30, 2007 from Raymond W. McDaniel, 
President, Moody's Investor Services (``Moody's 2nd Letter''); 
letter dated April 24, 2007 from Jeanne M. Dering, Executive Vice 
President, Global Regulatory Affairs & Compliance (``Moody's 3rd 
Letter); S&P Letter; Moody's Letter.
---------------------------------------------------------------------------

    The practices take several forms. The credit rating agency may, as 
a condition of issuing a credit rating for a structured product, 
require that it effectively issue a public credit rating for a fee for 
most, if not all, the assets underlying the structured product.\418\ 
The second form involves the credit rating agency insisting that it 
provide a private credit rating or credit assessment for a fee with 
respect to the unrated assets.\419\ The third form involves the credit 
rating agency taking into consideration the internal credit analysis of 
another person (e.g., the underwriter, sponsor, or manager of the 
structured product) with respect to the unrated assets to determine a 
credit rating or private credit rating, or perform a credit assessment 
of the unrated assets.\420\ The fourth form involves the credit rating 
agency taking into consideration but not necessarily adopting the 
credit ratings of another credit rating agency to determine a credit 
rating or private credit rating, or perform a credit assessment of the 
unrated assets.\421\ Under this last form, the credit rating agency may 
employ a standardized methodology to discount (notch down) the credit 
ratings of the other credit rating agency based on the type of security 
and category of credit rating.\422\
---------------------------------------------------------------------------

    \418\ Id.
    \419\ Id.
    \420\ Id.
    \421\ Id.
    \422\ Id.
---------------------------------------------------------------------------

b. Proposed Rule 17g-6(a)(4)
    In the proposing release, the Commission preliminarily determined 
that it would be unfair, coercive, or abusive for an NRSRO to issue or 
threaten to issue a lower credit rating, lower or threaten to lower an 
existing credit rating, refuse to issue a credit rating, or to withdraw 
a credit rating with respect to a structured product unless a portion 
of the assets underlying the structured product also are rated by the 
NRSRO. Consequently, the Commission proposed to prohibit these 
practices in paragraph (a)(4) of proposed Rule 17g-6.
    The Commission also proposed an exception to the prohibition that 
would permit an NRSRO to refuse to issue the credit rating or withdraw 
the credit rating if the NRSRO has rated less than 85% of the market 
value of the assets underlying the structured product. This was 
designed to address the concern that an NRSRO when assessing the 
creditworthiness of the structured product would be forced to issue a 
credit rating either when a substantial portion of the underlying 
assets were not rated or when the underlying assets have been rated by 
another credit rating agency. If the underlying assets were unrated, 
the NRSRO may not have sufficient information for issuing a credit 
rating on the structured product. In the case where the underlying 
assets were rated by another credit rating agency, the other credit 
rating agency may have used different methodologies to assess the 
creditworthiness of the asset and may have determined a credit rating 
that is different than the credit rating the NRSRO would issue, if it 
had rated the asset.
c. Comments on Proposed Rule 17g-6(a)(4)
i. Support for a Prohibition
    The Commission received far more comments on this provision of the 
proposed rules than on any other provision. Many commenters expressed 
strong support for the prohibition; though many of the supporters 
stated that the 85% exception was too high and should be lowered to at 
least 66%.\423\ These commenters generally

[[Page 33602]]

believe the proposed rule would serve to increase competition within 
the credit ratings market, thus benefiting investors in structured 
products.\424\
---------------------------------------------------------------------------

    \423\ See e.g., DBRS Letter; Fitch letter; Fitch 2nd Letter. See 
also letter dated February 13, 2007 from Janet M. Tavakoli, 
President, Tavakoli Structured Finance, Inc.; letter dated February 
14, 2007 from Gregory G. Raab, Chief Executive Officer, Axon; letter 
dated February 16, 2007 from Emile Van den Bol, Managing Director, 
Deutsche Bank; letter dated February 16, 2007 from Kent D. Born, 
Senior Managing Director, PPM America; letter dated February 23, 
2007 from Patti Unti, Managing Director, Capmark Investments LP; 
letter dated February 23, 2007 from David Lazarus, Managing 
Director, Capmark Securities, Inc.; letter dated February 28, 2007 
from Ronald E. Schrager, Chief Executive Officer, LNR Property 
Corporation; letter dated March 5, 2007 from David Hynes, Partner, 
Northcross Capital LLP; letter dated March 6, 2007 from S. Trezevant 
Moore, Jr., President & COO, Luminent Mortgage Capital, Inc.; letter 
dated March 7, 2007 from Bruce E. Stern, Chairman, Government 
Affairs Committee, Association of Financial Guaranty Insurers; 
letter dated March 9, 2007 from Petra Spiegel, Eurohypo AG; letter 
dated March 9, 2007 from Landon D. Parsons, Managing Director, G-
Bass (``G-Bass Letter''); letter dated March 9, 2007 from Pat G. 
Halter, Chief Executive Officer, Principal Real Estate Investors; 
letter dated March 12, 2007 from Charles Covell, Executive Vice 
President, Citigroup Alternative Investments; letter dated March 12, 
2007 from Rodney J. Dillman, General Counsel, Babson Capital 
Management LLC; letter dated March 12, 2007 from Louis C. Lucido, 
Group Managing Director, Trust Company of the West; letter dated 
March 12, 2007 from Daniel Ivascyn, Managing Director, PIMCO 
(``PIMCO Letter''); letter dated March 27, 2007 from Dottie 
Cunningham, Chief Executive Officer, Commercial Mortgage Securities 
Association; letter dated April 23, 2007 from Dwight M. Jaffe, 
Professor, Haas School of Business (``Jaffe Letter''); letter dated 
April 24, 2007 from Daniel Rubinfeld, Professor, Boalt Law School 
(``Rubinfeld Letter''); letter dated April 25, 2007 from Dottie 
Cunningham, Chief Executive Officer, Commercial Mortgage Securities 
Association; letter dated May 11, 2007 from Kent Wideman, Group 
Managing Director, Policy and Rating Committee, and Mary Keogh, 
Managing Director, Policy and Regulatory Affairs, Dominion Bond 
Rating Service (``DBRS 2nd Letter'').
    \424\ Id.
---------------------------------------------------------------------------

    For example, DBRS stated that notching has a ripple effect on 
competition wider than just the structured products and affects 
competition in the corporate bond rating market and that the practices 
employed by S&P and Moody's could have a profound and harmful effect on 
efforts to increase competition among NRSROs.\425\ Fitch stated that 
adoption of the proposed rule is critical to achieving the Rating 
Agency Act's objective of greater accountability, transparency, and 
competition in the credit ratings market.\426\ Fitch noted that 
structured products increasingly are designed to hold other structured 
products.\427\ Fitch stated that the practices employed by S&P and 
Moody's have increased their market share in rating structured 
products,
---------------------------------------------------------------------------

    \425\ See DBRS Letter; DBRS 2nd Letter.
    \426\ See Fitch Letter.
    \427\ Id.

    As the structured finance market has grown exponentially in 
terms of both dollar value and number of market participants, it has 
become increasingly circular. Most notably, [structured product] 
issuers regularly acquire securities of other [structured product] 
issuers. The circularity of the market, in which large, intertwined 
investors are each subject to notching guidelines mandated by 
Moody's and S&P, has allowed Moody's and S&P to extend their partner 
monopoly in the traditional bond market to the increasingly 
prominent structured finance market. Therein lies the power of the 
unfair, coercive, and abusive practice of notching.\428\
---------------------------------------------------------------------------

    \428\ Fitch Letter.

    Academic commenters also stated that Moody's and S&P's practices 
are unfair, coercive, and abusive within the meaning of the Rating 
Agency Act.\429\ They stated that the securities market would benefit 
from increased competition in the credit rating market, and that these 
practices have served to hinder Fitch's ability to compete.\430\ One 
commenter also argued that these practices may lead to misleading 
credit ratings if another credit rating agency's ratings are 
categorically reduced without analytic support.\431\
---------------------------------------------------------------------------

    \429\ See Rubinfeld Letter; Jaffe Letter.
    \430\ Id.
    \431\ See Jaffe Letter.
---------------------------------------------------------------------------

    As noted above, many of the commenters that supported the 
prohibition stated that the 85% threshold should be lowered to 66% or 
less.\432\ They based this assertion on Fitch's showing that S&P, 
Moody's, and Fitch each shared approximately 66% of the structured 
product market before S&P and Moody's began their practices in 
2001.\433\ They further stated that as a direct result of notching, S&P 
and Moody's have significantly increased their market share; while 
Fitch has lost market share.\434\
---------------------------------------------------------------------------

    \432\ See, e.g., Fitch Letter; PIMCO Letter; G-Bass Letter.
    \433\ Id.
    \434\ Id.
---------------------------------------------------------------------------

    The commenters that support prohibiting the practices of S&P and 
Moody's believe that the remedy is to require an NRSRO to rely on the 
credit ratings of another NRSRO without employing any mapping 
methodology that would lower the credit rating.\435\ For example, Fitch 
argues that historical default, transition rate, and rating 
comparability studies indicate that the credit ratings of S&P, Moody's, 
and Fitch for structured products are comparable.\436\ Therefore, Fitch 
asserts that NRSROs should rely on the credit ratings of other NRSROs 
at face value.\437\ Fitch suggested that the proposed rule be modified 
to provide that if an NRSRO has rated 66% of the par value of an asset 
pool, and all assets in the pool are publicly rated by two or more 
NRSROs, for those assets the NRSRO has not itself rated, the NRSRO be 
required to use one of the two or more public ratings assigned to the 
underlying asset.\438\
---------------------------------------------------------------------------

    \435\ See, e.g., Fitch Letter.
    \436\ Id.
    \437\ See Fitch Letter.
    \438\ See Fitch 2nd Letter.
---------------------------------------------------------------------------

ii. Opposition to a Prohibition
    S&P, Moody's, and several other commenters (including academic 
commenters) strongly opposed the prohibition in paragraph (a)(4) of 
proposed Rule 17g-6.\439\ They cited a number of reasons, most notably 
that it would require one NRSRO to rely on the credit ratings of 
another NRSRO.\440\ Several commenters asserted that the proposed rule 
would have an anticompetitive effect.\441\ They argued that requiring 
an NRSRO to adopt the credit ratings of competitors in its credit 
ratings analysis would reduce competition because the ability of an 
NRSRO to reach an independent determination of creditworthiness based 
on different methodologies or criteria would be impeded.\442\ These 
commenters state that value is brought to the market by allowing NRSROs 
to deliver different analytical perspectives on issuers and 
securities.\443\ Another commenter wrote that the proposed rule would 
require an NRSRO to put its own reputation at risk on behalf of the 
commercial interests of a competitor.\444\ Further, Moody's argued that 
differences among credit rating opinions on the same security tend to 
be larger than those observed when comparing only published credit 
ratings on jointly-rated securities, and that differences between 
credit rating opinions are more common and are often greater when 
Moody's rates securities in a category other than Aaa.\445\ A rule that 
prohibited notching would, in the view of many commenters, prohibit an 
agency from

[[Page 33603]]

forming its own opinion about the risks of collateral in a structured 
product.\446\
---------------------------------------------------------------------------

    \439\ See, e.g., S&P Letter; S&P 2nd Letter; Moody's Letter; 
Moody's 3rd; R&I Letter; FSR Letter; Rutherfurd Letter; Langohr 
Letter; AST Letter; letter dated March 30, 2007 from Raymond W. 
McDaniel, President, Moody's Investor Services (``Moody's 2nd 
Letter''); letter dated March 30, 2007 from Charles W. Calomiris, 
Professor, Columbia University, et al. (``Calomiris Letter''); 
letter dated April 3, 2007, from J. Darrell Duffie, Professor, 
Stanford University, Graduate School of Business; letter dated April 
6, 2007 from Jean Helwege, Associate Professor of Finance, Penn 
State University; letter dated April 13, 2007 from Robert M. 
Chilstrom, Esq., Skadden, Arps, Slate, Meagher & Flom LLP, on behalf 
of Moody's Investor Services; letter dated April 18, 2007 from 
Gunter Loeffler, Professor, University of Ulm, Germany; letter dated 
April 26, 2007 from Louis H. Ederington, Professor, Price College of 
Business, University of Oklahoma; letter dated April 28, 2007 from 
Mitchell A. Petersen, Professor, Kellogg School of Management, 
Northwestern University; letter dated May 3, 2007 from the Honorable 
Charles E. Schumer, Senator, Robert Menendez, Senator, John E. 
Sununu, Senator, and Mike Enzi, Senator, U.S. Senate; letter dated 
May 12, 2007 from Ren-Raw Chen, Professor, Rutgers University.
    \440\ Id.
    \441\ See Calomiris Letter.
    \442\ See Moody's 3rd Letter; Calomiris Letter.
    \443\ See Moody's Letter; Calomiris Letter. .
    \444\ See Langohr Letter.
    \445\ See Moody's 2nd Letter.
    \446\ See, e.g., Moody's Letter.
---------------------------------------------------------------------------

    Additionally, S&P and Moody's believe the proposed rule would 
unduly interfere with their methodologies for determining credit 
ratings, could lead to inaccurate credit ratings and credit ratings 
that violate securities laws, and unnecessarily raise constitutional 
issues.\447\ They argue that users of credit ratings believe ratings 
reflect the agency's bona fide opinion of the creditworthiness of a 
particular issuer, security, or transaction.\448\ S&P wrote that when 
an agency is asked to rate structured products it must understand the 
credit quality of all of the underlying assets.\449\ If an NRSRO was 
required to use the credit rating of another NRSRO, it would in effect 
lose the right to understand the credit quality of the underlying 
assets, and lose control over the credit rating opinions it 
publishes.\450\ Such a result, it argues, would be contrary to the 
legislative intent that credit ratings be independent and free from 
interference by third parties, including governments, issuers, 
investors, and competitors.\451\ Moody's similarly argues that such a 
credit rating would not reflect an evaluation of the credit risk of all 
the assets in the pool, and therefore, negatively impact the 
credibility and reliability of its credit ratings and increase the 
risks to investors who rely on its credit ratings.\452\
---------------------------------------------------------------------------

    \447\ See S&P Letter; Moody's Letter.
    \448\ Id.
    \449\ See S&P Letter.
    \450\ Id.
    \451\ Id.
    \452\ See Moody's 3rd Letter.
---------------------------------------------------------------------------

    S&P and Moody's argue that prohibiting their practices, in effect, 
would require them to rely on another NRSRO's credit rating even when 
they believed that credit rating to be unsupportable.\453\ Further, if 
they were required to rely on a credit rating from another NRSRO, they 
argue they would be placed in a position of having to publish credit 
ratings that they do not believe are accurate or engage in a prohibited 
practice.\454\ They state that this would create the untenable choice 
of taking an action that is inconsistent with general securities law 
principles or violating Rule 17g-6.\455\
---------------------------------------------------------------------------

    \453\ See Moody's Letter; Moody's 2nd Letter; Moody's 3rd 
Letter; S&P Letter; S&P 2nd Letter.
    \454\ Id.
    \455\ Id.
---------------------------------------------------------------------------

    S&P and Moody's state that their practices are analytically 
justified methods of forming an independent credit rating opinion.\456\ 
S&P asserts that it is appropriate to reserve the right to discount the 
credit ratings of other credit rating agencies when incorporating these 
credit ratings into its own analysis to account for differences in 
analytical and surveillance practices among credit rating agencies, 
preserve its ability to perform its own surveillance of the underlying 
assets, and account for the possibility that the assets could be down-
rated by another credit rating agency without notice.\457\
---------------------------------------------------------------------------

    \456\ Id.
    \457\ See S&P Letter; S&P 2nd Letter.
---------------------------------------------------------------------------

    S&P and Moody's also have disputed the assertion that there are no 
differences between their credit ratings and Fitch's credit 
ratings.\458\ S&P argues that historical correlations that may have 
existed are not a justification for adopting a rule that would require 
recognition of future credit ratings issued by credit rating agencies 
that may register as NRSROs.\459\ Moreover, S&P and Moody's say that 
their practice of mapping to other credit ratings was developed to 
accommodate structured product sponsors who did not want to wait or pay 
for credit analysis on the assets underlying a structured product that 
the agency had not previously rated.\460\ They asserted that this 
practice provides a quicker means to close a structured product 
issuance because the existing credit rating serves as a starting point 
in analyzing a portion of the pool of underlying assets.\461\ 
Therefore, in their view, prohibiting their practices would harm users 
of credit ratings.\462\
---------------------------------------------------------------------------

    \458\ See S&P 2nd Letter; Moody's 3rd Letter.
    \459\ See S&P 2nd Letter.
    \460\ See Moody's Letter; Moody's 2nd Letter; Moody's 3rd 
Letter; S&P Letter; S&P 2nd Letter.
    \461\ Id.
    \462\ Id.
---------------------------------------------------------------------------

    S&P and Moody's also commented on how paragraph (a)(4) of proposed 
Rule 17g-6 should be revised. For example, Moody's commented that the 
85% threshold in the proposed rule was not appropriate.\463\ It argued 
that credit ratings for tranches of structured products are sensitive 
to the accuracy of credit ratings for even small portions of the 
underlying asset pool. Further, S&P and Moody's argued that the 85% 
threshold would create an incentive for collateral managers to include 
the riskiest securities in the 15% unrated portion of the structured 
product.\464\ Other commenters also argued the proposed rule would 
undermine the market's ability to offset potential harm from credit 
rating shopping.\465\
---------------------------------------------------------------------------

    \463\ See Moody's Letter; Moody's 2nd Letter; Moody's 3rd 
Letter; S&P Letter; S&P 2nd Letter.
    \464\ Id.
    \465\ See Calomiris Letter.
---------------------------------------------------------------------------

    Moody's and S&P recommended that the Commission strike paragraph 
(a)(4) of Proposed Rule 17g-6 in its entirety. Alternatively, Moody's 
commented that if paragraph (a)(4) is retained, the rule should be 
revised to clearly prohibit only conduct that is motivated by an 
``unfair, coercive or abusive'' intent.\466\ Moody's suggested that the 
rule be amended to provide, among other things, that the prohibitions 
of paragraph (a)(4) shall not apply if any such action is taken in 
accordance with the NRSRO's analytical procedures and methodologies and 
that the rule should not compel credit rating agencies to use or to 
rely upon the credit rating opinions of other persons as their own.
---------------------------------------------------------------------------

    \466\ See Moody's Letter.
---------------------------------------------------------------------------

    S&P commented that one alternative to prohibiting these practices 
would be a record retention regime whereby NRSROs would be required to 
retain records related to their decisions to treat another NRSRO's 
credit ratings, including the NRSRO's reasons for the treatment.\467\ 
S&P stated that requiring the firm to explain its reasons would guard 
against unfair, coercive, or abusive practices.\468\
---------------------------------------------------------------------------

    \467\ See S&P Letter; see also DBRS 2nd Letter supporting 
increased recordkeeping and revising its earlier comment that an 
NRSRO should be required to rely on the credit ratings of another 
NRSRO in light of objections that this would interfere with how an 
NRSRO determines credit ratings.
    \468\ See S&P Letter.
---------------------------------------------------------------------------

    In lieu of striking paragraph (a)(4) or adopting only recordkeeping 
requirements, S&P commented that paragraph (a)(4) should be revised to 
provide that in situations where it has not rated 100% of the 
underlying assets, an NRSRO should have three options: (i) Accepting 
the credit ratings of others at face value; (ii) refusing to rate the 
transaction at all; or (iii) reviewing all the underlying assets and 
receiving compensation for the additional work involved.\469\
---------------------------------------------------------------------------

    \469\ Id.
---------------------------------------------------------------------------

d. Final Rule 17g-6(a)(4)
    At this time, the Commission cannot determine that the acts and 
practices described above are unfair, coercive, or abusive in and of 
themselves. The Commission needs more information about these practices 
to gain a better understanding of how they were developed and are being 
employed. The Commission is concerned, however, that these practices 
have adversely affected competition among credit rating agencies and 
that they may occur for anticompetitive purposes. Consequently, the 
Commission is adopting a final rule that is intended to increase 
accountability and

[[Page 33604]]

transparency in the structured product credit ratings market.
    First, the Commission has determined that the practices identified 
in Section 15E(i)(1)(B) of the Exchange Act \470\ are unfair, coercive, 
or abusive to the extent they are practiced with anticompetitive 
intent. Consequently, paragraph (a)(4) of Rule 17g-6 prohibits an NRSRO 
from issuing or threatening to issue a lower credit rating, lowering or 
threatening to lower an existing credit rating, refusing to issue a 
credit rating, or withdrawing or threatening to withdraw a credit 
rating, with respect to securities or money market instruments issued 
by an asset pool or as part of any asset-backed or mortgage-backed 
securities transaction, unless all or a portion of the assets within 
such pool or part of such transaction also are rated by the nationally 
recognized statistical rating organization where such practice is 
engaged in by the nationally recognized statistical rating organization 
for an anticompetitive purpose.
---------------------------------------------------------------------------

    \470\ 15 U.S.C. 78o-7(i)(1)(B).
---------------------------------------------------------------------------

    The Commission recognizes that proving anticompetitive intent will 
be difficult, particularly where an NRSRO has analysis to support the 
contention that its methodology is not arbitrary and is designed to 
make the credit rating of a structured product more accurate. 
Nonetheless, the Commission believes this prohibition will be an 
important deterrent against anticompetitive practices when combined 
with the enhanced recordkeeping requirements in Rule 17g-2 discussed 
below.
e. Enhanced Recordkeeping Requirements
    As noted above, two commenters suggested that an alternative to 
banning the practices of S&P and Moody's would be a record retention 
regime whereby NRSROs would be required to retain records related to 
their decisions on how to treat, and methodology for treating, another 
NRSRO's credit ratings into the credit rating of a structured 
product.\471\ S&P stated that requiring an NRSRO to explain its reasons 
for the treatment would guard against unfair, coercive, or abusive 
practices.\472\
---------------------------------------------------------------------------

    \471\ See S&P Letter; DBRS 2nd Letter.
    \472\ See S&P Letter.
---------------------------------------------------------------------------

    The Commission believes that recordkeeping requirements aimed at 
these practices are necessary or appropriate in the public interest or 
for the protection of investors. Consequently, the Commission is 
adopting three recordkeeping requirements in this area. These 
requirements will assist the Commission in better understanding how 
these practices are developed and employed. This information may 
provide a basis for the Commission to determine whether it should find 
a specific practice to be unfair, coercive, or abusive. The Commission 
also believes that increased scrutiny on the practices coupled with the 
potential for liability under Rule 17g-6 will deter an NRSRO from 
acting with anticompetitive intent.
i. Paragraph (a)(7) of Rule 17g-2
    As adopted, paragraph (a)(7) of Rule 17g-2 requires an NRSRO to 
make a record that lists each security and its corresponding credit 
rating issued by an asset pool or as part of any asset-backed or 
mortgage-backed securities transaction where the NRSRO in determining 
the credit rating for the security treats assets within such pool or as 
a part of such transaction that are not subject to a credit rating of 
the NRSRO by any or a combination of the practices described above and 
identified in paragraphs (a)(7)(i) through (iv) of Rule 17g-2.
    As discussed above, there are four practices by which a credit 
rating agency may treat unrated assets underlying a structured product 
when determining a credit rating for the structured product.\473\ 
Moreover, the credit rating agency may condition the issuance of a 
credit rating for the structured product on its employing one or more 
of these practices. First, the credit rating agency may require that it 
effectively issue a public credit rating for most, if not all, the 
assets underlying the structured product.\474\ This practice is 
described in paragraph (a)(7)(i) of Rule 17g-2. Second, the credit 
rating agency may require that it provide a private credit rating or 
credit assessment for a fee with respect to the unrated assets.\475\ 
This practice is described in paragraph (a)(7)(ii) of Rule 17g-2.
---------------------------------------------------------------------------

    \473\ See DBRS Letter; Fitch Letter; Fitch 2nd Letter; Moody's 
Letter; Moody's 2nd Letter; Moody's 3rd Letter; S&P Letter; S&P 2nd 
Letter.
    \474\ Id.
    \475\ Id.
---------------------------------------------------------------------------

    Third, the credit rating agency may take into consideration the 
internal credit analysis of another person (e.g., the underwriter, 
sponsor, or manager of the structured product) with respect to the 
unrated assets to determine a credit rating or private credit rating, 
or perform a credit assessment of the unrated assets.\476\ This 
practice is employed after the credit rating agency has done a review 
of how the person performs its credit analysis, including a review of 
the specific procedures and methodologies employed by the person. This 
practice is described in paragraph (a)(7)(iii) of Rule 17g-2.
---------------------------------------------------------------------------

    \476\ Id.
---------------------------------------------------------------------------

    Fourth, the credit rating agency may take into consideration but 
not necessarily adopt the credit ratings of another credit rating 
agency for the unrated assets to determine a credit rating or private 
credit rating, or perform a credit assessment of the unrated 
assets.\477\ Under this last practice, the credit rating agency may 
employ a standardized methodology to discount (notch down) the credit 
ratings of the other credit rating agency based on the type of security 
and category of credit rating.\478\ This practice is described in 
paragraph (a)(7)(iv) of Rule 17g-2.
---------------------------------------------------------------------------

    \477\ Id.
    \478\ Id.
---------------------------------------------------------------------------

    The intent of the recordkeeping provision in paragraph (a)(7) of 
Rule 17g-2 is to alert Commission examiners to those structured product 
credit ratings issued by an NRSRO that have been determined using one 
or more of these practices, which commenters have argued are unfair, 
coercive, or abusive. This will assist the examiners in requesting the 
records relating to these credit ratings in order to monitor these 
practices and get a better understanding of how they are employed. The 
Commission believes this provision is necessary or appropriate in the 
public interest or for the protection of investors because it will 
assist the Commission in reviewing whether these practices are being 
engaged in with anticompetitive intent in violation of Rule 17g-
6(a)(4).
    For these reasons, the Commission is adopting the provision in Rule 
17g-2.
ii. Paragraph (b)(8) of Rule 17g-2
    As adopted, paragraph (b)(8) of Rule 17g-2 requires an NRSRO to 
retain internal documents that contain information, analysis, or 
statistics that were used to develop a procedure or methodology to 
treat the credit ratings of another NRSRO for the purpose of 
determining a credit rating of a security or money market instrument 
issued by an asset pool or part of any asset-backed or mortgage-backed 
securities transaction.
    As discussed above, the commenters who opposed the prohibition in 
Rule 17g-6(a)(4), as proposed, stated that there were legitimate 
reasons for using, but lowering, another credit rating agency's credit 
ratings or insisting on performing an independent assessment of the 
assets rated by another credit rating agency.\479\ As noted above, the 
Commission has insufficient information at this time to determine

[[Page 33605]]

that such practices are a pretext for anticompetitive behavior or that 
such practices are appropriate. The records that an NRSRO must retain 
under this provision will assist the Commission in understanding 
whether the NRSROs that engage in these practices have analytical, 
statistical, or other bases to support their methodologies. The 
existence (or absence) and nature of such information will assist the 
Commission in analyzing whether the practices are employed with the 
intent to improve the quality and accuracy of credit ratings or as 
pretexts for anticompetitive behavior.
---------------------------------------------------------------------------

    \479\ See S&P Letter; Moody's Letter.
---------------------------------------------------------------------------

    For example, the Commission understands issuers may ask for pre-
credit rating assessments for a security from three or more credit 
rating agencies and, based on the assessments or other considerations, 
hire one or more, but not all, of the credit rating agencies to issue 
the credit rating.\480\ A credit rating agency that was not hired to 
issue a credit rating for the security may use its pre-credit rating 
assessment as part of an analysis of how it would rate this type of 
security as compared to the other credit rating agencies. This analysis 
may be used to develop a procedure or methodology to treat the credit 
ratings of the other credit rating agencies for securities underlying a 
structured product in developing a credit rating for the structured 
product.\481\ The treatment may include a schedule in which the credit 
ratings of the other credit rating agencies are notched down to the 
extent they are included in the structured product. Under paragraph 
(b)(8) of Rule 17g-2, an NRSRO that uses pre-credit rating assessments 
to develop such a schedule will need to retain any records documenting 
its pre-credit rating assessments and the process by which the pre-
credit rating assessments were used to arrive at the number of notches 
the securities will be discounted.
---------------------------------------------------------------------------

    \480\ See Moody's 3rd Letter.
    \481\ See 17 CFR 240.17g-2(b)(8).
---------------------------------------------------------------------------

    The Commission believes this provision is necessary or appropriate 
in the public interest or for the protection of investors because it 
will assist the Commission in reviewing whether these practices are 
being engaged in with anticompetitive intent in violation of Rule 17g-
6(a)(4).
iii. Paragraph (b)(9) of Rule 17g-2
    As adopted, paragraph (b)(9) of Rule 17g-2 requires an NRSRO to 
retain for each security identified in the record required under 
paragraph (a)(7) of Rule 17g-2, any document that contains a 
description of how assets within such pool or as a part of such 
transaction not rated by the NRSRO but rated by another NRSRO were 
treated for the purpose of determining the credit rating of the 
security.
    These records will permit Commission examiners to review on a case-
by-case basis the method by which an NRSRO incorporates the credit 
ratings of another NRSRO into the credit rating of a structured 
product. For example, examiners will be able to compare the 
methodologies for incorporating highly rated assets with those for 
lower rated assets. One commenter that strongly supports prohibiting 
these practices states that credit rating agencies engaging in these 
practices notch down assets they have rated in the highest credit 
rating categories even though studies suggest that its credit ratings 
perform comparably.\482\
---------------------------------------------------------------------------

    \482\ See Fitch Letter.
---------------------------------------------------------------------------

    The Commission believes this provision is necessary or appropriate 
in the public interest or for the protection of investors because it 
will assist the Commission in reviewing whether these practices are 
being engaged in with anticompetitive intent in violation of Rule 17g-
6(a)(4).
5. Unsolicited credit ratings
    In the proposing release, the Commission preliminarily determined 
that it would be unfair, coercive, or abusive to issue an unsolicited 
credit rating and communicate with the issuer or obligor to induce or 
attempt to induce them to pay for the credit rating or another product 
or service of the NRSRO or its affiliates. Consequently, paragraph 
(a)(5) of proposed Rule 17g-6 would have prohibited this practice.
    Commenters raised a number of concerns with respect to how this 
prohibition would operate in practice.\483\ For the most part, they 
worried it was overbroad and, consequently, would prohibit legitimate 
business activities that are not coercive.\484\ As discussed with 
respect to Exhibit 2, issuers and obligors, for example, may consent to 
the issuance, and participate in the determination, of a credit rating 
even if they did not specifically request that the credit rating be 
issued. The Commission wants to gain a better understanding through its 
examination function of how credit rating agencies define ``unsolicited 
credit ratings'' and the practices they employ with respect to these 
ratings. The Commission believes it must gain this understanding before 
prohibiting any practices in this area.
---------------------------------------------------------------------------

    \483\ See R&I Letter; FSR Letter; DBRS Letter; A.M. Best Letter; 
Fitch Letter; S&P Letter; Moody's Letter; Langohr Letter; LACE 
Letter.
    \484\ Id.
---------------------------------------------------------------------------

    For these reasons, the prohibition has been eliminated from Rule 
17g-6.

V. Paperwork Reduction Act

    Certain provisions of the rules contain a ``collection of 
information'' within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\485\ The Commission published a notice requesting comment on 
the collection of information requirements in the proposing release and 
submitted the proposed rules to the Office of Management and Budget 
(``OMB'') for review in accordance with the PRA. The Commission will 
publish notice in the Federal Register when it receives clearance from 
OMB. The Commission did not receive any comments on the burden 
estimates in the proposing release.
---------------------------------------------------------------------------

    \485\ 44 U.S.C. 3501 et seq.; 5 CFR 1320.11.
---------------------------------------------------------------------------

    An agency may not conduct or sponsor, and a person is not required 
to comply with, a collection of information unless it displays a 
currently valid control number. The titles for the collections of 
information are:
    (1) Rule 17g-1, Application for registration as a nationally 
recognized statistical rating organization; Form NRSRO and the 
Instructions for Form NRSRO;
    (2) Rule 17g-2, Records to be made and retained by national 
recognized statistical rating organizations;
    (3) Rule 17g-3, Annual financial reports to be furnished by 
nationally recognized statistical rating organizations; and
    (4) Rule 17g-4, Prevention of Misuse of Material Nonpublic 
Information.

A. Collections of Information in the Rules

    The rules being adopted implement registration, recordkeeping, 
financial reporting, and oversight provisions of the Credit Rating 
Agency Reform Act of 2006 (the ``Rating Agency Act'').\486\ The rules 
contain recordkeeping and disclosure requirements that are subject to 
the PRA for registered NRSROs and impose mandatory collection of 
information obligations.
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    \486\ Pub. L. 109-291 (2006).
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    In summary, the rules require a credit rating agency that wishes to 
register as an NRSRO to furnish an initial application to the 
Commission for registration on Form NRSRO; \487\ and a credit rating 
agency or NRSRO to furnish a written notice to the

[[Page 33606]]

Commission to withdraw an initial application or application to be 
registered in an additional class of credit ratings prior to final 
action by the Commission.\488\ Further, the rules require an NRSRO to 
(1) furnish an application to the Commission on Form NRSRO for 
registration in an additional class of credit ratings; \489\ (2) 
furnish an application supplement on Form NRSRO to update information 
for an initial application or for an application to register an 
additional class of credit ratings prior to final Commission action; 
\490\ (3) furnish an amendment to the Commission on Form NRSRO to 
update information in the application after registration; \491\ (4) 
furnish an annual certification to the Commission on Form NRSRO; \492\ 
(5) furnish a withdrawal of registration to the Commission on Form 
NRSRO; \493\ (6) make the current Form NRSRO and Exhibits 1 through 9 
publicly available on its Web site, or through another comparable, 
readily accessible means; \494\ (7) make, retain, and preserve certain 
records; \495\ (8) furnish an undertaking to the Commission if a third-
party custodian makes or retains these records; \496\ (9) furnish the 
Commission with annual financial reports; \497\ and (10) establish 
certain procedures to prevent the misuse of material nonpublic 
information.\498\ Many of these requirements are prescribed in Section 
15E of the Exchange Act.\499\
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    \487\ Section 15E(a)(1) of the Exchange Act (15 U.S.C. 78o-
7(a)(1)) and Rule 17g-1(a).
    \488\ Rule 17g-1(d); see also Section 15E(a)(1) of the Exchange 
Act (15 U.S.C. 78o-7(a)(1)).
    \489\ Rule 17g-1(b).
    \490\ Rule 17g-1(c).
    \491\ Section 15E(b)(1) of the Exchange Act (15 U.S.C. 78o-
7(b)(1)) and Rule 17g-1(e).
    \492\ Section 15E(b)(2) of the Exchange Act (15 U.S.C. 78o-
7(b)(2)) and Rule 17g-1(f).
    \493\ Section 15E(e)(1) of the Exchange Act (15 U.S.C. 78o-
7(e)(1)) and Rule 17g-1(g).
    \494\ Section 15E(a)(3) of the Exchange Act (15 U.S.C. 78o-
7(a)(3)) and Rule 17g-1(i).
    \495\ Rule 17g-2 under authority in Section 17(a)(1) of the 
Exchange Act (15 U.S.C. 78q(a)(1)).
    \496\ Rule 17g-2(e) under authority in Section 17(a)(1) of the 
Exchange Act (15 U.S.C. 78q(a)(1)).
    \497\ Section 15E(k) of the Exchange Act (15 U.S.C. 78o-7(k)) 
and Rule 17g-3.
    \498\ Section 15E(g) of the Exchange Act (15 U.S.C. 78o-7(g)) 
and Rule 17g-4.
    \499\ See 15 U.S.C. 78o-7.
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B. Use of the Information

    Rules 17g-1 through 17g-6, Form NRSRO, and the Instructions for 
Form NRSRO establish a framework for Commission oversight of NRSROs. 
The collections of information in the rules are designed to allow the 
Commission to determine whether an entity should be registered as an 
NRSRO. Further, they will assist the Commission in effectively 
monitoring, through its examination function, whether an NRSRO is 
conducting its activities in accordance with Section 15E of the 
Exchange Act \500\ and the rules thereunder. The rules also are 
designed to assist users of credit ratings by requiring the disclosure 
of information that may be used to compare the credit ratings quality 
of different NRSROs. The disclosures include information about methods 
for determining credit ratings, organizational structure, policies for 
safeguarding non-public information, conflicts of interest, policies 
for managing conflicts of interest, and credit analyst qualifications. 
As noted in the Senate Report accompanying the Rating Agency Act, this 
information ``will facilitate informed decisions by giving investors 
the opportunity to compare ratings quality of different firms.'' \501\
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    \500\ 15 U.S.C. 78o-7.
    \501\ See Report of the Senate Committee on Banking, Housing, 
and Urban Affairs to Accompany S. 3850, Credit Rating Agency Reform 
Act of 2006, S. Report No. 109-326, 109th Cong., 2d Sess. (Sept. 6, 
2006) (``Senate Report'').
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C. Respondents

    The number of respondents will depend, in part, on the number of 
entities that meet the statutory requirements to be eligible for 
registration. The Rating Agency Act, by adding definitions to Section 3 
of the Exchange Act,\502\ identifies the types of entities that may 
apply for registration with the Commission as an NRSRO.\503\ First, it 
defines an ``NRSRO'' as a ``credit rating agency'' that, in pertinent 
part, has been in business as a credit rating agency for at least three 
consecutive years immediately preceding the date of its application for 
registration; issues credit ratings certified by 10 QIBs (unless 
exempted from that requirement) with respect to financial institutions, 
brokers, dealers, insurance companies, corporate issuers, issuers of 
asset-backed securities (as that term defined in 17 CFR 229.1101(c)), 
issuers of government securities, issuers of municipal securities, or 
issuers of foreign government securities; and is registered with the 
Commission.\504 \
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    \502\ 15 U.S.C. 78c.
    \503\ See Section 3 of the Rating Agency Act.
    \504\ Section 3(a)(62) of the Exchange Act (15 U.S.C. 
78c(a)(62)). Section 3(a)(64) of the Exchange Act (15 U.S.C. 
78c(a)(64)) defines the term ``qualified institutional buyer'' 
(``QIB'') as having the ``meaning given such term in [17 CFR 
230.144A(a)] or any successor thereto.''
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    Section 3 of the Exchange Act also defines the term ``credit rating 
agency'' as, in pertinent part, any person engaged in the business of 
issuing credit ratings on the Internet or through another readily 
accessible means, for free or for a reasonable fee; employing either a 
quantitative or qualitative model, or both, to determine credit 
ratings; and receiving fees from either issuers, investors, or other 
market participants, or a combination of these persons.\505\ The 
definition specifically excludes a commercial credit reporting 
company.\506\ Finally, Section 3 of the Exchange Act defines the term 
``credit rating'' to mean ``an assessment of the creditworthiness of an 
obligor as an entity or with respect to specific securities or money 
market instruments.'' \507\
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    \505\ Section 3(a)(61) of the Exchange Act (15 U.S.C. 
78c(a)(61)).
    \506\ Section 3(a)(61)(A) of the Exchange Act (15 U.S.C. 
78c(a)(61)(A)).
    \507\ Section 3(a)(60) of the Exchange Act (15 U.S.C. 
78c(a)(60)).
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    These definitions create threshold eligibility requirements with 
respect to the entities that are eligible to apply for registration as 
an NRSRO. Because NRSROs have not previously been supervised as such, 
and because credit rating agencies include publicly and privately held 
companies located throughout the world, it is difficult to estimate the 
number of entities that are eligible to register as NRSROs.
    In 2000, a working group of the Basel Committee on Banking 
Supervision \508\ issued a report on credit rating agencies that was 
based, in part, on surveys of 28 credit rating agencies located around 
the world, including the five credit rating agencies currently 
identified as NRSROs through the Commission's no-action letter 
process.\509\ In its report, the working group estimated that there 
were approximately 150 credit rating agencies located world-wide.\510\ 
The working group also noted that there was a wide disparity in size 
among credit rating agencies in terms of number of employees and credit 
ratings issued.\511\ In addition, the working group noted that some 
credit rating agencies focus exclusively on issuers in the countries 
where they are located.\512\
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    \508\ The Basel Committee on Banking Supervision is comprised of 
members from Belgium, Canada, France, Germany, Italy, Japan, 
Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United 
Kingdom and the United States. Countries are represented by their 
central bank and also by the authority with formal responsibility 
for the prudential supervision of banking business where this is not 
the central bank. More information about the Basel Committee for 
Banking Supervision can be found at: http://www.bis.org/.
    \509\ Credit Ratings and Complementary Sources of Credit Quality 
Information, Working group of the Basel Committee on Banking 
Supervision, No. 3--August 2000 (``Basel Report'').
    \510\ Id.
    \511\ Id.
    \512\ Id.
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    The Web site http://www.DefaultRisk.com, which has

[[Page 33607]]

tracked the number of credit rating agencies, identifies 57 credit 
rating agencies as of February 2006 and indicates that this count 
reflects a decrease from a previous count of 74.\513\ The Web site 
attributed the decrease to smaller firms either being consolidated into 
larger firms or ceasing operations.\514\
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    \513\ See http://www.defaultrisk.com (``DefaultRisk.com'').
    \514\ Id.
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    The estimates in the 2000 Basel Report and by DefaultRisk.Com 
provide some basis upon which to estimate the number of entities 
engaging in the business of issuing credit ratings. We cannot determine 
how many of the entities included in these estimates meet the statutory 
requirements to apply for, and be registered as, an NRSRO.
    In addition, it is difficult to estimate with certitude how many 
credit rating agencies ultimately would volunteer to be registered as 
NRSROs.\515\ Some credit rating agencies may decide not to seek 
registration because, for example, they do not believe that being an 
NRSRO would benefit them based on their business model. The Commission 
staff's experience with the expiring no-action letter process of 
identifying NRSROs provides some support for the conclusion that a 
substantial number of credit rating agencies may not apply for 
registration. Specifically, if the number of credit rating agencies has 
fluctuated over the years from between approximately 150 as of 2000 
(Basel Report) and 57 as of February 2006 (DefaultRisk.com), then a 
large majority of these firms have not applied to the Commission to be 
identified as NRSROs under the no-action letter process. It is possible 
that certain firms that did not seek NRSRO status previously will seek 
it under Section 15E of the Exchange Act.\516\ In addition, the use of 
QIB certifications as a prerequisite to registration (as opposed to the 
no-action letter process which evaluated national recognition) also may 
increase the number of credit rating agencies that are eligible for 
registration as an NRSRO.
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    \515\ Section 15E(a)(1) of the Exchange Act makes registration 
voluntary (15 U.S.C. 78o-7(a)(1)).
    \516\ 15 U.S.C. 78o-7.
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    For all these reasons, we estimated that the number of credit 
rating agencies applying for registration would be larger than the sum 
of the number of credit rating agencies currently identified as NRSROs 
plus the handful of entities that requested no-action letters. At the 
same time, the Commission did not believe that all of the 57 credit 
rating agencies identified by DefaultRisk.Com would apply for, or be 
granted, registration. Consequently, the Commission estimated that 
approximately 30 credit rating agencies would be registered as NRSROs 
under Section 15E of the Exchange Act.\517 \
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    \517\ 15 U.S.C. 78o-7.
---------------------------------------------------------------------------

    The Commission requested comment on this estimate and whether more 
or fewer credit rating agencies would be registered as NRSROs. The 
Commission also requested comment on whether the sources of industry 
information referenced in the proposing release (the Basel Report and 
the DefaultRisk.Com Web site) provided a reasonable basis for arriving 
at the estimate of 30 NRSROs. The Commission further requested comment 
on whether there were other industry sources that could provide 
credible statistics that could be used to determine the number of 
credit rating agencies that would be registered as NRSROs.
    The Commission did not receive any comments in response to these 
requests. The Commission continues to estimate, for purposes of this 
PRA, that approximately 30 credit rating agencies will be registered as 
NRSROs.

D. Total Annual Recordkeeping and Reporting Burden

    The Commission estimates the total recordkeeping burden resulting 
from these rules is approximately 15,722 hours \518\ on an annual basis 
and 21,755 hours\519\ on a one-time basis.
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    \518\ This total is derived from the total annual hours set 
forth in the order that the totals appear in the text: 1 + 1,500 + 
300 + 1 + 300 + 7,620 + 6,000 = 15,722 hours.
    \519\ This total is derived from the total one-time hours set 
forth in the order that the totals appear in the text: 9,000 + 1,200 
+ 125 + 900 + 9,000 + 50 + 1,500 = 21,775 hours.
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    The total annual and one-time hour burden estimates are averages 
across all types of expected NRSROs. The size and complexity of NRSROs 
will range from small entities to entities that are part of complex 
global organizations employing thousands of credit analysts. Larger 
NRSROs generally have established written policies and procedures and 
recordkeeping systems that comply with a substantial portion of the 
requirements in the rules. For example, many of the requirements in the 
rules are consistent with the IOSCO Code, which a number of credit 
rating agencies have adopted. The Commission assumed in its estimate 
that these firms would be required to augment or modify existing 
policies and procedures and recordkeeping systems to comply with the 
rules.
    The Commission further estimated that some smaller entities also 
have implemented the policies, procedures, and recordkeeping systems 
that substantially would comply with the proposed rules. Moreover, 
given their smaller size and simpler structure, the Commission assumed 
that smaller entities would require significantly fewer hours to comply 
with a substantial portion of the requirements in the proposed rules.
    Consequently, the burden hour estimates in the proposing release 
were designed to represent the average time across all NRSROs 
(regardless of size) and taking into account that many firms would only 
be required to augment existing policies, procedures, and recordkeeping 
systems and processes to comply with the proposed rules. The Commission 
noted that, given the significant variance in size between the largest 
credit rating agencies and the smaller firms, the burden estimates, as 
averages across all NRSROs, were skewed higher by the largest firms. 
Furthermore, because the Commission proposed to require additional 
information in Form NRSRO beyond that prescribed in Section 15E(1)(B) 
of the Exchange Act,\520\ the burden estimates for Rule 17g-1 included 
estimates arising from requirements of Section 15E of the Exchange 
Act.\521\ The intent was to quantify the incremental burden of 
complying with these statutory requirements as a result of the 
additional information that would be required under Rule 17g-1. Thus, 
the estimates did not seek to capture paperwork burden that would be 
solely attributable to requirements in Section 15E of the Exchange 
Act.\522\
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    \520\ 15 U.S.C. 78o-7(a)(1)(B).
    \521\ 15 U.S.C. 78o-7.
    \522\ Id.
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    The Commission sought comment on whether these factors were 
reasonably incorporated into the burden estimates. The Commission did 
not receive any comments in response to this request. The Commission 
continues to believe that it is appropriate to incorporate these 
factors into the final estimates, and has done so.
1. Rule 17g-1, Form NRSRO, and Instructions for Form NRSRO
    Section 15E(a)(1) of the Exchange Act requires a credit rating 
agency applying for registration with the Commission to furnish an 
application containing certain specified information and such other 
information as the Commission prescribes as necessary or appropriate in 
the public interest or for the protection of investors.\523\ Rule 17g-1 
\524\

[[Page 33608]]

implements this statutory provision by requiring a credit rating agency 
to furnish a completed initial application on Form NRSRO to the 
Commission to apply to be registered under Section 15E of the Exchange 
Act.\525\ The Commission estimated that the average time necessary to 
complete the initial Form NRSRO, and compile the various attachments, 
would be approximately 300 hours per applicant. This estimate was based 
on staff experience with the current NRSRO no-action letter 
process.\526\ The Commission, therefore, estimated that the total one-
time burden to the industry as a result of this requirement would be 
approximately 9,000 hours.\527\
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    \523\ 15 U.S.C. 78o-7(a)(1).
    \524\ See paragraphs (a), (c), and (h) of Rule 17g-1.
    \525\ 15 U.S.C. 78o-7.
    \526\ As a comparison, the proposing release noted that Form 
ADV, the registration form for investment advisers, is estimated to 
take approximately 22.25 hours to complete. See Investment Advisor 
Act of 1940 Release No. 2266 (July 20, 2004). The Commission 
estimated that the hour burden under Rule 17g-1 would be greater, 
given the substantially larger amount of information that will be 
required in Form NRSRO.
    \527\ 300 hours x 30 entities = 9,000 hours.
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    The Commission did not receive any comments on these specific 
estimates. The Commission notes that Form NRSRO has been changed to 
ease the burden of completing the Form. For example, applicants will 
not be required to provide information about each credit analyst, 
credit analyst supervisor, and compliance employee that assists the 
designated compliance officer. As discussed above, we developed these 
estimates based on the rules as proposed. We continue to believe the 
estimates are appropriate for the rules as now modified. Indeed, 
because we have in a variety of respects narrowed the requirements of 
the rules, we believe the estimates are likely to be conservative. We 
also note that NRSROs with small staffs will be less impacted by these 
modifications.
    The Commission also noted that an NRSRO likely would engage outside 
counsel to assist it in the process of completing and submitting a Form 
NRSRO. The Commission estimated that the amount of time an outside 
attorney will spend on this work would depend on the size and 
complexity of the NRSRO. Therefore, the Commission estimated that, on 
average, an outside counsel would spend approximately 40 hours 
assisting an NRSRO in preparing its application for registration for a 
one-time aggregate burden to the industry of 1,200 hours.\528\ The 
Commission further estimated that this work would be split between a 
partner and associate, with an associate performing a majority of the 
work. Therefore, the Commission estimated that the average hourly cost 
for an outside counsel would be approximately $400 per hour. For these 
reasons, the Commission estimated that the average one-time cost to an 
NRSRO would be $16,000 \529\ and the one-time cost to the industry 
would be $480,000.\530\ The Commission did not receive any comments on 
these specific estimates and continues to believe that they are 
appropriate. Therefore, the Commission is retaining these estimates 
without revision.
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    \528\ 40 hours x 30 entities = 1,200 hours.
    \529\ $400 per hour x 40 hours = $16,000.
    \530\ $16,000 x 30 NRSROs = $480,000.
---------------------------------------------------------------------------

    Rule 17g-1 requires that an NRSRO registered for fewer than the 
five classes of credit ratings listed in Section 3(a)(62)(B) of the 
Exchange Act apply to be registered for an additional class by 
furnishing an amendment on a completed Form NRSRO.\531\ The Commission 
estimated that it would take an NRSRO substantially less time to update 
the Form NRSRO for this purpose than to prepare the initial 
application. For example, much of the information on the Form and many 
of the Exhibits would still be current and not have to be updated. 
Based on the burden estimate to complete a Form ADV, the Commission 
estimated that furnishing an application on Form NRSRO for this purpose 
would take an average of approximately 25 hours per NRSRO.\532\
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    \531\ See paragraphs (c), (d), and (h) of Rule 17g-1.
    \532\ As noted above, the Commission's burden estimate for Form 
ADV is approximately 22.25 hours to complete. See Investment Advisor 
Act of 1940 Release No. 2266 (July 20, 2004).
---------------------------------------------------------------------------

    The Commission further estimated based on staff experience that 
approximately five of the 30 credit rating agencies expected to 
register with the Commission would apply to register for additional 
classes of credit ratings within the first year. The Commission 
explained that almost all NRSROs would initially apply to register for 
the first three classes of credit ratings identified in the definition 
of NRSRO: (1) Financial institutions, brokers, or dealers; (2) 
insurance companies; and (3) corporate issuers.\533\ These are the most 
common types of credit ratings issued, particularly since some credit 
rating agencies limit their credit ratings to domestic companies. The 
Commission explained that, after these three classes, the next largest 
class of credit ratings for which most NRSROs would be registered would 
be for credit ratings with respect to issuers of government securities, 
municipal securities, and foreign government securities.\534\ These 
types of credit ratings take additional expertise. Finally, the 
Commission explained that the class of credit ratings for which the 
least number of NRSROs would be registered would be credit ratings of 
issuers of asset-backed securities (as that term is defined in 17 CFR 
229.1101(c)).\535\ This assumption was based on the fact that 
determining a credit rating for an asset-backed security takes 
specialized expertise beyond that for determining credit ratings of 
corporate issuers and obligors. For example, it requires analysis of 
complex legal structures.
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    \533\ Section 3(a)(62)(B) of the Exchange Act (15 U.S.C. 
78c(a)(62)(B)).
    \534\ Section 3(a)(62)(B)(v) of the Exchange Act (15 U.S.C. 
78c(a)(62)(B)(v)).
    \535\ Section 3(a)(62)(B)(iv) of the Exchange Act (15 U.S.C. 
78c(a)(62)(B)(iv)).
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    For these reasons, the Commission anticipated that some NRSROs 
might register for less than all five classes of credit ratings. 
Moreover, these NRSROs, in time, may develop their businesses to 
include issuing credit ratings in a class for which they are not 
initially registered. Based on staff experience, the Commission 
estimated that approximately five of the 30 NRSROs would apply to add 
another class of credit ratings to their registration within the first 
year. Therefore, given the 25 hour per NRSRO average burden estimate, 
the total aggregate one-time burden to the industry for filing the 
amended Form NRSRO to change the scope of registration was estimated be 
approximately 125 hours.\536\ The Commission did not receive any 
comments on these specific estimates and continues to believe that they 
are appropriate. Therefore, the Commission is retaining these estimates 
without revision.
---------------------------------------------------------------------------

    \536\ 25 hours x 5 NRSROs = 125 hours.
---------------------------------------------------------------------------

    Rule 17g-1 requires a credit rating agency to provide the 
Commission with a written notice if it intends to withdraw its 
application prior to final Commission action.\537\ Based on staff 
experience, the Commission estimated that one credit rating agency per 
year would withdraw a Form NRSRO prior to final Commission action on 
the application and, consequently, would furnish a notice of its intent 
to withdraw the application. Based on current estimates for a broker-
dealer to file a notice under Rule 17a-11, the Commission estimated the 
average burden to an NRSRO to furnish the notice of withdrawal would be 
one hour.\538\ Thus, the Commission estimated that the aggregate annual 
burden to the industry of providing a

[[Page 33609]]

notice of withdrawal prior to final Commission action would be one hour 
per year.\539\ The Commission did not receive any comments on these 
specific estimates and continues to believe that they are appropriate. 
Therefore, the Commission is retaining these estimates without 
revision.
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    \537\ See paragraph (d) of Rule 17g-1.
    \538\ See Exchange Act Release No. 49830 (June 8, 2004); see 
also 17 CFR 240.17a-11.
    \539\ 1 hour x 1 entity = 1 hour.
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    Section 15E(b)(1) of the Exchange Act requires an NRSRO to promptly 
amend its application for registration if any information or document 
provided in the application becomes materially inaccurate.\540\ Rule 
17g-1 requires an NRSRO to comply with this statutory requirement by 
furnishing the amendment on Form NRSRO.\541\ Based on staff experience, 
the Commission estimated that an NRSRO would file two amendments of its 
Form NRSRO per year on average. Furthermore, for the reasons discussed 
above, the Commission estimated that it would take an average of 
approximately 25 hours to prepare and furnish an amendment on Form 
NRSRO.\542\ Therefore, the Commission estimated that the total 
aggregate annual burden to the industry to update Form NRSRO would be 
approximately 1,500 hours each year.\543\ The Commission did not 
receive any comments on these specific estimates and continues to 
believe that they are appropriate. Therefore, the Commission is 
retaining these estimates without revision.
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    \540\ 15 U.S.C. 78o-7(b)(1).
    \541\ See paragraph (e) of Rule 17g-1.
    \542\ This estimate also is based on the estimates for the 
collection of information on Rule 17i-2 under the Exchange Act (17 
CFR 240.17i-2).
    \543\ 25 hours per amendment x 2 amendments x 30 NRSROs = 1,500 
hours.
---------------------------------------------------------------------------

    Section 15E(b)(2) of the Exchange Act requires an NRSRO to furnish 
an annual certification.\544\ Rule 17g-1 requires an NRSRO to furnish 
the annual certification on Form NRSRO.\545\ The Commission estimated 
that the annual certification, generally, would take less time than an 
amendment to Form NRSRO because it would be done on a regular basis 
(albeit yearly) and, therefore, become more a matter of routine over 
time. Consequently, the Commission estimated that the burden would be 
similar to that of broker-dealers filing the quarterly reports required 
under Rules 17h-1T and 17h-2T, which is approximately 10 hours per year 
for each respondent.\546\ Therefore, the Commission estimated it would 
take an NRSRO approximately 10 hours to complete the annual 
certification for a total aggregate annual hour burden to the industry 
of 300 hours.\547\ The Commission did not receive any comments on these 
specific estimates and continues to believe that they are appropriate. 
Therefore, the Commission is retaining these estimates without 
revision.
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    \544\ 15 U.S.C. 78o-7(b)(2).
    \545\ See paragraph (f) of Rule 17g-1.
    \546\ See 17 CFR 240.17h-1T and 2T.
    \547\ 10 hour x 30 NRSROs = 300 hours.
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    Rule 17g-1 has been modified to require an NRSRO to furnish the 
Commission with a withdrawal of registration on Form NRSRO.\548\ As 
proposed, the Commission required a written notice without prescribing 
the form of the notice. The Commission expects that the furnishing of 
these withdrawals will be rare, given that only 30 credit rating 
agencies are expected to register. Based on staff experience, the 
Commission estimates that one NRSRO per year will withdraw its 
registration. Further, the instructions to Form NRSRO provide that only 
the items on the Form are required to be completed in the case of a 
withdrawal; an NRSRO would not be required to update or attach any of 
the information required in the Exhibits. Based on current estimates 
for a broker-dealer to file a notice under Rule 17a-11, the Commission 
estimates the average burden to an NRSRO to furnish the notice of 
withdrawal would be one hour.\549\ Thus, the Commission estimates that 
the aggregate annual burden to the industry of providing a notice of 
withdrawal prior to final Commission action would be one hour per 
year.\550\
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    \548\ See paragraph (g) of Rule 17g-1.
    \549\ See Exchange Act Release No. 49830 (June 8, 2004); see 
also 17 CFR 240.17a-11.
    \550\ 1 hour x 1 entity = 1 hour.
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    Section 15E(a)(3) of the Exchange Act requires an NRSRO to make 
certain information and documents submitted in its application publicly 
available on its Web site, or through another comparable, readily 
accessible means.\551\ Rule 17g-1 requires that this be done within 10 
business days of the granting of an NRSRO's registration or the 
furnishing of an amendment, annual certification, or withdrawal.\552\ 
The Commission believed that each NRSRO already would have a Web site 
and would choose to use its Web site to comply with Section 15E(a)(3) 
of the Exchange Act (15 U.S.C. 78o-7(a)(3)). Therefore, based on staff 
experience, the Commission estimated that, on average, an NRSRO would 
spend 30 hours to disclose the information in its initial application 
on its Web site and, thereafter, 10 hours per year to disclose updated 
information. Accordingly, the total aggregate one-time burden to the 
industry to make Form NRSRO publicly available would be 900 hours \553\ 
and the total aggregate annual burden would be 300 hours.\554\ The 
Commission did not receive any comments on these specific estimates and 
continues to believe that they are appropriate. Therefore, the 
Commission is retaining these estimates without revision.
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    \551\ 15 U.S.C. 78o-7(a)(3).
    \552\ See Rule 17g-1(i).
    \553\ 30 hours x 30 NRSROs = 900 hours.
    \554\ 10 hours x 30 NRSROs = 300 hours.
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2. Rule 17g-2
    Section 17(a)(1) of the Exchange Act (as amended by the Rating 
Agency Act) \555\ provides the Commission with authority to require an 
NRSRO to make and maintain such records as the Commission prescribes by 
rule as necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the Exchange 
Act.\556\ Rule 17g-2 implements this rulemaking authority by requiring 
an NRSRO to make and keep current certain records relating to its 
business. In addition, the rule requires an NRSRO to preserve these and 
other records for certain prescribed time periods. This rule is 
designed to assist the Commission in monitoring, through its 
examination function, whether NRSROs are complying with the 
requirements of Section 15E of the Exchange Act \557\ and the 
regulations thereunder. The Commission estimated that the average one-
time burden of implementing a recordkeeping system to comply with this 
rule would be approximately 300 hours. This estimate was based on the 
Commission's experience with, and burden estimates for, certain 
recordkeeping requirements of consolidated supervised entities 
(``CSEs'') subject to Commission supervision.\558\
---------------------------------------------------------------------------

    \555\ See Section 5 of the Rating Agency Act.
    \556\ See Section 5 of the Rating Agency Act and 15 U.S.C 
78q(a)(1).
    \557\ 15 U.S.C. 78o-7.
    \558\ See 17 CFR 15c3-1g.
---------------------------------------------------------------------------

    The Commission also estimated that an NRSRO might be required to 
purchase recordkeeping system software to establish a recordkeeping 
system in conformance with the rule. The Commission estimated that the 
cost of the software would vary based on the size and complexity of the 
NRSRO. Also, the Commission estimated that some NRSRO's would not 
require such software because they already have adequate recordkeeping 
systems or, given their small size, such software would not be 
necessary. Based on these estimates, the Commission estimated that the 
average cost for recordkeeping software across all NRSROs would be

[[Page 33610]]

approximately $1000 per firm. Therefore, the one-time cost to the 
industry would be $30,000.
    Additionally, the Commission estimated that the average annual 
amount of time that an NRSRO would spend to make and maintain these 
records would be approximately 254 hours per year. The estimate for 
annual hours was based on the Commission's present estimate for the 
amount of time it would take a broker-dealer to comply with the 
recordkeeping rule, Rule 17a-4.\559\ Therefore, the Commission 
estimated that the one-time hour burden for making and preserving the 
records under proposed Rule 17g-2 would be approximately 9,000 hours 
\560\ and the total annual hour burden would be approximately 7,620 
hours per year.\561\
---------------------------------------------------------------------------

    \559\ See 17 CFR 240.17a-4 (recordkeeping requirements for 
broker-dealers). This rule has previously been subject to notice and 
comment and has been approved by OMB. The Commission noted in the 
proposing release that Rule 17g-2 is based, in part, on Exchange Act 
Rules 17a-3 (17 CFR 240.17a-3) and 17a-4 (17 CFR 240.17a-4). The 
annual hour burden estimate for the rule, however, was based only on 
the PRA estimate for Rule 17a-4. The rule requires substantially 
less records to be made and maintained than Rules 17a-3 and 17a-4. 
Therefore, the Commission based its estimate only on the estimate 
for Rule 17a-4 (as opposed to Rules 17a-3 and 17a-4 combined).
    \560\ 300 hours x 30 NRSROs = 9,000 hours.
    \561\ 254 hours x 30 NRSROs = 7,620 hours.
---------------------------------------------------------------------------

    Rule 17g-2 also requires an NRSRO that uses a third-party record 
custodian to furnish the Commission with an undertaking from the 
custodian. Based on staff experience, the Commission estimated that 
approximately five NRSROs would file this undertaking on a one-time 
basis. The Commission estimated, based on staff experience, it would 
take an NRSRO approximately 10 hours to process an undertaking prior to 
furnishing it to the Commission.\562\ Therefore, the Commission 
estimated the total one-time hour burden for these undertakings would 
be 50 hours.\563\
---------------------------------------------------------------------------

    \562\ The estimated 10 hours includes drafting, legal review and 
receiving corporate authorization to file the undertaking with the 
Commission.
    \563\ 10 hours x 5 NRSROs = 50 hours.
---------------------------------------------------------------------------

    The Commission did not receive any comments on these specific 
burden estimates. The Commission notes that Rule 17g-2 has been 
modified in certain respects that decrease the burden, but also in 
other respects that will increase burden. For example, requirements to 
make records identifying the methodology used to determine each credit 
rating and how the credit rating was made readily available have been 
eliminated. Further, the retention periods for all the records have 
been harmonized and the requirement for a non-resident NRSRO to furnish 
an undertaking has been eliminated. On the other hand, the rule now 
requires an NRSRO to document its methodologies for determining credit 
ratings and, if applicable, to make and retain certain records relating 
to practices with respect to rating structured products. The Commission 
believes that these adjustments will largely offset each other or 
result in a net decrease in burden. For example, the elimination of the 
requirement to identify the methodology used to determine a credit 
rating would have impacted all NRSROs and required them to make a 
record for each credit rating (which could be in the many thousands). 
Conversely, the requirements with respect to structured products only 
will impact NRSROs that rate these types of securities, which the 
Commission estimates is less than five. While the Commission could 
reduce its burden estimate, it is taking a conservative approach to the 
net results of these changes. For these reasons, the Commission is 
retaining the rule's overall burden estimates without revision.
3. Rule 17g-3
    Section 15E(k) of the Exchange Act requires an NRSRO to furnish to 
the Commission, on a confidential basis and at intervals determined by 
the Commission, such financial statements and information concerning 
its financial condition that the Commission, by rule, may prescribe as 
necessary or appropriate in the public interest or for the protection 
of investors.\564\ The section also provides that the Commission may, 
by rule, require that the financial statements be certified by an 
independent public accountant.\565\
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    \564\ 15 U.S.C. 78o-7(k). An applicant can request that the 
Commission keep this information confidential. See 17 CFR 200.80 and 
17 CFR 200.83.
    \565\ Id.
---------------------------------------------------------------------------

    Rule 17g-3 implements this statutory provision by requiring an 
NRSRO to furnish financial reports to the Commission. We estimated 
that, on average, it would take an NRSRO approximately 200 hours to 
prepare for and file the annual financial reports. This estimate was 
based on the current PRA estimates used for CSEs under Appendix G to 
Exchange Act Rule 15c3-1, as well as the PRA estimates for supervised 
investment bank holding companies under Rule 17i-5.\566\ Therefore, the 
Commission estimated that the total annual hour burden to prepare and 
furnish annual audited financial statements with the Commission would 
be approximately 6,000 hours.\567\
---------------------------------------------------------------------------

    \566\ See 17 CFR 240.15c3-1g and 17 CFR 240.17i-5.
    \567\ 200 hours x 30 NRSROs = 6,000 hours.
---------------------------------------------------------------------------

    To comply with Rule 17g-3, an NRSRO would be required to engage the 
services of an independent public accountant. The Commission estimated 
that the cost of hiring an accountant would vary substantially based on 
the size and complexity of the NRSRO. For example, the Commission noted 
that, based on staff experience, the annual audit costs of a small 
broker-dealer generally range from $3,000 to $5,000 per year. The 
Commission estimated that the annual audit costs for a small NRSRO 
would be comparable. The costs for a large NRSRO would be much greater. 
However, many of these firms already are audited by a public accountant 
for other regulatory purposes. For these reasons, the Commission 
estimated that the average annual cost across all NRSROs to engage the 
services of an independent public accountant would be approximately 
$15,000. Therefore, the annual cost to the industry would be 
$450,000.\568\
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    \568\ $15,000 x 30 NRSROs = $450,000.
---------------------------------------------------------------------------

    The Commission did not receive any comments on these specific 
estimates. The Commission notes that Rule 17g-3 has been modified to 
decrease the burden. For example, the requirement to comply with all 
provisions of Regulation S-X has been eliminated, as has the 
requirement to have the information in the proposed schedules audited. 
As discussed above, we developed these estimates based on the rule as 
proposed. We continue to believe the estimates are appropriate for the 
rule as now modified. Indeed, because we have in a variety of respects 
narrowed the requirements of the rule, we believe the estimates are 
likely to be conservative.
4. Rule 17g-4
    Section 15E(g)(1) of the Exchange Act \569\ requires an NRSRO to 
establish, maintain, and enforce written policies and procedures to 
prevent the misuse of material, nonpublic information in violation of 
the Exchange Act.\570\ Section 15E(g)(2) of the Exchange Act provides 
that the Commission shall adopt rules requiring an NRSRO to establish 
specific policies and procedures to prevent the misuse of material, 
non-public information.\571\ Rule 17g-4 implements this statutory 
provision by requiring that an NRSRO's policies and procedures 
established pursuant to Section 15E(g)(1) of the Exchange Act \572\ 
include three specific types of procedures.
---------------------------------------------------------------------------

    \569\ 15 U.S.C. 78o-7(g)(1).
    \570\ 15 U.S.C. 78a et seq.
    \571\ 15 U.S.C. 78o-7(g)(2).
    \572\ 15 U.S.C. 78o-7(g)(1).

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[[Page 33611]]

    The Commission assumed that most credit rating agencies already 
have procedures in place to address the specific misuses of material 
nonpublic information identified in Rule 17g-4.\573\ Nonetheless, the 
Commission anticipated that some NRSROs might need to modify their 
procedures to comply with the rule. Based on staff experience, the 
Commission estimated that it would take approximately 50 hours for an 
NRSRO to establish procedures in conformance with the rule for a total 
one-time burden of 1,500 hours.\574\ The Commission did not receive any 
comments on these specific estimates and continues to believe that they 
are appropriate. Therefore, the Commission is retaining these estimates 
without revision.
---------------------------------------------------------------------------

    \573\ For example, the IOSCO Code requires credit rating 
agencies to develop such procedures.
    \574\ 50 hours x 30 NRSROs = 1,500 hours.
---------------------------------------------------------------------------

E. Collection of Information Is Mandatory

    These recordkeeping and notice requirements are mandatory.

F. Confidentiality

    Pursuant to section 15E(a)(1)(B) of the Exchange Act, certain 
information collected in Form NRSRO required under Rule 17g-1(a) will 
not be confidential. However, credit rating agencies and NRSROs may 
seek confidential treatment of information furnished to the Commission 
under existing rules, and the Commission will keep this information 
confidential to the extent permitted by law. The books and records 
information collected under Rules 17g-2 and 17g-4 will be stored by the 
NRSRO and made available to the Commission and its representatives as 
required in connection with examinations, investigations, and 
enforcement proceedings.
    The information collected under Rule 17g-3 (the annual financial 
reports) will be generated from the internal records of the NRSRO. 
Pursuant to Section 15E(k) of the Exchange Act, the annual financial 
reports will be furnished to the Commission on a confidential basis, to 
the extent permitted by law.\575\
---------------------------------------------------------------------------

    \575\ 15 U.S.C. 78o-7(k).
---------------------------------------------------------------------------

G. Record Retention Period

    Paragraph (c) of Rule 17g-2 requires an NRSRO to retain the records 
for at least three years.

H. Request for Comment

    The Commission requested comment on the collections of information 
in order to: (1) Evaluate whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the Commission, including whether the information would have practical 
utility; (2) evaluate the accuracy of the Commission's 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; (4) evaluate whether there are ways to 
minimize the burden of the collection of information on those who 
respond, including through the use of automated collection techniques 
or other forms of information technology; and (5) evaluate whether the 
proposed rules would have any effects on any other collection of 
information not previously identified in this section.

VI. Costs and Benefits of the Rules

    The Commission is sensitive to the costs and benefits that result 
from its rules. The Commission identified certain costs and benefits 
arising from these rules and requested comment on all aspects of the 
cost-benefit analysis contained therein, including identification and 
assessment of any costs and benefits not discussed in the 
analysis.\576\ The Commission sought comment and data on the value of 
the benefits identified. The Commission also elicited comment on the 
accuracy of the cost estimates in each section of the cost-benefit 
analysis, and requested those commenters to provide data so the 
Commission could improve the cost estimates, including identification 
of industry statistics relied on by commenters to reach conclusions on 
cost estimates. The Commission also sought comment on the extent to 
which costs were attributable to requirements set forth in Section 15E 
of the Exchange Act,\577\ rather than the rules. Finally, the 
Commission requested estimates and views regarding the costs and 
benefits for particular types of market participants, as well as any 
other costs or benefits that might result from the rules.
---------------------------------------------------------------------------

    \576\ For the purposes of this cost/benefit analysis, the 
Commission is using salary data from the SIA Report on Management 
and Professional Earnings in the Securities Industry 2005 (``SIA 
Management Report 2005''), which provides base salary and bonus 
information for middle-management and professional positions within 
the securities industry. The positions in the report are divided 
into the following categories: Accounting, Administration & Finance, 
Compliance, Customer Service, Floor/Trading, Human Resources 
Management, Internal Audit, Legal, Marketing/Corporate 
Communications, New Business Development, Operations, Research, 
Systems/Technology, Wealth Management, and Business Continuity 
Planning. The Commission believes that the salaries for these 
securities industry positions would be comparable to the salaries of 
similar positions in the credit rating industry. The Commission also 
notes that it is using salaries for New York-based employees, which 
tend to be higher than the salaries for comparable positions located 
outside of New York. This conservative approach is intended to 
capture unforeseen costs. Finally, the salary costs derived from the 
SIA Management Report 2005 and referenced in this cost benefit 
section, are modified to account for an 1800-hour work year and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits and overhead.
    \577\ 15 U.S.C. 78o-7.
---------------------------------------------------------------------------

    As discussed below, the Commission received very limited comment on 
the cost-benefit analysis in the proposing release. Except as discussed 
below, the Commission continues to believe that the specific estimates 
are appropriate and is retaining these estimates generally without 
revision.

A. Benefits

    The purposes of the Credit Rating Agency Reform Act of 2006 (the 
``Rating Agency Act'') \578\ are to improve ratings quality for the 
protection of investors and in the public interest by fostering 
accountability, transparency, and competition in the credit rating 
industry.\579\ As the Senate Report states, the Rating Agency Act 
establishes ``fundamental reform and improvement of the designation 
process,'' and ``eliminating the artificial barrier to entry will 
enhance competition and provide investors with more choices, higher 
quality ratings, and lower costs.'' \580\
---------------------------------------------------------------------------

    \578\ Pub. L. 109-291 (2006).
    \579\ See Report of the Senate Committee on Banking, Housing, 
and Urban Affairs to Accompany S. 3850, Credit Rating Agency Reform 
Act of 2006, S. Report No. 109-326, 109th Cong., 2d Sess. (Sept. 6, 
2006) (``Senate Report'').
    \580\ Id.
---------------------------------------------------------------------------

    To these ends, the Rating Agency Act establishes--through statutory 
provisions and the grant of Commission rulemaking authority--a 
regulatory program for credit rating agencies opting to have their 
credit ratings qualify for purposes of laws and rules using the term 
``NRSRO.'' Specifically, the Rating Agency Act sets out a voluntary 
mechanism for credit rating agencies to register with the Commission as 
an NRSRO.\581\ It requires an NRSRO to make public certain information 
to help users of credit ratings assess the NRSRO's credibility and 
compare the NRSRO with other NRSROs.\582\ The Rating Agency Act also 
requires an NRSRO to furnish the Commission with periodic financial 
reports.\583\ Further, the Rating Agency Act requires an NRSRO to 
implement policies to manage the handling of material non-

[[Page 33612]]

public information and conflicts of interest.\584\ Pursuant to 
authority under the Rating Agency Act, the Commission must prohibit 
certain acts and practices the Commission finds to be unfair, coercive, 
or abusive.\585\
---------------------------------------------------------------------------

    \581\ Section 15E of the Exchange Act (15 U.S.C. 78o-7).
    \582\ Sections 15E(a)(1) and (b)(1) of the Exchange Act (15 
U.S.C. 78o-7(a)(1) and (b)(1)).
    \583\ Section 15E(k) of the Exchange Act (15 U.S.C. 78o-7(k)).
    \584\ Sections 15E(g) and (h) of the Exchange Act (15 U.S.C. 
78o-7(g) and (h)).
    \585\ Section 15E(i) of the Exchange Act (15 U.S.C. 78o-7(i)).
---------------------------------------------------------------------------

    The rules the Commission is adopting under the Rating Agency Act 
are being issued pursuant to specific statutory mandates and grants of 
rulemaking authority. They are designed to further the goals of the 
Rating Agency Act, including fostering ``competition in the credit 
rating agency business.'' \586\ The practice of identifying NRSROs 
through staff no-action letters has been criticized as a process that 
lacks transparency and creates a barrier for credit rating agencies 
seeking wider recognition and market share. The Commission believes 
that these rules further the goal of increasing competition because 
they provide credit rating agencies with a transparent process to apply 
for registration as an NRSRO that does not favor a particular business 
model or larger, established firms. This will make it easier for more 
credit rating agencies to apply for registration. Increased competition 
in the credit ratings business could lower the cost to issuers, 
obligors, and underwriters of obtaining credit ratings.
---------------------------------------------------------------------------

    \586\ See Report of the Senate Committee on Banking, Housing, 
and Urban Affairs to Accompany S. 3850, Credit Rating Agency Reform 
Act of 2006, S. Report No. 109-326, 109th Cong., 2d Sess. (Sept. 6, 
2006) (``Senate Report'').
---------------------------------------------------------------------------

    In addition, the Rating Agency Act requires NRSROs to make their 
credit ratings and information about themselves available to the 
public. Part of the Rating Agency Act's definition of ``credit rating 
agency'' is that the entity must be in the business of issuing credit 
ratings on the Internet or through another readily accessible means, 
for free or for a reasonable fee.\587\ Under the Rating Agency Act and 
the rules adopted thereunder, an NRSRO will be required to disclose 
information about its credit ratings performance statistics, its 
methods for determining credit ratings, its organizational structure, 
its procedures to prevent the misuse of material non-public 
information, the conflicts of interest that arise from its business 
activities, its code of ethics, and the qualifications of its credit 
analysts and credit analyst supervisors. The Commission believes that 
these disclosures will allow users of the credit ratings to compare the 
credit ratings quality of different NRSROs. Although the information an 
NRSRO will provide on its Form NRSRO and to comply with the rules 
cannot substitute for an investor's due diligence in evaluating a 
credit rating, it will aid investors by providing a publicly accessible 
foundation of basic information about an NRSRO.
---------------------------------------------------------------------------

    \587\ Section 3(a)(61) of the Exchange Act (15 U.S.C. 
78c(a)(61)).
---------------------------------------------------------------------------

    In addition, the rules implement provisions of the Rating Agency 
Act that are designed to improve the integrity of NRSROs. For example, 
the registration of a credit rating agency as an NRSRO will allow the 
Commission to conduct regular examinations of the credit rating agency 
to evaluate compliance with the regulatory scheme set forth in Section 
15E of the Exchange Act \588\ and the rules thereunder and will subject 
an NRSRO to disclosure, recordkeeping, and annual financial reporting 
requirements, as well as requirements regarding the prevention of 
misuse of material, nonpublic information, the management of conflicts 
of interest, and certain prohibited acts and practices. Increased 
confidence in the integrity of NRSROs and the credit ratings they issue 
could promote participation in the securities markets. Better quality 
ratings could also reduce the likelihood of an unexpected collapse of a 
rated issuer or obligor, reducing risks to individual investors and to 
the financial markets. In addition to improving the quality of credit 
ratings, increased oversight of NRSROs could increase the 
accountability of an NRSRO to its subscribers, investors, and other 
persons who rely on the credibility and objectivity of credit ratings 
in making an investment decision.
---------------------------------------------------------------------------

    \588\ 15 U.S.C. 78o-7.
---------------------------------------------------------------------------

    Rule 17g-1 prescribes a process for a credit rating agency to 
register with the Commission as an NRSRO. The rule requires a credit 
rating agency to apply for registration using Form NRSRO. Form NRSRO 
requires that a credit rating agency provide information required under 
Section 15E(a)(1)(B) of the Exchange Act and certain additional 
information.\589\ The additional information will assist the Commission 
in making the assessment regarding financial and managerial resources 
required under Section 15E(a)(2)(C)(ii)(I) of the Exchange Act.\590\ 
This section directs the Commission to grant a credit rating agency's 
application for registration as an NRSRO unless, among other things, 
the Commission finds that the applicant does not have adequate 
financial and managerial resources to consistently issue ratings with 
integrity and to materially comply with its procedures and 
methodologies disclosed under Sections 15E(a)(1)(B) of the Exchange Act 
\591\ and with the requirements in Sections 15E(g), (h), (i) and (j) of 
the Exchange Act.\592\ Certain other additional information required to 
be made public will assist users of credit ratings in assessing the 
credibility of the NRSRO and in comparing the NRSRO with other NRSROs.
---------------------------------------------------------------------------

    \589\ See Section 15E(a)(1)(B) of the Exchange Act (15 U.S.C. 
78o-7(a)(1)(B)).
    \590\ See 15 U.S.C. 78o-7(a)(2)(C)(ii)(I).
    \591\ 15 U.S.C. 78o-7(a)(1)(B).
    \592\ 15 U.S.C. 78o-7(g), (h), (i) and (j).
---------------------------------------------------------------------------

    Rule 17g-2 implements the Commission's recordkeeping and rulemaking 
authority under Section 17(a) of the Exchange Act \593\ by requiring an 
NRSRO to make and retain certain records related to its business as a 
credit rating agency. This recordkeeping rule will assist the 
Commission in monitoring whether an NRSRO is complying with provisions 
of Section 15E of the Exchange Act and the rules thereunder by 
requiring information about each NRSRO's financial condition, 
management, and operations. This information will permit the Commission 
to observe differences between NRSROs and changes over time in 
individual NRSROs. The information also will permit the Commission to 
review whether an NRSRO is operating consistently with the 
methodologies and procedures it establishes to determine credit ratings 
and its policies and procedures designed to ensure the impartiality of 
its credit ratings.
---------------------------------------------------------------------------

    \593\ 15 U.S.C. 78q(a)(1).
---------------------------------------------------------------------------

    Section 15E(k) of the Exchange Act requires an NRSRO to furnish to 
the Commission, on a confidential basis and at intervals determined by 
the Commission, such financial statements and information concerning 
its financial condition that the Commission, by rule, may prescribe as 
necessary or appropriate in the public interest or for the protection 
of investors.\594\ The section also provides that the Commission may, 
by rule, require that an independent public accountant certify the 
financial statements.\595\ Rule 17g-3 implements this rulemaking 
authority by requiring an NRSRO to furnish annual financial reports to 
the Commission. This rule will enhance Commission oversight of an 
NRSRO. Specifically, it will aid the Commission in monitoring whether 
the initiation of a proceeding under Section 15E(d) of the Exchange Act 
will be appropriate because the NRSRO ``fails to maintain adequate 
financial and managerial resources to consistently produce credit

[[Page 33613]]

ratings with integrity.'' \596\ In addition, the financial reports also 
will assist the Commission in monitoring potential conflicts of 
interests of a financial nature arising from the operation of an 
NRSRO.\597\
---------------------------------------------------------------------------

    \594\ 15 U.S.C. 78o-7(k).
    \595\ Id.
    \596\ 15 U.S.C. 78o-7(d).
    \597\ See, e.g., Rule 17g-5(c)(1) prohibiting an NRSRO from 
issuing or maintaining a credit rating for a person that, in the 
most recently ended fiscal year, provided the NRSRO with net revenue 
equaling or exceeding 10% of the NRSRO's total revenue for the year.
---------------------------------------------------------------------------

    Section 15E(g)(1) of the Exchange Act \598\ requires an NRSRO to 
establish, maintain, and enforce written policies and procedures to 
prevent the misuse of material, nonpublic information in violation of 
the Exchange Act.\599\ Section 15E(g)(2) of the Exchange Act provides 
that the Commission shall adopt rules requiring an NRSRO to establish 
specific policies and procedures to prevent the misuse of material, 
nonpublic information.\600\ Rule 17g-4 implements this statutory 
provision by requiring that an NRSRO's policies and procedures 
established pursuant to Section 15E(g)(1) of the Exchange Act \601\ 
include three specific types of procedures. These specific procedures 
establish a baseline for the type of procedures an NRSRO must implement 
to meet the statutory requirement in Section 15E(g) of the Exchange 
Act.\602\ By providing this baseline, the rule is designed to ensure 
that an NRSRO establishes adequate procedures and controls to protect 
material nonpublic information.
---------------------------------------------------------------------------

    \598\ 15 U.S.C. 78o-7(g)(1).
    \599\ 15 U.S.C. 78a et seq.
    \600\ 15 U.S.C. 78o-7(g)(2).
    \601\ 15 U.S.C. 78o-7(g)(1).
    \602\ 15 U.S.C. 78o-7(g).
---------------------------------------------------------------------------

    Rule 17g-5 implements Section 15E(h)(2) of the Exchange Act \603\ 
by requiring an NRSRO to disclose and manage certain conflicts of 
interest, as well as specifically prohibiting other conflicts of 
interest. This rule will promote the disclosure and management of 
conflicts of interest required by Sections 15E(a)(1)(B)(vi) and 15E(h) 
of the Exchange Act and mitigate potential undue influences on an 
NRSRO's credit rating process.\604\
---------------------------------------------------------------------------

    \603\ 15 U.S.C. 78o-7(h)(2).
    \604\ 15 U.S.C. 78o-7(a)(1)(B)(vi) and (h).
---------------------------------------------------------------------------

    Rule 17g-6 prohibits an NRSRO from engaging in certain unfair, 
abusive, or coercive acts or practices. These prohibitions are designed 
to enhance the integrity of NRSROs, promote competition and fulfill a 
statutory mandate.
    The Commission requested comment on available metrics to quantify 
these benefits and any other benefits the commenter may identify, 
including the identification of sources of empirical data that could be 
used for such metrics. The Commission did not receive any comments in 
response to this request.

B. Costs

    The Rating Agency Act requires that the rules and regulations that 
the Commission may prescribe ``be narrowly tailored'' to meet its 
requirements.\605\ The rules being adopted by the Commission are 
designed to adhere to this statutory mandate and, thereby, keep 
compliance costs as low as possible.
---------------------------------------------------------------------------

    \605\ 15 U.S.C. 78o-7(c)(2).
---------------------------------------------------------------------------

    The cost of compliance to a given NRSRO will depend on its size and 
the complexity of its business activities. As discussed above, the size 
and complexity of credit rating agencies varies significantly. 
Therefore, it is difficult to quantify a cost per NRSRO. Instead, the 
Commission provided estimates of the average cost per NRSRO taking into 
consideration the range in size and complexity of NRSROs and the fact 
that many already may have established policies, procedures, and 
recordkeeping systems and processes that will comply substantially with 
the requirements.
    The Commission believes that larger NRSROs generally already have 
established written policies and procedures and recordkeeping systems 
that will comply with a substantial portion of the requirements in the 
rules. Many of the requirements in the rules are consistent with the 
IOSCO Code principles, which a number of credit rating agencies 
(including the largest) have implemented. These firms will be required 
to augment or modify existing policies and procedures and recordkeeping 
systems to comply with the rules (rather than establish new ones). Some 
smaller credit rating agencies also have implemented the policies, 
procedures, and recordkeeping systems necessary to comply with the 
rules. Moreover, given their smaller size and simpler structure, 
smaller entities will require less effort and incur less cost to comply 
with a substantial portion of the requirements in these rules.
    For these reasons, the cost estimates represent the average cost 
across all NRSROs (regardless of size) and take into account that many 
firms will only be required to augment existing policies, procedures, 
and recordkeeping systems and processes to come into compliance with 
the rules. Furthermore, as discussed with respect to the Paperwork 
Reduction Act of 1995 (``PRA''),\606\ the Commission is requiring 
additional information in Form NRSRO beyond that prescribed in Section 
15E(1)(B) of the Exchange Act.\607\ Therefore, the cost estimates for 
Rule 17g-1 include estimates that arise from requirements imposed by 
Section 15E of the Exchange Act.\608\ The intent is to quantify the 
incremental burden of complying with these statutory requirements as a 
result of the additional information that will be required under Rule 
17g-1. Thus, those estimates do not seek to capture costs that are 
solely attributable to requirements in Section 15E of the Exchange 
Act.\609\
---------------------------------------------------------------------------

    \606\ 44 U.S.C. 3501 et seq. 5 CFR 1320.11.
    \607\ 15 U.S.C. 78o-7(a)(1)(B).
    \608\ 15 U.S.C. 78o-7.
    \609\ Id.
---------------------------------------------------------------------------

    The Commission requested commenters to provide data for the costs 
that would be solely attributable to the requirements of Section 15E of 
the Exchange Act. The Commission received one comment from an entity 
that the overall cost of complying with the rules would be 
$207,515.\610\ The commenter did not provide any further detail on how 
these costs would be solely attributable to the Commission's proposed 
rules (as opposed to provisions of the Rating Agency Act).\611\ The 
commenter also did not identify the specific costs that would arise 
from each discreet rule provision.\612\ The Commission believes that 
the estimated costs the commenter would incur if registered as an NRSRO 
are included in the cost estimates discussed below.
---------------------------------------------------------------------------

    \610\ See Lace Letter.
    \611\ Id.
    \612\ Id.
---------------------------------------------------------------------------

    Given the estimates set forth below, the Commission estimates that 
the total one-time estimated cost to NRSROs resulting from these rule 
proposals would be approximately $4,936,325 \613\ and the total 
estimated annual cost to NRSROs resulting from these rule proposals 
would be approximately $3,955,500 per year.\614\
---------------------------------------------------------------------------

    \613\ This total is derived from the total one-time costs set 
forth in the order that they appear in the text: $2,007,000 + 
$480,000 + $25,625 + $241,200 + $1,845,000 + $30,000 + $307,500 = 
$4,936,325.
    \614\ This total is derived from the total annual costs set 
forth in the order that they appear in the text: $307,500 + $61,500 
+ $80,400 + $1,562,100 + $1,494,000 + $450,000 = $3,955,500.
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1. Rule 17g-1, Form NRSRO and Instructions to Form NRSRO
    Section 15E(a)(1) of the Exchange Act requires a credit rating 
agency applying for registration with the Commission to furnish an 
application containing certain specified information and such other 
information as the Commission prescribes as necessary or appropriate in 
the public interest or for the protection

[[Page 33614]]

of investors.\615\ Rule 17g-1 \616\ implements this statutory provision 
by requiring a credit rating agency to furnish an initial application 
on a completed Form NRSRO to apply to be registered under section 15E 
of the Exchange Act.\617\
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    \615\ 15 U.S.C. 78o-7(a)(1).
    \616\ See paragraphs (a), (c) and (h) of Rule 17g-1.
    \617\ 15 U.S.C. 78o-7.
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    NRSROs will incur costs to register under Section 15E of the 
Exchange Act and Rule 17g-1.\618\ As discussed above with respect to 
PRA, the Commission estimates that an NRSRO will spend approximately 
300 hours to complete and furnish an initial Form NRSRO. Also, as 
discussed with respect to the PRA, the Commission estimates there will 
be 30 NRSROs. For these reasons, the Commission estimates that the 
average one-time cost to an NRSRO will be $66,900 \619\ and the total 
aggregate one-time cost to the industry will be $2,007,000.\620\
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    \618\ There is no filing fee for a Form NRSRO.
    \619\ The Commission estimates that a credit rating agency will 
have a senior compliance examiner perform these responsibilities. 
The SIA Management Report 2005 (Senior Compliance Examiner) 
indicates that the average hourly cost for a senior compliance 
examiner is $223. Therefore, the average one-time cost per NRSRO 
will be approximately $66,900 [(300 hours) x ($223 per/hour)].
    \620\ 30 NRSROs x $66,900 = $2,007,000.
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    Also, as discussed with respect to the PRA, the Commission 
anticipates that an NRSRO likely will engage outside counsel to assist 
in the process of completing and submitting a Form NRSRO. The amount of 
time an outside attorney will spend on this work will depend on the 
size and complexity of the NRSRO. Therefore, the Commission estimates 
that, on average, an outside counsel will spend approximately 40 hours 
assisting an NRSRO in preparing its application for registration. The 
Commission further estimates that this work will be split between a 
partner and associate, with an associate performing a majority of the 
work. Therefore, the Commission estimates that the average hourly cost 
for an outside counsel will be approximately $400 per hour. For these 
reasons, the Commission estimates that the average one-time cost to an 
NRSRO will be $16,000 \621\ and the one-time cost to the industry will 
be $480,000.\622\
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    \621\ $400 per hour x 40 hours = $16,000.
    \622\ $16,000 x 30 NRSROs = $480,000.
---------------------------------------------------------------------------

    Under Rule 17g-1, an NRSRO applying to be registered for an 
additional class of credit ratings will be required to file an amended 
Form NRSRO with the Commission.\623\ As discussed with respect to the 
PRA, the Commission estimates, on average, an NRSRO will spend 25 hours 
completing and furnishing a Form NRSRO for this purpose. The Commission 
also estimates with respect to the PRA that five of the 30 NRSROs will 
apply to register for an additional class of credit ratings. For these 
reasons, the Commission estimates that the average one-time cost to an 
NRSRO will be $5,125 \624\ and the total aggregate one-time cost to the 
industry will be $25,625.\625\
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    \623\ See paragraph (b) of Rule 17g-1.
    \624\ The Commission estimates an NRSRO will have a senior 
compliance person perform these responsibilities. The SIA Management 
Report 2005 (Compliance Officer) indicates that the average hourly 
cost for a compliance manager is $205. Therefore, the average cost 
to an NRSRO will be $5,125 [(25 hours for one year) x ($205)].
    \625\ 5 NRSROs x $5,125 = $25,625.
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    Section 15E(b)(1) of the Exchange Act requires an NRSRO to promptly 
amend its application for registration if any information or document 
provided in the application becomes materially inaccurate.\626\ Rule 
17g-1 requires an NRSRO to comply with this statutory requirement by 
furnishing the amendment on Form NRSRO.\627\ As discussed with respect 
to the PRA, the Commission estimates that an NRSRO will furnish two 
amendments on Form NRSRO per year on average. The Commission also 
estimates with respect to the PRA that it will take approximately 25 
hours to prepare and furnish an amendment and that there will be 30 
NRSROs. For these reasons, the Commission estimates that the average 
annual cost to an NRSRO will be $10,250 \628\ and the total aggregate 
annual cost to the industry will be $307,500.\629\
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    \626\ 15 U.S.C. 78o-7(b)(1).
    \627\ See paragraph (e) of Rule 17g-1.
    \628\ Based on the PRA estimates, an NRSRO will spend 
approximately 50 hours each year updating its application on Form 
NRSRO (25 hours per amendment x two amendments). The Commission 
estimates an NRSRO will have a senior compliance person perform 
these responsibilities. The SIA Management Report 2005 (Compliance 
Officer) indicates that the average hourly cost for a compliance 
manager is $205. Therefore, the total average annual cost to an 
NRSRO to update its registration on Form NRSRO will be $10,250 [(50 
hours per year) x ($205 per hour)].
    \629\ $10,250 x 30 NRSROs = $307,500.
---------------------------------------------------------------------------

    Section 15E(b)(2) of the Exchange Act requires an NRSRO to furnish 
an annual certification.\630\ Rule 17g-1 will require an NRSRO to 
furnish the annual certification on Form NRSRO.\631\ As discussed with 
respect to the PRA, the Commission estimates an NRSRO will spend 
approximately 10 hours per year completing and furnishing the annual 
certification and that there will be 30 NRSROs. For these reasons, the 
Commission estimates that the average annual cost to an NRSRO will be 
$2,050 \632\ and the total aggregate annual cost to the industry will 
be $61,500.\633\
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    \630\ 15 U.S.C. 78o-7(b)(2).
    \631\ See paragraph (f) Rule 17g-1.
    \632\ The Commission estimates an NRSRO will have a senior 
compliance person perform these responsibilities. The SIA Management 
Report 2005 (Compliance Officer) indicates that the average hourly 
cost for a compliance manager is $205. Therefore, the average annual 
cost will be $2,050 [(10 hours per year) x ($205 per hour)].
    \633\ $2,050 x 30 NRSROs = $61,500.
---------------------------------------------------------------------------

    Section 15E(a)(3) of the Exchange Act requires an NRSRO to make 
certain information and documents submitted in its application publicly 
available on its Web site, or through another comparable, readily 
accessible means.\634\ Rule 17g-1 requires that this be done within 10 
business days of the granting of an NRSRO's application or the 
furnishing of an amendment to the form or annual certification.\635\ As 
discussed with respect to the PRA, the Commission estimates that the 
average hour burden for an NRSRO to disclose this information on its 
Web site will be approximately 30 hours on a one-time basis and 10 
hours per year. Furthermore, as discussed with respect to the PRA, the 
Commission estimates that there will be 30 NRSROs. For these reasons, 
the Commission estimates that an NRSRO will incur an average one-time 
cost of $8,040 and an average annual cost of $2,680.\636\ Consequently, 
the total aggregate one-time cost to the industry will be $241,200 
\637\ and total aggregate annual cost to the industry will be $80,400 
per year.\638\
    The Commission believes the requirements in Rule 17g-1 to furnish a 
notice on Form NRSRO when an NRSRO withdraws its registration will 
result in de minimis costs.
    The Commission requested comment on these cost estimates. We also 
requested comment on whether there would be costs in addition to those 
identified above, such as costs arising from systems changes. Comment 
also was sought on whether these requirements would impose costs on 
other market participants, including persons who use credit ratings to 
make investment decisions or for regulatory purposes, and persons who 
purchase services and products from NRSROs. Commenters were asked to 
identify the

[[Page 33615]]

metrics and sources of any empirical data that supported their costs 
estimates. The Commission did not receive any comments in response to 
these requests.
---------------------------------------------------------------------------

    \634\ 15 U.S.C. 78o-7(a)(3).
    \635\ See paragraph (i) of Rule 17g-1.
    \636\ The Commission estimates that an NRSRO will have a Senior 
Programmer perform this work. The SIA Management Report 2005 (Senior 
Programmer) indicates that the average hourly cost for a senior 
programmer is $268. Therefore, the average one-time cost will be 
$8,040 [(30 hours) x ($268 per hour)] and the average annual cost 
will be $2,680 [(10 hours per year) x ($268 per hour)].
    \637\ $8,040 x 30 NRSROs = $241,200.
    \638\ $2,680 x 30 NRSROs = $80,400.
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2. Rule 17g-2
    Section 17(a)(1) of the Exchange Act \639\ provides the Commission 
with authority to require an NRSRO to make and maintain such records as 
the Commission prescribes by rule as necessary or appropriate in the 
public interest, for the protection of investors, or otherwise in 
furtherance of the Exchange Act.\640\ Rule 17g-2 implements this 
rulemaking authority by requiring an NRSRO to make and preserve 
specified records related to its credit rating business.
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    \639\ See Section 5 of the Rating Agency Act and 15 U.S.C. 
78q(a)(1).
    \640\ Id.
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    As discussed with respect to the PRA, the Commission estimates that 
an NRSRO, on average, will spend approximately 300 hours on a one-time 
basis to establish a recordkeeping system and 254 hours each year 
updating its books and records. For these reasons, the Commission 
estimates that an NRSRO will incur an average one-time cost of $61,500 
and an average annual cost of $52,070.\641\ Consequently, the total 
aggregate one-time cost to the industry will be $1,845,000,\642\ and 
the total aggregate annual cost to the industry will be $1,562,100 per 
year.\643\
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    \641\ The Commission estimates that an NRSRO will have a 
compliance manager perform these responsibilities. The SIA 
Management Report 2005 indicates that the average hourly cost for a 
compliance manager is $205. Therefore, the average one-time cost 
will be $61,500 [(300 hours) x ($205 per hour)] and the average 
annual cost will be $52,070 [(254 hours per year) x ($205 per 
hour)].
    \642\ $61,500 x 30 NRSROs = $1,845,000.
    \643\ $52,070 x 30 NRSROs = $1,562,100.
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    Furthermore, as discussed above with respect to the PRA, the 
Commission also estimates that an NRSRO may be required to purchase 
recordkeeping system software to establish a recordkeeping system in 
conformance with the rule. The Commission estimates that the cost of 
the software will vary based on the size and complexity of the NRSRO. 
Also, the Commission estimates that some NRSROs will not require such 
software because they already have adequate recordkeeping systems or, 
given their small size, such software will not be necessary. Based on 
these estimates, the Commission estimates that the average cost for 
recordkeeping software across all NRSROs will be approximately $1,000 
per firm. Therefore, the one-time cost to the industry will be 
$30,000.\644\
---------------------------------------------------------------------------

    \644\ $1,000 x 30 NRSROs = $30,000.
---------------------------------------------------------------------------

    The Commission requested comment on these cost estimates. We also 
requested comment on whether there would be costs in addition to those 
identified above, such as costs arising from restructuring business 
practices. Comment also was sought on whether these rules would impose 
costs on other market participants, including persons who use credit 
ratings to make investment decisions or for regulatory purposes, and 
persons who purchase services and products from NRSROs. Commenters were 
asked to identify the metrics and sources of any empirical data that 
supported their costs estimates. The Commission did not receive any 
comments in response to these requests.
3. Rule 17g-3
    Section 15E(k) of the Exchange Act requires an NRSRO to furnish to 
the Commission, on a confidential basis \645\ and at intervals 
determined by the Commission, such financial statements and information 
concerning its financial condition that the Commission, by rule, may 
prescribe as necessary or appropriate in the public interest or for the 
protection of investors.\646\ The section also provides that the 
Commission may, by rule, require that the financial statements be 
certified by an independent public accountant.\647\
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    \645\ An applicant can request that the Commission keep this 
information confidential to the extent permitted by law. See 17 CFR 
200.80 and 17 CFR 200.83.
    \646\ 15 U.S.C. 78o-7(k).
    \647\ Id.
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    Rule 17g-3 implements this statutory provision by requiring an 
NRSRO to furnish annual financial reports to the Commission. As 
discussed above with respect to the PRA, the Commission estimates that 
an NRSRO, on average, will spend approximately 200 hours per year 
preparing for and furnishing these financial reports. For these 
reasons, the Commission estimates that the average annual cost to an 
NRSRO will be $49,800 \648\ and the total aggregate annual cost to the 
industry will be $1,494,000.\649\
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    \648\ The Commission estimates that a senior internal auditor 
will perform these responsibilities. The SIA Management Report 2005 
(Senior Internal Auditor) indicates that the average hourly cost for 
a senior internal auditor is $249. Therefore, the average annual 
cost will be $49,800 [(200 hours per year) x ($249 per hour)].
    \649\ $49,800 x 30 NRSROs = $1,494,000.
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    As noted above, the average one-time and annual costs to NRSROs 
will vary widely depending on the size and complexity of the NRSRO. 
Moreover, some large credit rating agencies already prepare audited 
financial statements in accordance with other regulatory requirements. 
Nonetheless, these credit rating agencies may be required to make 
changes to their accounting systems to comply with the requirements in 
Rule 17g-3. The Commission believes these costs will vary depending on 
the size and complexity of the NRSRO. The Commission sought comment on 
the costs that would be incurred to make changes to their accounting 
systems.
    The Commission received one comment in response to this specific 
request from a large credit rating agency.\650\ The commenter stated 
that it would cost between $6 and $8 million to develop a system that 
could capture revenues received by the credit rating agency and its 
affiliates from customers in order to create the list of large 
customers that could be audited.\651\ The Commission notes, as an 
initial matter, that Section 15E(a)((B)(viii) of the Exchange Act 
requires an NRSRO to create this list with respect to issuers and 
subscribers.\652\ Consequently, the costs of developing a system that 
can capture this information can largely be attributed to the statute. 
Nonetheless, Rule 17g-3 has been modified in ways that the Commission 
believes will largely reduce these costs. First, an NRSRO is not 
required to include revenue received by affiliates that are not part of 
the credit rating organization in determining this list. Second, the 
list is now a separate financial report that is not required to be 
audited. Third, the definition of net revenue was modified to refer to 
revenues ``earned'' by the NRSRO (as opposed to revenues ``received''). 
This is designed to provide flexibility so that each NRSRO can define 
``revenues'' consistent with how its accounting system recognizes 
revenues. The Commission believes these modifications significantly 
reduce the operational difficulties in determining the list of large 
customers.
---------------------------------------------------------------------------

    \650\ See Fitch Letter.
    \651\ Id.
    \652\ 15 U.S.C. 78o-7(a)(1)(B)(viii).
---------------------------------------------------------------------------

    As discussed above with respect to the PRA, an NRSRO will be 
required to engage the services of independent public accountant to 
comply with Rule 17g-3. The cost of hiring an account will vary 
substantially based on the size and complexity of the NRSRO. As the 
noted above, based on staff experience, the annual audit costs of a 
small broker-dealer generally range from $3,000 to $5,000 a year. As 
the Commission estimated above, the annual audit costs for a small 
NRSRO will likely be comparable to the costs incurred by a

[[Page 33616]]

small broker-dealer. The costs for a large NRSRO will be much greater. 
However, many of these firms already are audited by a public accountant 
for other regulatory purposes. For these reasons, the Commission 
estimates that the average annual cost across all NRSROs to engage the 
services of an independent public account will be approximately 
$15,000. Therefore, the annual cost to the industry will be 
$450,000.\653\
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    \653\ $15,000 x 30 NRSROs = $450,000.
---------------------------------------------------------------------------

    The Commission requested comment on these cost estimates. We also 
requested comment on whether there would be costs in addition to those 
identified above. Comment was sought on whether these requirements 
would impose costs on other market participants, including persons who 
use credit ratings to make investment decisions or for regulatory 
purposes, and persons who purchase services and products from NRSROs. 
Commenters were asked to identify the metrics and sources of any 
empirical data that supported their costs estimates. Other than the one 
comment discussed above, the Commission did not receive any comments in 
response to these requests.
4. Rule 17g-4
    Section 15E(g)(1) of the Exchange Act \654\ requires an NRSRO to 
establish, maintain, and enforce written policies and procedures to 
prevent the misuse of material, nonpublic information in violation of 
the Exchange Act.\655\ Section 15E(g)(2) of the Exchange Act provides 
that the Commission shall adopt rules requiring an NRSRO to establish 
specific policies and procedures to prevent the misuse of material, 
non-public information.\656\ Rule 17g-4 implements this statutory 
provision by requiring that an NRSRO's policies and procedures 
established pursuant to Section 15E(g)(1) of the Exchange Act \657\ 
include three specific types of procedures.
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    \654\ 15 U.S.C. 78o-7(g)(1).
    \655\ 15 U.S.C. 78a et seq.
    \656\ 15 U.S.C. 78o-7(g)(2).
    \657\ 15 U.S.C. 78o-7(g)(1).
---------------------------------------------------------------------------

    As discussed above with respect to PRA, the Commission estimates 
that it will take approximately 50 hours for an NRSRO to establish 
procedures in conformance with the rule and that there will be 30 
NRSROs. For these reasons, the Commission estimates that the average 
one-time cost to an NRSRO will be $10,250 \658\ and the total aggregate 
one-time cost to the industry will be $307,500.\659\
---------------------------------------------------------------------------

    \658\ The Commission estimates an NRSRO will have a senior 
compliance person perform these responsibilities. The SIA Management 
Report 2005 (Compliance Officer) indicates that the average hourly 
cost for a compliance manager is $205. Therefore, the average one-
time cost to an NRSRO will be $10,250 [(50 hours) x ($205)].
    \659\ 30 NRSROs x $10,250 = $307,500.
---------------------------------------------------------------------------

    The Commission requested comment on these cost estimates. We also 
requested comment on whether there would be costs in addition to those 
identified above, such as costs arising from systems changes and 
restructuring business practices. Comment also was sought on whether 
these requirements would impose costs on other market participants, 
including persons who use credit ratings to make investment decisions 
or for regulatory purposes, and persons who purchase services and 
products from NRSROs. Commenters were asked to identify the metrics and 
sources of any empirical data that supported their costs estimates. The 
Commission did not receive any comments in response to these requests.
5. Rules 17g-5 and 17g-6
    Rules 17g-5 and 17g-6 are conduct rules that require NRSROs 
respectively to avoid certain conflicts of interest and unfair, abusive 
or coercive acts and practices and, consequently, do not require an 
NRSRO to make records or reports or create recordkeeping or accounting 
systems. Moreover, 15E(1)(B)(vi) of the Exchange Act requires an NRSRO 
to disclose any conflicts of interest. Additionally, Section 15E(h) of 
the Exchange Act requires an NRSRO establish, maintain, and enforce 
written policies and procedures reasonable designed to address and 
manage any conflicts of interest that can arise from its business. 
Therefore, the Commission does not anticipate that Rule 17g-5 will 
result in any significant incremental costs.
    Rules 17g-5 and 17g-6 prohibit respectively certain conflicts of 
interest and unfair, coercive and abusive acts and practices. The 
Commission believes that most entities that will become NRSROs do not 
engage in these types of conflicts, acts and practices. Therefore, the 
Commission estimates that these rules generally will impose de minimis 
costs. However, the Commission recognizes that an NRSRO may incur costs 
related to training employees about the requirements in these rules. It 
also is possible that the rules may require some NRSROs to restructure 
their business models or activities. The Commission, therefore, 
requested comment on such training and restructuring costs. The 
Commission also requested comment on whether there are any other costs 
associated with these rules. The Commission did not receive any 
comments on these specific issues.

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

    Under Section 3(f) of the Exchange Act,\660\ the Commission must, 
when engaging in rulemaking that requires the Commission to consider or 
determine if an action is necessary or appropriate in the public 
interest, consider whether the action will promote efficiency, 
competition, and capital formation. Section 23(a)(2) of the Exchange 
Act \661\ requires the Commission to consider the anticompetitive 
effects of any rules the Commission adopts under the Exchange Act. 
Section 23(a)(2) prohibits the Commission from adopting any rule that 
would impose a burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act.
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    \660\ 15 U.S.C. 78c(f).
    \661\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The Commission's view is that the rules will promote efficiency, 
competition, and capital formation. As discussed above with respect to 
the costs and benefits of the rules, the primary purpose of the Credit 
Rating Agency Reform Act of 2006 (the ``Rating Agency Act'') \662\ is 
to foster ``competition in the credit rating agency business.'' \663\ 
The practice of identifying NRSROs through staff no-action letters has 
been criticized as a process that lacks transparency and creates a 
barrier for credit rating agencies seeking wider recognition and market 
share. The Commission believes that these rules implementing provisions 
of the Rating Agency Act further the Rating Agency Act's goal of 
increasing competition because they will provide credit rating agencies 
with a transparent process to apply for registration as an NRSRO that 
does not favor a particular business model or larger, established 
firms. This will make it easier for more credit rating agencies to 
apply for registration. Increased competition in the credit ratings 
business may lower the cost to issuers, obligors, and underwriters of 
obtaining credit ratings.
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    \662\ Pub. L. 109-291 (2006).
    \663\ See Report of the Senate Committee on Banking, Housing, 
and Urban Affairs to Accompany S. 3850, Credit Rating Agency Reform 
Act of 2006, S. Report No. 109-326, 109th Cong., 2d Sess. (Sept. 6, 
2006) (``Senate Report'').
---------------------------------------------------------------------------

    In addition, the Rating Agency Act requires NRSROs to make their 
credit ratings and information about themselves available to the 
public. Part of the definition of ``credit rating agency'' in the 
Rating Agency Act is that the entity must be in the business of

[[Page 33617]]

issuing credit ratings on the Internet or through another readily 
accessible means, for free or for a reasonable fee.\664\ Under the 
Rating Agency Act and the rules adopted thereunder, an NRSRO will be 
required to disclose information about its credit ratings performance 
statistics, its methods for determining credit ratings, its 
organizational structure, its procedures to prevent the misuse of 
material non-public information, the conflicts of interest that arise 
from its business activities, its code of ethics, and the 
qualifications of its credit analysts and credit analyst supervisors. 
The Commission believes that these disclosures will allow users of the 
credit ratings to compare the ratings quality of different NRSROs. 
Although the information an NRSRO will provide on its Form NRSRO and to 
comply with the rules cannot substitute for an investor's due diligence 
in evaluating a credit rating, it will aid investors by providing a 
publicly accessible foundation of basic information about an NRSRO.
---------------------------------------------------------------------------

    \664\ Section 3(a)(61) of the Exchange Act (15 U.S.C. 
78c(a)(61)).
---------------------------------------------------------------------------

    In addition, the rules implement provisions of the Rating Agency 
Act that are designed to improve the integrity of NRSROs. For example, 
the registration of a credit rating agency as an NRSRO will allow the 
Commission to conduct regular examinations of the credit rating agency 
to evaluate compliance with the regulatory scheme set forth in Section 
15E of the Exchange Act and the rules thereunder and will subject an 
NRSRO to disclosure, recordkeeping, and annual audit requirements, as 
well as requirements regarding the prevention of misuse of material, 
nonpublic information, the management of conflicts of interest, and 
certain prohibited acts and practices. Increased confidence in the 
integrity of NRSROs and the credit ratings they issue may promote 
participation in the securities markets and facilitate capital 
formation. Better quality credit ratings could also reduce the 
likelihood of an unexpected collapse of a rated issuer or obligor, 
reducing risks to individual investors and to the financial markets. In 
addition to improving the quality of credit ratings, increased 
oversight of NRSROs may increase the accountability of an NRSRO to its 
subscribers, investors, and other persons who rely on the credibility 
and objectivity of credit ratings in making an investment decision.
    The Commission sought comment on these matters. In particular, the 
Commission solicited comment on whether the rules would have an adverse 
effect on competition that is neither necessary nor appropriate in 
furtherance of the purposes of the Exchange Act. In addition, comment 
was sought on whether the rules would promote efficiency, competition, 
and capital formation. Commenters were requested to provide empirical 
data and other factual support for their views, if possible.
    The Commission received several comments on how the rules will 
impact competition.\665\ Many commenters weighing in on this issue 
stated that the rules will further the goals of the Rating Agency Act 
by fostering more competition.\666\ Other commenters stated that the 
rules create undue burden and would be a barrier to entry for new or 
smaller credit rating agencies.\667\ In response to this concern, the 
Commission notes that the rules have been modified in ways designed to 
decrease burden. Some of these modifications address specific issues 
raised by the commenters. For example, one commenter stated that the 
requirements to provide background information on each credit analyst 
and for non-resident NRSROs to provide a special undertaking should be 
eliminated.\668\ As discussed above with respect to Form NRSRO and Rule 
17g-2, these requirements have been eliminated. As discussed above in 
the sections on each rule, the Commission believes that the 
requirements in the rules that have been retained are necessary and 
narrowly tailored. The Commission believes these requirements represent 
a proper balance in promoting competition and the quality and integrity 
of credit ratings, and in fulfilling the Commission's statutory mandate 
to create a regulatory framework for NRSROs.
---------------------------------------------------------------------------

    \665\ See, e.g., Gross Letter; AFP Letter; FSR Letter; ICI 
Letter; AEI Letter.
    \666\ See, e.g., Gross Letter; AFP Letter; FSR Letter; ICI 
Letter.
    \667\ See, e.g., AEI Letter.
    \668\ Id.
---------------------------------------------------------------------------

    Finally, the Commission also notes that most of the commenters that 
weighed in on the prohibition in Rule 17g-6(a)(4) expressed an opinion 
as to how the provision, as proposed, would impact competition. For 
example, many of the commenters stated that the 85% threshold in the 
proposed rule was too high and, therefore, the prohibition would not 
achieve the desired goal of increasing competition insomuch as it would 
maintain the status quo in which the two largest credit rating agencies 
dominate the market for rating structured products.\669\ On the other 
side of the issue, as discussed in the section describing Rule 17g-6, 
commenters argued that the Commission has insufficient data upon which 
to make a finding that a specific practice is unfair, abusive, or 
coercive and, consequently, the prohibition, as proposed, would 
interfere with natural market forces.\670\
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    \669\ See, e.g., DBRS Letter; Fitch Letter; letter dated 
February 13, 2007 from Janet M. Tavakoli, President, Tavakoli 
Structured Finance, Inc.; letter dated February 14, 2007 from 
Gregory G. Raab, Chief Executive Officer, Axon; letter dated 
February 16, 2007 from Emile Van den Bol, Managing Director, 
Deutsche Bank; letter dated February 16, 2007 from Kent D. Born, 
Senior Managing Director, PPM America; letter dated February 23, 
2007 from Patti Unti, Managing Director, Capmark Investments LP; 
letter dated February 23, 2007 from David Lazarus, Managing 
Director, Capmark Securities, Inc.; letter dated February 28, 2007 
from Ronald E. Schrager, Chief Executive Officer, LNR Property 
Corporation; letter dated March 5, 2007 from David Hynes, Partner, 
Northcross Capital LLP; letter dated March 6, 2007 from S. Trezevant 
Moore, Jr., President & COO, Luminent Mortgage Capital, Inc.; letter 
dated March 7, 2007 from Bruce E. Stern, Chairman, Government 
Affairs Committee, Association of Financial Guaranty Insurers; 
letter dated March 8, 2007 from Majorie E. Gross; letter dated March 
9, 2007 from Petra Spiegel, Eurohypo AG; letter dated March 9, 2007 
from Landon D. Parsons, Managing Director, G-Bass; letter dated 
March 9, 2007 from Pat G. Halter, Chief Executive Officer, Principal 
Real Estate Investors; letter dated March 12, 2007 from Charles 
Covell, Executive Vice President, Citigroup Alternative Investments; 
letter dated March 12, 2007 from Rodney J. Dillman, General Counsel, 
Babson Capital Management LLC; letter dated March 12, 2007 from 
Louis C. Lucido, Group Managing Director, Trust Company of the West; 
letter dated March 12, 2007 from Daniel Ivascyn, Managing Director, 
PIMCO.
    \670\ See, e.g., S&P Letter; Moody's Letter; R&I Letter; FSR 
Letter; Rutherfurd Letter; Langohr Letter; AST Letter.
---------------------------------------------------------------------------

    The Commission notes that the rule has been modified to eliminate 
the 85% threshold. The rule now prohibits the practices where the 
practice is engaged in for an anticompetitive purpose. In this way, the 
rule is designed to prohibit conduct that inappropriately stifles 
competition and, at the same time, avoid the establishment of 
artificial constraints that could interfere with natural market forces. 
The Commission recognizes that the two largest credit rating agencies 
dominate the market for rating structured products. Consequently, the 
Commission intends--aided by the enhanced recordkeeping requirements 
around rating structured products--to monitor closely the practices 
NRSROs employ in this area.

VIII. Final Regulatory Flexibility Analysis

    The Commission proposed Rules 17g-1, 17g-2, 17g-3, 17g-4, 17g-5, 
and 17g-6 and Form NRSRO in the proposing release under Section 15E of 
the Exchange Act.\671\ An Initial Regulatory

[[Page 33618]]

Flexibility Analysis (``IRFA'') was published in the proposing release. 
The Commission has prepared the following Final Regulatory Flexibility 
Analysis (FRFA), in accordance with the provisions of the Regulatory 
Flexibility Act,\672\ regarding Rules 17g-1, 17g-2, 17g-3, 17g-4, 17g-
5, and 17g-6 and Form NRSRO under Section 15E of the Exchange Act.\673\
---------------------------------------------------------------------------

    \671\ 15 U.S.C. 78o-7.
    \672\ 5 U.S.C. 603.
    \673\ 15 U.S.C. 78o-7.
---------------------------------------------------------------------------

A. Need for and Objective of the Rules

    The rules implement specific provisions of the Credit Rating Agency 
Reform Act of 2006 (the ``Rating Agency Act'').\674\ The Rating Agency 
Act defines the term ``nationally recognized statistical rating 
organization'' as a credit rating agency registered with the 
Commission, provides authority for the Commission to implement 
registration, recordkeeping, financial reporting, and oversight rules 
with respect to registered credit rating agencies, and directs the 
Commission to issue final implementing rules no later than 270 days 
after its enactment.
---------------------------------------------------------------------------

    \674\ Pub. L. 109-291 (2006).
---------------------------------------------------------------------------

    The objectives of the Rating Agency Act are ``to improve ratings 
quality for the protection of investors and in the public interest by 
fostering accountability, transparency, and competition in the credit 
rating industry.'' \675\ The rules are designed to further these 
objectives and to: Assist the Commission in determining whether an 
entity should be registered as an NRSRO; assist the Commission in 
reviewing whether an NRSRO complies with the provisions of the Rating 
Agency Act and rules thereunder; adhere to the Commission's statutory 
mandate to adopt rules to implement the NRSRO regulatory program; and 
provide information regarding NRSROs to the public and to users of 
credit ratings.
---------------------------------------------------------------------------

    \675\ See Report of the Senate Committee on Banking, Housing, 
and Urban Affairs to Accompany S. 3850, Credit Rating Agency Reform 
Act of 2006, S. Report No. 109-326, 109th Cong., 2d Sess. (Sept. 6, 
2006) (``Senate Report'').
---------------------------------------------------------------------------

B. Significant Issues Raised by Commenters

    The Commission sought comment with respect to every aspect of the 
IRFA, including comments with respect to the number of small entities 
that may be affected by the proposed rules. Commenters were asked to 
specify the costs of compliance with the proposed rules and suggest 
alternatives that would accomplish the goals of the rules. The 
Commission did not receive any specific comments on the IRFA. The 
Commission did, however, receive a limited number of comments that 
discussed the effect the rules might have on smaller credit rating 
agencies, although these commenters did not address whether their 
comments pertained to entities that would be small businesses for 
purposes of Regulatory Flexibility Act analysis. For example, one 
commenter stated that the rules, as proposed, created an undue burden 
and would be a barrier to entry for new or smaller credit rating 
agencies.\676\ Several commenters stated that the prohibition in Rule 
17g-5 from having a conflict with respect to a client that has provided 
10% or more of the NRSRO's annual revenues could prevent smaller credit 
rating agencies from registering as NRSROs.\677\
---------------------------------------------------------------------------

    \676\ See AEI Letter.
    \677\ See, e.g., Fitch Letter; AEI Letter; AST Letter; ASF 
Letter.
---------------------------------------------------------------------------

C. Legal Basis

    The Commission is adopting the rules pursuant to the Exchange Act 
\678\ and, particularly, Section 15E of the Exchange Act.\679\
---------------------------------------------------------------------------

    \678\ 15 U.S.C. 78a et seq.
    \679\ 15 U.S.C. 78o-7.
---------------------------------------------------------------------------

D. Small Entities Subject to the Rule

    Paragraph (a) of Rule 0-10 provides that for purposes of the 
Regulatory Flexibility Act, a small entity ``[w]hen used with reference 
to an `issuer' or a `person' other than an investment company'' means 
``an `issuer' or `person' that, on the last day of its most recent 
fiscal year, had total assets of $5 million or less.'' \680\ The 
Commission believes that an NRSRO with total assets of $5 million or 
less would qualify as a ``small'' entity for purposes of the Regulatory 
Flexibility Act.
---------------------------------------------------------------------------

    \680\ 17 CFR 240.0-10(a).
---------------------------------------------------------------------------

    As noted above, the Commission believes that approximately 30 
credit rating agencies will be registered as NRSROs. Moreover, as also 
noted above, the Senate Report accompanying the Rating Agency Act 
states that the two largest credit rating agencies have about 80% of 
the market share as measured by revenues. The Senate Report also states 
that these two firms rate more than 99% of the debt obligations and 
preferred stock issues publicly traded in the United States. Given 
these figures, the Commission believes that the majority of the credit 
rating agencies registered with the Commission will be ``small'' 
entities.\681\ Consequently, the Commission estimates that, of the 
approximately 30 credit rating agencies estimated to be registered with 
the Commission, approximately 20 would be ``small'' entities for 
purposes of the Regulatory Flexibility Act.\682\
---------------------------------------------------------------------------

    \681\ See 17 CFR 240.0-10(a).
    \682\ Id.
---------------------------------------------------------------------------

E. Reporting, Recordkeeping, and Other Compliance Requirements

    A credit rating agency seeking to apply to the Commission for 
registration as an NRSRO will apply using Form NRSRO.\683\ The Form 
elicits certain information and requires the credit rating agency to 
attach a number of documents as Exhibits (some of which would have to 
be made publicly available) and certifications from qualified 
institutional buyers. The public Exhibits consist of information about 
credit ratings performance data, the credit rating agency's 
organizational structure, the methods used by the credit rating agency 
for issuing credit ratings, the policies used by the credit rating 
agency to manage activities that could potentially risk the 
impartiality of its credit ratings, and the credit rating agency's 
credit analysts. To the extent permitted by law, the confidential 
Exhibits consist of information about the credit rating agency's 
financial condition, revenues, and credit analyst compensation.
---------------------------------------------------------------------------

    \683\ Rule 17g-1.
---------------------------------------------------------------------------

    After registration, the credit rating agency (now an NRSRO) 
generally will be required to promptly update the public information on 
its Form NRSRO whenever an Item or Exhibit becomes materially 
inaccurate. To update information, the NRSRO must furnish the 
Commission with an amendment using Form NRSRO. In addition, the NRSRO 
must furnish the Commission with an annual certification on Form 
NRSRO.\684\ In the annual certification, the NRSRO must represent that 
all information on the Form, as amended, continues to be accurate, list 
any material changes made during the previous year, and include an 
update to the public Exhibit relating to the performance statistics of 
its credit ratings. After its application for registration is approved, 
the NRSRO must make Form NRSRO and the public Exhibits submitted to the 
Commission, and all amendments, readily accessible to the public.
---------------------------------------------------------------------------

    \684\ Id.
---------------------------------------------------------------------------

    NRSROs also are subject to a recordkeeping rule.\685\ This rule 
requires an NRSRO to make and retain certain records relating to the 
business of issuing credit ratings. These records will assist the 
Commission, through its examination process, in monitoring whether the 
NRSRO continues to maintain adequate financial and

[[Page 33619]]

managerial resources to consistently produce credit ratings with 
integrity (as required under the Rating Agency Act) and whether the 
NRSRO is complying with the provisions of the Rating Agency Act, the 
rules adopted thereunder, and the NRSRO's disclosed policies and 
procedures.
---------------------------------------------------------------------------

    \685\ Rule 17g-2.
---------------------------------------------------------------------------

    On an annual fiscal year basis, an NRSRO must furnish the 
Commission with audited financial statements.\686\ This requirement is 
designed to assist the Commission in monitoring whether the NRSRO 
continues to maintain adequate financial resources to consistently 
produce credit ratings with integrity. It also is designed to assist 
the Commission in monitoring whether the NRSRO is complying with 
provisions of the Rating Agency Act and the rules adopted thereunder 
regarding potential conflicts of interest arising from dealings with 
large customers in terms of revenues earned.
---------------------------------------------------------------------------

    \686\ Rule 17g-3.
---------------------------------------------------------------------------

    Finally, all NRSROs will be subject to requirements designed to 
protect their impartiality with respect to issuing credit ratings. 
First, they must establish, maintain, and enforce specific written 
policies designed to prevent the misuse of material non-public 
information.\687\ Second, an NRSRO is prohibited from having certain 
general conflicts unless it, as required under the Rating Agency Act, 
disclosed the conflict and adopted procedures to manage the 
conflict.\688\ Further certain conflicts of interest--for example, 
rating a security owned by the NRSRO--are prohibited.\689\ Third, 
NRSROs are prohibited from engaging in certain practices that the 
Commission has found to be unfair, coercive, or abusive practices.\690\
---------------------------------------------------------------------------

    \687\ Rule 17g-4.
    \688\ Rule 17g-5.
    \689\ Id.
    \690\ Rule 17g-6.
---------------------------------------------------------------------------

F. Duplicative, Overlapping, or Conflicting Federal Rules

    The Commission believes that there are no federal rules that 
duplicate, overlap, or conflict with the rules.

G. Significant Alternatives

    Pursuant to section 3(a) of the RFA,\691\ the Commission must 
consider certain types of alternatives, including: (1) The 
establishment of differing compliance or reporting requirements or 
timetables that take into account the resources available to small 
entities; (2) the clarification, consolidation, or simplification of 
compliance and reporting requirements under the rule for small 
entities; (3) the use of performance rather than design standards; and 
(4) an exemption from coverage of the rule, or any part of the rule, 
for small entities.
---------------------------------------------------------------------------

    \691\ 5 U.S.C. 603(c).
---------------------------------------------------------------------------

    The Commission does not believe it is appropriate to establish 
different compliance or reporting requirements or timetables; clarify, 
consolidate, or simplify compliance and reporting requirements under 
the rules for small entities; or exempt small entities from coverage of 
the rules, or any part of the rules. The Rating Agency Act and the 
rules establish a voluntary program of registration and supervision 
that allows all NRSROs the flexibility to develop procedures tailored 
to their specific organizational structures and business models. 
Further, many of the rules, as adopted, are due to a direct statutory 
mandate. The Commission also does not believe that it is necessary to 
consider whether small entities should be permitted to use performance 
rather than design standards to comply with the rules as the rules 
already propose performance standards and do not dictate for entities 
of any size any particular design standards that must be employed to 
achieve the objectives of the rules.
    As for the comment that the rules will be a barrier to entry for 
small entities, the Commission notes that the commenter did not specify 
how the rules would disproportionately burden small entities, nor did 
it provide cost estimates for small entities.\692\ The Commission 
believes the burden associated with the rules will impact all NRSROs in 
a proportionate manner based on their size and complexity. Therefore, 
the Commission does not believe it would be appropriate to prescribe 
lesser requirements for small entities, nor have any commenters 
suggested lesser requirements.
---------------------------------------------------------------------------

    \692\ See AEI letter.
---------------------------------------------------------------------------

    Further, the Commission notes that the rules, as adopted, have been 
modified in ways designed to decrease burden. Some of these 
modifications address specific issues raised by the commenter.\693\ For 
example, the commenter stated that the requirements to provide 
background information on each credit analyst and for non-resident 
NRSROs to provide a special undertaking should be eliminated.\694\ 
These requirements have been eliminated. As discussed above in the 
sections on each rule, the Commission believes that the requirements in 
the rules that have been retained are necessary and narrowly tailored.
---------------------------------------------------------------------------

    \693\ Id.
    \694\ Id.
---------------------------------------------------------------------------

    As for the comment that the prohibition on having a conflict with 
respect to a client that has provided 10% or more of the NRSRO's 
revenues, the Commission notes that the commenters did not provide any 
supporting data. In addition, no commenter specifically identifying 
itself as a small entity raised this prohibition as an issue.\695\ The 
Commission believes that it would be highly unusual for a small credit 
rating agency to derive 10% or more of its revenues from a single 
client and, if this was the case, that it would very difficult for the 
credit rating agency to issue an impartial rating requested by the 
client. The Commission notes that the smaller credit rating agencies 
tend to use a subscriber fee-based business model. Thus, they are not 
paid to determine specific credit ratings and, consequently, would not 
be impacted by this prohibition.
---------------------------------------------------------------------------

    \695\ The Commission intends to monitor how the prohibition 
operates in practice, particularly with respect to structured 
products. If the prohibition interferes with how NRSROs as a matter 
of course deal with structured product sponsors, the Commission will 
evaluate whether the rule should be modified to accommodate this 
business practice or whether an exemption would be appropriate.
---------------------------------------------------------------------------

IX. Statutory Authority

    The Commission is adopting Form NRSRO and Rules 17g-1, 17g-2, 17g-
3, 17g-4, 17g-5 and 17g-6 under the Exchange Act pursuant to the 
authority conferred by the Exchange Act, including Sections 3(b), 15E, 
17, 23(a) and 36.\696\
---------------------------------------------------------------------------

    \696\ 15 U.S.C. 78c(b), 78o-7, 78q, 78w, and 78mm.
---------------------------------------------------------------------------

Text of Rules

List of Subjects

17 CFR Parts 240 and 249b

    Brokers, Reporting and recordkeeping requirements, Securities.

0
In accordance with the foregoing, the Commission hereby amends Title 
17, Chapter II of the Code of Federal Regulation as follows.

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

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

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-l, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 
80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise 
noted.
* * * * *

[[Page 33620]]


0
2. An undesignated center heading and Sec. Sec.  240.17g-1 through 
240.17g-6 are added to read as follows:

Nationally Recognized Statistical Rating Organizations

Sec.
240.17g-1 Application for registration as a nationally recognized 
statistical rating organization.
240.17g-2 Records to be made and retained by nationally recognized 
statistical rating organizations.
240.17g-3 Annual financial reports to be furnished by nationally 
recognized statistical rating organizations.
240.17g-4 Prevention of misuse of material nonpublic information.
240.17g-5 Conflicts of interest.
240.17g-6 Prohibited acts and practices.

Nationally Recognized Statistical Rating Organizations


Sec.  240.17g-1  Application for registration as a nationally 
recognized statistical rating organization.

    (a) Initial application. A credit rating agency applying to the 
Commission to be registered under section 15E of the Act (15 U.S.C. 
78o-7) as a nationally recognized statistical rating organization must 
furnish the Commission with an initial application on Form NRSRO (Sec.  
249b.300 of this chapter) that follows all applicable instructions for 
the Form.
    (b) Application to register for an additional class of credit 
ratings. A nationally recognized statistical rating organization 
applying to register for an additional class of the credit ratings 
described in section 3(a)(62)(B) of the Act (15 U.S.C. 78c(a)(62)(B)) 
must furnish the Commission with an application to add a class of 
credit ratings on Form NRSRO that follows all applicable instructions 
for the Form. The application will be subject to the requirements of 
section 15E(a)(2) of the Act (15 U.S.C. 78o-7(a)(2)).
    (c) Supplementing an application prior to final action by the 
Commission. An applicant must promptly furnish the Commission with a 
written notice if information submitted to the Commission in an initial 
application to be registered as a nationally recognized statistical 
rating organization or in an application to register for an additional 
class of credit ratings is found to be or becomes materially inaccurate 
prior to the date of a Commission order granting or denying the 
application. The notice must identify the information that was found to 
be materially inaccurate. The applicant also must promptly furnish the 
Commission with an application supplement on Form NRSRO that follows 
all applicable instructions for the Form.
    (d) Withdrawing an application. An applicant may withdraw an 
initial application to be registered as a nationally recognized 
statistical rating organization or an application to register for an 
additional class of credit ratings prior to the date of a Commission 
order granting or denying the application. To withdraw the application, 
the applicant must furnish the Commission with a written notice of 
withdrawal executed by a duly authorized person.
    (e) Update of registration. A nationally recognized statistical 
rating organization amending materially inaccurate information in its 
application for registration pursuant to section 15E(b)(1) of the Act 
(15 U.S.C. 78o-7(b)(1)) must promptly furnish the Commission with the 
update of its registration on Form NRSRO that follows all applicable 
instructions for the Form.
    (f) Annual certification. A nationally recognized statistical 
rating organization amending its application for registration pursuant 
to section 15E(b)(2) of the Act (15 U.S.C. 78o-7(b)(2)) must furnish 
the Commission with the annual certification on Form NRSRO that follows 
all applicable instructions for the Form not later than 90 days after 
the end of each calendar year.
    (g) Withdrawal from registration. A nationally recognized 
statistical rating organization withdrawing from registration pursuant 
to section 15E(e)(1) of the Act (15 U.S.C. 78o-7(e)(1)) must furnish 
the Commission with a notice of withdrawal from registration on Form 
NRSRO that follows all applicable instructions for the Form. The 
withdrawal from registration will become effective 45 calendar days 
after the notice is furnished to the Commission upon such terms and 
conditions as the Commission may establish as necessary in the public 
interest or for the protection of investors.
    (h) Furnishing Form NRSRO. A Form NRSRO submitted under any 
paragraph of this section will be considered furnished to the 
Commission on the date the Commission receives a complete and properly 
executed Form NRSRO that follows all applicable instructions for the 
Form. Information submitted on a confidential basis and for which 
confidential treatment has been requested pursuant to applicable 
Commission rules will be accorded confidential treatment to the extent 
permitted by law.
    (i) Public availability of Form NRSRO. A nationally recognized 
statistical rating organization must make its current Form NRSRO and 
information and documents submitted in Exhibits 1 through 9 to Form 
NRSRO publicly available on its Web site, or through another 
comparable, readily accessible means within 10 business days after the 
date of the Commission order granting an initial application for 
registration as a nationally recognized statistical rating organization 
or an application to register for an additional class of credit ratings 
and within 10 business days after furnishing a Form NRSRO to the 
Commission under paragraphs (e), (f), or (g) of this section.


Sec.  240.17g-2  Records to be made and retained by nationally 
recognized statistical rating organizations.

    (a) Records required to be made and retained. A nationally 
recognized statistical rating organization must make and retain the 
following books and records, which must be complete and current:
    (1) Records of original entry into the accounting system of the 
nationally recognized statistical rating organization and records 
reflecting entries to and balances in all general ledger accounts of 
the nationally recognized statistical rating organization for each 
fiscal year.
    (2) Records with respect to each current credit rating of the 
nationally recognized statistical rating organization indicating (as 
applicable):
    (i) The identity of any credit analyst(s) that participated in 
determining the credit rating;
    (ii) The identity of the person(s) that approved the credit rating 
before it was issued;
    (iii) Whether the credit rating was solicited or unsolicited; and
    (iv) The date the credit rating action was taken.
    (3) An account record for each person (for example, an obligor, 
issuer, underwriter, or other user) that has paid the nationally 
recognized statistical rating organization for the issuance or 
maintenance of a credit rating indicating:
    (i) The identity and address of the person; and
    (ii) The credit rating(s) determined or maintained for the person.
    (4) An account record for each subscriber to the credit ratings 
and/or credit analysis reports of the nationally recognized statistical 
rating organization indicating the identity and address of the 
subscriber.
    (5) A record listing the general types of services and products 
offered by the nationally recognized statistical rating organization.
    (6) A record documenting the established procedures and 
methodologies used by the nationally recognized statistical rating 
organization to determine credit ratings.

[[Page 33621]]

    (7) A record that lists each security and money market instrument 
and its corresponding credit rating issued by an asset pool or as part 
of any asset-backed or mortgage-backed securities transaction where the 
nationally recognized statistical rating organization, in determining 
the credit rating for the security or money market instrument, treats 
assets within such pool or as a part of such transaction that are not 
subject to a credit rating of the nationally recognized statistical 
rating organization by any or a combination of the following methods:
    (i) Determining credit ratings for the unrated assets;
    (ii) Performing credit assessments or determining private credit 
ratings for the unrated assets;
    (iii) Determining credit ratings or private credit ratings, or 
performing credit assessments for the unrated assets by taking into 
consideration the internal credit analysis of another person; or
    (iv) Determining credit ratings or private credit ratings, or 
performing credit assessments for the unrated assets by taking into 
consideration (but not necessarily adopting) the credit ratings of 
another nationally recognized statistical rating organization.
    (b) Records required to be retained. A nationally recognized 
statistical rating organization must retain the following books and 
records (excluding drafts of documents) that relate to its business as 
a credit rating agency:
    (1) Significant records (for example, bank statements, invoices, 
and trial balances) underlying the information included in the annual 
financial reports furnished by the nationally recognized statistical 
rating organization to the Commission pursuant to Sec.  240.17g-3.
    (2) Internal records, including nonpublic information and work 
papers, used to form the basis of a credit rating issued by the 
nationally recognized statistical rating organization.
    (3) Credit analysis reports, credit assessment reports, and private 
credit rating reports of the nationally recognized statistical rating 
organization and internal records, including nonpublic information and 
work papers, used to form the basis for the opinions expressed in these 
reports.
    (4) Compliance reports and compliance exception reports.
    (5) Internal audit plans, internal audit reports, documents 
relating to internal audit follow-up measures, and all records 
identified by the internal auditors of the nationally recognized 
statistical rating organization as necessary to perform the audit of an 
activity that relates to its business as a credit rating agency.
    (6) Marketing materials of the nationally recognized statistical 
rating organization that are published or otherwise made available to 
persons that are not associated with the nationally recognized 
statistical rating organization.
    (7) External and internal communications, including electronic 
communications, received and sent by the nationally recognized 
statistical rating organization and its employees that relate to 
initiating, determining, maintaining, changing, or withdrawing a credit 
rating.
    (8) Internal documents that contain information, analysis, or 
statistics that were used to develop a procedure or methodology to 
treat the credit ratings of another nationally recognized statistical 
rating organization for the purpose of determining a credit rating for 
a security or money market instrument issued by an asset pool or part 
of any asset-backed or mortgage-backed securities transaction.
    (9) For each security or money market instrument identified in the 
record required to be made and retained under paragraph (a)(7) of this 
section, any document that contains a description of how assets within 
such pool or as a part of such transaction not rated by the nationally 
recognized statistical rating organization but rated by another 
nationally recognized statistical rating organization were treated for 
the purpose of determining the credit rating of the security or money 
market instrument.
    (10) Form NRSROs (including Exhibits and accompanying information 
and documents) submitted to the Commission by the nationally recognized 
statistical rating organization.
    (c) Record retention periods. The records required to be retained 
pursuant to paragraphs (a) and (b) of this section must be retained for 
three years after the date the record is made or received.
    (d) Manner of retention. An original, or a true and complete copy 
of the original, of each record required to be retained pursuant to 
paragraphs (a) and (b) of this section must be maintained in a manner 
that, for the applicable retention period specified in paragraph (c) of 
this section, makes the original record or copy easily accessible to 
the principal office of the nationally recognized statistical rating 
organization and to any other office that conducted activities causing 
the record to be made or received.
    (e) Third-party record custodian. The records required to be 
retained pursuant to paragraphs (a) and (b) of this section may be made 
or retained by a third-party record custodian, provided the nationally 
recognized statistical rating organization furnishes the Commission at 
its principal office in Washington, DC with a written undertaking of 
the custodian executed by a duly authorized person. The undertaking 
must be in substantially the following form:

    The undersigned acknowledges that books and records it has made 
or is retaining for [the nationally recognized statistical rating 
organization] are the exclusive property of [the nationally 
recognized statistical rating organization]. The undersigned 
undertakes that upon the request of [the nationally recognized 
statistical rating organization] it will promptly provide the books 
and records to [the nationally recognized statistical rating 
organization] or the U.S. Securities and Exchange Commission 
(``Commission'') or its representatives and that upon the request of 
the Commission it will promptly permit examination by the Commission 
or its representatives of the records at any time or from time to 
time during business hours and promptly furnish to the Commission or 
its representatives a true and complete copy of any or all or any 
part of such books and records.


A nationally recognized statistical rating organization that engages a 
third-party record custodian remains responsible for complying with 
every provision of this section.

    (f) A nationally recognized statistical rating organization must 
promptly furnish the Commission or its representatives with legible, 
complete, and current copies, and, if specifically requested, English 
translations of those records of the nationally recognized statistical 
rating organization required to be retained pursuant to paragraphs (a) 
and (b) this section, or any other records of the nationally recognized 
statistical rating organization subject to examination under section 
17(b) of the Act (15 U.S.C. 78q(b)) that are requested by the 
Commission or its representatives.


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

    (a) A nationally recognized statistical rating organization must 
annually, not more than 90 calendar days after the end of its fiscal 
year (as indicated on its current Form NRSRO), furnish the Commission, 
at the Commission's principal office in Washington, DC, with the 
following financial reports as of the end of its most recent fiscal 
year:
    (1) Audited financial statements of the nationally recognized 
statistical rating organization or audited consolidated financial 
statements of its parent if the nationally recognized statistical 
rating organization is a separately identifiable

[[Page 33622]]

division or department of the parent. The audited financial statements 
must:
    (i) Include a balance sheet, an income statement and statement of 
cash flows, and a statement of changes in ownership equity;
    (ii) Be prepared in accordance with generally accepted accounting 
principles in the jurisdiction in which the nationally recognized 
statistical rating organization or its parent is incorporated, 
organized, or has its principal office; and
    (iii) Be certified by an accountant who is qualified and 
independent in accordance with paragraphs (a), (b), and (c)(1), (2), 
(3), (4), (5) and (8) of Sec.  210.2-01 of this chapter. The accountant 
must give an opinion on the financial statements in accordance with 
paragraphs (a) through (d) of Sec.  210.2-02 of this chapter.
    (2) If applicable, unaudited consolidating financial statements of 
the parent of the nationally recognized statistical rating organization 
that include the nationally recognized statistical rating organization.

    Note to paragraph (a)(2): This financial report must be 
furnished only if the audited financial statements provided pursuant 
to paragraph (a)(1) of this section are consolidated financial 
statements of the parent of the nationally recognized statistical 
rating organization.

    (3) An unaudited financial report providing information concerning 
the revenue of the nationally recognized statistical rating 
organization in each of the following categories (as applicable) for 
the fiscal year:
    (i) Revenue from determining and maintaining credit ratings;
    (ii) Revenue from subscribers;
    (iii) Revenue from granting licenses or rights to publish credit 
ratings; and
    (iv) Revenue from all other services and products (include 
descriptions of any major sources of revenue).
    (4) An unaudited financial report providing the total aggregate and 
median annual compensation of the credit analysts of the nationally 
recognized statistical rating organization for the fiscal year.

    Note to paragraph (a)(4): In calculating total and median annual 
compensation, the nationally recognized statistical rating 
organization may exclude deferred compensation, provided such 
exclusion is noted in the report.

    (5) An unaudited financial report listing the 20 largest issuers 
and subscribers that used credit rating services provided by the 
nationally recognized statistical rating organization by amount of net 
revenue attributable to the issuer or subscriber during the fiscal 
year. Additionally, include on the list any obligor or underwriter that 
used the credit rating services provided by the nationally recognized 
statistical rating organization if the net revenue attributable to the 
obligor or underwriter during the fiscal year equaled or exceeded the 
net revenue attributable to the 20th largest issuer or subscriber. 
Include the net revenue amount for each person on the list.

    Note to paragraph (a)(5): A person is deemed to have ``used the 
credit rating services'' of the nationally recognized statistical 
rating organization if the person is any of the following: an 
obligor that is rated by the nationally recognized statistical 
rating organization (regardless of whether the obligor paid for the 
credit rating); an issuer that has securities or money market 
instruments subject to a credit rating of the nationally recognized 
statistical rating organization (regardless of whether the issuer 
paid for the credit rating); any other person that has paid the 
nationally recognized statistical rating organization to determine a 
credit rating with respect to a specific obligor, security, or money 
market instrument; or a subscriber to the credit ratings, credit 
ratings data, or credit analysis of the nationally recognized 
statistical rating organization. In calculating net revenue 
attributable to a person, the nationally recognized statistical 
rating organization should include all revenue earned by the 
nationally recognized statistical rating organization for any type 
of service or product, regardless of whether related to credit 
rating services, and net of any rebates and allowances paid or owed 
to the person by the nationally recognized statistical rating 
organization.

    (b) The nationally recognized statistical rating organization must 
attach to each financial report furnished pursuant to paragraph (a) of 
this section a signed statement by a duly authorized person associated 
with the nationally recognized statistical rating organization that the 
person has responsibility for the report and, to the best knowledge of 
the person, the financial report fairly presents, in all material 
respects, the financial condition, results of operations, cash flows, 
revenues, and analyst compensation, as applicable, of the nationally 
recognized statistical rating organization for the period presented.
    (c) The Commission may grant an extension of time or an exemption 
with respect to any requirements in this section either unconditionally 
or on specified terms and conditions on the written request of a 
nationally recognized statistical rating organization if the Commission 
finds that such extension or exemption is necessary or appropriate in 
the public interest and consistent with the protection of investors.


Sec.  240.17g-4  Prevention of misuse of material nonpublic 
information.

    (a) The written policies and procedures a nationally recognized 
statistical rating organization establishes, maintains, and enforces to 
prevent the misuse of material, nonpublic information pursuant to 
section 15E(g)(1) of the Act (15 U.S.C. 78o-7(g)(1)) must include 
policies and procedures reasonably designed to prevent:
    (1) The inappropriate dissemination within and outside the 
nationally recognized statistical rating organization of material 
nonpublic information obtained in connection with the performance of 
credit rating services;
    (2) A person within the nationally recognized statistical rating 
organization from purchasing, selling, or otherwise benefiting from any 
transaction in securities or money market instruments when the person 
is aware of material nonpublic information obtained in connection with 
the performance of credit rating services that affects the securities 
or money market instruments; and
    (3) The inappropriate dissemination within and outside the 
nationally recognized statistical rating organization of a pending 
credit rating action before issuing the credit rating on the Internet 
or through another readily accessible means.
    (b) For the purposes of this section, the term person within a 
nationally recognized statistical rating organization means a 
nationally recognized statistical rating organization, its credit 
rating affiliates identified on Form NRSRO, and any partner, officer, 
director, branch manager, and employee of the nationally recognized 
statistical rating organization or its credit rating affiliates (or any 
person occupying a similar status or performing similar functions).


Sec.  240.17g-5  Conflicts of interest.

    (a) A person within a nationally recognized statistical rating 
organization is prohibited from having a conflict of interest relating 
to the issuance or maintenance of a credit rating identified in 
paragraph (b) of this section, unless:
    (1) The nationally recognized statistical rating organization has 
disclosed the type of conflict of interest in Exhibit 6 to Form NRSRO 
in accordance with section 15E(a)(1)(B)(vi) of the Act (15 U.S.C. 78o-
7(a)(1)(B)(vi)) and Sec.  240.17g-1; and
    (2) The nationally recognized statistical rating organization has 
established and is maintaining and enforcing written policies and 
procedures to address and manage

[[Page 33623]]

conflicts of interest in accordance with section 15E(h) of the Act (15 
U.S.C. 78o-7(h)).
    (b) Conflicts of interest. For purposes of this section, each of 
the following is a conflict of interest:
    (1) Being paid by issuers or underwriters to determine credit 
ratings with respect to securities or money market instruments they 
issue or underwrite.
    (2) Being paid by obligors to determine credit ratings with respect 
to the obligors.
    (3) Being paid for services in addition to determining credit 
ratings by issuers, underwriters, or obligors that have paid the 
nationally recognized statistical rating organization to determine a 
credit rating.
    (4) Being paid by persons for subscriptions to receive or access 
the credit ratings of the nationally recognized statistical rating 
organization and/or for other services offered by the nationally 
recognized statistical rating organization where such persons may use 
the credit ratings of the nationally recognized statistical rating 
organization to comply with, and obtain benefits or relief under, 
statutes and regulations using the term nationally recognized 
statistical rating organization.
    (5) Being paid by persons for subscriptions to receive or access 
the credit ratings of the nationally recognized statistical rating 
organization and/or for other services offered by the nationally 
recognized statistical rating organization where such persons also may 
own investments or have entered into transactions that could be 
favorably or adversely impacted by a credit rating issued by the 
nationally recognized statistical rating organization.
    (6) Allowing persons within the nationally recognized statistical 
rating organization to directly own securities or money market 
instruments of, or having other direct ownership interests in, issuers 
or obligors subject to a credit rating determined by the nationally 
recognized statistical rating organization.
    (7) Allowing persons within the nationally recognized statistical 
rating organization to have a business relationship that is more than 
an arms length ordinary course of business relationship with issuers or 
obligors subject to a credit rating determined by the nationally 
recognized statistical rating organization.
    (8) Having a person associated with the nationally recognized 
statistical rating organization that is a broker or dealer engaged in 
the business of underwriting securities or money market instruments.
    (9) Any other type of conflict of interest relating to the issuance 
of credit ratings by the nationally recognized statistical rating 
organization that is material to the nationally recognized statistical 
rating organization and that is identified by the nationally recognized 
statistical rating organization in Exhibit 6 to Form NRSRO in 
accordance with section 15E(a)(1)(B)(vi) of the Act (15 U.S.C. 78o-
7(a)(1)(B)(vi)) and Sec.  240.17g-1.
    (c) Prohibited conflicts. A nationally recognized statistical 
rating organization is prohibited from having the following conflicts 
of interest relating to the issuance or maintenance of a credit rating 
as a credit rating agency:
    (1) The nationally recognized statistical rating organization 
issues or maintains a credit rating solicited by a person that, in the 
most recently ended fiscal year, provided the nationally recognized 
statistical rating organization with net revenue (as reported under 
Sec.  240.17g-3) equaling or exceeding 10% of the total net revenue of 
the nationally recognized statistical rating organization for the 
fiscal year;
    (2) The nationally recognized statistical rating organization 
issues or maintains a credit rating with respect to a person (excluding 
a sovereign nation or an agency of a sovereign nation) where the 
nationally recognized statistical rating organization, a credit analyst 
that participated in determining the credit rating, or a person 
responsible for approving the credit rating, directly owns securities 
of, or has any other direct ownership interest in, the person that is 
subject to the credit rating;
    (3) The nationally recognized statistical rating organization 
issues or maintains a credit rating with respect to a person associated 
with the nationally recognized statistical rating organization; or
    (4) The nationally recognized statistical rating organization 
issues or maintains a credit rating where a credit analyst who 
participated in determining the credit rating, or a person responsible 
for approving the credit rating, is an officer or director of the 
person that is subject to the credit rating.
    (d) For the purposes of this section, the term person within a 
nationally recognized statistical rating organization means a 
nationally recognized statistical rating organization, its credit 
rating affiliates identified on Form NRSRO, and any partner, officer, 
director, branch manager, and employee of the nationally recognized 
statistical rating organization or its credit rating affiliates (or any 
person occupying a similar status or performing similar functions).


Sec.  240.17g-6  Prohibited acts and practices.

    (a) Prohibitions. A nationally recognized statistical rating 
organization is prohibited from engaging in any of the following 
unfair, coercive, or abusive practices:
    (1) Conditioning or threatening to condition the issuance of a 
credit rating on the purchase by an obligor or issuer, or an affiliate 
of the obligor or issuer, of any other services or products, including 
pre-credit rating assessment products, of the nationally recognized 
statistical rating organization or any person associated with the 
nationally recognized statistical rating organization.
    (2) Issuing, or offering or threatening to issue, a credit rating 
that is not determined in accordance with the nationally recognized 
statistical rating organization's established procedures and 
methodologies for determining credit ratings, based on whether the 
rated person, or an affiliate of the rated person, purchases or will 
purchase the credit rating or any other service or product of the 
nationally recognized statistical rating organization or any person 
associated with the nationally recognized statistical rating 
organization.
    (3) Modifying, or offering or threatening to modify, a credit 
rating in a manner that is contrary to the nationally recognized 
statistical rating organization's established procedures and 
methodologies for modifying credit ratings based on whether the rated 
person, or an affiliate of the rated person, purchases or will purchase 
the credit rating or any other service or product of the nationally 
recognized statistical rating organization or any person associated 
with the nationally recognized statistical rating organization.
    (4) Issuing or threatening to issue a lower credit rating, lowering 
or threatening to lower an existing credit rating, refusing to issue a 
credit rating, or withdrawing or threatening to withdraw a credit 
rating, with respect to securities or money market instruments issued 
by an asset pool or as part of any asset-backed or mortgage-backed 
securities transaction, unless all or a portion of the assets within 
such pool or part of such transaction also are rated by the nationally 
recognized statistical rating organization, where such practice is 
engaged in by the nationally recognized statistical rating organization 
for an anticompetitive purpose.

[[Page 33624]]

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

0
3. The authority citation for part 249b continues to read in part as 
follows.

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

0
4. Section 249b.300 and Form NRSRO are added to read as follows:


Sec.  249b.300  FORM NRSRO, application for registration as a 
nationally recognized statistical rating organization pursuant to 
section 15E of the Securities Exchange Act of 1934 and Sec.  240.17g-1 
of this chapter.

    This Form shall be used for an initial application for and an 
application to add a class of credit ratings to, a supplement to an 
initial application for and an application to add a class of credit 
ratings to, an update and amendment to an application for, and a 
withdrawal from a registration as a nationally recognized statistical 
rating organization pursuant to section 15E of the Securities Exchange 
Act of 1934 (15 U.S.C. 78o-7) and Sec.  240.17g-1 of this chapter.

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

Form NRSRO--Application for Registration as a Nationally Recognized 
Statistical Rating Organization (NRSRO)

OMB Approval
    OMB Number: 3235-0625.
    Expires: May 31, 2010.
    Estimated average burden hours per response: 300.
    Persons who respond to the collection of information contained in 
this form are not required to respond unless the form displays a 
currently valid OMB control number.
SEC 1541 (2-07)
BILLING CODE 8010-01-P

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BILLING CODE 8010-01-C

Form NRSRO Instructions

A. General Instructions

    1. Form NRSRO is the Application for Registration as a Nationally 
Recognized Statistical Rating Organization (``NRSRO'') under Section 
15E of the Securities Exchange Act of 1934 (``Exchange Act'') and 
Exchange Act Rule 17g-1. Exchange Act Rule 17g-1 requires an Applicant/
NRSRO to use Form NRSRO to furnish the U.S. Securities and Exchange 
Commission (``Commission'') with:
     An initial application to be registered as an NRSRO;
     An application to register for an additional class of 
credit ratings;
     An application supplement;
     An update of registration pursuant to Section 15E(b)(1) of 
the Exchange Act;
     An annual certification pursuant to Section 15E(b)(2) of 
the Exchange Act; and
     A withdrawal of registration pursuant to Section 15E(e) of 
the Exchange Act.
    2. Exchange Act Rule 17g-1(c) requires that an Applicant/NRSRO 
promptly provide the Commission with a written notice if information 
submitted to the Commission in an initial application for registration 
or in an application to register for an additional class of credit 
ratings is found to be or becomes materially inaccurate before the 
Commission has granted or denied the application. The notice must 
identify the information found to be materially inaccurate. The 
Applicant/NRSRO must also promptly furnish the Commission with accurate 
and complete information as an application supplement on Form NRSRO.
    3. Pursuant to Exchange Act Rule 17g-1(i), an NRSRO must make its 
current Form NRSRO and information and documents furnished in Exhibits 
1 through 9 to Form NRSRO publicly available on its Web site, or 
through another comparable, readily accessible means within 10 business 
days after the date of the Commission Order granting an initial 
application for registration as an NRSRO or an application to register 
for an additional class of credit ratings and within 10 business days 
after submitting an update of registration, annual certification, or 
withdrawal from registration to the Commission on Form NRSRO. The 
certifications from qualified institutional buyers, disclosure 
reporting pages, and Exhibits 10 through 13 are not required to be made 
publicly available by the NRSRO pursuant to Rule 17g-1(i). An 
Applicant/NRSRO may request that the Commission keep confidential the 
certifications from qualified institutional buyers, the disclosure 
reporting pages, and the information and documents in Exhibits 10-13 
submitted to the Commission. An Applicant/NRSRO seeking confidential 
treatment for these submissions should mark each page ``Confidential 
Treatment'' and comply with Commission rules governing confidential 
treatment (See 17 CFR 200.80 and 17 CFR 200.83). The Commission will 
keep this information confidential to the extent permitted by law.
    4. Section 15E(a)(2) of the Exchange Act prescribes time periods 
and requirements for the Commission to grant or deny an initial 
application for registration as an NRSRO. These time periods also apply 
to an application to register for an additional class of credit 
ratings.
    5. Type or clearly print all information. Use only the current 
version of Form NRSRO or a reproduction of it.
    6. Section 15E of the Exchange Act (15 U.S.C. 78o-7) authorizes the 
Commission to collect the Information on Form NRSRO from an Applicant/
NRSRO. The principal purposes of Form NRSRO are to determine whether an 
Applicant should be granted registration as an NRSRO, whether an NRSRO 
should be granted registration in an additional class of credit 
ratings, whether an NRSRO continues to meet the criteria for 
registration as an NRSRO, to withdraw a registration, and to provide 
information about an NRSRO to users of credit ratings. Intentional 
misstatements or omissions may constitute federal criminal violations 
under 18 U.S.C. 1001.
    The information collection is in accordance with the clearance 
requirements of Section 3507 of the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507). The Commission may not conduct or sponsor, and you are 
not required to respond to, a collection of information unless it 
displays a valid Office of Management and Budget (OMB) control number. 
The time required to complete and furnish this form will vary depending 
on individual

[[Page 33631]]

circumstances. The estimated average time to complete an initial 
application is displayed on the facing page of this Form. Send comments 
regarding this burden estimate or suggestions for reducing the burden 
to Director, Office of Information Technology, Securities and Exchange 
Commission, 100 F Street, NE, Washington, DC 20549.
    7. Under Exchange Act Rule 17g-2(b)(10), an NRSRO must retain 
copies of all Form NRSROs (including Exhibits, accompanying 
information, and documents) submitted to the Commission. Exchange Act 
Rule 17g-2(c) requires that these records be retained for three years 
after the date the record is made.
    8. ADDRESS--The mailing address for Form NRSRO is: U.S. Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549.
    9. A Form NRSRO will be considered furnished to the Commission on 
the date the Commission receives a complete and properly executed Form 
NRSRO that follows all applicable instructions for the Form.

B. Instructions for an Initial Application

    An Applicant applying to be registered with the Commission as an 
NRSRO must furnish the Commission with an initial application on Form 
NRSRO. To complete an initial application:
     Check the ``INITIAL APPLICATION'' box at the top of Form 
NRSRO.
     Complete Items 1, 2, 3, 4, 5, 6, and 8. (See Instructions 
below for each Item). Enter ``None'' or ``N/A'' where appropriate.
     Unless exempt from the requirement, attach certifications 
from qualified institutional buyers, marked ``Certification from 
Qualified Institutional Buyer'' (See Instructions below for Item 6C).
     Attach Exhibits 1 through 13 (See Instructions below for 
each Exhibit).
     Execute the Form.
    The Applicant must promptly furnish the Commission with a written 
notice if information submitted to the Commission in an initial 
application is found to be or becomes materially inaccurate prior to 
the date of a Commission order granting or denying the application. The 
notice must identify the information found to be materially inaccurate. 
The Applicant also must promptly furnish the Commission with an 
application supplement on Form NRSRO (See instructions below for an 
application supplement).

C. Instructions for an Application to Add a Class of Credit Ratings

    An NRSRO applying to register for an additional class of credit 
ratings must furnish the Commission with an application on Form NRSRO. 
To complete an application to register for an additional class of 
credit ratings:
     Check the ``APPLICATION TO ADD CLASS OF CREDIT RATINGS'' 
box at the top of Form NRSRO.
     Complete Items 1, 2, 3, 4, 5, 6, 7, and 8 on the Form 
following all applicable instructions for each Item (See Instructions 
below for each Item). If any information in an Item on the previously 
furnished Form NRSRO is materially inaccurate, update that information. 
Enter ``None'' or ``N/A'' where appropriate. Complete each Item even if 
the Item is not being updated.
     Unless exempt from the requirement, attach certifications 
from qualified institutional buyers for the additional class of credit 
ratings marked ``Certification from Qualified Institutional Buyer'' 
(See Instructions below for Item 6C).
     If any information in an Exhibit previously furnished is 
materially inaccurate, update that information.
     Execute the Form.
    The Applicant must promptly furnish the Commission with a written 
notice if information submitted to the Commission in an application to 
add a class of credit ratings is found to be or becomes materially 
inaccurate prior to the date of a Commission order granting or denying 
the application. The notice must identify the information found to be 
materially inaccurate. The Applicant also must promptly furnish the 
Commission with an application supplement on Form NRSRO (See 
instructions below for an application supplement).

D. Instructions for an Application Supplement

    An Applicant must furnish an application supplement to the 
Commission on Form NRSRO if information submitted to the Commission in 
a pending initial application for registration as an NRSRO or a pending 
application to register for an additional class of credit ratings is 
found to be or becomes materially inaccurate. To complete an 
application supplement:
     Check the ``APPLICATION SUPPLEMENT'' box at the top of 
Form NRSRO.
     Indicate on the line provided under the box the Item(s) or 
Exhibit(s) being supplemented.
     Complete Items 1, 2, 3, 4, 5 and 8 on the Form following 
all applicable instructions for each Item (See Instructions below for 
each Item). If supplementing an initial application, also complete Item 
6. If supplementing an application for registration in an additional 
class of credit ratings, also complete Items 6 and 7. If any 
information in an Item on the previously furnished Form NRSRO is 
materially inaccurate, update that information. Enter ``None'' or ``N/
A'' where appropriate. Complete each Item even if the Item is not being 
updated.
     If a certification from a qualified institutional buyer is 
being updated or a new certification is being added, attach the updated 
or new certification.
     If an Exhibit is being updated, attach the updated 
Exhibit.
     Execute the Form.

E. Instructions for an Update of Registration

    After registration is granted, Section 15E(b)(1) of the Exchange 
Act requires that an NRSRO must promptly amend its application for 
registration if information or documents provided in the previously 
furnished Form NRSRO become materially inaccurate. This requirement 
does not apply to Item 7 and Exhibit 1, which only are required to be 
updated annually with the annual certification. It also does not apply 
to Exhibits 10-13 and the certifications from qualified institutional 
buyers, which are not required to be updated on Form NRSRO after 
registration. An NRSRO amending its application for registration must 
furnish the Commission with an update of its registration on Form 
NRSRO. To complete an update of registration:
     Check the ``UPDATE OF REGISTRATION'' box at the top of 
Form NRSRO.
     Indicate on the line provided under the box the Item(s) or 
Exhibit(s) being updated.
     Complete Items 1, 2, 3, 4, 5, 7, and 8 on the Form 
following all applicable instructions for each Item (See Instructions 
below for each Item). If any information in an Item on the previously 
furnished Form NRSRO is materially inaccurate, update that information. 
Enter ``None'' or ``N/A'' where appropriate. Complete each Item even if 
the Item is not being updated.
     If an Exhibit is being updated, attach the updated 
Exhibit.
     Execute the Form.

F. Instructions for Annual Certifications

    After registration is granted, Section 15E(b)(2) of the Exchange 
Act requires that an NRSRO furnish the Commission with an annual 
certification not later than 90 days after the end of each

[[Page 33632]]

calendar year. The annual certification must be furnished to the 
Commission on Form NRSRO and must include an update of the information 
in Item 7 and the credit ratings performance measurement statistics 
furnished in Exhibit 1, a certification that the information and 
documents furnished on or with Form NRSRO continue to be accurate (use 
the certification on the Form), and a list of material changes to the 
application for registration that occurred during the previous calendar 
year. To complete an annual certification:
     Check the ``ANNUAL CERTIFICATION'' box at the top of Form 
NRSRO.
     Complete Items 1, 2, 3, 4, 5, 7, and 8 on the Form 
following all applicable instructions for each Item (See Instructions 
below for each Item). If any information in an Item on the previously 
furnished Form NRSRO is materially inaccurate, update that information. 
Enter ``None'' or ``N/A'' where appropriate. Complete each Item even if 
the Item is not being updated.
     If any information in an Exhibit previously furnished is 
materially inaccurate, update that information.
     Attach a list of all material changes made to the 
information or documents in the application for registration of the 
NRSRO that occurred during the previous calendar year.
     Execute the Form.

G. Instructions for a Withdrawal From Registration

    Section 15E(e)(1) of the Exchange Act provides that an NRSRO may 
voluntarily withdraw its registration with the Commission. To withdraw 
from registration, an NRSRO must furnish the Commission with a notice 
of withdrawal from registration on Form NRSRO. The withdrawal from 
registration will become effective 45 calendar days after the 
withdrawal from registration is furnished to the Commission upon such 
terms and conditions as the Commission may establish as necessary in 
the public interest or for the protection of investors. To complete a 
withdrawal from registration:
     Check the ``WITHDRAWAL FROM REGISTRATION'' box at the top 
of Form NRSRO.
     Complete Items 1, 2, 3, 4, 5, 7, and 8 on the Form 
following all applicable instructions for each Item (See Instructions 
below for each Item). If any information on the previously furnished 
Form NRSRO is materially inaccurate, update that information. Enter 
``None'' or ``N/A'' where appropriate. Complete each Item even if the 
Item is not being updated.
     Execute the Form.

H. Instructions for Specific Line Items

    Item 1A. Provide the name of the person (e.g., XYZ Corporation) 
that is furnishing the Form NRSRO to the Commission. This means the 
name of the person that is applying for registration as an NRSRO or is 
registered as an NRSRO and not the name of the individual that is 
executing the Form.
    Item 1E. The individual listed as the contact person must be 
authorized to receive all communications and papers from the Commission 
and must be responsible for their dissemination within the Applicant/
NRSRO.
    Certification. The certification must be executed by the Chief 
Executive Officer or the President of the person that is furnishing the 
Form NRSRO to the Commission or an individual with similar 
responsibilities.
    Item 3. Identify credit rating affiliates that issue credit ratings 
on behalf of the person furnishing the Form NRSRO to the Commission in 
one or more of the classes of credit ratings identified in Item 6 or 
Item 7. A ``credit rating affiliate'' is a separate legal entity or a 
separately identifiable department or division thereof that determines 
credit ratings that are credit ratings of the person furnishing the 
Form NRSRO to the Commission. The information in Items 4-8 and all the 
Exhibits must incorporate information about the credit ratings, 
methodologies, procedures, policies, financial condition, results of 
operations, personnel, and organizational structure of each credit 
rating affiliate identified in Item 3, as applicable. Any credit rating 
determined by a credit rating affiliate identified in Item 3 will be 
treated as a credit rating issued by the person furnishing the Form 
NRSRO to the Commission for purposes of Section 15E of the Exchange Act 
and the Commission's rules thereunder. The terms ``Applicant'' and 
``NRSRO'' as used on Form NRSRO and the Instructions for the Form mean 
the person furnishing the Form NRSRO to the Commission and any credit 
rating affiliate identified in Item 3.
    Item 4. Section 15E(j) of the Exchange Act requires an NRSRO to 
designate a compliance officer responsible for administering the 
policies and procedures of the NRSRO established pursuant to Sections 
15E(g) and (h) of the Exchange Act (respectively, to prevent the misuse 
of material nonpublic information and address and manage conflicts of 
interest) and for ensuring compliance with applicable securities laws, 
rules, and regulations.
    Item 5. Section 15E(a)(3) of the Exchange Act and Exchange Act Rule 
17g-1(i) require an NRSRO to make Form NRSRO and Exhibits 1-9 to Form 
NRSRO furnished to the Commission publicly available on the NRSRO's Web 
site, or through another comparable, readily accessible means within 10 
business days after the date of the Commission order granting an 
initial application for registration as an NRSRO or an application to 
register for an additional class of credit ratings and within 10 
business days after furnishing the Commission with an amendment, annual 
certification, or withdrawal of registration on Form NRSRO. The 
certifications from qualified institutional investors, Disclosure 
Reporting Pages, and Exhibits 10 through 13 are not required to be made 
publicly available on the NRSRO's Web site, or through another 
comparable, readily accessible means. Describe how the current Form 
NRSRO and Exhibits 1-9 will be made publicly available. If they will be 
posted on a Web site, for example, give the Internet address and link 
to the Form and Exhibits.
    Item 6. Complete Item 6 only if furnishing an initial application 
for registration, an application to be registered in an additional 
class of credit ratings, or an application supplement.
    Item 6A. Pursuant to Section 15E(a)(1)(B)(vii) of the Exchange Act, 
an Applicant applying for registration as an NRSRO must disclose in the 
application the classes of credit ratings for which the Applicant/NRSRO 
is applying to be registered. Indicate these classes by checking the 
appropriate box or boxes. For each class of credit ratings, provide in 
the appropriate box the approximate number of credit ratings the 
Applicant/NRSRO presently has outstanding as of the date of the 
application. Pursuant to the definition of ``nationally recognized 
statistical rating organization'' in Section 3(a)(62) of the Exchange 
Act, an Applicant/NRSRO must have been in business as a ``credit rating 
agency'' for at least the 3 consecutive years immediately preceding the 
date of its application for registration as an NRSRO. For each class of 
credit ratings, also provide in the appropriate box the approximate 
date the Applicant/NRSRO began issuing and making readily accessible 
credit ratings in the class on a continuous basis through the present 
as a ``credit rating agency,'' as that term is defined in Section 
3(a)(61) of the Exchange Act. If there was a period when the Applicant/
NRSRO stopped issuing credit ratings in a particular

[[Page 33633]]

class or stopped operating as a credit rating agency, provide the 
approximate date the Applicant/NRSRO resumed issuing and making readily 
accessible credit ratings in that class as a credit rating agency. 
Refer to the definition of ``credit rating agency'' in the instructions 
below (also at 15 U.S.C. 78c(a)(61)) to determine when the Applicant/
NRSRO began operating as a ``credit rating agency.''
    Item 6B. To meet the definition of ``credit rating agency'' 
pursuant to Section 3(a)(61)(A) of the Exchange Act, the Applicant 
must, among other things, issue ``credit ratings on the Internet or 
through another readily accessible means, for free or for a reasonable 
fee.'' Briefly describe how the Applicant/NRSRO makes the credit 
ratings in the classes indicated in Item 6A readily accessible for free 
or for a reasonable fee. If a person must pay a fee to obtain a credit 
rating made readily accessible by the Applicant/NRSRO, provide a fee 
schedule or describe the price(s) charged.
    Item 6C. If the Applicant/NRSRO is required to furnish qualified 
institutional buyer certifications, under Section 15E(a)(1)(C) of the 
Exchange Act, submit a minimum of 10 certifications from qualified 
institutional buyers, none of which is affiliated with the Applicant/
NRSRO. Each certification may address more than one class of credit 
ratings. To be registered as an NRSRO for a class of credit ratings 
identified in Item 6A under ``Applying for Registration,'' the 
Applicant/NRSRO must submit at least two certifications that address 
the class of credit ratings. If this is an application of an NRSRO to 
be registered in one or more additional classes of credit ratings, 
furnish at least two certifications that address each additional class 
of credit ratings. The required certifications must be signed by a 
person duly authorized by the certifying entity, must be notarized, 
must be marked ``Certification from Qualified Institutional Buyer,'' 
and must be in substantially the following form:

    ``I, [Executing official], am authorized by [Certifying entity] 
to execute this certification on behalf of [Certifying entity]. I 
certify that all actions by stockholders, directors, general 
partners, and other bodies necessary to authorize me to execute this 
certification have been taken and that [Certifying entity]:
    (i) Meets the definition of a 'qualified institutional buyer' as 
set forth in section 3(a)(64) of the Securities Exchange Act of 1934 
(15 U.S.C. 78c(a)(64)) pursuant to the following subsection(s) of 17 
CFR 230.144A(a)(1) [insert applicable citations];
    (ii) Has seriously considered the credit ratings of [the 
Applicant/NRSRO] in the course of making some of its investment 
decisions for at least the three years immediately preceding the 
date of this certification, in the following classes of credit 
ratings: [Insert applicable classes of credit ratings]; and
    (iii) Has not received compensation either directly or 
indirectly from [the Applicant/NRSRO] for executing this 
certification.
    [Signature]
    Print Name and Title

    You are not required to make a Certification from a Qualified 
Institutional Buyer submitted with this Form NRSRO publicly available 
on your Web site, or through another comparable, readily accessible 
means pursuant to Exchange Act Rule 17g-1(i). You may request that the 
Commission keep these certifications confidential by marking each page 
``Confidential Treatment'' and complying with Commission rules 
governing confidential treatment (See 17 CFR 200.80 and 17 CFR 200.83). 
The Commission will keep the certifications confidential upon request 
to the extent permitted by law.
    Item 7. An Applicant furnishing Form NRSRO to apply for 
registration as an NRSRO should not complete Item 7. An NRSRO 
furnishing Form NRSRO for any other reason must complete Item 7. The 
information in Item 7 must be updated on an annual basis with the 
furnishing of the annual certification.
    Item 7A. Indicate the classes of credit ratings for which the NRSRO 
is currently registered by checking the appropriate box or boxes. For 
each class of credit ratings, provide in the appropriate box the 
approximate number of credit ratings the NRSRO had outstanding as of 
the end of the most recently ended calendar year. For each class of 
credit ratings, also provide in the appropriate box the approximate 
date the NRSRO began issuing and making readily accessible credit 
ratings in the class on a continuous basis through the present as a 
``credit rating agency,'' as that term is defined in Section 3(a)(61) 
of the Exchange Act. If there was a period when the NRSRO stopped 
issuing credit ratings in a particular class or stopped operating as a 
credit rating agency, provide the approximate date the NRSRO resumed 
issuing and making readily accessible credit ratings in that class as a 
credit rating agency. Refer to the definition of ``credit rating 
agency'' in the instructions below (also at 15 U.S.C. 78c(a)(61)) to 
determine when the NRSRO began operating as a ``credit rating agency.''
    Item 7B. Briefly describe how the NRSRO makes the credit ratings in 
the classes indicated in Item 7A readily accessible for free or for a 
reasonable fee. If a person must pay a fee to obtain a credit rating 
made readily accessible by the NRSRO, provide a fee schedule or 
describe the price(s) charged.
    Item 8. Answer each question by checking the appropriate box. Refer 
to the definition of ``person within an Applicant/NRSRO'' set forth 
below to determine the persons to which the questions apply. 
Information that relates to an affirmative answer must be provided on a 
Disclosure Reporting Page (NRSRO) and furnished with Form NRSRO. Submit 
a separate Disclosure Reporting Page (NRSRO) for each person that: (a) 
has committed or omitted any act, or has been subject to an order or 
finding, enumerated in subparagraphs (A), (D), (E), (G), or (H) of 
section 15(b)(4) of the Securities Exchange Act of 1934, has been 
convicted of any offense specified in section 15(b)(4)(B) of the 
Securities Exchange Act of 1934, or has been enjoined from any action, 
conduct, or practice specified in section 15(b)(4)(C) of the Securities 
Exchange Act of 1934; (b) has been convicted of any crime that is 
punishable by imprisonment for 1 or more years, and that is not 
described in section 15(b)(4) of the Securities Exchange Act of 1934, 
or has been convicted of a substantially equivalent crime by a foreign 
court of competent jurisdiction; or (c) is subject to any order of the 
Commission barring or suspending the right of the person to be 
associated with an NRSRO. The Disclosure Reporting Page (NRSRO) is 
attached to these instructions. Note: the definition of ``person within 
an Applicant/NRSRO'' is narrower than the definition of ``person 
associated with a nationally recognized statistical rating 
organization'' in Section 3(a)(63) of the Exchange Act.
    You are not required to make any disclosure reporting pages 
submitted with this Form NRSRO publicly available on your Web site, or 
through another comparable, readily accessible means pursuant to 
Exchange Act Rule 17g-1(i). You may request that the Commission keep 
any disclosure reporting pages confidential by marking each page 
``Confidential Treatment'' and complying with Commission rules 
governing confidential treatment. The Commission will keep the 
disclosure reporting pages confidential upon request to the extent 
permitted by law.
    Item 9. Exhibits. Section 15E(a)(1)(B) of the Exchange Act requires 
a credit rating agency's application for registration as an NRSRO to 
contain certain specific information and documents and, pursuant to 
Section 15E(a)(1)(B)(x), any other information and documents concerning 
the applicant and any person associated

[[Page 33634]]

with the applicant that the Commission requires as necessary or 
appropriate in the public interest or for the protection of investors. 
If any information or document required to be included with any Exhibit 
is maintained in a language other than English, provide a copy of the 
original document and a version of the document translated into 
English. Attach a certification by an authorized person that the 
translated version is a true, accurate, and complete English 
translation of the information or document. Attach the Exhibits to Form 
NRSRO in numerical order. Bind each Exhibit separately, and mark each 
Exhibit or bound volume of the Exhibit with the appropriate Exhibit 
number. The information provided in the Exhibits must be sufficiently 
detailed to allow for verification. The information and documents 
provided in Exhibits 1 through 9 must be made publicly available on the 
NRSRO's Web site, or through another comparable, readily accessible 
means pursuant to Exchange Act Rule 17g-1(i). The information and 
documents required to be provided in Exhibits 10 through 13 are not 
required to be made publicly available on the NRSRO's Web site, or 
through another comparable, readily accessible means pursuant to 
Exchange Act Rule 17g-1(i). An NRSRO may request that the Commission 
keep these Exhibits confidential by marking each page of them 
``Confidential Treatment'' and complying with Commission rules 
governing confidential treatment (See 17 CFR 200.80 and 17 CFR 200.83). 
The Commission will keep the information and documents in these 
Exhibits confidential upon request to the extent permitted by law.
    Exhibit 1. Provide in this Exhibit performance measurement 
statistics of the credit ratings of the Applicant/NRSRO over short-
term, mid-term, and long-term periods (as applicable) through the most 
recent calendar year-end, including, as applicable: historical down-
grade and default rates within each of the credit rating categories, 
notches, grades, or rankings used by the Applicant/NRSRO as an 
indicator of the assessment of the creditworthiness of an obligor, 
security, or money market instrument. As part of this Exhibit, define 
the credit rating categories, notches, grades, and rankings used by the 
Applicant/NRSRO and explain the performance measurement statistics, 
including the inputs, time horizons, and metrics used to determine the 
statistics.
    Exhibit 2. Provide in this Exhibit a general description of the 
procedures and methodologies used by the Applicant/NRSRO to determine 
credit ratings, including unsolicited credit ratings within the classes 
of credit ratings for which the Applicant/NRSRO is seeking registration 
or is registered. The description must be sufficiently detailed to 
provide users of credit ratings with an understanding of the processes 
employed by the Applicant/NRSRO in determining credit ratings, 
including, as applicable, descriptions of: policies for determining 
whether to initiate a credit rating; a description of the public and 
non-public sources of information used in determining credit ratings, 
including information and analysis provided by third-party vendors; the 
quantitative and qualitative models and metrics used to determine 
credit ratings; the methodologies by which credit ratings of other 
credit rating agencies are treated to determine credit ratings for 
securities or money market instruments issued by an asset pool or as 
part of any asset-backed or mortgaged-backed securities transaction; 
the procedures for interacting with the management of a rated obligor 
or issuer of rated securities or money market instruments; the 
structure and voting process of committees that review or approve 
credit ratings; procedures for informing rated obligors or issuers of 
rated securities or money market instruments about credit rating 
decisions and for appeals of final or pending credit rating decisions; 
procedures for monitoring, reviewing, and updating credit ratings; and 
procedures to withdraw, or suspend the maintenance of, a credit rating. 
An Applicant/NRSRO may provide in Exhibit 2 the location on its Web 
site where additional information about the procedures and 
methodologies is located.
    Exhibit 3. Provide in this Exhibit a copy of the written policies 
and procedures established, maintained, and enforced by the Applicant/
NRSRO to prevent the misuse of material, nonpublic information pursuant 
to Section 15E(g) of the Exchange Act and 17 CFR 240.17g-4. Do not 
include any information that is proprietary or that would diminish the 
effectiveness of a specific policy or procedure if made publicly 
available.
    Exhibit 4. Provide in this Exhibit information about the 
organizational structure of the Applicant/NRSRO, including, as 
applicable, an organizational chart that identifies, as applicable, the 
ultimate and sub-holding companies, subsidiaries, and material 
affiliates of the Applicant/NRSRO; an organizational chart showing the 
divisions, departments, and business units of the Applicant/NRSRO; and 
an organizational chart showing the managerial structure of the 
Applicant/NRSRO, including the designated compliance officer identified 
in Item 4.
    Exhibit 5. Provide in this Exhibit a copy of the written code of 
ethics the Applicant/NRSRO has in effect or a statement of the reasons 
why the Applicant/NRSRO does not have a written code of ethics in 
effect.
    Exhibit 6. Identify in this Exhibit the types of conflicts of 
interest relating to the issuance of credit ratings by the Applicant/
NRSRO that are material to the Applicant/NRSRO. First, identify the 
conflicts described in the list below that apply to the Applicant/
NRSRO. The Applicant/NRSRO may use the descriptions below to identify 
an applicable conflict of interest and is not required to provide any 
further details. Second, briefly describe any other type of conflict of 
interest relating to the issuance of credit ratings by the Applicant/
NRSRO that is not covered in the descriptions below that is material to 
the Applicant/NRSRO (for example, one the Applicant/NRSRO has 
established specific policies and procedures to address):
     The Applicant/NRSRO is paid by issuers or underwriters to 
determine credit ratings with respect to securities or money market 
instruments they issue or underwrite.
     The Applicant/NRSRO is paid by obligors to determine 
credit ratings of the obligors.
     The Applicant/NRSRO is paid for services in addition to 
determining credit ratings by issuers, underwriters, or obligors that 
have paid the Applicant/NRSRO to determine a credit rating.
     The Applicant/NRSRO is paid by persons for subscriptions 
to receive or access the credit ratings of the Applicant/NRSRO and/or 
for other services offered by the Applicant/NRSRO where such persons 
may use the credit ratings of the Applicant/NRSRO to comply with, and 
obtain benefits or relief under, statutes and regulations using the 
term ``nationally recognized statistical rating organization.''
     The Applicant/NRSRO is paid by persons for subscriptions 
to receive or access the credit ratings of the Applicant/NRSRO and/or 
for other services offered by the Applicant/NRSRO where such persons 
also may own investments or have entered into transactions that could 
be favorably or adversely impacted by a credit rating issued by the 
Applicant/NRSRO.
     The Applicant/NRSRO allows persons within the Applicant/
NRSRO to:
    [cir] Directly own securities or money market instruments of, or 
have other direct ownership interests in, obligors or

[[Page 33635]]

issuers subject to a credit rating determined by the Applicant/NRSRO.
    [cir] Have business relationships that are more than arms length 
ordinary course business relationships with obligors or issuers subject 
to a credit rating determined by the Applicant/NRSRO.
     A person associated with the Applicant/NRSRO is a broker 
or dealer engaged in the business of underwriting securities or money 
market instruments (identify the person).
     The Applicant/NRSRO has any other material conflict of 
interest that arises from the issuances of credit ratings (briefly 
describe).
    Exhibit 7. Provide in this Exhibit a copy of the written policies 
and procedures established, maintained, and enforced by the Applicant/
NRSRO to address and manage conflicts of interest pursuant to Section 
15E(h) of the Exchange Act. Do not include any information that is 
proprietary or that would diminish the effectiveness of a specific 
policy or procedure if made publicly available.
    Exhibit 8. Provide in this Exhibit the following information about 
the Applicant/NRSRO's credit analysts (See definition below) and the 
persons who supervise the credit analysts:
     The total number of credit analysts.
     The total number of credit analyst supervisors.
     A general description of the minimum qualifications 
required of the credit analysts, including education level and work 
experience (if applicable, distinguish between junior, mid, and senior 
level credit analysts).
     A general description of the minimum qualifications 
required of the credit analyst supervisors, including education level 
and work experience.
    Exhibit 9. Provide in this Exhibit the following information about 
the designated compliance officer (identified in Item 4) of the 
Applicant/NRSRO:
     Name.
     Employment history.
     Post secondary education.
     Whether employed by the Applicant/NRSRO full-time or part-
time.
    Exhibit 10. Provide in this Exhibit a list of the largest users of 
credit rating services of the Applicant by the amount of net revenue 
earned by the Applicant attributable to the person during the fiscal 
year ending immediately before the date of the initial application. 
First, determine and list the 20 largest issuers and subscribers in 
terms of net revenue. Next, add to the list any obligor or underwriter 
that, in terms of net revenue during the fiscal year, equaled or 
exceeded the 20th largest issuer or subscriber. In making the list, 
rank the persons in terms of net revenue from largest to smallest and 
include the net revenue amount for each person. For purposes of this 
Exhibit:
    Net revenue means revenue earned by the Applicant for any type of 
service or product provided to the person, regardless of whether 
related to credit rating services, and net of any rebates and 
allowances the Applicant paid or owes to the person; and
    Credit rating services means any of the following: rating an 
obligor (regardless of whether the obligor or any other person paid for 
the credit rating); rating an issuer's securities or money market 
instruments (regardless of whether the issuer, underwriter, or any 
other person paid for the credit rating); and providing credit ratings, 
credit ratings data, or credit ratings analysis to a subscriber.
    An NRSRO is not required to make this Exhibit publicly available on 
its Web site, or through another comparable, readily accessible means 
pursuant to Exchange Act Rule 17g-1(i). An NRSRO may request that the 
Commission keep this Exhibit confidential by marking each page 
``Confidential Treatment'' and complying with Commission rules 
governing confidential treatment (See 17 CFR 200.80 and 17 CFR 200.83). 
The Commission will keep the information and documents in the Exhibit 
confidential upon request to the extent permitted by law.
    Exhibit 11. Provide in this Exhibit the financial statements of the 
Applicant, which must include a balance sheet, an income statement and 
statement of cash flows, and a statement of changes in ownership 
equity, audited by an independent public accountant, for each of the 
three fiscal or calendar years ending immediately before the date of 
the Applicant's initial application to the Commission, subject to the 
following:
    If the Applicant is a division, unit, or subsidiary of a parent 
company, the Applicant may provide audited consolidated financial 
statements of its parent company.
    If the Applicant does not have audited financial statements for one 
or more of the three fiscal or calendar years ending immediately before 
the date of the initial application, the Applicant can provide 
unaudited financial statements for the applicable year or years, but 
must provide audited financial statements for the fiscal or calendar 
year ending immediately before the date of the initial application. 
Attach to the unaudited financial statements a certification by a 
person duly authorized by the Applicant to make the certification that 
the person has responsibility for the financial statements and that to 
the best knowledge of the person making the certification the financial 
statements fairly present, in all material respects, the Applicant's 
financial condition, results of operations, and cash flows for the 
period presented.
    An NRSRO is not required to make this Exhibit publicly available on 
its Web site, or through another comparable, readily accessible means 
pursuant to Exchange Act Rule 17g-1(i). An NRSRO may request that the 
Commission keep this Exhibit confidential by marking each page 
``Confidential Treatment'' and complying with Commission rules 
governing confidential treatment (See 17 CFR 200.80 and 17 CFR 200.83). 
The Commission will keep the information and documents in the Exhibit 
confidential upon request to the extent permitted by law.
    Exhibit 12. Provide in this Exhibit the following information, as 
applicable, and which is not required to be audited, regarding the 
Applicant's aggregate revenues for the fiscal or calendar year ending 
immediately before the date of the initial application:
     Revenue from determining and maintaining credit ratings;
     Revenue from subscribers;
     Revenue from granting licenses or rights to publish credit 
ratings; and
     Revenue from all other services and products offered by 
your credit rating organization (include descriptions of any major 
sources of revenue).
    An NRSRO is not required to make this Exhibit publicly available on 
its Web site or, through another comparable, readily accessible means 
pursuant to Exchange Act Rule 17g-1(i). An NRSRO may request that the 
Commission keep this Exhibit confidential by marking each page 
``Confidential Treatment'' and complying with Commission rules 
governing confidential treatment (See 17 CFR 200.80 and 17 CFR 200.83). 
The Commission will keep the information and documents in the Exhibit 
confidential upon request to the extent permitted by law.
    Exhibit 13. Provide in this Exhibit the approximate total and 
median annual compensation of the Applicant's credit analysts for the 
fiscal or calendar year ending immediately before the date of this 
initial application. In calculating total and median annual 
compensation, the Applicant may exclude deferred compensation, provided 
such exclusion is noted in the Exhibit.
    An NRSRO is not required to make this Exhibit publicly available on 
its

[[Page 33636]]

Web site, or through another comparable, readily accessible means 
pursuant to Exchange Act Rule 17g-1(i). An NRSRO may request that the 
Commission keep this Exhibit confidential by marking each page 
``Confidential Treatment'' and complying with Commission rules 
governing confidential treatment (See 17 CFR 200.80 and 17 CFR 200.83). 
The Commission will keep the information and documents in the Exhibit 
confidential upon request to the extent permitted by law.

F. Explanation of Terms

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

Disclosure Reporting Page (NRSRO)

    This Disclosure Reporting Page (DRP) is to be used to provide 
information concerning affirmative responses to Item 8 of Form NRSRO.
    Submit a separate DRP for each person that: (a) Has committed or 
omitted any act, or been subject to an order or finding, enumerated in 
subparagraphs (A), (D), (E), (G), or (H) of section 15(b)(4) of the 
Securities Exchange Act of 1934, has been convicted of any offense 
specified in section 15(b)(4)(B) of the Securities Exchange Act of 
1934, or has been enjoined from any action, conduct, or practice 
specified in section 15(b)(4)(C) of the Securities Exchange Act of 
1934; (b) has been convicted of any crime that is punishable by 
imprisonment for 1 or more years, and that is not described in section 
15(b)(4) of the Securities Exchange Act of 1934, or has been convicted 
of a substantially equivalent crime by a foreign court of competent 
jurisdiction; or (c) is subject to any order of the Commission barring 
or suspending the right of the person to be associated with an NRSRO.

Name of Applicant/NRSRO
-----------------------------------------------------------------------
Date
-----------------------------------------------------------------------

Check Item being responded to:

[ballot] Item 8A
[ballot] Item 8B
[ballot] Item 8C

    Full name of the person for whom this DRP is being submitted:

-----------------------------------------------------------------------
    If this DRP provides information relating to a ``Yes'' answer to 
Item 8A, describe the act(s) that was (were) committed or omitted; or 
the order(s) or finding(s); or the injunction(s) (provide the relevant 
statute(s) or regulation(s)) and provide jurisdiction(s) and date(s):
-----------------------------------------------------------------------
    If this DRP provides information relating to a ``Yes'' answer to 
Item 8B, describe the crime(s) and provide jurisdiction(s) and date(s):
-----------------------------------------------------------------------
    If this DRP provides information relating to a ``Yes'' answer to 
Item 8C, attach the relevant Commission order(s) and provide the 
date(s):
-----------------------------------------------------------------------

    By the Commission.
     Dated: June 5, 2007.

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-11166 Filed 6-15-07; 8:45 am]
BILLING CODE 8010-01-P