[Federal Register Volume 74, Number 25 (Monday, February 9, 2009)]
[Rules and Regulations]
[Pages 6456-6484]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-2513]



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Part II





Securities and Exchange Commission





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17 CFR Parts 240, 243, and 249b



Re-Proposed Rules for Nationally Recognized Statistical Rating 
Organizations; Amendments to Rules for Nationally Recognized 
Statistical Rating Organizations; Final Rule and Proposed Rule

  Federal Register / Vol. 74, No. 25 / Monday, February 9, 2009 / Rules 
and Regulations  

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249b

[Release No. 34-59342; File No. S7-13-08]
RIN 3235-AK14


Amendments to Rules for Nationally Recognized Statistical Rating 
Organizations

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

ACTION: Final rule.

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SUMMARY: The Commission is adopting rule amendments that impose 
additional requirements on nationally recognized statistical rating 
organizations (``NRSROs'') in order to address concerns about the 
integrity of their credit rating procedures and methodologies.

DATES: Effective Date: April 10, 2009.
    Compliance Date: April 10, 2009, except that the compliance date 
for the amendment to Sec.  240.17g-2(d) is August 10, 2009.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate 
Director, at (202) 551-5525; Thomas K. McGowan, Assistant Director, at 
(202) 551-5521; Randall W. Roy, Branch Chief, at (202) 551-5522; Joseph 
I. Levinson, Special Counsel, at (202) 551-5598; Carrie A. O'Brien, 
Special Counsel, at (202) 551-5640; Sheila D. Swartz, Special Counsel, 
at (202) 551-5545; Rose Russo Wells, Special Counsel, at (202) 551-
5527; Division of Trading and Markets, Securities and Exchange 
Commission, 100 F Street, NE., Washington, DC 20549-6628

SUPPLEMENTARY INFORMATION:

I. Background

    On June 16, 2008, the Commission, in the first of three related 
actions, proposed a series of amendments to its existing rules 
governing the conduct of NRSROs.\1\ The proposed amendments were 
designed to address concerns about the integrity of the process by 
which NRSROs rate structured finance products, particularly mortgage 
related securities.\2\ Today, the Commission is adopting, with 
revisions, a majority of the rule amendments proposed in the first 
action.\3\ These new requirements are designed to address practices 
identified, in part, by the Commission staff during its examination of 
the three largest NRSROs.\4\ In particular, the requirements are 
intended to increase the transparency of the NRSROs' rating 
methodologies, strengthen the NRSROs' disclosure of ratings 
performance, prohibit the NRSROs from engaging in certain practices 
that create conflicts of interest, and enhance the NRSROs' 
recordkeeping and reporting obligations to assist the Commission in 
performing its regulatory and oversight functions.\5\ The Commission 
received 61 comment letters on the amendments as proposed.\6\

[[Page 6457]]

Many commenters expressed general support for the proposals and the 
ends they were designed to achieve.\7\ At the same time, commenters 
raised concerns about the practicality and costs of the proposals.\8\ 
The rules being adopted today incorporate many aspects of the rules as 
proposed, but also include significant revisions based on the comments 
received.\9\ The revisions seek to address practical impediments 
identified by commenters while at the same time continuing to promote 
the substantive goals of the proposed rules (increasing transparency 
and disclosure, diminishing conflicts, and strengthening oversight) and 
of the Credit Rating Agency Reform Act of 2006 (``Rating Agency 
Act'').\10\
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    \1\ Proposed Rules for Nationally Recognized Statistical Rating 
Organizations, Exchange Act Release No. 57967 (June 16, 2008), 73 FR 
36212 (June 25, 2008) (``June 16, 2008 Proposing Release''). The 
existing NRSRO rules were adopted by the Commission in 2007. See 
Oversight of Credit Rating Agencies Registered as Nationally 
Recognized Statistical Rating Organizations, Exchange Act Release 
No. 55857 (June 5, 2007), 72 FR 33564 (June 18, 2007) (``June 5, 
2007 Adopting Release''). The second action taken by the Commission 
(also on June 16, 2008) was to propose a new rule that would require 
NRSROs to distinguish their ratings for structured finance products 
from other classes of credit ratings by publishing a report with the 
rating or using a different rating symbol. See June 16, 2008 
Proposing Release. The third action taken by the Commission was to 
propose a series of amendments to rules under the Exchange Act, 
Securities Act of 1933 (``Securities Act''), and Investment Company 
Act of 1940 (``Investment Company Act'') that would end the use of 
NRSRO credit ratings in the rules. See References to Ratings of 
Nationally Recognized Statistical Rating Organizations, Exchange Act 
Release No. 58070 (July 1, 2008), 73 FR 40088 (July 11, 2008); 
Securities Ratings, Securities Act Release No. 8940 (July 1, 2008), 
73 FR40106 (July 11, 2008); References to Ratings of Nationally 
Recognized Statistical Rating Organizations, Investment Company Act 
Release No. 28327 (July 1, 2008), 73 FR 40124 (July 11, 2008). The 
second and third actions are not being finalized in this release.
    \2\ The term ``structured finance product'' as used throughout 
this release refers broadly to any security or money market 
instrument issued by an asset pool or as part of any asset-backed or 
mortgage-backed securities transaction. This broad category of 
financial instrument includes, but is not limited to, asset-backed 
securities such as residential mortgage-backed securities (``RMBS'') 
and to other types of structured debt instruments such as 
collateralized debt obligations (``CDOs''), including synthetic and 
hybrid CDOs.
    \3\ The June 16, 2008 Proposing Release included amendments to 
paragraphs (a) and (b) of Rule 17g-5 that are not being adopted 
today. Instead, in part, in response to the many comments received 
on these proposed amendments identifying substantial issues as to 
how they would operate in practice, the Commission today is re-
proposing these amendments in a separate release. In addition, the 
Commission is also proposing potential additional requirements to 
the final amendment to paragraph (d) of Rule 17g-2 being adopted 
today.
    \4\ See June 16, 2008 Proposing Release, 73 FR at 36213; Summary 
Report of Issues Identified in the Staff's Examinations of Select 
Credit Rating Agencies (July 2008). The report can be accessed at 
http://www.sec.gov/news/studies/2008/craexamination070808.pdf.
    \5\ The June 16, 2008 Proposing Release contains a detailed 
discussion of concerns the final rules are intended to address, 
particularly with respect to the NRSROs' role in the credit market 
turmoil. See June 16, 2008 Proposing Release, 73 FR at 36213-36218.
    \6\ Letter dated June 10, 2008 from Deborah A. Cunningham and 
Boyce I. Greer, Co-Chairs Company, Co-Chairs, SIFMA Credit Rating 
Agency Task Force (``First SIFMA Letter''); letter dated June 12, 
2008 from G. Brooks Euler (``Euler Letter''); letter dated June 19, 
2008 from Rupert Schoder, Financial Engineer, Socit Gnrale, France 
(``SGF Letter''); letter dated July 8, 2008 from William Morris, 
Principal, The Morris Group (``Morris Letter''); letter dated July 
8, 2008 from Elaine Wieche (``Wieche Letter''); letter dated July 
13, 2008 from Walter C. Hamscher, Member, XBRL International Board 
of Directors (``Hamscher Letter''); letter dated July 14, 2008 from 
Robert Dobilas, President, CEO, Realpoint LLC (``Realpoint 
Letter''); letter dated July 21, 2008 from Dottie Cunningham, Chief 
Executive Officer, Commercial Mortgage Securities Association 
(``CMSA Letter''); letter dated July 21, 2008 from Bruce Goldstein, 
SunTrust Robinson Humphrey (``STRH Letter''); letter dated July 21, 
2008 from Raymond E. Petersen, President, Inland Mortgage Capital 
Corporation (``Inland Letter''); letter dated July 21, 2008 from 
Leonard W. Cotton, Vice Chairman, Centerline Capital Group 
(``Centerline Letter''); letter dated July 21, 2008 from Gregg 
Rademacher, Chief Executive Officer, Los Angeles County Employees 
Retirement Association (``LACERA Letter''); letter dated July 22, 
2008 from Kevin Kohler, VP--Levered Finance, Capmark Investments LP 
(``Capmark Letter''); letter dated July 22, 2008 from Richard 
Metcalf, Director, Corporate Affairs Department, Laborers' 
International Union of North America (``LIUNA Letter''); letter 
dated July 22, 2008 from Mary A. Downing, Director--Surveillance and 
Due Diligence, Hillenbrand Partners (``Hillenbrand Letter''); letter 
dated July 23, 2008 from Kent Wideman, Group Managing Director, 
Policy & Rating Committee and Mary Keogh, Managing Director, Policy 
& Regulatory Affairs, DBRS (``DBRS Letter''); letter dated July 24, 
2008 from Takefumi Emori, Managing Director, Japan Credit Rating 
Agency, Ltd. (``JCR Letter''); letter dated July 24, 2008 from J. 
Douglas Adamson, Executive Vice President, Technical Services, 
American Bankers Association (``ABA Letter''); letter dated July 24, 
2008 from Amy Borrus, Deputy Director, Council of Institutional 
Investors (``Council Letter''); letter dated July 24, 2008 from 
Joseph A. Hall and Michael Kaplan, Davis Polk, and Wardwell (``DPW 
Letter''); letter dated July 24, 2008 from Vickie A. Tillman, 
Executive Vice President, Standard & Poor's Ratings Services (``S&P 
Letter''); letter dated July 24, 2008 from Deborah A. Cunningham and 
Boyce I. Greer, Co-Chairs Company, Co-Chairs, SIFMA Credit Rating 
Agency Task Force (``Second SIFMA Letter''); letter dated July 24, 
2008 from Alex J. Pollock, Resident Fellow, American Enterprise 
Institute (``Pollock Letter''); letter dated July 25, 2008 from 
Sally Scutt, Managing Director, and Pierre de Lauzun, Chairman, 
Financial Markets Working Group, International Banking Federation 
(``IBFED Letter''); letter dated July 25, 2008 from Eric Sanitas, 
President, Association federative internationale des porteurs 
d'emprunts russe (``AFIPER Letter''); letter dated July 25, 2008 
from Denise L. Nappier, Treasurer, State of Connecticut (``Nappier 
Letter''); letter dated July 25, 2008 from Suzanne C. Hutchinson, 
Mortgage Insurance Companies of America (``MICA Letter''); letter 
dated July 25, 2008 from Kieran P. Quinn, Chairman, Mortgage Bankers 
Association (``MBA Letter''); letter dated July 25, 2008 from Sean 
J. Egan, President, Egan-Jones Ratings Co. (``Egan-Jones Letter''); 
letter dated July 25, 2008 from Frank Chin, Chairman, Municipal 
Securities Rulemaking Board (``MSRB Letter''); letter dated July 25, 
2008 from Charles D. Brown, General Counsel, Fitch Ratings (``Fitch 
Letter''); letter dated July 25, 2008 from Bill Lockyer, State 
Treasurer, California (``Lockyer Letter''); letter dated July 25, 
2008 from Jeremy Reifsnyder and Richard Johns, Co-Chairs, American 
Securitization Forum Credit Rating Agency Task Force (``ASF 
Letter''); letter dated July 25, 2008 from Annemarie G. DiCola, 
Chief Executive Officer, Trepp, LLC (``Trepp Letter''); letter dated 
July 25, 2008 from Francisco Paez, Metropolitan Life Insurance 
Company (``MetLife Letter''); letter dated July 25, 2008 from Cate 
Long, Multiple-Markets (``Multiple-Markets Letter''); letter dated 
July 25, 2008 from Kurt N. Schacht, Executive Director and Linda L. 
Rittenhouse, Senior Policy Analyst, CFA Institute Centre for 
Financial Market Integrity (``CFA Institute Letter''); letter dated 
July 25, 2008 from Lawrence J. White, Professor of Economics, Stern 
School of Business, New York University (``White Letter''); letter 
dated July 25, 2008 from Jack Davis, Head of Fixed Income Research, 
Schroder Investment Management North America Inc. (``Schroders 
Letter''); letter dated July 25, 2008 from Karrie McMillan, General 
Counsel, Investment Company Institute (``ICI Letter''); letter dated 
July 25, 2008 from Michael Decker, Co-Chief Executive Officer and 
Mike Nicholas, Co-Chief Executive Officer, Regional Bond Dealers 
Association (``RBDA Letter''); letter dated July 25, 2008 from 
Richard M. Whiting, Executive Director and General Counsel, 
Financial Services Roundtable (``Roundtable Letter''); letter dated 
July 25, 2008 from James H. Gellert, Chairman and CEO and Dr. 
Patrick J. Caragata, Founder and Executive Vice Chairman, Rapid 
Ratings International Inc. (''Rapid Ratings Letter''); letter dated 
July 25, 2008 from Alan P. Kress, Counsel, Principal Global 
Investors, LLC (``Principal Global Letter''); letter dated July 25, 
2008 from James A. Kaitz, President and CEO, Association for 
Financial Professionals (``AFP Letter''); letter dated July 25, 2008 
from Gregory W. Smith, General Counsel, Colorado Public Employees' 
Retirement Association (``Colorado PERA Letter''); letter dated July 
25, 2008 from Cleary Gottlieb Steen & Hamilton LLP, ``CGSH 
Letter''); letter dated July 25, 2008 from Keith A. Styrcula, 
Chairman, Structured Products Association (``SPA Letter''); letter 
dated July 25, 2008 from Yasuhiro Harada, Chairman and Co-CEO, 
Rating and Investment Information, Inc. (``R&I Letter''); letter 
dated July 28, 2008 from Michel Madelain, Chief Operating Officer, 
Moody's Investors Service (``Moody's Letter''); letter dated July 
28, 2008 from Keith F. Higgins, Chair, Committee on Federal 
Regulation of Securities and Vicki O. Tucker, Chair, Committee on 
Securitization and Structured Finance, American Bar Association 
(``ABA Business Law Committees Letter''); letter dated July 28, 2008 
from Morris C. Foutch (``Foutch Letter''); letter dated July 29, 
2008 from Glenn Reynolds, CEO and Peter Petas, President 
CreditSights, Inc. (``CreditSights Letter''); letter dated July 31, 
2008 from Robert S. Khuzami Managing Director and General Counsel, 
Deutsche Bank Americas (``DBA Letter''); letter dated August 5, 2008 
from John Taylor, President and CEO, National Community Reinvestment 
Coalition (``NCRC Letter''); letter dated August 8, 2008 from 
Jeffrey A. Perlowitz, Managing Director and Co-Head of Global 
Securitized Markets, and Myongsu Kong, Director and Counsel, 
Citigroup Global Markets Inc. (``Citi Letter''); letter dated August 
12, 2008 from John J. Niebuhr, Managing Director, Lehman Brothers, 
Inc. (``Lehman Letter''); letter dated August 15, 2008 from Steve 
Linehan, Executive Vice-President and Treasurer, Capital One 
Financial Corporation (``Capital One Letter''); letter dated August 
17, 2008 from Olivier Raingeard, Ph.D (``Raingeard Letter''); letter 
dated August 22, 2008 from Robert Dobilas, CEO and President, 
Realpoint LLC (``Second Realpoint Letter''); letter dated August 27, 
2008 from Larry G. Mayewski, Executive Vice President & Chief Rating 
Officer, A.M. Best Company (``A.M. Best Letter'').
    \7\ See, e.g., LACERA Letter; LIUNA Letter; Council Letter; 
Second SIFMA Letter; Nappier Letter; RBDA Letter; Colorado PERA 
Letter; CGSH Letter; SPA Letter; R&I Letter; Moody's Letter; 
CreditSights Letter; DBA Letter; NCRC Letter; Lehman Letter; Capital 
One Letter.
    \8\ See, e.g., White Letter; Roundtable Letter; Rapid Ratings 
Letter; ABA Business Law Committees Letter; Raingeard Letter.
    \9\ These comments are available on the Commission's Internet 
Web site, located at http://www.sec.gov/comments/s7-13-08/s71308.shtml, and in the Commission's Public Reference Room in its 
Washington DC headquarters.
    \10\ See Report of the Senate Committee on Banking, Housing, and 
Urban Affairs to Accompany S. 3850, Credit Rating Agency Reform Act 
of 2006, S. Report No. 109-326, 109th Cong., 2d Sess. (Sept. 6, 
2006) (``Senate Report''), p. 2.
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    In summary, the rule amendments require: (1) An NRSRO to provide 
enhanced disclosure of performance measurements statistics and the 
procedures and methodologies used by the NRSRO in determining credit 
ratings for structured finance products and other debt securities on 
Form NRSRO; \11\ (2) an NRSRO to make, keep and preserve additional 
records under Rule 17g-2; \12\ (3) an NRSRO to make publicly available 
on its Internet Web site in XBRL format a random sample of 10% of the 
ratings histories of credit ratings paid for by the obligor being rated 
or by the issuer, underwriter, or sponsor of the security being rated 
(``issuer-paid credit ratings'') in each class of credit ratings for 
which it is registered and has issued 500 or more issuer-paid credit 
ratings, with each new ratings action to be reflected in such histories 
no later than six months after they are taken; \13\ and (4) an NRSRO to 
furnish the Commission with an additional annual report.\14\
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    \11\ See amendments to Form NRSRO.
    \12\ 17 CFR 240.17g-2.
    \13\ See Rule 17g-2(a)(8) and (d).
    \14\ See Rule 17g-3(a)(6).
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II. The Final Rule Amendments

A. Amendments to the Instructions for Form NRSRO

    Form NRSRO contains 8 line items and requires 13 Exhibits. The line 
items elicit information about the applicant credit rating agency or 
NRSRO such as: its address; corporate form; credit rating affiliates 
that would be, or are, a part of its registration; the classes of 
credit ratings for which it is seeking, or is, registered as an NRSRO; 
the number of credit ratings it has issued in each class and the date 
it began issuing credit ratings in each class; and whether it or a 
person associated with it has committed or omitted any act, been 
convicted of any crime, or is subject to any order identified in 
Section 15(d) of the Exchange Act. The 13 Exhibits to Form NRSRO elicit 
the information required under Sections 15E(a)(1)(B)(i) through (ix) of 
the Exchange Act and additional information the Commission prescribed 
under authority in Section 15E(a)(1)(B)(x) of the Exchange Act.\15\
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    \15\ 15 U.S.C. 78o-7(a)(1)(B)(i)-(x).
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    The Commission proposed amending the instructions to Form NRSRO to 
enhance the disclosures NRSROs make in Exhibits 1 and 2. As discussed 
below, the Commission is adopting the changes with certain 
modifications that respond, in part, to points raised by commenters.
1. Enhanced Ratings Performance Measurement Statistics on Form NRSRO
    Exhibit 1 to Form NRSRO elicits the information required by Section 
15E(a)(1)(B)(i) of the Exchange Act: credit ratings performance 
measurement statistics over short-term, mid-term, and long-term periods 
(as applicable) of the credit rating agency.\16\ The instructions for 
the Exhibit 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.
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    \16\ 15 U.S.C. 78o-7(a)(1)(B)(i).
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    The first proposed amendment to the Exhibit 1 instructions would 
enhance the disclosure by requiring separate sets of default and 
transition statistics for different classes of credit ratings. 
Specifically, as proposed, the instructions would require separate sets 
of statistics for each class of credit rating for which an applicant is 
seeking registration as an NRSRO or an NRSRO is registered as well as 
for any other broad class of credit ratings issued by the NRSRO.
    The Commission received eight comment letters on this 
amendment.\17\ One commenter noted that separating performance 
measurements by classes of credit ratings would help market 
participants make informed decisions.\18\ Commenters suggested that the 
Commission refine the classes of credit ratings and raised concerns 
about how to interpret the catchall phrase in the rule ``any other 
broad class of credit

[[Page 6458]]

rating.'' For example, one commenter argued that such a category 
``would capture a variety of operational and qualitative scales, such 
as servicer and bank support ratings, for which default and/or 
transition studies are of limited or no value.'' \19\ The same 
commenter suggested that the single category encompassing government 
securities, municipal securities and foreign government securities be 
divided into three separate classes (sovereigns, United States public 
finance, and international public finance) to account for the different 
types of investors each such class of securities attracts as well as 
the potential for the much greater amount of data on public finance 
issuance in the United States to overwhelm the sovereign and 
international public finance data, thus making the statistics less 
useful to investors.\20\
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    \17\ See Second SIFMA Letter; Fitch Letter; Lockyer Letter; 
Multiple-Markets Letter; ICI Letter; AFP Letter; ABA Business Law 
Committees Letter; Raingeard Letter.
    \18\ See AFP Letter.
    \19\ See Fitch Letter.
    \20\ Id.
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    In response to commenters' concerns, the Commission is adopting the 
proposed amendments to the instructions but not adopting the 
``catchall'' requirement to which commenters objected. Eliminating the 
catchall will remove ambiguity in the rule. In addition, the Commission 
is adding language to the instructions as amended that divide 
government securities into three classes: sovereigns, United States 
public finance, and international public finance. This will make the 
performance statistics for these classes of credit ratings more 
meaningful, since the types of rated obligors and instruments in each 
class will be more similar.
    As proposed, the first amendment to the Exhibit 1 instructions also 
would require an NRSRO registered in the class of credit ratings 
described in Section 3(a)(62)(B)(iv) of the Rating Agency Act \21\ (or 
an applicant seeking registration in that class) when generating the 
performance statistics for that class to include credit ratings of any 
security or money market instrument issued by an asset pool or as part 
of any asset-backed or mortgage-backed securities transaction. This was 
designed to include ratings actions for credit ratings of structured 
finance products that do not meet the narrower statutory definition of 
``issuers of asset-backed securities (as that term is defined is 
section 1101(c) of part 229 of title 17, Code of Federal 
Regulations).'' \22\ The Commission received no comment on this aspect 
of the amendment and is adopting it as proposed.
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    \21\ 15 U.S.C. 78c(a)(62)(B)(iv).
    \22\ See id.
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    This first amendment to the Exhibit 1 instructions, modified as 
described above, will result in the generation of performance 
statistics that will make it easier for users of credit ratings to 
compare the accuracy of NRSRO credit ratings on a class-by-class basis. 
For the reasons discussed, the Commission is adopting the amendment to 
the instructions with the modifications described above.
    As proposed, the second amendment to the Exhibit 1 instructions 
would require that the class-by-class disclosures be broken out over 1, 
3 and 10-year periods. Section 15E(a)(1)(B)(i) of the Exchange Act 
requires that the performance statistics be over short, mid, and long-
term periods, which is also the language currently used in Form 
NRSRO.\23\ The purpose of this amendment was to prescribe periods in 
specific years so that the performance statistics generated by the 
NRSROs are more easily comparable.
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    \23\ 15 U.S.C. 78o-7(a)(1)(B)(i).
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    The Commission received 12 comments on the amendment.\24\ Most of 
the commenters supported the amendment, including the 1, 3, and 10 year 
time frames. These comments supported the Commission's view that 1, 3, 
and 10 year periods are reasonable definitions of the terms ``short-
term, mid-term, and long-term periods'' as used in Section 
15E(a)(1)(B)(i) of the Exchange Act.\25\ Commenters believed the 
proposed statistics would provide investors additional information to 
make informed investment decisions.\26\ Several commenters asked that 
the Commission clarify whether the default rates were for the most 
recent 1, 3, and 10 year periods or the average over multiple 1, 3, and 
10 year periods.\27\ The Commission intended the default statistics to 
be for the most recent 1, 3, and 10 year periods. The Commission is 
adopting the amendment to the instructions as proposed.
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    \24\ See LIUNA Letter; JCR Letter; Council Letter; S&P Letter; 
Second SIFMA Letter; Fitch Letter; Multiple-Markets Letter; AFP 
Letter; Colorado PERA Letter; ABA Business Law Committees Letter; 
NCRC Letter; Raingeard Letter.
    \25\ 15 U.S.C. 78o-7(a)(1)(B)(i).
    \26\ See LIUNA Letter; AFP Letter.
    \27\ See JCR Letter; S&P Letter.
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    As proposed, the third amendment to the Exhibit 1 instructions 
would clarify the type of ratings actions that are required to be 
included in these performance measurement statistics. Specifically, it 
would change the instruction requiring that the performance statistics 
show ``down-grade and default rates'' with an instruction that they 
show ``ratings transition and default rates.'' The switch to ``ratings 
transition'' rates from ``downgrade'' rates was designed to clarify 
that upgrades (as well as downgrades) should be included when 
generating the statistics. The Commission did not receive any comments 
on this amendment to the instructions and is adopting it as proposed.
    Finally, the Commission proposed an amendment to the instructions 
of Exhibit 1 that would specify that the default statistics required 
under the exhibit must show defaults relative to the initial rating and 
incorporate defaults that occur after a credit rating is withdrawn. The 
proposed amendment was designed to prevent an NRSRO from manipulating 
the performance statistics by not including defaults when generating 
statistics for a category of credit ratings (e.g., AA) because the 
defaults occur after the rating is downgraded to a lower category 
(e.g., CC) or withdrawn.
    Commenters raised a number of concerns about how this proposal 
would operate in practice.\28\ Several commenters expressed concern 
that the requirement to include defaults occurring after a rating is 
withdrawn could obligate an NRSRO to monitor ratings for an indefinite 
period of time after the NRSRO stops rating such instruments, and that 
an NRSRO may not be able to provide such statistics after a rating is 
withdrawn.\29\ Two NRSROs noted that the ability to monitor ratings 
depends on the ability of the NRSRO to obtain information that an event 
of default has occurred and that this may be impractical given limited 
access to information once a rating is withdrawn.\30\ Another NRSRO 
believed that the proposal was overbroad and outside the scope of the 
Commission's authority, asserting that it intrudes upon the substance 
of the NRSRO's rating procedures.\31\ The Commission agrees that, given 
the limited information available to NRSROs following the withdrawal of 
a rating, requiring the inclusion in these statistics of defaults 
occurring after a rating is withdrawn may be problematic. Therefore, 
the Commission is not adopting this provision at this time. While the 
instructions to Exhibit 1 will continue to require default statistics 
that are relative to initial rating on a class-by-class basis, for the 
reasons discussed

[[Page 6459]]

above, the amendment as adopted does not require the inclusion of 
defaults that occur after a credit rating is withdrawn in those 
statistics. As an alternative means of achieving the Commission's goals 
in proposing this amendment, the Commission notes that, as discussed 
below, ratings withdrawals must be included among the ratings actions 
to be disclosed under the Commission's amendment to Rule 17g-3,\32\ 
which requires an annual report of all ratings actions taken during the 
year within a class of credit ratings. This information will be useful 
in determining whether the number of ratings actions in a given class 
is unusually large and, if so, the need for a review of the causes of 
any significant changes to that number--including, potentially, a 
disproportionate amount of ratings withdrawals.
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    \28\ See DBRS Letter; S&P Letter; Fitch Letter; Moody's Letter.
    \29\ See DBRS Letter; S&P Letter.
    \30\ See S&P Letter; Fitch Letter.
    \31\ See Moody's Letter.
    \32\ 17 CFR 240.17g-3.
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2. Enhanced Disclosure of Ratings Methodologies
    Exhibit 2 to Form NRSRO elicits the information required by Section 
15E(a)(1)(B)(ii) of the Exchange Act: information regarding the 
procedures and methodologies used by the credit rating agency to 
determine credit ratings.\33\ The instructions for the Exhibit require 
a description of the procedures and methodologies (not the submission 
and disclosure of each actual procedure and methodology). The 
instructions further 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. The instructions also identify a number of areas that must be 
addressed in the description to the extent they are applicable.\34\
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    \33\ 15 U.S.C. 78o-7(a)(1)(B)(ii).
    \34\ Specifically, the instructions require an NRSRO to provide 
descriptions of the following areas (as applicable): ``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.'' See Form NRSRO 
Instructions for Exhibit 2.
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    The Commission proposed amending the instructions to Exhibit 2 to 
add three additional areas that an applicant and a registered NRSRO 
would need to address in the descriptions of its procedures and 
methodologies in Exhibit 2 to the extent they are applicable. The three 
proposed areas that would need to be addressed by an applicant and 
NRSRO were:
     Whether and, if so, how information about verification 
performed on assets underlying or referenced by a security or money 
market instrument issued by an asset pool or as part of any asset-
backed or mortgage-backed securities transaction is relied on in 
determining credit ratings;
     Whether and, if so, how assessments of the quality of 
originators of assets underlying or referenced by a security or money 
market instrument issued by an asset pool or as part of any asset-
backed or mortgage-backed securities transaction play a part in the 
determination of credit ratings; and
     How frequently credit ratings are reviewed, whether 
different models or criteria are used for ratings surveillance than for 
determining initial ratings, whether changes made to models and 
criteria for determining initial ratings are applied retroactively to 
existing ratings, and whether changes made to models and criteria for 
performing ratings surveillance are incorporated into the models and 
criteria for determining initial ratings.
    The comments submitted on the first proposed amendment to the 
instructions to Exhibit 2 were supportive of the proposal.\35\ 
Commenters generally supported the second proposed amendment as 
well.\36\ Likewise, commenters were supportive of the third proposed 
amendment. They stated that it would be particularly helpful to retail 
investors and that all investors would benefit from knowing what 
ratings have undergone surveillance by the NRSRO.\37\
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    \35\ See NCRC Letter; Second SIFMA Letter; MICA Letter; ASF 
Letter.
    \36\ See Second SIFMA Letter; ASF Letter.
    \37\ See ASF Letter; Multiple-Markets Letter; NCRC Letter.
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    The Commission is adopting the first amendment to the instructions 
to Exhibit 2 as proposed. This amendment requires an NRSRO to disclose 
whether and, if so, how information about verification performed on the 
assets is relied on in determining credit ratings for structured 
finance products. The Commission believes this disclosure will benefit 
users of credit ratings by providing information about the potential 
accuracy of an NRSRO's credit ratings. NRSROs determine credit ratings 
for structured finance products based on assumptions in their models as 
to how the assets underlying the instruments will perform under varying 
levels of stress. These assumptions are based on the characteristics of 
the assets (e.g., value of the property, income of the borrower) as 
reported by the arranger of the structured finance product. If this 
information is inaccurate, the capacity of the model to predict the 
potential future performance of the assets may be significantly 
impaired. Consequently, information about whether an NRSRO requires 
that some level of verification be performed or takes other steps to 
account for the lack of verification or a low level of verification 
will be useful to users of credit ratings in assessing the potential 
for an NRSRO's credit ratings to be adversely impacted by inaccurate 
information about the assets underlying a rated structured finance 
product.
    The Commission is adopting the second amendment to the instructions 
to Exhibit 2 as proposed. This amendment requires an NRSRO to disclose 
whether it considers qualitative assessments of the originator of 
assets underlying a structured finance product in the rating process 
for such products. The Commission believes that certain qualities of an 
asset originator, such as its experience and underwriting standards, 
may impact the quality of the loans it originates and the accuracy of 
the associated loan documentation. This, in turn, could influence how 
the assets ultimately perform and the ability of the NRSRO's models to 
predict their performance. Consequently, the failure to perform any 
assessment of the loan originators could increase the risk that an 
NRSRO's credit ratings may not be accurate. Therefore, disclosures as 
to whether the NRSRO performs any qualitative assessments of the 
originators would be useful in comparing the efficacy of the NRSROs' 
procedures and methodologies.
    The Commission is adopting the third amendment to the instructions 
to Exhibit 2 as proposed. This amendment requires an NRSRO to disclose 
the frequency of its surveillance efforts and how changes to its 
quantitative and qualitative ratings models are incorporated into the 
surveillance process. The Commission believes that users of credit 
ratings will find information about these matters useful in comparing 
the ratings methodologies of different NRSROs. For example, how often 
and with what models an NRSRO monitors its credit ratings would be

[[Page 6460]]

relevant to assessing the accuracy of the ratings inasmuch as ratings 
based on stale information and outdated models may not be as accurate 
as ratings of like products using newer data and models. Moreover, with 
respect to new types of rated obligors and debt securities, the NRSROs 
refine their models as more information about the performance of these 
obligors and debt securities is observed and incorporated into their 
assumptions. Consequently, as the models evolve based on more robust 
performance data, credit ratings of obligors or debt securities 
determined using older models may be at greater risk for being 
inaccurate than the newer ratings. Therefore, whether the NRSRO 
verifies the older ratings using the newer methodologies would be 
useful to users of credit ratings in assessing the accuracy of the 
credit ratings.
    The Commission notes that, unlike the prior two changes, this new 
instruction applies to all classes of credit ratings for which the 
NRSRO determines credit ratings (not solely to structured products). 
For the reasons noted above, the Commission is adopting this amendment 
as proposed.
    The Commission is adopting these amendments to the instructions to 
Exhibit 2 to Form NRSRO, in part, under authority to require such 
additional information in the application as it finds necessary or 
appropriate in the public interest or for the protection of 
investors.\38\ The Commission believes the new disclosure requirements 
are necessary and appropriate and in the public interest or for the 
protection of investors. Specifically, they are designed to provide 
greater clarity around three areas of the NRSROs' rating processes 
where questions have been raised, particularly for structured finance 
products, in the context of the credit market turmoil: Namely, the 
verification performed on information provided in loan documents; the 
quality of loan originators; and the surveillance of existing ratings 
and how changes to models are applied to existing ratings. The 
amendments are designed to enhance the disclosures NRSROs make in these 
areas and, thereby, allow users of credit ratings to better evaluate 
the quality of their ratings processes.
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    \38\ See Section 15E(a)(1)(B)(x) of the Exchange Act (15 U.S.C. 
78o-7(a)(1)(B)(x)).
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B. Amendments to Rule 17g-2

    Rule 17g-2 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.\39\ The rule also 
prescribes the time periods and manner in which these records are 
required to be retained. The Commission is adopting amendments to Rule 
17g-2 to require NRSROs to make and retain certain additional records 
and to require that a portion of these new records be made publicly 
available.
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    \39\ See 17 CFR 240.17g-2.
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1. A Record of Rating Actions and the Requirement That They Be Made 
Publicly Available
    The Commission proposed an amendment that would require an NRSRO to 
make and retain a record of the ratings history of each outstanding 
credit rating as well as an amendment that would require the NRSRO to 
make the ratings histories contained in the record publicly available 
on its corporate Web site in eXtensible Business Reporting Language 
(``XBRL'') electronic format, with each new ratings action to be made 
public no later than six months after the date of the rating action. 
The Commission is adopting the amendment with substantial changes in 
part to address concerns raised by commenters.
    As adopted, paragraph (a)(8) to Rule 17g-2 requires an NRSRO to 
make and retain a record for each outstanding credit rating it 
maintains showing all rating actions (initial rating, upgrades, 
downgrades, placements on watch for upgrade or downgrade, and 
withdrawals) and the date of such actions identified by the name of the 
security or obligor rated and, if applicable, the CUSIP for the rated 
security or the Central Index Key (CIK) number for the rated obligor. 
This full record of credit rating histories will be maintained by the 
NRSRO as part of its internal records that are available to Commission 
staff.
    In addition, paragraph (d) to Rule 17g-2, as amended, requires that 
an NRSRO make publicly available, on a six-month delayed basis, a 
random sample of 10% of the issuer-paid credit ratings and their 
histories documented pursuant to paragraph (a)(8) for each class of 
credit rating for which the NRSRO is registered and has issued 500 or 
more ratings paid for by the obligor being rated or by the issuer, 
underwriter, or sponsor of the security being rated. Consequently, the 
final rule only requires the disclosure of ratings histories for a 
limited number of outstanding credit ratings and only if they are 
issuer-paid credit ratings. Generally, NRSROs make their issuer-paid 
credit ratings publicly available for free.
    NRSROs also obtain revenues by selling subscriptions to their 
credit ratings. Certain NRSROs derive their credit rating revenues 
solely or predominantly from selling subscriptions to their credit 
ratings. These NRSROs determine credit ratings that are not paid for by 
the obligor being rated or by the issuer, underwriter, or sponsor of 
the security being rated (``subscriber-paid credit ratings''). 
Generally, NRSROs do not make their subscriber-paid credit ratings 
publicly available for free.
    The Commission believes it is appropriate at this time to adopt a 
rule that will accomplish much of what the Commission sought to achieve 
in the proposal, mindful of the many comments about the proposal's 
potential impact. In addition, in a companion release,\40\ the 
Commission is proposing additional means of accomplishing even more of 
the Commission's objective of providing information to the marketplace 
in order to gauge the accuracy of ratings over time. Both the rule 
adopted today and the re-proposal are designed to foster accountability 
and comparability--and hence, competition--among NRSROs.
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    \40\ See Re-proposed Rules for Nationally Recognized Statistical 
Rating Organizations, Exchange Act Release No. 59343 (February 2, 
2009) (``Companion Proposing Release'').
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    As noted above, NRSROs generally make their issuer-paid credit 
ratings publicly available for free. Currently, while these rating 
actions are made public free of charge, it may be difficult to compile 
the actions and compare them across NRSROs. Therefore, the Commission 
expects that making this information more accessible will advance the 
Commission's goal of fostering accountability and comparability among 
NRSROs with respect to their issuer-paid credit ratings. Furthermore, 
the Commission notes that issuer-paid credit ratings account for over 
98% of the outstanding credit ratings issued by NRSROs, according to 
information furnished by NRSROs in Form NRSRO. Moreover, seven of the 
ten registered NRSROs currently maintain 500 or more issuer-paid credit 
ratings in at least one class of credit ratings for which they are 
registered. Consequently, applying this rule to issuer-paid ratings 
should result in a substantial amount of new information for users of 
credit ratings. It also will allow market observers to begin analyzing 
the information and developing performance metrics based on it.
    The Commission is mindful of the potential impact on NRSROs that

[[Page 6461]]

determine issuer-paid credit ratings. Therefore, the Commission has 
taken a number of steps to minimize the impact on NRSROs and enable 
them to be able to continue to sell downloads and data feeds of their 
current credit ratings. For example, an NRSRO subject to the disclosure 
requirement would not be required to disclose a rating action taken 
with respect to an outstanding credit rating until six months after the 
action occurs.
    In addition, by requiring NRSROs to publicly disclose ratings 
action histories for a limited percentage of their outstanding issuer-
paid credit ratings, market participants, academics and others should 
still be able to use the information to perform analysis comparing how 
the NRSROs subject to the disclosure rule perform in the classes of 
credit ratings for which they are registered. This process will be 
facilitated by the requirement that the ratings actions data be 
provided in XBRL format, which will provide a uniform standard format 
for presenting the information and allow users to dynamically search 
and analyze the information. This should facilitate the processing of 
the information and enhance the ability of users to compare information 
across different NRSROs subject to the disclosure by ratings classes. 
The Commission believes the random 10% of ratings histories and 500 
ratings per class thresholds will result in the disclosure of a sample 
suitable for performing statistical analyses of NRSRO performance 
generally with respect to issuer-paid credit ratings.
    NRSROs that sell subscriber-paid credit ratings have suggested that 
requiring all the histories of these ratings to be publicly disclosed 
could reduce competition by putting them out of business or adversely 
impacting their business.\41\ They stated that this would be the case 
even with a substantial time lag between the date a rating action is 
taken and the date the action must be publicly disclosed. An NRSRO that 
determines issuer-paid credit ratings stated that ratings history data 
has substantial commercial value even after 6 months.\42\ The 
Commission wants further input on this issue before deciding on whether 
the rule should also apply to subscriber-paid credit ratings. As noted 
above, the Commission, in a separate release, is seeking comment on 
whether to impose additional means of increasing the amount of 
information publicly available with respect to the ratings histories of 
subscriber-paid credit ratings. The Commission wants to carefully 
balance the commercial and competitive concerns expressed by NRSROs 
that determine subscriber-paid credit ratings with the Commission's 
objective of fostering accountability and comparability among all 
NRSROs. Therefore, in that release, the Commission asks detailed 
questions about the potential impact of applying the rule to 
subscriber-paid credit ratings. The responses to those questions will 
inform the Commission's deliberations as to whether this rule 
ultimately should be expanded to cover subscriber-paid credit ratings.
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    \41\ See Realpoint Letter; Rapid Ratings Letter.
    \42\ See S&P Letter.
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    The amended rule further provides that the information must be made 
public on the NRSRO's corporate Internet Web site in XBRL format. The 
rule provides that in preparing the XBRL disclosure, an NRSRO must use 
the List of XBRL Tags for NRSROs as specified on the Commission's Web 
site. In order to allow NRSROs subject to this requirement sufficient 
time to implement this new disclosure requirement and the Commission 
time to develop the List of XBRL Tags for NRSROs, the compliance date 
of the amendment to paragraph (d) is delayed until 180 days after 
publication in the Federal Register.\43\
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    \43\ The Commission notes that the ability of NRSROs to comply 
with the amended rule depends on the availability of the List of 
XBRL Tags for NRSROs on the Commission's Web page. If the 
publication of those materials is delayed, the Commission will 
consider delaying compliance with the rule.
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    The Commission is adopting these amendments, in part, under 
authority to require NRSROs to make and keep for specified periods such 
records as the Commission prescribes as necessary or appropriate in the 
public interest, for the protection of investors, or otherwise in 
furtherance of the purposes of the Exchange Act.\44\ The Commission 
believes the new recordkeeping and disclosure requirements are 
necessary and appropriate in the public interest and for the protection 
of investors, or otherwise in furtherance of the purposes of the 
Exchange Act. The internal record of the complete ratings histories of 
each outstanding credit rating required under new paragraph (a)(8) of 
Rule 17g-2 will be useful to the Commission in performing its 
examination and oversight functions. The data could be analyzed to 
determine if NRSROs are following their own methodologies in their 
ratings actions and whether additional disclosure is necessary. This 
could provide valuable information that could be indicative of problems 
in the ratings process unrelated to the analytical process, such as 
conflicts of interest. The Commission notes that this recordkeeping 
requirement applies to all credit ratings regardless of whether they 
are issuer-paid or subscriber-paid. The disclosure requirements will 
assist users of credit ratings to compare the relative performance of 
NRSROs that determine issuer-paid credit ratings. This could enhance 
competition by making it easier for smaller NRSROs to develop proven 
track records of determining accurate credit ratings.
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    \44\ See Section 17(a)(1) of the Exchange Act (15 U.S.C. 
78q(a)(1)).
---------------------------------------------------------------------------

    The Commission received numerous comments on the proposed 
amendments to paragraphs (a)(8) and (d) to Rule 17g-2 as proposed.\45\ 
Many commenters expressed support for the proposal, stating that the 
proposed rule would be a meaningful step in furthering competition in 
the credit rating industry and could benefit the investor 
community.\46\ One commenter suggested that the proposed rule should 
require the sorting of records by classes of credit ratings and that 
the six month time lag should be reduced.\47\ Other commenters 
suggested either reducing \48\ or lengthening \49\ the proposed six 
month time lag.
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    \45\ See Nappier Letter; ICI Letter; RBDA Letter; R&I Letter; 
Moody's Letter; ABA Business Law Committee Letter; Realpoint Letter; 
CMSA Letter; DBRS Letter; ABA Letter; Council Letter; S&P Letter; 
Second SIFMA Letter; Pollock Letter; IBFED Letter; Egan Jones 
Letter; Fitch Letter; ASF Letter; Multiple-Markets Letter; CFA 
Institute Letter; Rapid Ratings Letter; AFP Letter; Colorado PERA 
Letter; R&I Letter; DBA Letter; NCRC Letter; Citi Letter; Raingeard 
Letter.
    \46\ See, e.g., AFP Letter; Colorado PERA Letter.
    \47\ See Second SIFMA Letter.
    \48\ See Multiple-Markets Letter; CFA Institute Letter; ICI 
Letter; RBDA Letter; NCRC Letter.
    \49\ See Realpoint Letter; S&P Letter; Pollock Letter; Multiple-
Markets Letter.
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    One NRSRO supported the proposal but believed the record of ratings 
histories should be limited to 10 years.\50\ The Commission notes that 
in order to make the information more meaningful, users seeking to 
analyze NRSRO performance should be able to review the entire history 
of a given rating. Imposing a time limit--and therefore eliminating the 
ability to compare a current rating against the initial rating--would 
curtail the usefulness of this information.
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    \50\ See DBRS Letter.
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    A number of commenters raised substantial concerns with the 
proposal.\51\ For example, NRSROs and others noted that NRSROs that 
determine subscriber-paid credit ratings

[[Page 6462]]

make the ratings available for a fee.\52\ These commenters argued that 
requiring them to make all the ratings publicly available for free--
even with a six month time lag--could cause them to lose subscribers.
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    \51\ See R&I Letter; ABA Business Law Committee Letter; DBRS 
Letter; S&P Letter; Fitch Letter; ASF Letter; Multiple-Markets 
Letter; AFP Letter; Moody's Letter.
    \52\ See ABA Business Law Committee Letter; Realpoint Letter; 
Pollock Letter; Egan-Jones Letter; Multiple-Markets Letter; Rapid 
Ratings Letter; AFP Letter; R&I Letter; Moody's Letter.
---------------------------------------------------------------------------

    Commenters also raised concerns that requiring an NRSRO that 
determines issuer-paid credit ratings to make all ratings actions 
available free of charge in a machine readable format would cause them 
to lose revenues they derive from selling downloadable packages of 
their credit ratings.\53\ These commenters also questioned whether the 
requirement would be permitted under the U.S. Constitution, arguing 
that it could be considered a taking of private property without 
compensation.\54\
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    \53\ See S&P Letter; Moody's Letter.
    \54\ See S&P Letter; Egan-Jones Letter; Fitch Letter; R&I 
Letter;
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    The Commission is adopting paragraph (a)(8) to Rule 17g-2, the 
recordkeeping provision, substantially as proposed, but, as noted 
above, has made substantial changes to paragraph (d), the public 
disclosure provision. Specifically, rather than disclose the ratings 
history for each outstanding credit rating, an NRSRO must disclose, in 
XBRL format and on a six-month delay, ratings action histories for a 
randomly selected sample of 10% of the outstanding credit ratings for 
each rating class for which the NRSRO has issued 500 or more ratings 
paid for by the obligor being rated or by the issuer, underwriter, or 
sponsor of the security being rated.
    The Commission believes that by limiting the ratings actions 
histories that need to be disclosed to a random selection of 10% of 
outstanding credit ratings, applying the requirement to issuer-paid 
credit ratings only, and allowing for a six-month delay before a 
ratings action is required to be disclosed, the amendment as adopted 
addresses the concerns among commenters that the rule would cause them 
to lose revenue. With respect to NRSROs that earn revenues from issuer-
paid credit ratings but sell access to packages of the ratings as well, 
the Commission believes that customers that are willing to pay for full 
and immediate access to downloadable information for all of an NRSRO's 
ratings actions are unlikely to reconsider their purchase of that 
product due to the ability to access ratings histories for 10% of the 
NRSRO's outstanding issuer-paid credit ratings selected on a random 
basis and disclosed with a six-month time lag. The 500 ratings 
threshold and random selection are designed to provide a sufficient 
sample of data upon which to draw reasonable inferences about the 
quality of ratings generally issued by NRSROs. The random 10% sample of 
issuer-paid credit ratings and six month time lag are designed to make 
it less likely that current purchasers of data about issuer-paid credit 
ratings could reliably find the information they want, and so NRSROs 
could continue to sell downloads and data feeds of the credit ratings. 
As such, the Commission believes that the changes made to the amendment 
address the commenters' concerns while still facilitating greater 
accountability for issuer-paid NRSROs, enhanced third-party development 
of performance measurement statistics for issuer-paid credit ratings, 
and increased competition among all NRSROs.
    The Commission has decided not to impose the same disclosure 
obligation on subscriber-paid credit ratings at this time out of 
competitive concerns raised, but is still considering how to make more 
information publicly available and accessible about the performance of 
these ratings. The Commission believes that the rule as adopted will 
address the concerns expressed by commenters and at the same time 
foster greater accountability of NRSROs with respect to their issuer-
paid credit ratings as well as increase competition among NRSROs by 
making it easier for persons to analyze the actual performance of their 
credit ratings.
    The amendment as adopted also will require that the data be made 
available in XBRL format, using the List of XBRL Tags for NRSROs as 
specified on the Commission's Web site. Several NRSROs provided 
information arguing that an XBRL format could be particularly costly 
and that the burden on smaller NRSROs could be particularly acute.\55\ 
They suggested that if the Commission adopted the rule as proposed, 
that the Commission allow NRSROs sufficient time to develop the 
necessary systems to implement the XBRL format or, in the alternative, 
to implement this required disclosure as a pilot program.\56\
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    \55\ See, e.g., DBRS Letter, Moody's Letter.
    \56\ See Fitch Letter; DBRS Letter; Multiple-Markers Letter; CFA 
Institute Letter; ICI Letter; R&I Letter; Moody's Letter.
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    The Commission believes, however, that the XBRL format will benefit 
market participants seeking to develop their own performance statistics 
using the ratings history data to be made public by the NRSROs. 
Requiring NRSROs to make histories of ratings actions for issuer-paid 
credit ratings publicly available using the interactive data format 
rather than using other machine readable format will enable market 
participants, academics and others to analyze this information more 
quickly, more accurately, and at a lower cost. The Commission believes 
that this will enhance the ability of end-users to compare the rating 
performance of different NRSROs, which will foster NRSRO competition.
    For purposes of the internal records required by new paragraph 
(a)(8), the NRSRO will be required to keep its records up to date to 
reflect the complete ratings history of each outstanding credit rating 
(including the current rating). However, for purposes of the 
requirement to make publicly available ratings action histories for a 
random sample of 10% of outstanding issuer-paid credit ratings in each 
class of credit rating for which the NRSRO is registered and has 500 or 
more such credit ratings outstanding, the NRSRO will be permitted to 
delay disclosure of a rating action for six months. As noted above, 
this limited disclosure and the six month time lag is expected to 
mitigate the concerns regarding the loss of revenues that NRSROs derive 
from selling data feeds and downloadable packages of their current 
outstanding issuer-paid credit ratings and histories of the ratings.
    Because NRSROs withdraw ratings and rated instruments mature, the 
number of ratings made public in a particular class may fall below the 
10% threshold. In order to continue to make a large sample of 
information publicly available, the Commission is requiring NRSROs to 
replenish the sample when it falls below 10%. Consequently, paragraph 
(d) of Rule 17g-2 provides that the NRSRO must replace a rating that 
rolls off for these reasons with a new randomly selected rating from 
the impacted class of credit ratings. In order to protect against the 
possibility of ``cherry picking'' ratings that may make the performance 
of the NRSRO more favorable, the Commission believes it is important 
that both the initial selection and any replenishment of ratings be 
randomly selected. The Commission is not specifying how the NRSROs must 
randomly select the initial ratings disclosed under paragraph (d) of 
Rule 17g-2 or how they must randomly select ratings going forward to 
maintain the 10% sample. The Commission believes the NRSROs should 
develop a selection process that they can demonstrate to be random.
    Finally, the Commission is adopting amendments to the instructions 
to Exhibit 1 of Form NRSRO to require that

[[Page 6463]]

NRSROs subject to the new requirements of Rule 17g-2(d) as amended 
disclose the Web address where the XBRL Interactive Data File with the 
required information can be accessed. The Commission did not receive 
any comments on this aspect of the proposal and is adopting the 
requirement with modifications to reflect the modifications to the 
final rule discussed above. This rule amendment is designed to inform 
persons who use credit ratings where the sample of ratings histories 
for each class of issuer-paid credit ratings for which the NRSRO is 
registered can be obtained.
2. A Record of Material Deviation From Model Output
    The Commission proposed amending paragraph (a)(2) of Rule 17g-2 to 
require NRSROs to make a record documenting the rationale when a final 
credit rating materially deviates from the rating implied by a 
quantitative model used in the rating process if the model was a 
substantial component of the rating process. Under this paragraph, as 
amended, if a quantitative model was a substantial component in the 
process of determining the 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, the NRSRO is required to make a 
record of the rationale for any material difference between the credit 
rating implied by the model and the final credit rating issued. The 
purpose of this rule is to enhance the recordkeeping process in order 
to enable Commission staff, as well as an NRSRO's internal auditors, to 
understand the methodologies through which analysts developed the 
credit rating issued by the NRSRO.
    The Commission is adopting this amendment, in part, under authority 
to require NRSROs to make and keep for prescribed periods such records 
as the Commission prescribes as necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Exchange Act.\57\ The Commission believes this 
new recordkeeping requirement is necessary and appropriate in the 
public interest and for the protection of investors, or otherwise in 
furtherance of the purposes of the Exchange Act.
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    \57\ See Section 17(a)(1) of the Exchange Act (15 U.S.C. 
78q(a)(1)).
---------------------------------------------------------------------------

    Specifically, the Commission believes that maintaining records 
identifying the rationale for material divergences from the ratings 
implied by qualitative models used as a substantial component in the 
ratings process will assist the Commission in evaluating whether an 
NRSRO is adhering to its disclosed procedures for determining ratings. 
As the Commission has noted, ``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.'' \58\ In the absence of such a 
recordkeeping requirement, there may be no way to determine whether an 
NRSRO adhered to its stated methodologies for obtaining a certain 
category of credit rating (e.g. AAA) as indicated by the model results, 
that is, whether adjustments to the result implied by the model were 
made by applying appropriate qualitative factors permitted under the 
NRSRO's documented procedures or because of undue influence from the 
person seeking the credit rating or other inappropriate reasons such as 
those prohibited by Rule 17g-6, including the prohibition on issuing or 
modifying credit ratings for unfair, abusive or coercive reasons. The 
new recordkeeping requirement will allow Commission staff to review 
whether an NRSRO is adhering to its disclosed procedures for 
determining structured finance ratings and complying with Rule 17g-
6.\59\
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    \58\ June 5, 2007 Adopting Release, 72 FR at 33582.
    \59\ 17 CFR 240.17g-6. Rule 17g-6 prohibits an NRSRO from 
engaging in certain unfair, abusive or coercive practices such as 
issuing a credit rating that is not determined in accordance with 
the NRSRO's established procedures and methodologies for determining 
credit ratings based on whether the rated person will purchase the 
credit rating. See 17 CRF 240.17g-6(a)(2).
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    The Commission received 18 comments addressing this proposal.\60\ 
Many commenters strongly supported the proposal.\61\ NRSROs and others, 
however, expressed concern over the possibility that the rule could 
lead to the regulation of the substance of ratings and the overemphasis 
of quantitative models at the expense of applying qualitative 
factors.\62\ These commenters argued that the model is just one tool in 
the rating process and that the proposal may lead to generalizations of 
models in order to avoid material differences.\63\ One commenter noted 
that this record may cause examiners to ignore the role qualitative 
factors play in developing ratings.\64\ Another commenter noted that 
models are not as integral to the process of rating commercial 
mortgage-backed securities.\65\
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    \60\ See CMSA Letter; DBRS Letter; Council Letter; S&P Letter; 
Second SIFMA Letter; Fitch Letter; Lockyer Letter; ASF Letter; 
Multiple-Markets Letter; CFA Institute Letter; Rapid Ratings Letter; 
AFP Letter; Colorado PERA Letter; R&I Letter; Moody's Letter; ABA 
Business Law Committee Letter; DBA Letter; NCRC Letter.
    \61\ See Council Letter; Second SIFMA Letter; CFA Institute 
Letter; AFP Letter; Colorado PERA Letter; DBA Letter NCRC Letter.
    \62\ See DBRS Letter; S&P Letter; Rapid Ratings Letter; R&I 
Letter; Moody's Letter; ABA Business Law Committee Letter.
    \63\ See, e.g., DBRS Letter.
    \64\ See Moody's Letter.
    \65\ See CMSA Letter.
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    In part in response to these comments, the Commission has narrowed 
the application of the rule to ratings of structured finance products. 
This will lessen the recordkeeping burden on an NRSRO and address 
commenters' concerns that the requirement could have negative effects 
on the ratings process for other classes of credit ratings where 
qualitative analysis is predominant and models have a more marginal 
role.
    Further, the Commission does not believe that the requirement will 
cause NRSROs to abandon qualitative analysis when determining credit 
ratings for structured finance products. The Commission does not 
believe that the record-making required by the amendment will be 
extensive. For example, if the NRSRO's methodologies permit an analyst 
to adjust required credit enhancement levels up or down for the various 
tranches of a structured finance issuer based on certain qualitative 
factors, the NRSRO could document the rationale for any material 
difference between the credit rating implied by the model and the final 
rating by describing the qualitative factor or factors that were relied 
on. In addition to benefiting the Commission's regulatory and oversight 
functions, this requirement may serve to assist analysts in ensuring 
that their use of qualitative factors follows the procedures documented 
in the NRSRO's methodologies.
    The Commission also notes that the NRSROs will be responsible for 
making the determination of when a model constitutes a ``substantial 
component'' of the rating process as well as when a difference between 
the rating issued and the rating implied by the model is ``material.'' 
NRSROs should document in their ratings methodologies the models they 
deem to be substantial components of a ratings process for structured 
finance products and the magnitude of deviation from the rating implied 
by the model and rating issued that they deem material.\66\
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    \66\ For example, the Commission believes the expected loss and 
cash flow models used by the NRSROs to rate RMBS and CDOs are 
substantial components of the rating process.
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    For the foregoing reasons, the Commission is adopting the rule with 
the modification discussed above.

[[Page 6464]]

3. Records Concerning Third-Party Analyst Complaints
    The Commission proposed adding a new paragraph (b)(8) to Rule 17g-2 
requiring NRSROs to retain records of any complaints about the 
performance of a credit analyst. The Commission is adopting this 
amendment with the modifications discussed below. Under this paragraph, 
an NRSRO is required to retain any written communications received from 
persons not associated with the NRSRO that contain complaints about the 
performance of a credit analyst in initiating, determining, 
maintaining, monitoring, changing, or withdrawing a credit rating. The 
purpose of this rule is to allow Commission examiners the opportunity 
to review external complaints and how the NRSRO addressed them.
    The Commission is adopting this amendment, in part, under authority 
to require NRSROs to make and keep for prescribed periods such records 
as the Commission prescribes as necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in the 
furtherance of the Exchange Act.\67\ The Commission believes this 
requirement is necessary and appropriate in the public interest and for 
the protection of investors, or otherwise in furtherance of the 
Exchange Act, because it will assist Commission examiners in reviewing 
how NRSROs handle the conflicts inherent in the issuer-pay and 
subscriber-pay models: Namely, that clients have an economic interest 
in the ratings issued by the NRSRO and may seek to influence the rating 
process by complaining about an analyst who does not issue ratings 
favorable to that interest. Commission examiners will be able to review 
the complaint file and follow-up with the relevant persons within the 
NRSRO as to how a particular complaint was handled. The potential for 
such a review by Commission examiners could reduce the willingness of 
an NRSRO to re-assign or terminate a credit analyst to placate a client 
that desires a different rating.
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    \67\ See Section 17(a)(1) of the Exchange Act (15 U.S.C. 
78q(a)(1)).
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    Commenters generally supported the proposal.\68\ Some commenters 
requested clarification that rule does not require the retention of 
oral communications.\69\ The Commission did not intend the rule to 
apply to oral communications. Consequently, the rule text has been 
modified to clarify that it only applies to ``written'' communications. 
One NRSRO expressed concern that privacy and labor laws in some non-
U.S. jurisdictions would prevent monitoring of an employee's electronic 
communications.\70\ The Commission intended the rule to apply to 
communications received by the NRSRO from outside parties such as 
subscribers or persons who pay to obtain credit ratings. The amendment 
was not intended to require the retention of complaints sent internally 
between, for example, employees of the NRSRO. The Commission has 
clarified the rule's scope in this regard by specifying that it only 
applies to complaints from persons not associated with the NRSRO.
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    \68\ See Council Letter; S&P Letter; MBA Letter; Fitch Letter; 
CFA Institute Letter; Rapid Ratings Letter; AFP Letter; Colorado 
PERA Letter; Moody's Letter.
    \69\ See Moody's Letter; S&P Letter.
    \70\ See S&P Letter.
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    For the foregoing reasons, the Commission is adopting the proposed 
rule with the modifications discussed above.
4. Clarifying Amendment to Rule 17g-2(b)(7)
    Paragraph (b)(7) of Rule 17g-2 currently requires an NRSRO to 
retain all internal and external communications that relate to 
``initiating, determining, maintaining, changing, or withdrawing a 
credit rating.'' \71\ The Commission proposed to add the word 
``monitoring'' to this list. The intent was to clarify that NRSRO 
recordkeeping rules extend to all aspects of the credit rating 
surveillance process as well as the initial rating process. This was 
the intent when the Commission originally adopted the rule as indicated 
by the use of the term ``maintaining.'' The Commission believes that 
adding the term ``monitoring''--a term of art in the credit rating 
industry--will better clarify this requirement. The Commission received 
5 comments on this proposed amendment, all of which were supportive of 
the change.\72\ The Commission is adopting this amendment as proposed.
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    \71\ 17 CFR 240.17g-2(b)(7).
    \72\ See S&P Letter; Multiple-Markets Letter; CFA Institute 
Letter; Rapid Ratings Letter; Moody's Letter.
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C. Amendment to Rule 17g-3 (Report of Credit Rating Actions)

    Rule 17g-3 requires an NRSRO to furnish the Commission on an annual 
basis the following reports: Audited financial statements; unaudited 
consolidated financial statements of the parent of the NRSRO, if 
applicable; an unaudited report concerning revenue categories of the 
NRSRO; an unaudited report concerning compensation of the NRSRO's 
credit analysts; and an unaudited report listing the largest customers 
of the NRSRO. The rule further requires an NRSRO to furnish the 
Commission these reports within 90 days of the end of its fiscal year. 
The Commission proposed amending the rule to require a report showing 
the number of rating actions taken by the NRSRO during the fiscal year 
in each class of credit rating for which the NRSRO is registered. In 
the June 16, 2008 Proposing Release, the Commission indicated that a 
``credit rating action'' includes upgrades, downgrades, or placements 
of the rating on watch for an upgrade or downgrade.\73\
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    \73\ June 16, 2008 Proposing Release, 73 FR at 36234.
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    The Commission received 10 comments on this proposal.\74\ 
Commenters were generally supportive of the proposal. One commenter 
recommended that the final rule should make clear what is meant by 
``class of credit rating'' and establish a measurement period.\75\ The 
Commission notes that the rule requires the report to cover each of the 
classes of credit rating identified in Section 3(a)(62)(B)(iv) of the 
Rating Agency Act \76\ for which the NRSRO is applying for registration 
or is registered. Further, as discussed below, the note to the 
paragraph clarifies that for the purposes of this requirement, the 
asset-backed securities class must include all structured finance 
products. The Commission further notes that the measurement period is 
on a fiscal year basis.
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    \74\ See S&P Letter; Fitch Letter; Multiple-Markets Letter; ICI 
Letter; Rapid Ratings Letter; AFP Letter; Moody's Letter; ABA 
Business Law Committee Letter; NCRC Letter; Raingeard Letter.
    \75\ See Fitch Letter.
    \76\ 15 U.S.C. 78c(a)(62)(B)(iv).
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    One commenter believed that the proposal is unclear or overbroad 
regarding the scope of a report on ``credit rating actions.'' This 
commenter also noted its belief that the proposed rule was 
inappropriate because ratings changes are not financial statements, and 
stated that the proposed requirement should be relocated to Rule 17g-
2.\77\ In response, the Commission notes that it is adopting this 
requirement, in part, under authority to require an NRSRO to ``make and 
disseminate such reports as the Commission, by rule, prescribes as 
necessary or appropriate in the public interest, for the protection of 
investors,

[[Page 6465]]

or otherwise in furtherance of the purposes of [the Exchange Act].'' 
\78\
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    \77\ See Moody's Letter.
    \78\ See Section 17(a)(1) of the Exchange Act (15 U.S.C. 
78q(a)(1)).
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    The Commission is adopting this amendment by adding paragraph 
(a)(6) to Rule 17g-3. Paragraph (a)(6) requires an NRSRO to provide the 
Commission with an unaudited report of the number of credit rating 
actions (upgrades, downgrades, placements on credit watch, and 
withdrawals) during the fiscal year in each class of credit rating for 
which the NRSRO is registered with the Commission. As proposed, the 
Commission did not identify the types of credit rating actions that 
should be used to generate the report. Instead, it identified them in 
the preamble as being upgrades of credit ratings, downgrades of credit 
ratings, placements of credit ratings on watch for an upgrade or 
downgrade. The final rule text identifies the types of ratings actions 
that should be included in order to provide greater clarity. In 
addition, the Commission is adding ``withdrawals'' to the types of 
credit rating actions that must be included in the ``credit ratings 
actions'' reported by the NRSRO. The Commission views a withdrawal as a 
``credit rating action'' since ceasing to monitor a credit rating is a 
significant change to the rating and, as such, is comparable to a 
downgrade, upgrade and placement on watch in terms of the potential 
impact on the rated obligor or security. Moreover, the inclusion of 
withdrawals in the report addresses the concerns that led the 
Commission to propose requiring that withdrawals be included in the 
default statistics generated for Exhibit 1 to Form NRSRO. As discussed 
above, NRSROs raised substantial compliance concerns with the proposal 
to require withdrawals in the performance statistics. This change is 
intended to address their concerns regarding that proposed amendment 
while at the same time ensuring that any disproportionate amount of 
ratings withdrawals in a class of ratings will be captured in the 
ratings action information provided to the Commission for examination 
and oversight purposes.
    The new rule includes a note to paragraph (a)(6) clarifying that 
for the purposes of reporting credit rating actions in the asset-backed 
security class of credit ratings described in Section 3(a)(62)(B)(iv) 
of the Rating Agency Act \79\ an NRSRO must include credit rating 
actions on any security or money market instrument issued by an asset 
pool or as part of any asset-backed or mortgage-backed securities 
transaction. As discussed in the June 16, 2008 Proposing Release, this 
note is designed to ensure the inclusion of information about ratings 
actions for credit ratings of structured finance products that do not 
meet the narrower statutory definition of ``issuers of asset-backed 
securities (as that term is defined is section 1101(c) of part 229 of 
title 17, Code of Federal Regulations).'' \80\ The Commission also 
notes that the report required under paragraph (a)(6) to Rule 17g-3 
will be furnished to the Commission on a confidential basis, to the 
extent permitted by law, consistent with the other reports furnished to 
the Commission under Rule 17g-3.\81\
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    \79\ 15 U.S.C. 78c(a)(62)(B)(iv).
    \80\ See June 16, 2008 Proposing Release, 73 FR at 36234.
    \81\ 17 CFR 240.17g-3; see also, June 5, 2007 Adopting Release, 
72 FR at 33592.
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    The Commission believes this amendment is necessary and appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Exchange Act because it will 
assist the Commission in its examination function of NRSROs. Large 
spikes in ratings actions within a class of credit ratings could 
indicate the processes for determining the ratings may be compromised 
by inappropriate factors. For example, a substantial increase in the 
number of downgrades in a particular class of credit rating may be 
indicative of the fact that the initial ratings were higher than the 
NRSRO's procedures and methodologies would have implied because the 
NRSRO sought to gain favor with issuers and underwriters by issuing 
higher ratings. A substantial increase in upgrades also could be the 
result of the NRSRO attempting to gain favor with issuers and 
underwriters.
    As discussed in the June 16, 2008 Proposing Release, the Commission 
recognizes that an increase in the number of ratings actions in a 
particular class of credit rating may be the result of macroeconomic 
factors broadly impacting the rated obligors or securities.\82\ In this 
case, the ratings actions are presumably the result of appropriate 
credit analysis and not inappropriate extraneous factors. On the other 
hand, large numbers of actions could be a signal that the process for 
rating and monitoring ratings in the impacted class has been 
compromised by improper practices such as failing to adhere to 
disclosed and internally documented ratings procedures and 
methodologies, having prohibited conflicts, failing to establish 
reasonable procedures to manage conflicts, or engaging in unfair, 
coercive, or abusive conduct. Consequently, the Commission expects that 
the report will be a valuable tool to improve the focus of examination 
resources. For these reasons, the Commission is adopting the amendment 
with the modifications described above.
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    \82\ See June 16, 2008 Proposing Release, 73 FR at 36235.
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D. Amendments to Rule 17g-5

    Rule 17g-5 identifies a series of conflicts arising from the 
business of determining credit ratings. Under the rule, some of these 
conflicts must be disclosed and managed, while others are prohibited 
outright. In the June 16, 2008 Proposing Release, the Commission 
identified three additional conflicts that would be prohibited under 
paragraph (c) of the rule.\83\ The Commission received a number of 
comments on the proposed amendments.\84\ As discussed below, the 
Commission is adopting the amendments but with revisions designed in 
part to address concerns raised by commenters.
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    \83\ Id, 73 FR at 36226-36228. The Commission also proposed 
amendments to paragraphs (a) and (b) of Rule 17g-5 that would 
require an NRSRO to manage the conflict of being repeatedly paid by 
arrangers of structured finance products by prohibiting the NRSRO 
from rating such a product unless, among other things, information 
about the underlying assets was disseminated to persons not involved 
in the rating process. Id, 73 FR at 36219-36226. The Commission 
received many thoughtful comments on the proposal that identified 
substantial issues as to how the proposed amendments would operate 
in practice. The Commission is re-proposing the amendments in a 
separate release. See Companion Proposing Release.
    \84\ See MICA Letter; ICI Letter; Rapid Ratings Letter; ABA 
Business Law Committees Letter; NCRC Letter; Nappier Letter; Egan-
Jones Letter; Lockyer Letter; RBDA Letter; Moody's Letter; A.M. Best 
Letter; Euler Letter; Realpoint Letter; CMSA Letter; LIUNA Letter; 
DBRS Letter; Council Letter; DPW Letter; S&P Letter; Second SIFMA 
Letter; IBFED Letter; MBA Letter; Fitch Letter; ASF Letter; Trepp 
Letter; CFA Institute Letter; Roundtable Letter; Colorado PERA 
Letter; CGSH Letter; SPA Letter; R&I Letter; CreditSights Letter; 
DBA Letter; Citi Letter; Lehman Letter; Raingeard Letter; JCR 
Letter; Second Realpoint Letter.
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1. Rule 17g-5 Prohibition on Conflict of Interest Related to Rating an 
Obligor or Debt Security Where the Obligor or Issuer Received Ratings 
Recommendations From the NRSRO or Person Associated With the NRSRO
    The Commission proposed adding a new paragraph (c)(5) to Rule 17g-5 
prohibiting the conflict that arises when an NRSRO or its affiliate 
makes recommendations on how to achieve a desired rating and then rates 
the obligor or debt instrument that was the subject of the 
recommendations. The final rule being adopted adds this new paragraph 
to Rule 17g-5. Under this paragraph, an NRSRO is prohibited from 
issuing or maintaining a credit rating with respect

[[Page 6466]]

to an obligor or security where the NRSRO or a person associated with 
the NRSRO made recommendations to the obligor or the issuer, 
underwriter, or sponsor of the security about the corporate or legal 
structure, assets, liabilities, or activities of the obligor or issuer 
of the security. The purpose of this rule is to address the potential 
lack of impartiality that could arise when an NRSRO determines a credit 
rating based on a corporate structure that was developed after 
consultations with the NRSRO or its affiliate on how to achieve a 
desired credit rating. In simple terms, the rule prohibits an NRSRO 
from rating its own work or the work of an affiliate.
    The Commission is adopting this amendment to Rule 17g-5, in part, 
pursuant to the authority in Section 15E(h)(2) of the Exchange Act.\85\ 
This section of the statute provides the Commission with authority to 
prohibit, or require the management and disclosure of, any potential 
conflict of interest relating to the issuance of credit ratings by an 
NRSRO.\86\ The Commission believes this amendment is necessary and 
appropriate in the public interest and for the protection of investors 
because it addresses a practice that could impair the objectivity, and, 
correspondingly, the quality, of a credit rating. It has been suggested 
that during the process of rating structured finance products the 
NRSROs have recommended to arrangers how to structure a trust or 
complete an asset pool to receive a desired credit rating and then 
rated the securities issued by the trust--in effect, rating their own 
work.\87\ This amendment will prohibit this conduct based on the 
Commission's belief that it creates a conflict that cannot be 
effectively managed insomuch as it would be very difficult for an NRSRO 
to remain objective when assessing the creditworthiness of an obligor 
or debt security where the NRSRO or person associated with the NRSRO 
made recommendations about steps the obligor or issuer of the security 
could take to obtain a desired credit rating.
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    \85\ 15 U.S.C. 78o-7(h)(2).
    \86\ Id.
    \87\ See e.g., Testimony of Professor John C. Coffee, Jr., Adolf 
A. Berle Professor of Law, Columbia University Law School, before 
the U.S. Senate Committee on Banking, Housing, and Urban Affairs 
(September 26, 2007), pp. 2-3.
---------------------------------------------------------------------------

    The Commission received 33 comments addressing this proposal.\88\ 
Most of the comments supported the proposal, although some commenters 
expressed concern that the provision may limit appropriate dialogue 
between an NRSRO and a person seeking a credit rating or subject to an 
existing rating.\89\ Several commenters asked that the Commission 
clarify the type of communications that would be acceptable feedback 
during the ratings process. As stated in the June 16, 2008 Proposing 
Release, it is not the Commission's intent to prohibit the flow of 
information between an NRSRO and the obligor, issuer, underwriter, or 
sponsor during the rating process.\90\ For example, the Commission does 
not view an explanation by an NRSRO of the assumptions and rationales 
it uses to arrive at ratings decisions and how they apply to a given 
rating transaction as a recommendation. Consequently, in the case of a 
residential mortgage-backed security, an NRSRO, after putting the 
underlying assets through an expected loss model run, may communicate 
the results to the sponsor and discuss how loan characteristics such as 
FICO scores, geographic concentrations, or loan-to-value ratios may 
have driven the results.
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    \88\ See Realpoint Letter; CMSA Letter; LIUNA Letter; DBRS 
Letter; JCR Letter; Council Letter; DPW Letter; S&P Letter; Second 
SIFMA Letter; IBFED Letter; Nappier Letter; MBA Letter; Fitch 
Letter; Lockyer Letter; ASF Letter; Multiple-Markets Letter; CFA 
Institute Letter; ICI Letter; RBDA Letter; Roundtable Letter; Rapid 
Ratings Letter; AFP Letter; Colorado PERA Letter; CGSH Letter; SPA 
Letter; R&I Letter; Moody's Letter; ABA Business Law Committees 
Letter; DBA Letter; NCRC Letter; Raingeard Letter; A.M. Best Letter.
    \89\ See, e.g., CMSA Letter; LIUNA Letter; DBRS Letter; JCR 
Letter; Second SIFMA Letter; IBFED Letter; MBA Letter; Fitch Letter; 
Roundtable Letter; AFP Letter.
    \90\ June 16, 2008 Proposing Release, 73 FR at 36226.
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    The Commission recognizes that providing this type of information 
during the rating process allows the person seeking the rating to make 
adjustments in response to the information provided by the NRSRO. 
However, the free flow of information between the NRSRO and the person 
increases the transparency of the rating process. Moreover, NRSROs 
generally make their models available to persons seeking ratings. 
Sponsors of structured finance securities can run potential asset pools 
through the models before bringing the transactions to the NRSRO to be 
rated. This gives them an understanding of the rating that the NRSRO 
likely will determine, particularly with respect to more standardized 
structured finance products. The Commission believes this level of 
transparency before and during the rating process benefits the credit 
markets by allowing participants to gain an understanding and, 
ultimately, to assess the methodologies used by the NRSROs. The 
alternative--restricting the flow of information--would make the rating 
process more opaque.
    The Commission notes, however, that if the feedback process turns 
into recommendations by the NRSRO about changes to the structure, 
assets, liabilities or activities of the obligor or security that the 
person seeking the rating potentially could make to obtain a desired 
credit rating, the NRSRO would be in violation of the new rule. For 
example, in the case of a residential mortgage-backed security, the 
NRSRO would not be prohibited from informing the sponsor that the 
expected loss model indicated that the underlying loan pool was too 
concentrated in a certain geographic region to receive the desired 
rating given the level of credit enhancement proposed. On the other 
hand, if an analyst recommends how to change the composition of the 
loans in the pool to achieve the desired rating, the NRSRO would be 
making a recommendation about the assets of the issuer and, 
consequently violate the rule. The sponsor must take the model results 
from the NRSRO and decide independently how to adjust the asset pool to 
achieve the desired rating. If changes are made, the NRSRO will run the 
new pool through the model as if it were a new transaction and report 
the results to the sponsor.
    Some argue that even this process of providing sponsors with 
information they can use to make adjustments during the rating process 
should be prohibited. The Commission disagrees because locking down the 
structure prior to the rating process could have serious adverse 
consequences. Investors seek securities with specific credit ratings. 
If sponsors cannot make adjustments to obtain those ratings, then the 
securities ultimately issued and rated may not be marketable.
    The Commission understands that NRSROs are concerned about how to 
draw the line between permissible and unlawful communication of 
information.\91\ In response, the Commission notes that NRSROs who 
provide the greatest clarity to the marketplace about their ratings 
methodologies will need to provide less explanation during the ratings 
process. Thus, NRSROs can mitigate the risk that communications during 
the rating process will violate the rule by enhancing their disclosures 
about their ratings methodologies, including about the qualitative 
factors they consider and the quantitative models and the assumptions 
underlying those models they employ. For these reasons, the Commission 
believes the new prohibition creates a strong incentive for NRSROs to 
improve their disclosures,

[[Page 6467]]

which, in turn, will benefit the users of credit ratings and, by 
extension, the credit markets.
---------------------------------------------------------------------------

    \91\ See, e.g., Fitch Letter, JCR Letter.
---------------------------------------------------------------------------

    Some commenters stated that this conflict should not be prohibited 
but, instead, included among the conflicts that must be disclosed and 
managed.\92\ Several commenters also suggested that the conflict should 
not be prohibited when the affiliate (as opposed to the NRSRO) makes 
the recommendation. The commenters suggested that measures such as 
information barriers could address the conflict adequately without the 
need to prohibit it outright.\93\ The Commission believes that an NRSRO 
cannot remain objective when rating its own work or that of an 
affiliate. As stated in the June 16, 2008 Proposing Release, the 
Commission believes it would be difficult for the NRSRO to remain 
objective if an affiliate were providing advice to obligors, issuers 
and sponsors about how to obtain desired credit ratings because the 
financial success of the affiliate would depend on issuers getting the 
ratings they sought after taking steps recommended by the 
affiliate.\94\ This may create undue pressure on the NRSRO's credit 
analysts to determine credit ratings that favored the affiliate. The 
Commission believes this pressure may undermine protective measures 
such as information barriers between the NRSRO and the affiliate as 
they both would be under the common control of a group that benefited 
from the affiliate's financial success.
---------------------------------------------------------------------------

    \92\ See, e.g., Realpoint Letter; DPW Letter; S&P Letter; ICI 
Letter; Colorado PERA Letter; R&I Letter; Moody's Letter.
    \93\ See, e.g., Fitch Letter; Moody's Letter.
    \94\ See June 16, 2008 Proposing Release, 73 FR at 36226.
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    Finally, several commenters requested that the Commission clarify 
whether this conflict applies only to structured finance ratings or 
whether it applies to all ratings classes.\95\ The Commission intends 
that this prohibited conflict would apply across all ratings classes.
---------------------------------------------------------------------------

    \95\ See, e.g., Lockyer Letter, RBDA Letter, A.M. Best Letter.
---------------------------------------------------------------------------

    For the reasons discussed above, the Commission is adopting the 
amendment as proposed.
2. Rule 17g-5 Prohibition on Conflict of Interest Related to the 
Participation of Certain Personnel in Fee Discussions
    The Commission proposed prohibiting the conflict that arises when 
persons within an NRSRO responsible for determining credit ratings or 
developing methodologies for determining credit ratings participate in 
fee discussions. The final rule being adopted adds a new paragraph 
(c)(6) to Rule 17g-5.\96\ Under this paragraph, an NRSRO is prohibited 
from issuing or maintaining a credit rating where the fee paid for the 
rating was negotiated, discussed, or arranged by a person within the 
NRSRO who has responsibility for participating in determining or 
approving credit ratings or for developing or approving procedures or 
methodologies used for determining credit ratings, including 
qualitative and quantitative models. The purpose of this rule is to 
remove the persons most directly involved in making the judgments that 
credit ratings are based on from fee negotiations and, thereby, 
insulate them from a process that could make them more or less 
favorably disposed toward a client or class of clients.
---------------------------------------------------------------------------

    \96\ 17 CFR 240.17g-5.
---------------------------------------------------------------------------

    As proposed, the rule did not explicitly mention persons involved 
in approving credit ratings, although it implicitly included them by 
including persons involved in ``determining'' credit ratings.\97\ The 
Commission notes that both determiners and approvers engage in analysis 
that results in a final rating, and the Commission intends them both to 
be covered by prohibitions aimed at protecting the integrity of this 
process. Therefore, the Commission is clarifying today that for the 
purposes of Rule 17g-5, the terms ``determine,'' ``determined,'' and 
``determining'' include both persons who develop credit ratings and 
persons who approve credit ratings. This clarification reflects the 
Commission's intent when it proposed the rule and is designed to remove 
any potential ambiguity that could arise if some of the Rule 17g-5 
prohibitions cover persons who determine and approve credit ratings and 
others only cover persons who determine credit ratings.
---------------------------------------------------------------------------

    \97\ June 16, 2008 Proposing Release, 73 FR at 36226-36228.
---------------------------------------------------------------------------

    The Commission is adopting this amendment to Rule 17g-5, in part, 
pursuant to the authority in Section 15E(h)(2) of the Exchange Act.\98\ 
This section of the statute provides the Commission with authority to 
prohibit, or require the management and disclosure of, any potential 
conflict of interest relating to the issuance of credit ratings by an 
NRSRO.\99\ The Commission believes this amendment is necessary and 
appropriate in the public interest or for the protection of investors 
because it addresses a potential practice that could impair the 
objectivity, and, correspondingly, the quality, of a credit rating. 
This amendment is designed to effectuate the separation within the 
NRSRO of persons involved in fee discussions from persons involved in 
the credit rating analytical process. While the incentives of the 
persons discussing fees could be based primarily on generating revenues 
for the NRSRO; the incentives of the persons involved in the analytical 
process should be based on determining accurate credit ratings. There 
is a significant potential for these distinct incentive structures to 
conflict with one another when persons within the NRSRO are engaged in 
both activities.
---------------------------------------------------------------------------

    \98\ 15 U.S.C. 78o-7(h)(2).
    \99\ Id.
---------------------------------------------------------------------------

    The potential consequences are that a credit analyst or person 
responsible for approving credit ratings or credit rating methodologies 
could, in the context of negotiating fees, let business considerations 
undermine the objectivity of rating process. For example, an individual 
involved in a fee negotiation with an issuer might not be impartial 
when it comes to rating the issuer's securities. In addition, persons 
involved in approving the methodologies and processes used to determine 
credit ratings could be reluctant to adjust a model to make it more 
conservative if doing so would make it more difficult to negotiate fees 
with issuers. For these reasons, the Commission believes that this 
conflict should be prohibited.
    The Commission received 19 comments addressing this proposal, most 
of which supported its goal.\100\ NRSROs, while agreeing in principle 
with the rule, raised a number of questions. First, several NRSROs 
suggested that the Commission revise the language of the amendment to 
conform to the International Organization of Securities Commissions' 
``Code of Conduct Fundamentals for Credit Rating Agencies'' (the 
``IOSCO Code'').\101\ The IOSCO Code provides that credit rating 
agencies ``should not have employees who are directly involved in the 
rating process initiate, or participate in, discussions regarding fees 
or payments with any entity they rate.'' The Commission believes, 
however, that the IOSCO Code provision would be insufficient to 
accomplish the goal of fully effectuating the separation within NRSROs 
of persons involved in fee discussions

[[Page 6468]]

from persons involved in the credit rating analytical process. In 
particular, the IOSCO Code's language would allow persons involved in 
approving the methodologies and processes used to determine credit 
ratings to negotiate ratings fees, which could make them reluctant to 
adjust a model to make it more conservative if doing so would make it 
more difficult to negotiate fees with issuers.
---------------------------------------------------------------------------

    \100\ See Realpoint Letter; CMSA Letter; LIUNA Letter; DBRS 
Letter; S&P Letter; Nappier Letter; Fitch Letter; ASF Letter; 
Multiple-Markets Letter; CFA Institute Letter; ICI Letter; Rapid 
Ratings Letter; AFP Letter; Colorado PERA Letter; Moody's Letter; 
ABA Business Law Committees Letter; NCRC Letter; Raingeard Letter; 
A.M. Best Letter.
    \101\ See, e.g., S&P Letter; Fitch Letter; A.M Best Letter. A 
copy of the IOSCO code is available at http://www.iosco.org.
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    In addition, other commenters, including the NRSROs, asked that the 
Commission clarify that the prohibition does not apply to internal 
communications.\102\ They stated that senior managers (some of whom may 
be covered by the prohibition) participate in internal discussions 
relating to fees to ensure that a fee charged is in proportion to the 
work performed by the NRSRO. The Commission recognizes that credit 
analysts may need to provide information on expected staffing and 
resource requirements to the persons involved in fee discussions so the 
latter can factor such information into the fees charged.
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    \102\ See, e.g., S&P Letter; Fitch Letter; A.M. Best Letter.
---------------------------------------------------------------------------

    Some commenters stated that this conflict should be subject to the 
requirement to disclose and manage, as opposed to being 
prohibited.\103\ The Commission disagrees for several reasons. There 
does not appear to be a compelling reason for credit analysts and model 
developers to participate in fee discussions. Furthermore, their 
involvement in that process creates greater risk that they will develop 
a favorable or negative view of the client or a class of clients based 
on how the negotiations proceed. This could influence the judgment they 
exercise in determining credit ratings or developing credit rating 
methodologies.
---------------------------------------------------------------------------

    \103\ See, e.g., DBRS Letter; ASF Letter; Multiple-Markets 
Letter; Moody's Letter.
---------------------------------------------------------------------------

    Several commenters noted that small NRSROs may need to have some 
analysts or model developers participate in fee discussions given their 
staffing levels.\104\ These commenters suggested that the rule should 
include an exemption for such NRSROs.\105\ The Commission agrees that 
the rule could potentially raise difficulties in certain circumstances 
for an NRSRO with a small staff. Consequently, the Commission will 
review requests by small NRSROs for exemptions from the rule under 
Section 36 of the Exchange Act based on their specific circumstances. 
The Commission notes that it has provided two small NRSROs with 
temporary exemptive relief from the prohibition in Rule 17g-5 against 
receiving 10% or more of their net revenues from a single client.\106\
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    \104\ See, e.g., DBRS Letter; Multiple-Markets Letter; CFA 
Institute Letter; Colorado PERA Letter; ABA Business Law Committees 
Letter.
    \105\ See, e.g., Fitch Letter; Rapid Ratings Letter; Moody's 
Letter.
    \106\ See Order Granting Temporary Exemption of LACE Financial 
Corp. from the Conflict of Interest Prohibition in Rule 17a-5(c)(1) 
of the Securities Exchange Act of 1934, Exchange Act Release No. 
57301 (February 11, 2008); Order Granting Temporary Exemption of 
Realpoint LLC from the Conflict of Interest Prohibition in Rule 17a-
5(c)(1) under the Securities Exchange Act of 1934, Exchange Act 
Release No. 58001 (June 23, 2008).
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    For the reasons discussed, the Commission is adopting the amendment 
as proposed and clarifies, as noted above, that persons responsible for 
``approving'' credit ratings are covered by the prohibition as well as 
the provisions of Rule 17g-5 as a whole.
3. Rule 17g-5 Prohibition of Conflict of Interest Related to Receipt of 
Gifts
    The Commission proposed adding a new paragraph (c)(7) to Rule 17g-5 
\107\ prohibiting the conflict that arises when persons responsible for 
determining or approving credit ratings receive gifts from the persons 
being rated or the sponsors of the persons being rated.\108\ The final 
rule being adopted includes this new paragraph. Under this paragraph, 
an NRSRO is prohibited from issuing or maintaining a credit rating 
where a credit analyst who participated in determining or monitoring 
the credit rating, or a person responsible for approving the credit 
rating received gifts, including entertainment, from the obligor being 
rated, or from the issuer, underwriter, or sponsor of the securities 
being rated, other than items provided in the context of normal 
business activities such as meetings that have an aggregate value of no 
more than $25. The purpose of this rule is to eliminate the potential 
undue influence that gifts can have on those responsible for 
determining credit ratings.
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    \107\ 17 CFR 240.17g-5.
    \108\ See June 16, 2008 Proposing Release, 73 FR at 36227-36228.
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    The Commission is adopting this amendment to Rule 17g-5, in part, 
pursuant to the authority in Section 15E(h)(2) of the Exchange 
Act.\109\ This section of the statute provides the Commission with 
authority to prohibit, or require the management and disclosure of, any 
potential conflict of interest relating to the issuance of credit 
ratings by an NRSRO as the Commission deems necessary or appropriate in 
the public interest or for the protection of investors.\110\ The 
Commission believes the amendment is necessary and appropriate in the 
public interest or for the protection of investors because it addresses 
a potential practice that could impair the objectivity, and, 
correspondingly, the quality, of a credit rating.
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    \109\ 15 U.S.C. 78o-7(h)(2).
    \110\ Id.
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    The Commission received 18 comments on the proposed amendment, most 
of which agreed in principle with the proposal.\111\ One commenter 
suggested that this conflict should be disclosed and managed instead of 
prohibited.\112\ The Commission disagrees because other than in the 
most obvious cases it would be very difficult to determine whether an 
analyst was swayed by gifts to adjust a rating. Persons seeking credit 
ratings for an obligor or debt security could use gifts in an attempt 
to gain favor with the analyst. In the case of a substantial gift, the 
potential to impact the analyst's objectivity could be immediate. With 
smaller gifts, the danger is that over time the cumulative effect of 
repeated gifts can impact the analyst's objectivity. In either case, 
there is little ability to ``manage'' the analyst's motivations. 
Therefore, the Commission believes that an absolute prohibition on 
gifts, with the exception of minor incidentals such as those provided 
in business meetings, is appropriate.
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    \111\ See S&P Letter; Nappier Letter; Lockyer Letter; ASF 
Letter; Multiple-Markets Letter; CFA Institute Letter; ICI Letter; 
Roundtable Letter; Rapid Ratings Letter; AFP Letter; R&I Letter; 
Moody's Letter; ABA Business Law Committees Letter; Foutch Letter; 
DBA Letter; NCRC Letter; Raingeard Letter; A.M. Best Letter.
    \112\ See Moody's Letter.
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    Several NRSROs noted the potential for cultural misunderstandings 
over the proposed gift limit, noting that issuers from other countries 
may be embarrassed or offended by the prohibition. One NRSRO suggested 
in response that the Commission include an exemption or higher dollar 
threshold for gifts from foreign issuers, while another cited such 
potential misunderstandings in support of its suggestion that the 
conflict be disclosed and managed instead of prohibited.\113\ The 
Commission recognizes that a prohibition may pose initial difficulties 
with certain foreign issuers but believes that over time, and given the 
uniformity of the rule across NRSROs, such issuers will come to 
understand and accept the prohibition.
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    \113\ See, e.g., S&P Letter, Moody's Letter.
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    Several commenters asked that the Commission clarify how the $25 
limit would operate \114\ and some suggested a

[[Page 6469]]

higher limit such as $50 or $100.\115\ The $25 limit is not designed to 
be an exception to the prohibition on giving gifts. Rather, it is 
intended to permit the exchange of items that are incidental to routine 
business interactions such as meetings. For example, if an analyst 
meets with an issuer to discuss a credit rating, the issuer could 
provide the analyst with note pads, pens and light refreshments, 
provided they did not have an aggregate value exceeding $25. The 
Commission notes that the rule is not intended to allow an analyst to 
accept a gift, regardless of its value, that has no use in conducting 
the meeting. In addition, the Commission wishes to clarify that the $25 
limit is per analyst and per interaction and not a one-time or annual 
limit.
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    \114\ See, e.g., S&P Letter; Roundtable Letter; R&I Letter; 
Moody's Letter.
    \115\ See, e.g., S&P Letter; CFA Institute Letter; Roundtable 
Letter; ABA Business Law Committees Letter; A.M. Best Letter.
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    The Commission also intends that the rule be prospective. 
Therefore, the fact that an analyst received a gift from a person 
seeking a credit rating prior to the rule's effective date will not 
preclude the NRSRO from issuing a credit rating determined by the 
analyst.
    Finally, a few commenters asked the Commission to clarify whether 
this amendment applied only to structured finance ratings or whether it 
applied to all ratings classes.\116\ The Commission believes that there 
is no reason to limit this prohibition to structured finance ratings: 
any person seeking a credit rating could attempt to gain favor with an 
analyst responsible for determining the credit rating by using gifts. 
Therefore, this prohibition applies across all classes of credit 
ratings.
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    \116\ See, e.g., Lockyer Letter.
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    For the reasons discussed, the Commission is adopting the amendment 
as proposed.

III. Paperwork Reduction Act

    Certain provisions of the rule amendments contain a ``collection of 
information'' within the meaning of the Paperwork Reduction Act of 1995 
(``PRA'').\117\ The Commission published a notice requesting comment on 
the collection of information requirements in the June 16, 2008 
Proposing Release and submitted the proposed amendments to the Office 
of Management and Budget (``OMB'') for review in accordance with the 
PRA.\118\ 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:
---------------------------------------------------------------------------

    \117\ 44 U.S.C. 3501 et seq.; 5 CFR 1320.11.
    \118\ See June 16, 2008 Proposing Release, 73 FR at 36236-36241.
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    (1) Rule 17g-1, Application for registration as a nationally 
recognized statistical rating agency; Form NRSRO and the Instructions 
for Form NRSRO (OMB Control Number 3235-0625);
    (2) Rule 17g-2, Records to be made and retained by national 
recognized statistical rating organizations (OMB Control Number 3235-
0628); and
    (3) Rule 17g-3, Annual reports to be furnished by nationally 
recognized statistical rating organizations (OMB Control Number 3235-
0626).

A. Collections of Information Under the Amended Rules

    The Commission is adopting rule amendments to prescribe additional 
requirements for NRSROs to address concerns that have arisen with 
respect to their role in the credit market turmoil. These amendments 
modify rules the Commission adopted in 2007 to implement registration, 
recordkeeping, financial reporting, and oversight rules under the 
Rating Agency Act. Certain of the amendments contain recordkeeping and 
disclosure requirements that will be subject to the PRA. The collection 
of information obligations imposed by the amendments is mandatory. The 
amendments, however, will apply only to credit rating agencies that are 
registered with the Commission as NRSROs. Such registration is 
voluntary.\119\
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    \119\ See Section 15E of the Exchange Act (15 U.S.C. 78o-7).
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    In summary, the rule amendments require: (1) An NRSRO to provide 
enhanced disclosure of performance measurements statistics and the 
procedures and methodologies used by the NRSRO in determining credit 
ratings for structured finance products and other debt securities on 
Form NRSRO; \120\ (2) an NRSRO to make, keep and preserve additional 
records under Rule 17g-2; \121\ (3) an NRSRO to make publicly available 
on its Internet Web site in XBRL format a random sample of 10% of the 
ratings histories in each ratings class for which it is registered and 
has issued 500 or more ratings paid for by the obligor being rated or 
by the issuer, underwriter, or sponsor of the security being rated, 
with each new ratings action to be reflected in such histories no later 
than six months after they are taken; \122\ and (4) an NRSRO to furnish 
the Commission with an additional annual report.\123\
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    \120\ See amendments to Form NRSRO.
    \121\ 17 CFR 240.17g-2.
    \122\ See Rule 17g-2(a)(8) and (d).
    \123\ See Rule 17g-3(a)(6).
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 B. Proposed Use of Information

    The amendments enhance the framework for Commission oversight of 
NRSROs, in part in response to the recent credit market turmoil.\124\ 
The collections of information in the rule amendments are designed to 
further assist the Commission in effectively monitoring, through its 
examination function, whether an NRSRO is conducting its activities in 
accordance with Section 15E of the Exchange Act \125\ and the rules 
thereunder. In addition, these rule amendments are designed to further 
assist users of credit ratings by requiring the disclosure of 
additional information with respect to an NRSRO that could be used to 
compare the credit ratings quality of different NRSROs, particularly 
with respect to structured finance products. The Commission believes 
that the information that NRSROs will be required to make public as a 
result of the amendments will advance one of the primary objectives of 
the Rating Agency Act, as noted in the accompanying Senate Report, to 
``facilitate informed decisions by giving investors the opportunity to 
compare ratings quality of different firms.'' \126\
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    \124\ See 17 CFR 17g-1 through 17g-6, and Form NRSRO.
    \125\ 15 U.S.C. 78o-7.
    \126\ See Senate Report, p. 8.
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C. Respondents

    In adopting the final rules under the Rating Agency Act, the 
Commission estimated that approximately 30 credit rating agencies would 
be registered as NRSROs.\127\ The Commission believes that this 
estimate continues to be appropriate for identifying the number of 
respondents for purposes of the amendments. Since the initial set of 
rules under the Rating Agency Act became effective in June 2007, ten 
credit rating agencies have registered with the Commission as 
NRSROs.\128\ The registration program has been in effect for over a 
year; consequently, the Commission expects additional entities will 
register. While 20 more entities may not ultimately register, the 
Commission believes the estimate is within reasonable bounds and 
appropriate given that it adds an element of conservatism to its 
paperwork burden estimates as well as cost estimates.
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    \127\ See June 5, 2007 Adopting Release, 72 FR at 33607.
    \128\ A.M. Best Company, Inc.; DBRS Ltd.; Fitch.; Japan Credit 
Rating Agency, Ltd.; Moody's; Rating and Investment Information, 
Inc.; S&P LACE Financial Corp.; Egan-Jones Rating Company; and 
Realpoint LLC.

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[[Page 6470]]

    The Commission requested comment on all aspects of the proposed 
estimate for the number of respondents. The Commission did not receive 
any comments in response to the proposed estimate. As discussed above, 
the Commission continues to estimate, for purposes of this PRA, that 
approximately 30 credit rating agencies will be registered as NRSROs 
and thus will be required to comply.

D. Total Annual Recordkeeping and Reporting Burden

    As discussed in further detail below, the Commission estimates the 
total recordkeeping burden resulting from the amendments will be 
approximately 820 hours on an annual basis \129\ and 4,560 hours on a 
one-time basis.\130\
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    \129\ This total is derived from the total annual hours set 
forth in the order that the totals appear in the text: 750 + 70 + 
1000 = 1,820.
    \130\ This total is derived from the total one-time hours set 
forth in the order that the totals appear in the text: 3,000 + 1,350 
+ 210 = 4,560.
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    The total annual and one-time hour burden estimates described below 
are averages across all types of NRSROs expected to be impacted by the 
rule amendments. The size and complexity of NRSROs range from small 
entities to entities that are part of complex global organizations 
employing thousands of credit analysts. Consequently, the burden hour 
estimates represent the average time across all NRSROs. The Commission 
further notes that, given the significant variance in size between the 
largest NRSROs and the smallest NRSROs, the burden estimates, as 
averages across all NRSROs, are skewed higher because the largest firms 
currently predominate in the industry.
1. Amendments to Form NRSRO
    The amendments to Form NRSRO change the instructions for the Form 
to require that NRSROs provide more detailed credit ratings performance 
statistics in Exhibit 1 and disclose with greater specificity 
information about the procedures and methodologies used to determine 
structured finance and other credit ratings in Exhibit 2.\131\ The 
total annual burden hours currently approved by OMB is 2,100, and the 
total one-time burden hours is 10,000. In the June 16, 2008 Proposing 
Release, the Commission stated that it expected that the proposed 
amendments would not have a material effect on the respondents' hour 
burden because the additional disclosures would be included within the 
overall preparation of the initial Form NRSRO for new applicants.\132\ 
Additionally, in that release, the Commission stated it believed that 
the NRSROs currently registered would be required to prepare and 
furnish an amended Form NRSRO to update their registration applications 
as a result of the adoption of the proposed amendments (i.e., as of 
today that would be ten amended Form NRSROs).\133\ However, the 
Commission stated that it believed these potential furnishings of Form 
NRSRO were accounted for in the currently approved PRA collection for 
Rule 17g-1, which includes an estimate that each NRSRO would file two 
amendments to Form NRSRO per year.
---------------------------------------------------------------------------

    \131\ 17 CFR 240.17g-1 and Form NRSRO.
    \132\ June 16, 2008 Proposing Release, 73 FR at 36237-36238.
    \133\ Id.
---------------------------------------------------------------------------

    The Commission requested comment on all aspects of the burden 
estimates for Rule 17g-1 and Form NRSRO, as amended.\134\ One commenter 
disagreed with the Commission that there would be no additional one-
time or ongoing collection of information burdens for NRSROs to provide 
the additional information required in Exhibit 2 to Form NRSRO.\135\ 
The commenter stated that it would need to conduct a survey of its 
practices, synthesize and summarize the results of the survey, and 
incorporate the results into Exhibit 2 of Form NRSRO.\136\ The 
commenter estimated that it would take at least 100 hours to complete a 
global survey, involving compliance personnel, as well as senior 
analysts and their supervisors. In addition, the commenter estimated 
that it would take at least 24 hours per year on average to collect 
information and another 12 hours per year to incorporate descriptions 
of changes into Form NRSRO, as well as an additional 24 hours per year 
conducting compliance assessments.\137\ The commenter noted, however, 
that it did not consider such one-time and ongoing compliance burdens 
to be excessive.\138\
---------------------------------------------------------------------------

    \134\ Id.
    \135\ See Moody's Letter.
    \136\ Id.
    \137\ Id.
    \138\ Id.
---------------------------------------------------------------------------

    As adopted, the amendments to the instructions to Exhibit 2 to Form 
NRSRO add three additional areas that an applicant and a registered 
NRSRO must address in the descriptions of its procedures and 
methodologies in Exhibit 2 to the extent they are applicable.\139\ 
Because the additional requirements, as adopted, require only a 
description of the procedures and methodologies, the Commission 
believes that there may have been some misinterpretation with respect 
to the actual requirements regarding the amendments to Exhibit 2. As 
stated above, the Commission notes that the instructions for Exhibit 2 
to Form NRSRO require only a description of the procedures and 
methodologies that the NRSRO actually employs and it does not require 
an NRSRO to adopt specific procedures. In addition, it only requires a 
description of the NRSRO's general ratings procedures and methodologies 
as opposed to the submission and disclosure of the actual procedures 
and methodologies used to determine credit ratings.\140\
---------------------------------------------------------------------------

    \139\ These additional areas are: Whether and, if so, how 
information about verification performed on assets underlying or 
referenced by a security or money market instrument issued by an 
asset pool or as part of any asset-backed or mortgage-backed 
securities transaction is relied on in determining credit ratings; 
whether and, if so, how assessments of the quality of originators of 
assets underlying or referenced by a security or money market 
instrument issued by an asset pool or as part of any asset-backed or 
mortgage-backed securities transaction play a part in the 
determination of credit ratings; and how frequently credit ratings 
are reviewed, whether different models or criteria are used for 
ratings surveillance than for determining initial ratings, whether 
changes made to models and criteria for determining initial ratings 
are applied retroactively to existing ratings, and whether changes 
made to models and criteria for performing ratings surveillance are 
incorporated into the models and criteria for determining initial 
ratings.
    \140\ The instructions further 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.
---------------------------------------------------------------------------

    Based on clarifications discussed above, the Commission believes 
that the actual time expenditures of NRSROs in complying with the rules 
will be less than the commenter's estimates. Nonetheless, the 
Commission is revising the one-time hourly burden estimate upward in 
response to the comment. The Commission, based on the comment received 
and staff experience, estimates that the average time necessary for an 
applicant or NRSRO to gather the information on a one-time basis in 
order to complete the additional disclosures required by the amendments 
to Exhibit 2 to Form NRSRO will be 100 hours per NRSRO, which would be 
a one-time hour burden to the industry of 3,000 hours.\141\ The 
Commission is not revising its annual burden because it believes that 
once an NRSRO has updated Exhibit 2 to Form NRSRO to include 
descriptions of these aspects of its methodologies, any further updates 
would be incremental and the time burdens associated with completing 
the updates are reflected in the current annual burdens discussed 
above.
---------------------------------------------------------------------------

    \141\ 100 hours x 30 NRSROs = 3,000 hours.
---------------------------------------------------------------------------

2. Amendments to Rule 17g-2
    Rule 17g-2 requires an NRSRO to make and keep current certain 
records

[[Page 6471]]

relating to its business and requires an NRSRO to preserve those and 
other records for certain prescribed time periods.\142\ The amendments 
to Rule 17g-2 require an NRSRO to make and retain two additional 
records and to retain a third type of record. The records to be made 
and retained are: (1) A record of the rationale for any material 
difference between the credit rating implied by the model and the final 
credit rating issued, if a quantitative model is a substantial 
component in the process 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; \143\ and (2) a 
record showing the history and dates of all previous rating actions 
with respect to each outstanding credit rating.\144\ The amendments to 
Rule 17g-2 also require an NRSRO to make public, in XBRL format and 
with a six-month grace period, the ratings action information required 
under new paragraph (a)(8) for a random sample of 10% of the issuer 
paid credit ratings for each ratings class for which it has issued 500 
or more issuer-paid credit ratings.\145\ In addition, the amendments 
require an NRSRO to retain communications from persons not associated 
with the NRSRO that contain any complaints by an obligor, issuer, 
underwriter, or sponsor about the performance of a credit analyst.\146\
---------------------------------------------------------------------------

    \142\ 17 CFR 240.17g-2.
    \143\ Paragraph (a)(2)(iii) of Rule 17g-2.
    \144\ Paragraph (a)(8) of Rule 17g-2.
    \145\ Amendment to Rule 17g-2(d).
    \146\ Paragraph (b)(8) of Rule 17g-2.
---------------------------------------------------------------------------

    The Commission requested comment in the June 16, 2008 Proposing 
Release on the burdens that would result from the proposed amendments 
to Rule 17g-2.\147\ The Commission received one comment regarding the 
PRA estimate for Rule 17g-2.\148\ This commenter, a large NRSRO, stated 
that the Commission has significantly underestimated the initial and 
ongoing recordkeeping burdens associated with its proposed changes to 
NRSROs' recordkeeping requirements.\149\
---------------------------------------------------------------------------

    \147\ See June 16, 2008 Proposing Release, 73 FR at 36238-36239.
    \148\ See Moody's Letter.
    \149\ Id.
---------------------------------------------------------------------------

    The same large NRSRO submitted comments specific to the proposed 
amendment to Rule 17g-2(d) which would have required disclosure of the 
histories of rating actions for outstanding credit ratings in an XBRL 
format. The commenter stated that developing and agreeing upon the 
taxonomy and tags for an XBRL data file would take at least several 
hundred hours over several months or even longer and that ongoing 
maintenance of the database could easily exceed two months per 
year.\150\ The Commission notes that the amendment as adopted specifies 
that in making the required information available on its Web site, an 
NRSRO will use the List of XBRL Tags for NRSROs as specified on the 
Commission's Web site, thus eliminating the need for an NRSRO to 
develop its own taxonomy and tags. In addition, as adopted, the 
amendment to Rule 17g-2(d) limits the requirement to the disclosure of 
a random sample of 10% of the issuer-paid credit rating histories for 
each ratings class for which an NRSRO has issued 500 or more issuer-
paid credit ratings. This is a substantial reduction from the amount of 
information that would have been required by the amendment as proposed. 
Consequently, the amount of time required to comply with the amendment 
to Rule 17g-2(d), as adopted, will be significantly reduced for what 
would have been required under the proposal. Finally, the Commission 
notes that, in order to allow NRSROs sufficient time to implement the 
new disclosure requirement of Rule 17g-2(d), as amended, the compliance 
date for that amendment will be 180 days after publication in the 
Federal Register.
---------------------------------------------------------------------------

    \150\ Id.
---------------------------------------------------------------------------

    In addition to its comments on the XBRL portion of the proposed 
amendments to Rule 17g-2, the same large NRSRO submitted comments on 
the proposed amendment to Rule 17g-2 regarding records of material 
deviation from model output and the recording of complaints relating to 
analysts. With respect to the record of material deviation from model 
output, the commenter stated it would take analysts, supervisors, and 
senior management more than 150 hours to determine which quantitative 
models were a ``substantial component'' in determining ratings; 200 
hours for compliance, legal and IT staff to develop policies, amend 
schedules and modify systems to comply with the rule; and 1,500 hours 
to develop compliance procedures and training materials. On an ongoing 
basis, the commenter estimated that it would take approximately 60-90 
minutes to create, approve and file each record related to this 
amendment. Finally, the commenter estimated that, on an annual basis, 
it would spend 40 to 80 hours per year on compliance reviews and 200 
hours per year on training.\151\ In response to comments on the 
proposed rule language, the Commission narrowed the application of Rule 
17g-2(a)(2)(iii) to ratings of structured finance products only. This 
will lessen the recordkeeping burden on an NRSRO and be responsive to 
commenters' concerns that the requirement could have negative effects 
on the ratings process for other classes of credit ratings where 
qualitative analysis is predominant and models have a more marginal 
role.
---------------------------------------------------------------------------

    \151\ Id.
---------------------------------------------------------------------------

    Finally, the same NRSRO commenter estimated that with respect to 
the records of complaints about analysts under Rule 17g-2(b)(8), it 
would take approximately 100 hours to implement the proposed rule, 
draft a policy, and change its systems to capture the required records, 
as well as 1,500 hours to develop compliance procedures and a training 
module. On an ongoing basis, the commenter estimated it would take 
approximately 10 to 100 hours to follow-up and document each complaint. 
Finally, on an annual basis, the commenter estimated it would spend 
approximately 40 to 80 hours per year on compliance reviews and 150 
hours per year on training.\152\ With respect to this requirement, the 
Commission notes that it intends the rule to apply only to 
communications received by the NRSRO from outside parties such as 
subscribers or entities that pay to obtain credit ratings. The 
amendment was not intended to require the retention of complaints sent 
internally between, for example, employees of the NRSRO. Further, the 
Commission has clarified that the rule does not apply to oral 
communications.
---------------------------------------------------------------------------

    \152\ Id.
---------------------------------------------------------------------------

    Based on the modifications and clarifications discussed above, the 
Commission believes that the actual time expenditures of NRSROs in 
complying with the rules will be less than the commenter's estimates. 
Nonetheless, the Commission is revising its hourly burden estimates 
upward in response to the comment.
    With respect to the amendments to Rule 17g-2, the Commission 
estimates, based on staff information gained from the NRSRO examination 
process and in response to comments received, that the total one-time 
and annual recordkeeping burdens will increase approximately 15% and 
10%, respectively. The Commission believes that the one-time burden to 
set up and/or modify a recordkeeping system to comply with the 
amendments would be greater than the ongoing annual burden. Once an 
NRSRO has set up or modified its recordkeeping system to comply with 
the amendments, its annual hour burden would be increased only to the

[[Page 6472]]

extent it would be required to make and retain additional records. In 
the June 16, 2008 Proposing Release, the Commission estimated that the 
total one-time and annual recordkeeping burdens would increase 
approximately 10% and 5%, respectively.\153\ Thus, the Commission 
estimates that the one-time burden that each NRSRO will spend 
implementing a recordkeeping system to comply with Rule 17g-2, as 
amended, will be approximately 345 hours,\154\ for a total one-time 
burden of 10,350 hours for 30 NRSROs,\155\ which represents an increase 
in the currently approved PRA burden under Rule 17g-2 of 1,350 total 
one-time burden hours.\156\ The Commission estimates that an NRSRO 
would spend an average of 279 hours per year \157\ to make and retain 
records under Rule 17g-2 as amended, for a total annual hour burden 
under Rule 17g-2 of 8,370 hours.\158\ This estimate will result in an 
increase in the currently approved PRA burden under Rule 17g-2 of 750 
annual burden hours.\159\ As discussed above, the increase in annual 
burden hours will result from the increase in the number of records an 
NRSRO will be required to make and retain under the amendments to Rule 
17g-2. The Commission notes that the PRA estimates for Rule 17g-2 are 
averages across all types of NRSROs expected to be affected by the rule 
amendments. The size and complexity of NRSROs range from small entities 
to entities that are part of complex global organizations employing 
thousands of credit analysts. Consequently, the burden hour estimates 
for Rule 17g-2 represent the average time across all NRSROs.
---------------------------------------------------------------------------

    \153\ See June 16, 2008 Proposing Release, 73 FR at 36238-36239.
    \154\ 300 hours x 1.15 = 345 hours. This will result in an 
increase of approximately 45 hours per NRSRO for the one-time hour 
burden.
    \155\ 345 hours x 30 respondents = 10,350 hours.
    \156\ 10,350 hours - 9,000 hours = 1,350 hours.
    \157\ 254 hours x 1.10 = 279 hours. The amendments would result 
in an increase of approximately 25 annual burden hours per NRSRO for 
Rule 17g-2.
    \158\ 279 hours x 30 respondents = 8,370 hours.
    \159\ 8,370 hours - 7,620 hours = 750 hours.
---------------------------------------------------------------------------

    In addition, the amendments to Rule 17g-2 require an NRSRO to make 
publicly available on its Web site in XBRL format ratings action 
histories for a random sample of 10% of its outstanding issuer-paid 
credit ratings in each class of credit rating for which it is 
registered and has determined 500 or more issuer-paid credit 
ratings.\160\ Based on information furnished on Form NRSRO, seven of 
the ten currently registered NRSROs issue 500 or more issuer-paid 
credit ratings in at least one of the classes of credit ratings for 
which they are registered. The Commission believes that even as the 
number of registered NRSROs expands to the 30 ultimately expected to 
register, this number will remain relatively constant, as new entrants 
are likely to predominantly determine subscriber-paid credit ratings, 
at least in the near future. In addition, the Commission believes that 
each of the NRSROs affected by this new requirement already has, or 
will have, an Internet Web site. As noted above, the amendment as 
adopted specifies that in making the required information available on 
its Web site, an NRSRO will use the List of XBRL Tags for NRSROs as 
specified on the Commission's Web site, thus eliminating the need for 
an NRSRO to develop its own taxonomy and tags and significantly 
reducing the amount of time required to comply with the amendment.
---------------------------------------------------------------------------

    \160\ See amendment to Rule 17g-2(d).
---------------------------------------------------------------------------

    Therefore, based on staff experience, the Commission estimates 
that, on average, an NRSRO subject to the requirement will spend 
approximately 30 hours to publicly disclose the required information in 
an XBRL format and, thereafter, 10 hours per year to update this 
information.\161\ Accordingly, the total aggregate one-time burden to 
the industry to make the history of rating actions publicly available 
in an XBRL format will be 210 hours,\162\ and the total aggregate 
annual burden hours will be 70 hours.\163\
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    \161\ The Commission also bases this estimate on the current 
one-time and annual burden hours for an NRSRO to publicly disclose 
its Form NRSRO. No alternatives to these estimates as proposed were 
suggested by commenters. See June 5, 2007 Adopting Release, 72 FR at 
33609.
    \162\ 30 hours x 7 NRSROs = 210 hours.
    \163\ 10 hours x 7 NRSROs = 70 hours.
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    Under the currently approved PRA collection for Rule 17g-2, the 
Commission estimated that an NRSRO may need to purchase recordkeeping 
system software to establish a recordkeeping system in conformance with 
Rule 17g-2.\164\ 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 NRSROs would not need 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 approximately $1,000 
per firm, with an aggregate one-time cost to the industry of 
$30,000.\165\ In response to comments discussed above, the Commission 
estimates that the amendments to Rule 17g-2 would alter this per firm 
estimate upward by approximately $800.\166\ For example, in the PRA for 
the proposed rules requiring the submission of risk/return summary 
information using interactive data, the Commission estimated that 
software and consulting services would be used by mutual funds for an 
increase of approximately $803 per mutual fund.\167\ The Commission 
believes that the requirement to publicly disclose certain ratings 
action histories in an XBRL format would result in a similar cost.
---------------------------------------------------------------------------

    \164\ See June 5, 2007 Adopting Release, 72 FR at 33609, 33610.
    \165\ Id.
    \166\ See Interactive Data for Mutual Fund Risk/Return Summary, 
Securities Act Release No. 8929 (June 10, 2008), 73 FR 35442 (June 
23, 2008).
    \167\ Id.
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 3. Amendment to Rule 17g-3
    Rule 17g-3 requires an NRSRO to furnish certain financial reports 
to the Commission on an annual basis, including audited financial 
statements as well as other financial reports.\168\ The Commission is 
amending Rule 17g-3 to require an NRSRO to furnish the Commission with 
an additional report: An unaudited report of the number of credit 
ratings actions (upgrades, downgrades, placements on credit watch, and 
withdrawals) taken during the fiscal year in each class of credit 
ratings identified in section 3(a)(62)(B) of the Act (15 U.S.C. 
78c(a)(62)(B)) for which the NRSRO is registered with the 
Commission.\169\
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    \168\ 17 CFR 240.17g-3.
    \169\ See Rule 17g-3(a)(6).
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    The total annual burden currently approved by OMB for Rule 17g-3 is 
6,000 hours, based on the fact that it will take an NRSRO, on average, 
approximately 200 hours to prepare for and file the annual 
reports.\170\ In addition, the total annual cost burden currently 
approved by OMB is $450,000 to engage the services of an independent 
public accountant to conduct the annual audit as part of the 
preparation of the first report required by Rule 17g-3.\171\ This 
estimate is based on 30 NRSROs hiring an independent public accountant 
on an annual basis for an average of $15,000.\172\
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    \170\ 200 hours x 30 NRSROs = 6,000 hours. See June 5, 2007 
Adopting Release, 72 FR at 33610.
    \171\ Rule 17g-3 currently requires six reports. Only the first 
report--financial statements--need be audited.
    \172\ $15,000 x 30 NRSROs = $450,000. See June 5, 2007 Adopting 
Release, 72 FR at 33610.
---------------------------------------------------------------------------

    The Commission requested comment in the June 16, 2008 Proposing 
Release on the burdens that would result from the proposed amendments 
to Rule 17g-

[[Page 6473]]

3.\173\ One commenter, a large NRSRO, estimated that it would cost 
$300,000 to build and test a system to comply with this amendment and 
that its ongoing costs would be $70,000 per year.\174\ The commenter 
did not provide specific data and analysis to support the 
estimates.\175\ The Commission believes that most NRSROs already will 
have the information that it needs in order to comply with the 
amendment to Rule 17g-3 with respect to each class of credit ratings 
for which it is registered. In addition, the Commission emphasizes that 
this amendment does not prescribe a specific format for the report. 
Consequently, the Commission believes that the actual time expenditures 
of NRSROs in complying with the rule amendment will be less than the 
commenter's estimates. Nonetheless, the Commission is revising its PRA 
estimate for Rule 17g-3 upward in response to the comment.
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    \173\ See June 16, 2008 Proposing Release, 73 FR at 36239.
    \174\ See S&P Letter.
    \175\ Id.
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    The Commission, based on the comment received and staff experience, 
estimates that the average time necessary for an applicant or NRSRO to 
establish an internal process to conform its systems to generate a 
report in compliance with the amendment will be 100 hours per NRSRO, 
for a total one-time hour burden to the industry of 3,000 hours.\176\ 
The Commission believes that once an NRSRO complies with the amendment 
to Rule 17g-3 in the first year, that preparation of the new annual 
report will become routine. To account for this one-time burden of 
3,000 hours and the possibility that new credit rating agencies will 
register as NRSROs, the Commission is averaging this burden estimate 
over the three year approval period. Consequently, the Commission is 
increasing the annual burden estimate by 1,000 hours for a total annual 
burden estimate for Rule 17g-3 of 7,000 hours.
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    \176\ 100 hours x 30 NRSROs = 3,000 hours.
---------------------------------------------------------------------------

E. Collection of Information Is Mandatory

    The recordkeeping requirements for the rule amendments are 
mandatory.

F. Confidentiality

    The disclosures required under the amendments to Rule 17g-1 and 
Form NRSRO will be made publicly available on Form NRSRO. The books and 
records information to be collected under the amendments to Rule 17g-2 
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. However, an NRSRO will be 
required to make public, in XBRL format and with a six-month grace 
period, the ratings action histories for a random sample of 10% of the 
issuer-paid credit ratings for each ratings class for which it has 
issued 500 or more issuer-paid credit ratings.\177\ The information 
collected under the amendment to Rule 17g-3 will be generated from the 
internal records of the NRSRO and will be furnished to the Commission 
on a confidential basis, to the extent permitted by law.\178\
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    \177\ Amendment to Rule 17g-2(d).
    \178\ 15 U.S.C. 78o-7(k).
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IV. Costs and Benefits of the Amended 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 amendments 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.\179\ The Commission sought comment and data on the value of 
the benefits identified. The Commission also requested 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 statistics relied on by commenters to reach conclusions on cost 
estimates. 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 adoption of the rule amendments.
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    \179\ For the purposes of this cost/benefit analysis, the 
Commission is using salary data from the Securities Industry and 
Financial Markets Association (``SIFMA'') Report on Management and 
Professional Earnings in the Securities Industry 2007, which 
provides base salary and bonus information for middle-management and 
professional positions within the securities industry. The 
Commission believes that the salaries for these securities industry 
positions would be comparable to the salaries of similar positions 
in the credit rating industry. Finally, the salary costs derived 
from the report and referenced in this cost benefit section, are 
modified to account for an 1800-hour work year and multiplied by 
5.35 to account for bonuses, firm size, employee benefits and 
overhead. The Commission used comparable assumptions in adopting the 
final rules implementing the Rating Agency Act in 2007, requested 
comments on such assumptions, and received no comments in response 
to its request. See June 5, 2007 Adopting Release, 72 FR at 33611, 
note 576. Hereinafter, references to data derived from the report as 
modified in the manner described above will be cited as ``SIFMA 2007 
Report as Modified.''
---------------------------------------------------------------------------

A. Benefits

    The purposes of the Rating Agency Act, as stated in the 
accompanying Senate Report, are to improve ratings quality for the 
protection of investors and in the public interest by fostering 
accountability, transparency, and competition in the credit rating 
industry.\180\ As the Senate Report states, the Rating Agency Act 
establishes ``fundamental reform and improvement of the designation 
process'' to further the belief that ``eliminating the artificial 
barrier to entry will enhance competition and provide investors with 
more choices, higher quality ratings, and lower costs.'' \181\
---------------------------------------------------------------------------

    \180\ Senate Report, p. 2.
    \181\ Id, p. 7.
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    The Commission requested comment on all aspects of the benefits of 
the amendments as proposed.\182\ In addition, the Commission requested 
specific 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.\183\ The Commission did not receive any comments in response 
to this request.
---------------------------------------------------------------------------

    \182\ See June 16, 2008 Proposing Release, 73 FR at 36241-36243.
    \183\ Id.
---------------------------------------------------------------------------

    The amendments are designed to further the goals of the Rating 
Agency Act, including fostering transparency in the credit rating 
agency industry. Since the adoption of the final rules implementing the 
Rating Agency Act in 2007,\184\ the Commission has identified a number 
of areas where it is appropriate to enhance the current regulatory 
program for NRSROs.
---------------------------------------------------------------------------

    \184\ See June 5, 2007 Adopting Release.
---------------------------------------------------------------------------

    Consequently, the Commission is adopting amendments that enhance 
the disclosure of credit ratings performance measurement statistics; 
increase the disclosure of information about the assets underlying 
structured finance products; require more information about the 
procedures and methodologies used to determine structured finance 
ratings; and address conflicts of interest arising from the structured 
finance rating process. As discussed below, the Commission believes 
that these amendments will further the purpose of the Rating Agency Act 
to improve the quality of credit ratings by fostering accountability, 
transparency, and competition in the credit rating industry, 
particularly with respect to

[[Page 6474]]

credit ratings for structured finance products.\185\
---------------------------------------------------------------------------

    \185\ See Senate Report, p. 2.
---------------------------------------------------------------------------

    Rule 17g-1 prescribes a process for a credit rating agency to 
register with the Commission as an NRSRO using Form NRSRO,\186\ and 
requires that a credit rating agency provide information required under 
Section 15E(a)(1)(B) of the Exchange Act and certain additional 
information.\187\ Form NRSRO is also the means by which NRSROs update 
the information they must publicly disclose. The amendments to the 
instructions to Exhibit 1 to Form NRSRO will require NRSROs to provide 
more detailed performance statistics and, thereby, make it easier for 
users of credit ratings to compare the ratings performance of the 
NRSROs.\188\ In addition, these amendments will make it easier for an 
NRSRO to demonstrate that it has a superior ratings methodology or 
competence and, thereby, attract clients.
---------------------------------------------------------------------------

    \186\ See Rule 17g-1.
    \187\ See Section 15E(a)(1)(B) of the Exchange Act. 15 U.S.C. 
78o-7(a)(1)(B).
    \188\ 17 CFR 240.17g-1 and Form NRSRO.
---------------------------------------------------------------------------

    The amendments to the instructions to Exhibit 2 of Form NRSRO are 
designed to provide greater clarity around three areas of the NRSROs' 
rating processes that have raised concerns in the context of the recent 
credit market turmoil: The level of verification performed on 
information provided in loan documents; the quality of loan 
originators; and the on-going surveillance of existing ratings and how 
changes made to a model used for initial ratings are applied to 
existing ratings. The additional information provided by the amendments 
will assist users of credit ratings in making more informed decisions 
about the quality of an NRSRO's ratings processes, particularly with 
regard to structured finance products.
    The Commission believes that these enhanced disclosures in the 
Exhibits to Form NRSRO will make it easier for market participants to 
select the NRSROs that are performing well and have the highest quality 
processes for determining credit ratings. The Commission expects that 
providing market participants with enhanced disclosures will lead to 
increased competition and the promotion of capital formation through a 
restoration of confidence in credit ratings.
    The amendments to Rule 17g-2 are designed to provide greater 
documentation of the ratings process to assist Commission staff in its 
examination function as well as to provide greater information to users 
of issuer-paid credit ratings about the performance of an NRSRO's 
issuer-paid credit ratings. The additional records will be: (1) A 
record of the rationale for any material difference between the credit 
rating implied by the model and the final credit rating issued, if a 
quantitative model is a substantial component in the process of 
determining a credit rating for a structured finance product;\189\ (2) 
a record showing the history and dates of all previous rating actions 
with respect to each outstanding credit rating; (3) a record, to be 
made publicly available, showing the history and dates of a 10% random 
sample of issuer-paid credit ratings, for each ratings class for which 
an NRSRO is registered and has issued 500 or more issuer-paid credit 
ratings, of all previous rating actions with respect to each 
outstanding credit rating;\190\ and (4) any written complaints 
regarding the performance of a credit analyst in determining credit 
ratings.\191\ These records will assist the Commission in monitoring 
whether an NRSRO is complying with provisions of Section 15E of the 
Exchange Act and the rules thereunder. The Commission will be better 
able to monitor whether an NRSRO is operating consistently with the 
methodologies and procedures it establishes (and discloses) to 
determine credit ratings and its policies and procedures designed to 
ensure the impartiality of its credit ratings, including its ratings of 
structured finance products.
---------------------------------------------------------------------------

    \189\ Paragraph (a)(2)(iii) of Rule 17g-2.
    \190\ Paragraph (a)(8) of Rule 17g-2.
    \191\ Paragraph (b)(8) of Rule 17g-2.
---------------------------------------------------------------------------

    In addition, the amendment to Rule 17g-2(d) will require an NRSRO 
to make publicly available a random sample of 10% of the issuer-paid 
credit ratings actions histories, in an XBRL format and with a six-
month grace period, for each ratings class for which it has issued 500 
or more issuer-paid credit ratings. This XBRL disclosure requirement 
will allow the marketplace to better compare the performance of 
different NRSROs that determine issuer-paid credit ratings, since it 
will shift the source of data formatting from end-users to NRSROs 
submitting interactive data, thus eliminating the need for end-users to 
make interpretive decisions on how to compare data fields across 
NRSROs' reported rating histories. This additional disclosure also may 
make NRSROs more accountable for their issuer-paid credit ratings by 
enhancing the transparency of their ratings performance. The Commission 
believes the XBRL format will benefit market participants seeking to 
develop their own performance statistics using the ratings history data 
to be made public by the NRSROs because it will require them to present 
the information in a standard format. Making the information available 
in an XBRL format will facilitate the process of creating better and 
more useful means to analyze how a given NRSRO performed in a certain 
class of issuer-paid credit ratings and compare that broader 
performance across NRSROs subject to the public disclosure rule, 
increasing the transparency of the results of their rating processes 
and encouraging competition within the industry by making it easier for 
users of issuer-paid credit ratings to judge the output of such NRSROs. 
As noted above, the Commission believes that the XBRL format will 
increase access to information in the financial marketplace and 
transform the manner in which individual investors, financial 
intermediaries, analysts, the financial media, and others access, use, 
and ultimately understand the wealth of available data. Requiring 
NRSROs to provide this disclosure in a single industry standard format 
will offer market participants the benefits of simplification, 
increased transparency, and ease of comparisons.
    The amendment to Rule 17g-3 will require an NRSRO to furnish an 
additional annual report to the Commission: an unaudited report of the 
number of credit ratings actions (upgrades, downgrades, placements on 
credit watch, and withdrawals) taken during the fiscal year in each 
class of credit ratings identified in section 3(a)(62)(B) of the Act 
(15 U.S.C. 78c(a)(62)(B)) for which the NRSRO is registered with the 
Commission.\192\ The new report is designed to enhance the Commission's 
oversight of NRSROs by providing the Commission with additional 
information to assist in the monitoring of NRSROs for compliance with 
their stated policies and procedures. For example, the proposed new 
report will allow examiners to target potential problem areas in an 
NRSRO's rating processes by highlighting spikes in rating actions 
within a particular class of credit rating.
---------------------------------------------------------------------------

    \192\ See Rule 17g-3(a)(6).
---------------------------------------------------------------------------

    The amendments to Rule 17g-5 will prohibit an NRSRO from issuing or 
maintaining a credit rating where the NRSRO or an affiliate provided 
recommendations on the structure of the transaction being rated; a 
credit analyst or person involved in the ratings process participated 
in fee negotiations; or a credit analyst or a person responsible for 
approving a credit rating received gifts from the obligor being rated, 
or from the issuer, underwriter, or

[[Page 6475]]

sponsor of the securities being rated, other than items provided in the 
context of normal business activities such as meetings that have an 
aggregate value of no more than $25.\193\ The Commission believes that 
the amendments to Rule 17g-5 will promote the disclosure and management 
of conflicts of interest and mitigate potential undue influences on an 
NRSRO's credit rating process, particularly with respect to credit 
ratings for structured finance products.\194\ These amendments will, in 
turn, increase confidence in the integrity of NRSRO ratings and, 
thereby, promote capital formation.
---------------------------------------------------------------------------

    \193\ See Rule 17 CFR 240.17g-5(c)(5)-(7).
    \194\ See 15 U.S.C. 78o-7(a)(1)(B)(vi) and (h).
---------------------------------------------------------------------------

B. Costs

    The cost of compliance to a given NRSRO will depend on its size and 
the complexity of its business activities. The size and complexity of 
the ten NRSROs vary significantly. For example, the three largest 
NRSROs account for approximately 98% of all outstanding credit ratings 
as reported on their most recent Form NRSROs. In addition, these three 
NRSROs also employ approximately 92% of the credit analysts among the 
ten registered NRSROs. In the June 16, 2008 Proposing Release, the 
Commission provided estimates of the average cost per NRSRO as a result 
of the proposed amendments, 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 would comply substantially with the amendments.\195\
---------------------------------------------------------------------------

    \195\ See June 16, 2008 Proposing Release, 73 FR at 36243-36247.
---------------------------------------------------------------------------

    The Commission also sought comment on its cost estimates and the 
assumptions behind the estimates. One of the largest NRSROs provided 
cost data for the proposed rules but, significantly, only in summary 
form.\196\ That is, the NRSRO provided estimates for the total one-time 
and on-going costs to comply with each proposed rule but did not 
identify the particular components of each total cost estimate. For 
example, the NRSRO did not identify the amount of each cost estimate 
that would be due to internal costs such as employee salaries and 
internal systems developments; nor the amount of each cost that would 
be due to external costs such as the need to purchase software to 
comply with a recordkeeping requirement in a rule. Nonetheless, the 
Commission believes that the summary form cost estimates provided by 
the NRSRO do provide some basis for revising the Commission's earlier 
cost estimates because they reflect the experience of a large highly 
complex NRSRO that has been subject to existing Commission rules. 
However, the Commission does note that, because the cost estimates were 
provided in summary form, the Commission cannot identify specific 
components of the cost estimates that are linked to a recordkeeping 
requirement and, therefore, subject to the PRA. Consequently, the 
Commission continued to analyze the PRA burden estimates separately 
from these summary cost estimates.
---------------------------------------------------------------------------

    \196\ See S&P Letter.
---------------------------------------------------------------------------

    For the reasons discussed above, the cost estimates below are 
calculated for two categories of NRSROs. The first category is 
comprised of the three largest NRSROs in terms of the number of credit 
ratings outstanding. As noted above, these three firms account for 98% 
of the credit ratings outstanding. The second category is comprised of 
the seven smaller NRSROs currently registered with the Commission. 
These NRSROs account for the remaining 2% of credit ratings 
outstanding. The theory behind this analysis is that the total cost to 
the NRSRO industry resulting from an amendment will be incurred by each 
NRSRO in approximate proportion to the percentage of the total credit 
ratings it issues. As discussed below, the Commission is determining a 
total cost to the industry using the summary cost figures provided by 
the large NRSRO by estimating that, since this firm accounts for 47% of 
the credit ratings outstanding, its summary cost estimate is 47% of the 
total cost to the industry. Having derived a total cost to the industry 
using this NRSRO's summary cost estimates, the Commission allocates a 
percentage of that total cost to the two different categories of 
NRSROs: 98% for the first category and 2% for the second category. 
Further, the Commission estimates an average cost per NRSRO by dividing 
the amount of the total cost allocated to the first category by the 
three NRSROs in that category and the amount of the total cost 
allocated to the second category of NRSROs by the seven NRSROs in that 
category.
    The Commission continues to estimate that 30 NRSROs ultimately may 
register. However, because the Commission assumes the total number of 
ratings extant would remain stable, the total cost to the industry 
likely would remain stable and be reallocated among new entrants. 
Therefore, for the purposes of cost estimates derived using this 
analysis, the Commission is not including the potential 20 new entrants 
in either the first or second categories of NRSROs for the purposes of 
determining the cost per NRSRO.
    Additionally, the Commission notes that ten credit rating agencies 
are currently registered with the Commission as NRSROs and subject to 
the statutory and regulatory requirements for NRSROs. The cost of 
compliance to these firms will vary depending on which classes of 
credit ratings an NRSRO issues. For example, NRSROs that issue credit 
ratings for structured finance products--the focus of many of these new 
requirements--will incur higher compliance costs than NRSROs that do 
not issue credit ratings or that issue relatively few credit ratings in 
that class. The Commission notes that the bulk of the structured 
finance credit ratings outstanding are issued by NRSROs in the first 
category.
    This method of calculating costs also differs from the one used in 
the June 16, 2008 Proposing Release in that it is not derived by 
multiplying the number of burden hours estimated for purposes of the 
PRA by hourly costs of personnel expected to undertake the 
responsibilities for complying with the amendment. As noted above, the 
Commission received summary cost data from the NRSRO in its comments 
that did not separate internal costs from external costs or paperwork 
burdens from other economic impacts. Nonetheless, the Commission 
believes that using the summary cost information provided by the NRSRO 
allows for a more robust method of estimating the total economic impact 
of the amendments. The Commission believes that for purposes of the 
cost-benefit analysis this methodology provides a more conservative 
method for estimating costs because it is based on the experience of an 
NRSRO that has been subject to existing Commission rules and it 
accounts for the substantial variance in size and complexity of the 10 
registered NRSROs. For example, the methodology provides a basis for 
assessing the different cost impacts the rules will have on the largest 
NRSROs, which skew the total costs to the industry.
1. Amendments to Form NRSRO
    The Commission is amending the instructions to Exhibit 1 to Form 
NRSRO to require the disclosure of more detailed performance 
statistics. Currently, the instructions require the disclosure of 
performance measurement statistics of the credit ratings of the 
``Applicant/NRSRO over the short-term, mid-term and long-term periods 
(as applicable) through the most recent calendar year end.'' The new 
amendments refine these instructions to

[[Page 6476]]

require the disclosure of separate sets of default and transition 
statistics for each class of credit ratings. In addition, the class-by-
class disclosures need to be broken out over 1, 3 and 10 year 
periods.\197\
---------------------------------------------------------------------------

    \197\ See instructions to Exhibit 1, Form NRSRO.
---------------------------------------------------------------------------

    The Commission also is amending the instructions to Exhibit 2 to 
Form NRSRO to require enhanced disclosures about the procedures and 
methodologies an NRSRO uses to determine credit ratings, including 
whether and, if so, how information about verification performed on 
assets underlying a structured finance transaction is relied on in 
determining credit ratings; whether and, if so, how assessments of the 
quality of originators of assets underlying a structured finance 
transaction factor into the determination of credit ratings; and how 
frequently credit ratings are reviewed, whether different models are 
used for ratings surveillance than for determining credit ratings, and 
whether changes made to models and criteria for determining initial 
ratings are applied retroactively to existing ratings.
    In the June 16, 2008 Proposing Release, the Commission 
preliminarily stated that it believed NRSROs may incur a cost of 
compliance in updating their performance metric statistics to conform 
to the new requirements set forth in the proposed rule amendments.\198\ 
Specifically, the Commission estimated that it would take each NRSRO 
currently registered with the Commission approximately 50 hours to 
review its performance measurement statistics and to develop and 
implement any changes necessary to comply with the proposed 
amendment.\199\ For these reasons, the Commission originally estimated 
that the average one-time cost to an NRSRO would be $12,740 \200\ and 
the total aggregate cost to the currently registered NRSROs would be 
$114,660.\201\
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    \198\ See June 16, 2008 Proposing Release, 73 FR at 36244.
    \199\ Id.
    \200\ The Commission estimated that a Compliance Attorney (40 
hours) and a Programmer Analyst (10 hours) would perform these 
responsibilities. The SIFMA 2007 Report as Modified indicates that 
the average hourly rates for a Compliance Attorney and a Programmer 
Analyst are $270 and $194 per hour, respectively. Therefore, the 
average one-time cost to an NRSRO would be $12,740 [(40 hours x 
$270) + (10 hours x $194)].
    \201\ $12,740 x 9 NRSROs = $114,660.
---------------------------------------------------------------------------

    The Commission received one comment on these proposed costs. The 
commenter, a large NRSRO, estimated that it would have to build systems 
to comply with each new amendment to Form NRSRO, resulting in a one-
time cost to the NRSRO of $6,710,000.\202\ The commenter further 
estimated that its costs on an annual basis would be $1,860,000.\203\ 
The commenter did not break down these cost estimates or provide 
supporting data. Although the Commission believes existing systems 
could be adjusted instead of rebuilt to comply with the new Exhibit 
instructions, the Commission is taking into account the comment 
received regarding the cost and, therefore, is revising its cost 
estimates.
---------------------------------------------------------------------------

    \202\ See S&P Letter.
    \203\ Id.
---------------------------------------------------------------------------

    The Commission believes the costs incurred by the NRSROs will be in 
approximate proportion to the number of credit ratings they issue. The 
commenter that provided cost estimates for this rule amendment is the 
largest NRSRO in terms of credit ratings outstanding. As such, it 
accounts for approximately 47% of the total outstanding credit ratings 
reported by all registered NRSROs on their most recent Form NRSROs. The 
Commission estimates that this NRSRO will incur 47% of the total costs 
to the NRSROs from this amendment. Consequently, the total one time 
cost to the industry will be approximately $14,276,600 \204\ and the 
total annual cost to the industry will be $3,957,400.\205\ Furthermore, 
the three largest NRSROs constituting the first category account for 
approximately 98% of the total credit ratings outstanding among all 
NRSROs and, therefore, the Commission estimates they will incur 
approximately $13,991,100 \206\ of the total one-time cost to the 
industry and approximately $3,878,300 \207\ of the total annual cost to 
the industry. Consequently, the Commission estimates that they will 
incur approximately $4,663,700 \208\ per firm in one time costs and 
approximately $1,292,800 \209\ per firm in annual costs. The seven 
remaining NRSROs account for 2% of the credit ratings outstanding among 
all NRSROs and, therefore, the Commission estimates they will incur 
approximately $285,500 \210\ of the total one time costs to the 
industry and approximately $79,100 \211\ of the total annual costs to 
the industry. Consequently, the Commission estimates that they will 
incur approximately $40,790 \212\ per firm in one time costs and 
$11,300 \213\ per firm in annual costs. The Commission further 
estimates that the cost per NRSRO within each category will vary based 
on their relative sizes.
---------------------------------------------------------------------------

    \204\ $6,710,000 x 100 = $671,000,000; $671,000,000/47 = 
$14,276,600.
    \205\ $1,860,000 x 100 = $186,000,000; $186,000,000/47 = 
$3,957,400.
    \206\ $14,276,600 x .98 = $13,991,100.
    \207\ $3,957,400 x .98 = $3,878,300.
    \208\ $13,991,100/3 = $4,663,700.
    \209\ $3,878,300/3 = $1,292,800.
    \210\ $14,276,600 x .02 = $285,500.
    \211\ $3,957,400 x .02 = $79,100.
    \212\ $285,500/7 = $40,790.
    \213\ $79,100/7 = $11,300.
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    Finally, the Commission has made changes to the final amendments to 
Form NRSRO that will minimize the burdens. Therefore, the Commission 
anticipates that the costs could be lower than those estimated here for 
NRSROs in both the first and second categories.
2. Amendments to Rule 17g-2
    Rule 17g-2 requires an NRSRO to make and preserve specified records 
related to its credit rating business as well as to make a portion of 
those records available publicly.\214\ The amendments to Rule 17g-2 
will require an NRSRO to make and retain two additional records and 
retain a third type of record. The records to be made and retained are: 
(1) A record of the rationale for any material difference between the 
credit rating implied by the model and the final credit rating issued, 
if a quantitative model is a substantial component in the process of 
determining a credit rating; \215\ and (2) a record showing the history 
and dates of all previous rating actions with respect to each 
outstanding credit rating.\216\ In addition, the amendments will 
require an NRSRO to make publicly available a random sample of 10% of 
the issuer-paid credit ratings actions histories, in an XBRL format and 
with a six-month grace period, for each ratings class for which it has 
issued 500 or more ratings under the issuer-pay model.\217\ Finally, 
the amendments will require an NRSRO to retain written communications 
that contain any complaints by an obligor, issuer, underwriter, or 
sponsor about the performance of a credit analyst.\218\
---------------------------------------------------------------------------

    \214\ 17 CFR 240.17g-2.
    \215\ Paragraph (a)(2)(iii) of Rule 17g-2.
    \216\ Paragraph (a)(8) of Rule 17g-2.
    \217\ Paragraph (d) of Rule 17g-2.
    \218\ Paragraph (b)(8) of Rule 17g-2.
---------------------------------------------------------------------------

    The Commission requested comment in the June 16, 2008 Proposing 
Release on the costs that would result from the proposed amendments to 
Rule 17g-2.\219\ In addition, the Commission requested specific comment 
on whether the proposals imposed 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.\220\

[[Page 6477]]

The Commission asked that commenters provide specific data and analysis 
to support any comments they submit with respect to the burden 
estimates.\221\ The Commission received two comments on the proposed 
amendments.\222\ The first commenter, a large NRSRO, stated that the 
comment period did not provide time to fully assess the costs and 
benefits of the proposed rule.\223\ The second commenter, also a large 
NRSRO, stated that its one-time cost would be $10,660,000 and its 
annual cost would be $3,260,000.\224\ The commenter did not provide any 
data or analysis to support this view.
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    \219\ See June 16, 2008 Proposing Release, 73 FR at 36244-36245.
    \220\ Id.
    \221\ Id.
    \222\ See Moody's Letter; S&P Letter.
    \223\ See Moody's Letter.
    \224\ See S&P Letter.
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    The Commission is sensitive to the costs of the new amendments to 
NRSROs. The Commission is therefore revising its cost estimates based 
on the comments received.\225\ The Commission believes the costs 
incurred by the NRSROs will be in approximate proportion to the number 
of credit ratings they issue. The commenter that provided cost 
estimates for this rule amendment is the largest NRSRO in terms of 
credit ratings outstanding, accounting for approximately 47% of the 
total outstanding credit ratings reported by all registered NRSROs on 
their most recent Form NRSROs. The Commission estimates that this NRSRO 
will incur 47% of the total costs to the NRSROs from this amendment. 
Consequently, the total one time cost to the industry will be 
approximately $22,680,900 \226\ and the total annual cost to the 
industry will be $6,936,200.\227\ Furthermore, the three largest NRSROs 
constituting the first category account for approximately 98% of the 
total credit ratings outstanding among all NRSROs and, therefore, the 
Commission estimates they will incur approximately $22,227,300 \228\ of 
the total one-time cost to the industry and approximately $6,797,500 
\229\ of the total annual cost to the industry. Consequently, the 
Commission estimates that they will incur approximately $7,409,100 
\230\ per firm in one time costs and $2,265,800 \231\ per firm in 
annual costs.
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    \225\ To address commenter concerns, the Commission has employed 
a different methodology for these cost estimates than that used in 
the June 16, 2008 Proposing Release. For a discussion of the 
Commission's original cost estimates, see June 16, 2008 Proposing 
Release, 73 FR at 36244-36245.
    \226\ $10,660,000 x 100 = $1,066,000,000; $1,066,000,000/47 = 
$22,680,900.
    \227\ $3,260,000 x 100 = $326,000,000; $326,000,000/47 = 
$6,936,200.
    \228\ $22,680,900 x .98 = $22,227,300.
    \229\ $6,936,200 x .98 = $6,797,500.
    \230\ $22,227,300/3 = $7,409,100.
    \231\ $6,797,500/3 = $2,265,800.
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    The seven remaining NRSROs account for 2% of the credit ratings 
outstanding among all NRSROs and, therefore, the Commission estimates 
they will incur approximately $453,600 \232\ of the total one time 
costs to the industry and approximately $138,700 \233\ of the total 
annual costs to the industry. Consequently, the Commission estimates 
that they will incur approximately $64,800 \234\ per firm in one time 
costs and $19,810 \235\ per firm in annual costs. The Commission 
further estimates that the cost per NRSRO within each category will 
vary based on their relative sizes.
---------------------------------------------------------------------------

    \232\ $22,680,900 x .02 = $453,600.
    \233\ $6,936,200 x .02 = $138,700.
    \234\ $453,600/7 = $64,800.
    \235\ $138,700/7 = $19,810.
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    New paragraph (a)(8) to Rule 17g-2 requires an NRSRO to create and 
maintain a record showing all rating actions and the date of such 
actions from the initial rating to the current rating identified by the 
name or rated security or obligor, and, if applicable, the CUSIP of the 
rated security or the Central Index Key (CIK) number of the rated 
obligor.\236\ In the June 16, 2008 Proposing Release, the Commission 
estimated that an NRSRO may choose to purchase a license from the CUSIP 
Service Bureau in order to access CUSIP numbers for the securities it 
rates.\237\ The CUSIP Service Bureau's operations are covered by fees 
paid by issuers and licensees of the CUSIP Service Bureau's data. 
Issuers pay a one-time fee for each new CUSIP assigned, and licensees 
pay a renewable subscription or a license fee for access and use of the 
CUSIP Service Bureau's various database services. The CUSIP Service 
Bureau's license fees vary based on usage, i.e., how many securities or 
by type of security or business line.\238\ In the June 16, 2008 
Proposing Release, the Commission estimated that the license fees 
incurred by an NRSRO that chose to purchase a license would vary 
depending on the size of the NRSRO and the number of credit ratings it 
issues.\239\ For purposes of this cost estimate, the Commission 
estimates that an NRSRO opting to purchase a license would incur a fee 
of $100,000 to obtain access to the CUSIP numbers for the securities it 
rates. Consequently, the estimated total one-time cost to the industry 
would be $3,000,000.\240\ The Commission believes that this estimate 
continues to be valid for the purposes of new paragraph (a)(8) to Rule 
17g-2.
---------------------------------------------------------------------------

    \236\ See Rule 17g-2(a)(8). The Central Index Key (CIK) is used 
on the Commission's computer systems to identify corporations and 
individual people who have filed disclosure with the Commission. 
Anyone may search http://www.edgarcompany.sec.gov for a company, 
fund, or individual CIK. There is no fee for this service. CUSIP 
stands for Committee on Uniform Securities Identification 
Procedures. A CUSIP number identifies most securities, including: 
Stocks of all registered U.S. and Canadian companies, U.S. 
government and municipal bonds, as well as structured finance 
issuances. The CUSIP system-owned by the American Bankers 
Association and operated by Standard & Poor's-facilitates the 
clearing and settlement process of securities. The CUSIP number 
consists of nine characters (including letters and numbers) that 
uniquely identify a company or issuer and the type of security.
    \237\ See June 16, 2008 Proposing Release, 73 FR at 36245.
    \238\ See https://www.cusip.com/static/html/webpage/service_fees.html#lic_fees.
    \239\ See June 16, 2008 Proposing Release, 73 FR at 36245.
    \240\ $100,000 x 30 NRSROs = $3,000,000.
---------------------------------------------------------------------------

    Under paragraph (d) of Rule 17g-2, as amended, NRSROs are required 
to publicly provide the histories of 10% of their issuer-paid credit 
ratings, in each class of ratings for which they have issued 500 or 
more such ratings, in XBRL format and with a six month grace period. 
The main cost of mandated use of the XBRL format likely will be the 
incremental cost of developing the systems to make the information 
available on the NRSROs' Web sites in interactive format rather than 
machine readable format. The Commission recognizes that new systems 
will have to be developed regardless of the reporting format. The 
Commission expects that the incremental cost of reporting credit rating 
information in XBRL format relative to other machine readable format 
will not be large. The Commission bases this assessment on the 
responses collected through voluntary program questionnaires on the 
direct costs of submitting interactive data-formatted risk/return 
summary information by mutual funds and interactive data-formatted 
financial statements by reporting companies. Participating mutual funds 
indicated that the estimated direct costs of Web posting of their risk/
return summary in interactive data are $23,450 for the first submission 
and $3,350 for each subsequent submission.\241\ Reporting companies, 
which participated in the voluntary program questionnaire, estimated 
their direct reporting costs at $40,509 for the first submission and 
$13,452 for each subsequent

[[Page 6478]]

submission.\242\ The Commission expects that the costs to NRSROs will 
be closer to those for mutual funds' risk/return summary reporting, 
since the reporting complexity (and therefore tagging) of credit rating 
actions is closer to that of risk/return summaries than to quarterly 
financial reports. The Commission believes the incremental costs 
allocable to the XBRL requirement are accounted for in the per-firm 
one-time and annual costs described above for the two categories of 
NRSROs.
---------------------------------------------------------------------------

    \241\ Interactive Data for Mutual Fund Risk/Return Summary, 
Securities Act Release No. 8929 (June 10, 2008), 73 FR 35442 (June 
23, 2008).
    \242\ Interactive Data to Improve Financial Reporting, 
Securities Act Release No. 8924 (May 30, 2008), 73 FR 35442 (June 
10, 2008).
---------------------------------------------------------------------------

    The Commission anticipates that the changes made to the final 
amendments to Rule 17g-2 will result, for NRSROs in both the first and 
second categories, in lower costs overall than those estimated in the 
June 16, 2008 Proposing Release. For example, the Commission is instead 
requiring that NRSROs provide a 10% sample of their issuer-paid credit 
ratings histories for each ratings class for which they have issued 500 
or more ratings under the issuer-pay model instead of the history for 
all outstanding credit ratings. In addition, the Commission is 
specifying that this data be provided in XBRL format using the List of 
XBRL Tags for NRSROs as specified on the Commission's Web site, thus 
eliminating the need for an NRSRO to develop its own taxonomy and tags 
for the data. Finally, the Commission is only requiring that the record 
of the rationale for any material difference between the credit rating 
implied by the model and the final credit rating be kept for structured 
finance products only, rather than for all classes of ratings. These 
changes to the amendments to Rule 17g-2 were designed in part to reduce 
the costs associated with implementing the new amendments.
    Finally, one commenter, an NRSRO, suggested that the requirement to 
post their ratings histories would destroy a revenue stream at the 
company.\243\ Currently, the company charges subscribers a fee to 
access historical data and information on ratings actions. The 
Commission believes that the changes to the amendments to Rule 17g-2(d) 
from those that were proposed address this concern. The amendment now 
requires NRSROs provide a random 10% sample of their issuer-paid credit 
ratings histories for each ratings class for which they have issued 500 
or more ratings paid for by the obligor being rated or by the issuer, 
underwriter, or sponsor of the security being rated with a six-month 
grace period for posting new ratings actions. The Commission believes 
the disclosure of 10% of the issuer-paid credit ratings, selected 
randomly and disclosed with a six-month time lag, will not cause 
persons who pay for ratings downloads to cease purchasing this service, 
as customers that are willing to pay for full and immediate access to 
all of an NRSRO's ratings actions are unlikely to reconsider their 
purchase of that product due to the ability to access 10% of the 
ratings on a six-month delayed basis free of charge. In addition, the 
Commission has decided not to impose the same disclosure obligation on 
subscriber-paid credit ratings at this time out of competitive concerns 
raised, but is still considering how to make more information publicly 
available and accessible about the performance of these ratings. The 
Commission believes that the rule as adopted will address the concerns 
expressed by commenters and at the same time foster greater 
accountability of NRSROs with respect to their issuer-paid credit 
ratings as well as increase competition among NRSROs by making it 
easier for persons to analyze the actual performance of their credit 
ratings.
---------------------------------------------------------------------------

    \243\ See S&P Letter.
---------------------------------------------------------------------------

3. Amendment to Rule 17g-3
    Rule 17g-3 requires an NRSRO to furnish audited annual financial 
statements to the Commission, including certain specified 
schedules.\244\ The amendment to Rule 17g-3 will require an NRSRO to 
furnish the Commission with an additional annual report: An unaudited 
report of the number of credit ratings that were changed during the 
fiscal year in each class of credit ratings for which the NRSRO is 
registered with the Commission. As stated in the June 16, 2008 
Proposing Release, the Commission believed that the annual costs to 
NRSROs to comply with the proposed amendment to Rule 17g-3 would be de 
minimis.\245\ The Commission preliminarily believed that an NRSRO 
already would have this information with respect to each class of 
credit ratings for which it is registered.\246\ In addition, the 
amendment does not prescribe a format for the report. Consequently, the 
Commission estimated that proposed Rule 17g-3(a)(6) would not have a 
significant effect on the total average annual cost burden currently 
estimated for Rule 17g-3.\247\
---------------------------------------------------------------------------

    \244\ 17 CFR 240.17g-3.
    \245\ See June 16, 2008 Proposing Release, 73 FR at 36245-36246.
    \246\ Id.
    \247\ Id.
---------------------------------------------------------------------------

    The Commission requested comment in the June 16, 2008 Proposing 
Release on the costs that would result from the proposed amendments to 
Rule 17g-3.\248\ In addition, the Commission requested specific comment 
on whether this proposal imposed 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.\249\ The Commission asked that commenters provide 
specific data and analysis to support any comments they submit with 
respect to these burden estimates. The Commission received one comment 
on this cost estimate.\250\ The commenter, a large NRSRO, estimated 
that it would cost $300,000 to build and test a system to comply with 
this amendment and that its ongoing costs would be $70,000 per 
year.\251\ The commenter did not provide specific data and analysis to 
support the estimates.\252\
---------------------------------------------------------------------------

    \248\ Id.
    \249\ Id.
    \250\ Id.
    \251\ See S&P Letter.
    \252\ Id.
---------------------------------------------------------------------------

    The Commission is revising its cost estimates based on the specific 
costs included in the comments received. The commenter that provided 
cost estimates for this rule amendment is the largest NRSRO in terms of 
credit ratings outstanding. As such, it accounts for approximately 47% 
of the total outstanding credit ratings reported by all registered 
NRSROs on their most recent Form NRSROs. The Commission estimates that 
this NRSRO will incur 47% of the total costs to the NRSROs from this 
amendment. Consequently, the total one time cost to the industry will 
be approximately $638,300 \253\ and the total annual cost to the 
industry will be $148,900.\254\ Furthermore, the three largest NRSROs 
in the first category account for approximately 98% of the total credit 
ratings issued by the NRSROs and, therefore, the Commission estimates 
they will incur approximately $625,500 \255\ of the total one-time cost 
to the industry and approximately $145,900 \256\ of the total annual 
cost to the industry. Consequently, the Commission estimates that they 
will incur approximately $208,500 \257\ per firm in one time costs and 
$48,600 \258\ per firm in annual costs.
---------------------------------------------------------------------------

    \253\ $300,000 x 100 = $30,000,000; $30,000,000/47 = $638,300.
    \254\ $70,000 x 100 = $7,000,000; $7,000,000/47 = $148,900.
    \255\ $638,300 x 0.98 = $625,500.
    \256\ $148,900 x 0.98 = $145,900.
    \257\ $625,500/3 = $208,500.
    \258\ $145,900/3 = $48,600.

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

[[Page 6479]]

    The seven remaining NRSROs account for 2% of the credit ratings 
outstanding and, therefore, the Commission estimates they will incur 
approximately $12,800 \259\ of the total one time costs to the industry 
and approximately $3,000 \260\ of the total annual costs to the 
industry. Consequently, the Commission estimates that they will incur 
approximately $1,830 \261\ per firm in one time costs and $430 \262\ 
per firm in annual costs. The Commission further estimates that the 
cost per NRSRO within each category will vary based on their relative 
sizes.
---------------------------------------------------------------------------

    \259\ $638,300 x .02 = $12,800.
    \260\ $148,900 x .02 = $3,000.
    \261\ $12,800/7 = $1,830.
    \262\ $3,000/7 = $430.
---------------------------------------------------------------------------

4. Amendments to Rule 17g-5
    Rule 17g-5 requires an NRSRO to manage and disclose certain 
conflicts of interest and prohibits other conflicts outright.\263\ The 
Commission is amending paragraph (c) to Rule 17g-5 to add three 
additional prohibited conflicts of interest.\264\ In the June 16, 2008 
Proposing Release, the Commission estimated that the amendments to 
paragraph (c) to Rule 17g-5 generally would impose de minimis costs on 
an NRSRO.\265\ However, the Commission recognized that an NRSRO may 
incur costs related to training employees about the new 
requirements.\266\ The Commission also recognized that it was possible 
that the proposed amendments could require some NRSROs to restructure 
their business models or activities, in particular with respect to 
their consulting services.\267\
---------------------------------------------------------------------------

    \263\ 17 CFR 240.17g-5.
    \264\ See Rule 17g-5(c)(5)-(7).
    \265\ See June 16, 2008 Proposing Release, 73 FR at 36246-36247.
    \266\ Id.
    \267\ Id.
---------------------------------------------------------------------------

    The Commission requested comment in the June 16, 2008 Proposing 
Release on the costs that would result from the proposed amendments to 
Rule 17g-5.\268\ In addition, the Commission requested specific comment 
on whether the proposed amendments to paragraph (c) of Rule 17g-5 would 
impose training and restructuring costs, would impose personnel costs, 
or would impose any additional costs on an NRSRO that is part of a 
large conglomerate related to monitoring the business activities of 
persons associated with the NRSRO, such as affiliates located in other 
countries.\269\ The Commission asked that commenters provide specific 
data and analysis to support any comments they submit with respect to 
these cost estimates.\270\ The Commission received two comments on the 
proposed amendment, both from large NRSROs.\271\
---------------------------------------------------------------------------

    \268\ Id.
    \269\ Id.
    \270\ Id.
    \271\ See Moody's Letter; S&P Letter.
---------------------------------------------------------------------------

    One commenter said that paragraph (c)(6) would cause the NRSRO to 
create a number of new positions for senior chief credit officers so 
that drafting, approving and implementing methodologies could be 
handled exclusively by individuals with no involvement in the business 
of running an NRSRO.\272\ The commenter also stated that it would be 
necessary for the NRSRO to create additional, senior positions in its 
issuer and intermediary relations team for individuals, such as former 
analysts, who were deeply familiar with the NRSRO's methodologies and 
procedures and could assist with fee negotiations.\273\ The NRSRO 
further stated that it would have to transfer former credit analysts to 
this team regularly and on an ongoing basis so that this team retained 
sufficient and current technical knowledge to handle fees.\274\ The 
NRSRO did not provide specific cost estimates. Another commenter stated 
that it would cost $7,830,000 for personnel time, system modifications, 
and training to implement the new amendments.\275\ In addition, the 
NRSRO estimated that its annual, ongoing costs would be 
$2,250,000.\276\ The NRSRO did not provide a breakdown of costs with 
its estimate.
---------------------------------------------------------------------------

    \272\ See Moody's Letter.
    \273\ Id.
    \274\ Id.
    \275\ See S&P Letter.
    \276\ See id.
---------------------------------------------------------------------------

    The Commission is revising its cost estimates based on the specific 
comments received. The Commission believes the costs incurred by the 
NRSROs will be in approximate proportion to the number of credit 
ratings they issue. The commenter that provided cost estimates for this 
rule amendment is the largest NRSRO in terms of credit ratings 
outstanding. As such, it accounts for approximately 47% of the total 
outstanding credit ratings reported by all registered NRSROs on their 
most recent Form NRSROs. The Commission estimates that this NRSRO will 
incur 47% of the total costs to the NRSROs from this amendment. 
Consequently, the total one time cost to the industry will be 
approximately $16,659,600 \277\ and the total annual cost to the 
industry will be $4,787,200.\278\ Furthermore, the three largest NRSROs 
in the first category account for approximately 98% of the total credit 
ratings issued by the NRSROs and, therefore, the Commission estimates 
they will incur approximately $16,326,400 \279\ of the total one-time 
cost to the industry and approximately $4,691,500 \280\ of the total 
annual cost to the industry. Consequently, the Commission estimates 
that they will incur approximately $5,442,100 \281\ per firm in one 
time costs and $1,563,800 \282\ per firm in annual costs.
---------------------------------------------------------------------------

    \277\ $7,830,000 x 100 = $783,000,000; $783,000,000/47 = 
$16,659,600.
    \278\ $2,250,000 x 100 = $225,000,000; $225,000,000/47 = 
$4,787,200.
    \279\ $16,659,600 x 0.98 = $16,326,400.
    \280\ $4,787,200 x 0.98 = $4,691,500.
    \281\ $16,326,400/3 = $5,442,100.
    \282\ $4,691,500/3 = $1,563,800.
---------------------------------------------------------------------------

    The seven remaining NRSROs account for 2% of the credit ratings 
outstanding and, therefore, the Commission estimates they will incur 
approximately $333,200 \283\ of the total one time costs to the 
industry and approximately $95,700 \284\ of the total annual costs to 
the industry. Consequently, the Commission estimates that they will 
incur approximately $47,600 \285\ per firm in one time costs and 
$13,760 \286\ per firm in annual costs. The Commission further 
estimates that the cost per NRSRO within each category will vary based 
on their relative sizes.
---------------------------------------------------------------------------

    \283\ $16,659,600 x .02 = $333,200.
    \284\ $4,787,200 x .02 = $95,700.
    \285\ $333,200/7 = $47,600.
    \286\ $95,700/7 = $13,671 = $13,670.
---------------------------------------------------------------------------

C. Total Estimated Costs of This Rulemaking

    Based on the figures discussed above, the Commission estimates that 
the first year quantifiable costs related to this proposed rulemaking 
will be approximately $73,085,100.\287\
---------------------------------------------------------------------------

    \287\ $57,255,400 (total one-time costs) + $15,829,700 (total 
annual costs) = $73,085,100.
---------------------------------------------------------------------------

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

    Under Section 3(f) of the Exchange Act,\288\ the Commission shall, 
when engaging in rulemaking that requires the Commission to consider or 
determine if an action is necessary or appropriate in the public 
interest, consider whether the action will promote efficiency, 
competition, and capital formation. Section 23(a)(2) of the Exchange 
Act \289\ requires the Commission to consider the anticompetitive 
effects of any rules the

[[Page 6480]]

Commission adopts under the Exchange Act. Section 23(a)(2) prohibits 
the Commission from adopting any rule that would impose a burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Exchange Act. As discussed below, the Commission believes that 
the amendments will promote efficiency, competition, and capital 
formation.
---------------------------------------------------------------------------

    \288\ 15 U.S.C. 78c(f).
    \289\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The amendments to the Instructions to Exhibit 1 to Form NRSRO will 
require NRSROs to make more comparable disclosures about the 
performance of their credit ratings. These disclosures will provide 
more information to users of credit ratings about the relative 
performance of the NRSROs and, thereby, promote competition. In 
addition, the amendments to the instructions to Exhibit 2 are designed 
to enhance the disclosures NRSROs make with respect to their 
methodologies for determining credit ratings. The Commission believes 
these enhanced disclosures will make it easier for users of credit 
ratings to compare the quality of the NRSRO's procedures and 
methodologies for determining credit ratings. The greater transparency 
that will result from all these enhanced disclosures will make it 
easier for market participants to select the NRSROs that have the 
highest quality processes for determining credit ratings. This 
transparency is designed to increase competition and promote capital 
formation by restoring confidence in the credit ratings, which are an 
integral part of the capital formation process.
    The amendments to Rule 17g-2 are designed to enhance the 
Commission's oversight of NRSROs and, with respect to the public 
disclosure of a percentage of the histories of their issuer-paid credit 
ratings, provide the marketplace with information for comparing the 
ratings performance of NRSROs subject to the requirement. Enhancing the 
Commission's oversight will help enhance confidence in credit ratings 
and, thereby, promote capital formation. Increased disclosure of the 
histories of issuer-paid credit ratings could make the ratings 
performance of the NRSROs subject to this requirement more transparent 
to the marketplace and, thereby, highlight those firms that analyze 
credit risk better. The Commission believes that this enhanced 
disclosure will benefit smaller NRSROs to the extent they have 
performed better in determining issuer-paid credit ratings than other 
NRSROs by alerting the market to their superior performance.
    The amendment to Rule 17g-3 is designed to enhance the Commission's 
oversight of NRSROs. Enhancing the Commission's oversight will help 
enhance confidence in credit ratings and, thereby, promote capital 
formation.
    The amendments to Rule 17g-5 will prohibit NRSROs from determining 
credit ratings where they or their affiliate provided recommendations 
about the corporate or legal structure, assets, liabilities, or 
activities of the obligor being rated or the issuer of the security 
being rated, prohibit analysts from participating in fee negotiations, 
and prohibit credit analysts or persons responsible for approving a 
credit rating from receiving gifts from the obligor being rated, or 
from the issuer, underwriter, or sponsor of the securities being rated, 
other than items provided in the context of normal business activities 
such as meetings that have an aggregate value of no more than $25. 
These proposals are designed to increase confidence in the integrity of 
NRSROs and the credit ratings they issue and, thereby, enhance 
confidence in credit ratings and, by extension, promote capital 
formation.
    The Commission received one comment specifically on the 
Commission's analysis of the whether the amendments would promote 
efficiency, competition, and capital formation.\290\ The commenter 
argued that the requirement to publish all ratings histories free of 
charge would be a ``new barrier to entry'' and would create ``a 
significant disincentive to apply for the NRSRO designation'' thereby 
reducing competition among NRSROs.\291\ The commenter stated that if 
these amendments were passed, the estimate that there would be 30 
NRSROs would need to be revised.
---------------------------------------------------------------------------

    \290\ See Rapid Ratings Letter.
    \291\ Id.
---------------------------------------------------------------------------

    As discussed more fully in section II.B.1, in response to this 
comment and similar concerns raised by other commenters, the Commission 
has balanced the many competitive concerns expressed by commenters. The 
rule is designed to foster competition, by making ratings histories 
more accessible. However, the Commission has taken a number of steps to 
minimize the potential competitive effects. First, the amendments do 
not apply to subscriber-paid credit ratings. Second, with respect to 
issuer-paid credit ratings, the Commission notes that NRSROs generally 
make these ratings public. This publicly available, historical 
information currently is difficult to access and compare. The 
Commission expects that making this information more accessible will 
advance the Commission's goal of fostering accountability and 
comparability among NRSROs. The Commission does not, however, expect 
that requiring NRSROs to make publicly available ratings action 
histories for a random sample of 10% of their outstanding issuer-paid 
credit ratings in a more accessible form six months after the rating 
action has been taken will have a material effect on their business. 
Because the Commission is requiring only a small portion of the ratings 
histories to be made available in a more accessible format, the 
Commission expects NRSROs will still be able to realize economic value 
from the information.
    The Commission has decided not to impose the same disclosure 
obligation on subscriber-paid credit ratings at this time out of 
competitive concerns raised, but is still considering how to make more 
information publicly available and accessible about the performance of 
these ratings. The Commission believes that the rule as adopted will 
address the concerns expressed by commenters and at the same time 
foster greater accountability of NRSROs with respect to their issuer-
paid credit ratings as well as increase competition among NRSROs by 
making it easier for persons to analyze the actual performance of their 
credit ratings.

VI. Final Regulatory Flexibility Analysis

    The Commission proposed amendments to Form NRSRO, Rule 17g-2, Rule 
17g-3, and Rule 17g-5 under the Exchange Act. An Initial Regulatory 
Flexibility Analysis (``IRFA'') was published in the June 16, 2008 
Proposing Release.\292\ The Commission has prepared the following Final 
Regulatory Flexibility Analysis (``FRFA''), in accordance with the 
provisions of the Regulatory Flexibility Act,\293\ regarding amendments 
to Form NRSRO, Rule 17g-2, Rule 17g-3, and Rule 17g-5 under the 
Exchange Act.
---------------------------------------------------------------------------

    \292\ See June 16, 2008 Proposing Release, 73 FR at 36248-36250.
    \293\ 5 U.S.C. 603.
---------------------------------------------------------------------------

A. Need for and Objective of the Amendments

    The amendments will prescribe additional requirements for NRSROs to 
address concerns raised about the role of credit rating agencies in the 
recent credit market turmoil. The amendments are designed to enhance 
and strengthen the rules the Commission adopted in 2007 to implement 
specific provisions of the Rating Agency Act.\294\ The objectives of 
the Rating Agency Act are ``to improve ratings quality for the

[[Page 6481]]

protection of investors and in the public interest by fostering 
accountability, transparency, and competition in the credit rating 
industry.'' \295\ The amendments are designed to further achieve these 
objectives and further assist the Commission in monitoring whether an 
NRSRO complies with the statutes and regulations applicable to NRSROs.
---------------------------------------------------------------------------

    \294\ Public Law No. 109-291 (2006); see also June 5, 2007 
Adopting Release.
    \295\ See 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 amendments.\296\ Commenters were 
asked to specify the costs of compliance with the proposed rules and 
suggest alternatives that would accomplish the goals of the rules.\297\ 
The Commission did not receive any 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, a commenter stated that the 
proposed amendments, if adopted, would create a barrier to entry for 
new NRSROs.\298\ In addition, several commenters suggested that small 
NRSROs would not be able to comply with Rule 17g-5(c)(6), which 
prohibits persons within an NRSRO that are responsible for determining 
or approving credit ratings or developing the methodologies for 
determining credit ratings from participating in fee discussions.\299\ 
In response to these comments, the Commission will review requests by 
small NRSROs for exemptions from the rule under Section 36 of the 
Exchange Act based on their specific circumstances.
---------------------------------------------------------------------------

    \296\ See June 16, 2008 Proposing Release, 73 FR 36250.
    \297\ Id.
    \298\ See Rapid Ratings Letter.
    \299\ See, e.g., DBRS Letter; Multiple-Markets Letter; CFA 
Institute Letter; Colorado PERA Letter; ABA Business Law Committees 
Letter.
---------------------------------------------------------------------------

C. 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.'' \300\ 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.
---------------------------------------------------------------------------

    \300\ 17 CFR 240.0-10(a).
---------------------------------------------------------------------------

    As noted in the June 5, 2007 Adopting Release, the Commission 
believes that approximately 30 credit rating agencies ultimately may 
register as an NRSRO.\301\ Of the approximately 30 credit rating 
agencies that may register with the Commission, the Commission 
estimates that approximately 20 may be ``small'' entities for purposes 
of the Regulatory Flexibility Act.\302\
---------------------------------------------------------------------------

    \301\ June 5, 2007 Adopting Release, 72 FR at 33618.
    \302\ See 17 CFR 240.0-10(a).
---------------------------------------------------------------------------

D. Reporting, Recordkeeping, and Other Compliance Requirements

    The amendments will revise Form NRSRO to elicit certain additional 
information regarding the performance data for the credit ratings and 
the methods used by an NRSRO for issuing credit ratings.\303\
---------------------------------------------------------------------------

    \303\ See amendments to Form NRSRO.
---------------------------------------------------------------------------

    The amendments will revise Rule 17g-2 to establish additional 
recordkeeping requirements for NRSROs.\304\ The amendments will require 
an NRSRO to make and retain two additional records and retain a third 
type of record. The records would be: (1) A record of the rationale for 
any material difference between the credit rating implied by the model 
and the final credit rating issued, if a quantitative model is a 
substantial component in the process of determining a credit rating; 
\305\ and (2) a record showing the history and dates of all previous 
rating actions with respect to each outstanding credit rating. An NRSRO 
also will be required to publicly disclose, in XBRL format and on a six 
month delay, a record showing the history and dates of all previous 
rating actions with respect to a random sample of 10% of the issuer-
paid credit ratings for each ratings class for which an NRSRO is 
registered and has issued 500 or more ratings paid for by the obligor 
being rated or by the issuer, underwriter, or sponsor of the security 
being rated.\306\ In addition, the NRSRO will be required to retain any 
complaints about the performance of a credit analyst.\307\ These 
records will assist the Commission, through its examination process, in 
monitoring whether the NRSRO continues to maintain adequate financial 
and managerial resources to consistently produce credit ratings with 
integrity (as required under the Rating Agency Act) and whether the 
NRSRO was complying with the provisions of the Exchange Act including 
the provisions of the Rating Agency Act, the rules adopted thereunder, 
and the NRSRO's disclosed policies and procedures.
---------------------------------------------------------------------------

    \304\ See amendments to Form NRSRO.
    \305\ See amendments to Rule 17g-2.
    \306\ Paragraph (a)(2)(iii) of Rule 17g-2.
    \307\ Paragraph (a)(8) of Rule 17g-2.
---------------------------------------------------------------------------

    The amendments will revise Rule 17g-3 to require an NRSRO to 
furnish the Commission with an additional annual report: The number of 
ratings actions in each class of credit rating for which it is 
registered.\308\ This requirement is designed to further assist the 
Commission in its examination function.
---------------------------------------------------------------------------

    \308\ See amendments to Rule 17g-3.
---------------------------------------------------------------------------

    The amendments will revise Rule 17g-5 to prohibit NRSROs and their 
affiliates from providing consulting or advisory services, prohibit 
analysts from participating in fee negotiations, and prohibit credit 
analysts or persons responsible for approving a credit rating from 
receiving gifts from the obligor being rated, or from the issuer, 
underwriter, or sponsor of the securities being rated, other than items 
provided in the context of normal business activities such as meetings 
that have an aggregate value of no more than $25.\309\
---------------------------------------------------------------------------

    \309\ See amendments to Rule 17g-5.
---------------------------------------------------------------------------

E. Significant Alternatives

    Pursuant to Section 3(a) of the RFA,\310\ 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.
---------------------------------------------------------------------------

    \310\ 5 U.S.C. 603(c).
---------------------------------------------------------------------------

    The Commission is not establishing different compliance or 
reporting requirements or timetables. The Commission believes that 
obtaining comparable information from NRSROs regardless of size is 
important. Moreover, because the rules are relatively straightforward, 
the Commission does not believe it necessary to clarify, consolidate, 
or simplify compliance and reporting requirements under the rule for 
small entities at this time. Because the amendments are designed to 
improve the overall quality of ratings and enhance the Commission's 
oversight,

[[Page 6482]]

the Commission is not proposing to exempt any specific small entities 
from coverage of the rule, or any part of the rule. However, the 
Commission would be willing to consider requests for exemptive relief 
from smaller NRSROs for which the prohibition on participating in fee 
discussions may be more difficult to comply with than for larger 
NRSROs. The other prohibited conflicts do not appear to impose any 
disproportionate impact on smaller NRSROs. The amendments are designed 
to allow NRSROs the flexibility to develop procedures tailored to their 
specific organizational structure and business models.

VII. Statutory Authority

    The Commission is adopting amendments to Form NRSRO and Rules 17g-
2, 17g-3, and 17g-5 pursuant to the authority conferred by the Exchange 
Act, including Sections 3(b), 15E, 17, 23(a) and 36.\311\
---------------------------------------------------------------------------

    \311\ 15 U.S.C. 78c(b), 78o-7, 78q, 78w, and 78mm.
---------------------------------------------------------------------------

Text of the Amendments

List of Subjects in 17 CFR Parts 240 and 249b

    Brokers, Reporting and recordkeeping requirements, Securities.


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

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

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

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u5, 
78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 
80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise 
noted.
* * * * *
0
2. Section 240.17g-2 is amended by:
0
a. Removing paragraph (a)(2)(iv);
0
b. Redesignating paragraph (a)(2)(iii) as paragraph (a)(2)(iv);
0
c. In newly redesignated paragraph (a)(2)(iv), removing ``; and'' and 
in its place adding a period;
0
d. Adding new paragraph (a)(2)(iii);
0
e. Adding paragraph (a)(8);
0
f. In paragraph (b)(7), removing the phrase ``maintaining, changing,'' 
and in its place adding ``maintaining, monitoring, changing,'';
0
g. Redesignating paragraphs (b)(8), (b)(9), and (b)(10) as paragraphs 
(b)(9), (b)(10), and (b)(11), respectively;
0
h. Adding new paragraph (b)(8); and
0
i. In paragraph (d), adding four sentences to the end of the paragraph.
    The additions read as follows:


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

    (a) * * *
    (2) * * *
    (iii) If a quantitative model was a substantial component in the 
process of determining the 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, a record of the rationale for 
any material difference between the credit rating implied by the model 
and the final credit rating issued; and
* * * * *
    (8) For each outstanding credit rating, a record showing all rating 
actions and the date of such actions from the initial credit rating to 
the current credit rating identified by the name of the rated security 
or obligor and, if applicable, the CUSIP of the rated security or the 
Central Index Key (CIK) number of the rated obligor.
    (b) * * *
    (8) Any written communications received from persons not associated 
with the nationally recognized statistical rating organization that 
contain complaints about the performance of a credit analyst in 
initiating, determining, maintaining, monitoring, changing, or 
withdrawing a credit rating.
* * * * *
    (d) * * * In addition, a nationally recognized statistical rating 
organization must make and keep publicly available on its corporate 
Internet Web site in an XBRL (eXtensible Business Reporting Language) 
format the ratings action information for ten percent of the 
outstanding credit ratings required to be retained pursuant to 
paragraph (a)(8) of this section and which were paid for by the obligor 
being rated or by the issuer, underwriter, or sponsor of the security 
being rated, selected on a random basis, for each class of credit 
rating for which it is registered and for which it has issued 500 or 
more outstanding credit ratings paid for by the obligor being rated or 
by the issuer, underwriter, or sponsor of the security being rated. Any 
ratings action required to be disclosed pursuant to this paragraph (d) 
need not be made public less than six months from the date such ratings 
action is taken. If a credit rating made public pursuant to this 
paragraph (d) is withdrawn or the instrument rated matures, the 
nationally recognized statistical rating organization must randomly 
select a new outstanding credit rating from that class of credit 
ratings in order to maintain the 10 percent disclosure threshold. In 
making the information available on its corporate Internet Web site, 
the nationally recognized statistical rating organization shall use the 
List of XBRL Tags for NRSROs as specified on the Commission's Internet 
Web site.
* * * * *

0
3. Section 240.17g-3 is amended by:
0
a. Adding paragraph (a)(6); and
0
b. Revising paragraph (b).
    The addition and revision read as follows:


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

    (a) * * *
    (6) An unaudited report of the number of credit ratings actions 
(upgrades, downgrades, placements on credit watch, and withdrawals) 
taken during the fiscal year in each class of credit ratings identified 
in section 3(a)(62)(B) of the Act (15 U.S.C. 78c(a)(62)(B)) for which 
the nationally recognized statistical rating organization is registered 
with the Commission.

    Note to paragraph (a)(6): A nationally recognized statistical 
rating organization registered in the class of credit ratings 
described in section 3(a)(62)(B)(iv) of the Act (15 U.S.C. 
78c(a)(62)(B)(iv)) must include credit ratings actions taken on 
credit ratings of any security or money market instrument issued by 
an asset pool or as part of any asset-backed or mortgage-backed 
securities transaction for purposes of reporting the number of 
credit ratings actions in this class.

    (b) The nationally recognized statistical rating organization must 
attach to the financial reports furnished pursuant to paragraphs (a)(1) 
through (a)(6) of this section a signed statement by a duly authorized 
person associated with the nationally recognized statistical rating 
organization stating that the person has responsibility for the 
financial reports and, to the best knowledge of the person, the 
financial reports fairly present, in all material respects, the 
financial condition, results of operations, cash flows, revenues, 
analyst compensation, and credit rating actions of the nationally 
recognized statistical rating organization for the period presented.
* * * * *

0
4. Section 240.17g-5 is amended by:
0
a. Removing the word ``or'' at the end of paragraph (c)(3);
0
b. Removing the period at the end of paragraph (c)(4) and in its place 
adding a semi-colon; and

[[Page 6483]]

0
c. Adding paragraphs (c)(5), (c)(6), and (c)(7).
    The additions read as follows:


Sec.  240.17g-5  Conflicts of interest.

* * * * *
    (c) * * *
    (5) The nationally recognized statistical rating organization 
issues or maintains a credit rating with respect to an obligor or 
security where the nationally recognized statistical rating 
organization or a person associated with the nationally recognized 
statistical rating organization made recommendations to the obligor or 
the issuer, underwriter, or sponsor of the security about the corporate 
or legal structure, assets, liabilities, or activities of the obligor 
or issuer of the security;
    (6) The nationally recognized statistical rating organization 
issues or maintains a credit rating where the fee paid for the rating 
was negotiated, discussed, or arranged by a person within the 
nationally recognized statistical rating organization who has 
responsibility for participating in determining credit ratings or for 
developing or approving procedures or methodologies used for 
determining credit ratings, including qualitative and quantitative 
models; or
    (7) The nationally recognized statistical rating organization 
issues or maintains a credit rating where a credit analyst who 
participated in determining or monitoring the credit rating, or a 
person responsible for approving the credit rating received gifts, 
including entertainment, from the obligor being rated, or from the 
issuer, underwriter, or sponsor of the securities being rated, other 
than items provided in the context of normal business activities such 
as meetings that have an aggregate value of no more than $25.
* * * * *

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

0
6. 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
7. Form NRSRO (referenced in Sec.  249b.300) is amended by revising 
Exhibits 1 and 2 in section H, Item 9 of the Form NRSRO Instructions to 
read as follows:

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

Form NRSRO

* * * * *

Form NRSRO Instructions

* * * * *
H. INSTRUCTIONS FOR SPECIFIC LINE ITEMS
* * * * *
    Item 9. Exhibits. * * *
    Exhibit 1. Provide in this Exhibit performance measurement 
statistics of the credit ratings of the Applicant/NRSRO, including 
performance measurement statistics of the credit ratings separately for 
each class of credit rating for which the Applicant/NRSRO is seeking 
registration or is registered (as indicated in Item 6 and/or 7 of Form 
NRSRO). For the purposes of this Exhibit, an Applicant/NRSRO registered 
in the class of credit ratings described in Section 3(a)(62)(B)(iv) of 
the Act (15 U.S.C. 78c(a)(62)(B)(iv)) must include credit ratings of 
any security or money market instrument issued by an asset pool or as 
part of any asset-backed or mortgage-backed securities transaction for 
purposes of reporting the performance measurement statistics for this 
class. In addition, the class of government securities should be 
separated into three additional classes: Sovereigns, United States 
public finance, and international public finance. The performance 
measurement statistics must at a minimum show the performance of credit 
ratings in each class over 1 year, 3 year, and 10 year periods (as 
applicable) through the most recent calendar year-end, including, as 
applicable: Historical ratings transition 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 in 
each class of credit rating. The default statistics must include 
defaults relative to the initial rating. 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. If the Applicant/NRSRO is required to make 
and keep publicly available on its corporate Internet Web site in an 
XBRL (eXtensible Business Reporting Language) format a sample of 
ratings action information pursuant to the requirements of 17 CFR 
240.17g-2(d), provide in this Exhibit the Web site address where this 
information is, or will be, made publicly available.
    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; 
whether and, if so, how information about verification performed on 
assets underlying or referenced by a security or money market 
instrument issued by an asset pool or as part of any asset-backed or 
mortgage-backed securities transaction is relied on in determining 
credit ratings; the quantitative and qualitative models and metrics 
used to determine credit ratings, including whether and, if so, how 
assessments of the quality of originators of assets underlying or 
referenced by a security or money market instrument issued by an asset 
pool or as part of any asset-backed or mortgage-backed securities 
transaction factor into the determination of 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, including how frequently credit ratings 
are reviewed, whether different models or criteria are used for ratings 
surveillance than for determining initial ratings, whether changes made 
to models and criteria for determining initial ratings are applied 
retroactively to existing ratings, and whether changes made to models 
and criteria for performing ratings surveillance are incorporated into 
the models and criteria for determining initial ratings; and procedures 
to withdraw, or suspend the

[[Page 6484]]

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.
* * * * *

    Dated: February 2, 2009.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9-2513 Filed 2-6-09; 8:45 am]
BILLING CODE 8011-01-P