[Federal Register Volume 77, Number 230 (Thursday, November 29, 2012)]
[Notices]
[Pages 71201-71203]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-28900]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68286; File No. S7-04-09]


Order Extending Temporary Conditional Exemption for Nationally 
Recognized Statistical Rating Organizations From Requirements of Rule 
17g-5 Under the Securities Exchange Act of 1934 and Request for Comment

November 26, 2012.

I. Introduction

    On May 19, 2010, the Securities and Exchange Commission 
(``Commission'') conditionally exempted, with respect to certain credit 
ratings and until December 2, 2010, nationally recognized statistical 
rating organizations (``NRSROs'') from certain requirements in Rule 
17g-5(a)(3) \1\ under the Securities Exchange Act of 1934 (``Exchange 
Act''), which had a compliance date of June 2, 2010.\2\ Pursuant to the 
Order, an NRSRO is not required to comply with Rule 17g-5(a)(3) until 
December 2, 2010 with respect to credit ratings where: (1) The issuer 
of the structured finance product is a non-U.S. person; and (2) the 
NRSRO has a reasonable basis to conclude that the structured finance 
product will be offered and sold upon issuance, and that any arranger 
linked to the structured finance product will effect transactions of 
the structured finance product after issuance, only in transactions 
that occur outside the U.S. (``covered transactions'').\3\ On November 
23, 2010, the Commission extended the conditional temporary exemption 
until December 2, 2011.\4\ On November 16, 2011, the Commission 
extended the conditional temporary exemption until December 2, 2012.\5\ 
The Commission is extending the temporary conditional exemption 
exempting NRSROs from complying with Rule 17g-5(a)(3) with respect to 
rating covered transactions until December 2, 2013.
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    \1\ See 17 CFR 240.17g-5(a)(3).
    \2\ See Exchange Act Release No. 62120 (May 19, 2010), 75 FR 
28825 (May 24, 2010) (``Order'').
    \3\ See id. at 28827-28 (setting forth conditions of relief).
    \4\ See Exchange Act Release No. 63363 (Nov. 23, 2010), 75 FR 
73137 (Nov. 29, 2010) (``First Extension Order'').
    \5\ See Exchange Act Release No. 65765 (Nov. 16, 2011), 76 FR 
72227 (Nov. 22, 2011) (``Second Extension Order'').
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II. Background

    Rule 17g-5 identifies, in paragraphs (b) and (c) of the rule, a 
series of conflicts of interest arising from the business of 
determining credit ratings.\6\ Paragraph (a) of Rule 17g-5 \7\ 
prohibits an NRSRO from issuing or maintaining a credit rating if it is 
subject to the conflicts of interest identified in paragraph (b) of 
Rule 17g-5 unless the NRSRO has taken the steps prescribed in paragraph 
(a)(1) (i.e., disclosed the type of conflict of interest in Exhibit 6 
to Form NRSRO in accordance with Section 15E(a)(1)(B)(vi) of the 
Exchange Act \8\ and Rule 17g-1) \9\ and paragraph (a)(2) (i.e., 
established and is maintaining and enforcing written policies and 
procedures to address and manage conflicts of interest in accordance 
with Section 15E(h) of the Exchange Act).\10\ Paragraph (c) of Rule 
17g-5 specifically prohibits seven types of conflicts of interest. 
Consequently, an NRSRO is prohibited from issuing or maintaining a 
credit rating when it is subject to these conflicts regardless of 
whether it had disclosed them and established procedures reasonably 
designed to address them.
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    \6\ 17 CFR 240.17g-5(b) and (c).
    \7\ 17 CFR 240.17g-5(a).
    \8\ 15 U.S.C. 78o-7(a)(1)(B)(vi).
    \9\ 17 CFR 240.17g-1.
    \10\ 15 U.S.C. 78o-7(h).
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    In December 2009, the Commission adopted subparagraph (a)(3) to 
Rule 17g-5. This provision requires an NRSRO that is hired by an 
arranger to determine an initial credit rating for a structured finance 
product to take certain steps designed to allow an NRSRO that is not 
hired by the arranger to nonetheless determine an initial credit 
rating--and subsequently monitor that credit rating--for the structured 
finance product.\11\ In particular, under Rule 17g-5(a)(3), an NRSRO is 
prohibited from issuing or maintaining a credit rating when it is 
subject to the conflict of interest identified in paragraph (b)(9) of 
Rule 17g-5 (i.e., being hired by an arranger to determine a credit 
rating for a structured finance product) \12\ unless it has taken the 
steps

[[Page 71202]]

prescribed in paragraphs (a)(1) and (2) of Rule 17g-5 (discussed above) 
and the steps prescribed in new paragraph (a)(3) of Rule 17g-5.\13\ 
Rule 17g-5(a)(3), among other things, requires that the NRSRO must:
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    \11\ See 17 CFR 240.17g-5(a)(3); see also Exchange Act Release 
No. 61050 (Nov. 23, 2009), 74 FR 63832 (Dec. 4, 2009) (``Adopting 
Release'') at 63844-45.
    \12\ Paragraph (b)(9) of Rule 17g-5 identifies the following 
conflict of interest: Issuing or maintaining a credit rating for a 
security or money market instrument issued by an asset pool or as 
part of any asset-backed or mortgage-backed securities transaction 
that was paid for by the issuer, sponsor, or underwriter of the 
security or money market instrument. 17 CFR 240.17g-5(b)(9).
    \13\ 17 CFR 240.17g-5(a)(3).
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     Maintain on a password-protected Internet Web site a list 
of each structured finance product for which it currently is in the 
process of determining an initial credit rating in chronological order 
and identifying the type of structured finance product, the name of the 
issuer, the date the rating process was initiated, and the Internet Web 
site address where the arranger represents the information provided to 
the hired NRSRO can be accessed by other NRSROs;
     Provide free and unlimited access to such password-
protected Internet Web site during the applicable calendar year to any 
NRSRO that provides it with a copy of the certification described in 
paragraph (e) of Rule 17g-5 that covers that calendar year; \14\ and
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    \14\ Paragraph (e) of Rule 17g-5 requires that an NRSRO seeking 
to access the hired NRSRO's Internet Web site during the applicable 
calendar year must furnish the Commission with the following 
certification:
     The undersigned hereby certifies that it will access the 
Internet Web sites described in 17 CFR 240.17g-5(a)(3) solely for 
the purpose of determining or monitoring credit ratings. Further, 
the undersigned certifies that it will keep the information it 
accesses pursuant to 17 CFR 240.17g-5(a)(3) confidential and treat 
it as material nonpublic information subject to its written policies 
and procedures established, maintained, and enforced pursuant to 
section 15E(g)(1) of the Act (15 U.S.C. 78o-7(g)(1)) and 17 CFR 
240.17g-4. Further, the undersigned certifies that it will determine 
and maintain credit ratings for at least 10% of the issued 
securities and money market instruments for which it accesses 
information pursuant to 17 CFR 240.17g-5(a)(3)(iii), if it accesses 
such information for 10 or more issued securities or money market 
instruments in the calendar year covered by the certification. 
Further, the undersigned certifies one of the following as 
applicable: (1) In the most recent calendar year during which it 
accessed information pursuant to 17 CFR 240.17g-5(a)(3), the 
undersigned accessed information for [Insert Number] issued 
securities and money market instruments through Internet Web sites 
described in 17 CFR 240.17g-5(a)(3) and determined and maintained 
credit ratings for [Insert Number] of such securities and money 
market instruments; or (2) The undersigned previously has not 
accessed information pursuant to 17 CFR 240.17g-5(a)(3) 10 or more 
times during the most recently ended calendar year.
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     Obtain from the arranger a written representation that can 
reasonably be relied upon that the arranger will, among other things, 
disclose on a password-protected Internet Web site the information it 
provides to the hired NRSRO to determine the initial credit rating (and 
monitor that credit rating) and provide access to the Web site to an 
NRSRO that provides it with a copy of the certification described in 
paragraph (e) of Rule 17g-5.\15\
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    \15\ In particular, under paragraph (a)(3)(iii) of Rule 17g-5, 
the arranger must represent to the hired NRSRO that it will:
    (1) Maintain the information described in paragraphs 
(a)(3)(iii)(C) and (a)(3)(iii)(D) of Rule 17g-5 available at an 
identified password-protected Internet Web site that presents the 
information in a manner indicating which information currently 
should be relied on to determine or monitor the credit rating;
    (2) Provide access to such password-protected Internet Web site 
during the applicable calendar year to any NRSRO that provides it 
with a copy of the certification described in paragraph (e) of Rule 
17g-5 that covers that calendar year, provided that such 
certification indicates that the nationally recognized statistical 
rating organization providing the certification either: (i) 
Determined and maintained credit ratings for at least 10% of the 
issued securities and money market instruments for which it accessed 
information pursuant to paragraph (a)(3)(iii) of Rule 17g-5 in the 
calendar year prior to the year covered by the certification, if it 
accessed such information for 10 or more issued securities or money 
market instruments; or (ii) has not accessed information pursuant to 
paragraph (a)(3) of Rule 17g-5 10 or more times during the most 
recently ended calendar year;
    (3) Post on such password-protected Internet Web site all 
information the arranger provides to the NRSRO, or contracts with a 
third party to provide to the NRSRO, for the purpose of determining 
the initial credit rating for the security or money market 
instrument, including information about the characteristics of the 
assets underlying or referenced by the security or money market 
instrument, and the legal structure of the security or money market 
instrument, at the same time such information is provided to the 
NRSRO; and
    (4) Post on such password-protected Internet Web site all 
information the arranger provides to the NRSRO, or contracts with a 
third party to provide to the NRSRO, for the purpose of undertaking 
credit rating surveillance on the security or money market 
instrument, including information about the characteristics and 
performance of the assets underlying or referenced by the security 
or money market instrument at the same time such information is 
provided to the NRSRO.
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    The Commission stated in the Adopting Release that subparagraph 
Rule 17g-5(a)(3) is designed to address conflicts of interest and 
improve the quality of credit ratings for structured finance products 
by making it possible for more NRSROs to rate structured finance 
products.\16\ For example, the Commission noted that when an NRSRO is 
hired to rate a structured finance product, some of the information it 
relies on to determine the rating is generally not made public.\17\ As 
a result, structured finance products frequently are issued with 
ratings from only the one or two NRSROs that have been hired by the 
arranger, with the attendant conflict of interest that creates.\18\ The 
Commission stated that subparagraph Rule 17g-5(a)(3) was designed to 
increase the number of credit ratings extant for a given structured 
finance product and, in particular, to promote the issuance of credit 
ratings by NRSROs that are not hired by arrangers.\19\ The Commission's 
goal in adopting the rule was to provide users of credit ratings with 
more views on the creditworthiness of structured finance products.\20\ 
In addition, the Commission stated that Rule 17g-5(a)(3) was designed 
to reduce the ability of arrangers to obtain better than warranted 
ratings by exerting influence over NRSROs hired to determine credit 
ratings for structured finance products.\21\ Specifically, by opening 
up the rating process to more NRSROs, the Commission intended to make 
it easier for the hired NRSRO to resist such pressure by increasing the 
likelihood that any steps taken to inappropriately favor the arranger 
could be exposed to the market through the credit ratings issued by 
other NRSROs.\22\
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    \16\ Adopting Release at 63844.
    \17\ Id.
    \18\ Id.
    \19\ Id.
    \20\ Id.
    \21\ Id.
    \22\ Id.
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    Rule 17g-5(a)(3) became effective on February 2, 2010, and the 
compliance date for Rule 17g-5(a)(3) was June 2, 2010.

III. Extension of Conditional Temporary Extension

    In the Order, the Commission requested comment generally, but also 
on a number of specific issues.\23\ The Commission received six comment 
letter in response to this solicitation of comment.\24\ The commenters 
expressed concern that the extraterritorial application of Rule 17g-
5(a)(3) could, in the commenter's view, among other things, disrupt 
local securitization markets,\25\ inhibit the ability of local

[[Page 71203]]

firms to raise capital,\26\ and conflict with local laws.\27\ Several 
commenters also requested that the conditional temporary exemption be 
extended or made permanent.\28\ The First Extension Order again 
solicited public comment on issues raised in connection with the extra-
territorial application of Rule 17g-5(a)(3).\29\ One commenter 
requested that the Order be made permanent, citing many of the same 
reasons set forth in prior comment letters.\30\ The Second Extension 
Order again solicited public comment on issues raised in connection 
with the extra-territorial application of Rule 17g-5(a)(3).\31\ 
Commenters supported the exemption regarding the extra-territorial 
application of the Rule,\32\ with one of those commenters again 
requesting that the Order be made permanent.\33\
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    \23\ See Order at 28828.
    \24\ Letter from Masamichi Kono, Vice Commissioner for 
International Affairs, Financial Services Agency, Japan, to 
Elizabeth Murphy, Secretary, Commission, dated Nov. 12, 2010 
(``Japan FSA Letter''); Letter from Masaru Ono, Executive Director, 
Securitization Forum of Japan, to Elizabeth Murphy, Secretary, 
Commission, dated Nov. 12, 2010 (``SFJ Letter''); Letter from Rick 
Watson, Managing Director, Association for Financial Markets in 
Europe/European Securitisation Forum, to Elizabeth Murphy, 
Secretary, Commission, dated Nov. 11, 2010 (``AFME Letter''); Letter 
from Jack Rando, Director, Capital Markets, Investment Industry 
Association of Canada, to Randall Roy, Assistant Director, Division 
of Trading and Markets (``Division''), Commission, dated Sep. 22, 
2010 (``IIAC Letter''); Letter from Christopher Dalton, Chief 
Executive Officer, Australian Securitisation Forum, to Randall Roy, 
Assistant Director, Division, Commission, dated Jun. 27, 2010 
(``AuSF Letter''); Letter from Takefumi Emori, Managing Director, 
Japan Credit Rating Agency, Ltd. (``JCR'') to Elizabeth Murphy, 
Secretary, Commission, dated Jun. 25, 2010 (``JCR Letter'').
    \25\ See Japan FSA Letter; SFJ Letter; AFME Letter; JCR Letter; 
AuSF Letter.
    \26\ See AFME Letter; JCR Letter; AuSF Letter.
    \27\ See Japan FSA Letter; AFME Letter; JCR Letter; AuSF Letter; 
IIAC Letter. With respect to local laws, we note that the European 
Commission in recent months has issued a relevant proposal for 
amendments to the European Union Regulation on Credit Ratings. See 
``Regulation of the European Parliament and of the Counsel on 
amending Regulation (EC) No 1060/2009 on credit rating agencies'' 
(available at http://ec.europa.eu/internal_market/securities/docs/agencies/100602_proposal_en.pdf).
    \28\ See Japan FSA Letter; SFJ Letter; AFME Letter; JCR Letter.
    \29\ See Letter from Tom Deutsch, Executive Director, American 
Securitization Forum, and Chris Dalton, Chief Executive Officer, 
Australian Securitization Forum, to Randall Roy, Assistant Director, 
and Joseph Levinson, Special Counsel, Division, Commission, dated 
Aug. 9, 2011 (``ASF/AuSF Letter 1''); Letter from Jack Rando, 
Director, Capital Markets, Investment Industry Association of 
Canada, to Randall Roy, Assistant Director, Division, Commission, 
dated Nov. 2, 2011 (``IIAC Letter 2'').
    \30\ See ASF/AuSF Letter 1.
    \31\ Letter from Chris Barnard to the Commission, dated Nov. 23, 
2011 (``Barnard Letter''); Letter from Tom Deutsch, Executive 
Director, American Securitization Forum and Chris Dalton, Chief 
Executive Officer, Australian Securitisation Forum, to Thomas 
Butler, Director, Office of Credit Ratings, Randall Roy, Associate 
Director, and Joseph Levinson, Special Counsel, Division, dated Aug. 
28, 2012 (``ASF/AuSF Letter 2'').
    \32\ See Barnard Letter; ASF/AuSF Letter 2.
    \33\ See ASF/AuSF Letter 2.
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    Given the continued concerns about potential disruptions of local 
securitization markets, and because the Commission's consideration of 
the issues raised will benefit from additional time to engage in 
further dialogue with interested parties and to monitor market and 
regulatory developments, the Commission believes extending the 
conditional temporary exemption until December 2, 2013 is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors.

IV. Request for Comment

    The Commission believes that it would be useful to continue to 
provide interested parties opportunity to comment. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/exorders.shtml); or
     Send an email to [email protected]. Please include 
File Number S7-04-09 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F St. NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number S7-04-09. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/exorders.shtml). Comments 
are also available for Web site viewing and printing in the 
Commission's Public Reference Room, 100 F St. NE., Washington, DC 20549 
on official business days between the hours of 10 a.m. and 3 p.m. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly.

V. Conclusion

    For the foregoing reasons, the Commission believes it would be 
necessary or appropriate in the public interest and consistent with the 
protection of investors to extend the conditional temporary exemption 
exempting NRSROs from complying with Rule 17g-5(a)(3) with respect to 
rating covered transactions until December 2, 2013.
    Accordingly,
    It is hereby ordered, pursuant to Section 36 of the Exchange Act, 
that a nationally recognized statistical rating organization is exempt 
until December 2, 2013 from the requirements in Rule 17g-5(a)(3) (17 
CFR 240.17g-5(a)(3)) for credit ratings where:
    (1) The issuer of the security or money market instrument is not a 
U.S. person (as defined under Securities Act Rule 902(k)); and
    (2) The nationally recognized statistical rating organization has a 
reasonable basis to conclude that the structured finance product will 
be offered and sold upon issuance, and that any arranger linked to the 
structured finance product will effect transactions of the structured 
finance product after issuance, only in transactions that occur outside 
the U.S.

    By the Commission.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-28900 Filed 11-28-12; 8:45 am]
BILLING CODE 8011-01-P