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CONTENTS
I.
INTRODUCTION ................................................................................................................... 1
II.
STATUS OF REGISTRANTS AND APPLICANTS ............................................................. 1
III.
EXAMINATIONS AND MONITORING .............................................................................. 4
A.
Overview ............................................................................................................................ 4
B.
Risk Assessment ................................................................................................................ 4
C.
Monitoring ......................................................................................................................... 6
D.
2024 Section 15E(p)(3) Examinations ............................................................................... 8
1.
Overview ....................................................................................................................... 8
2.
Terms Used in This Report............................................................................................ 8
3.
Summary of Essential Findings and Responses to Material Regulatory
Deficiencies ................................................................................................................... 9
4.
Responses to Recommendations from Prior Section 15E Examinations .................... 16
IV. STATE OF COMPETITION, TRANSPARENCY, AND CONFLICTS OF INTEREST.... 18
A.
V.
Competition...................................................................................................................... 18
1.
Select NRSRO Statistics.............................................................................................. 18
2.
Market Share Observations in the Asset-Backed Securities Rating Category ............ 29
3.
Barriers to Entry .......................................................................................................... 35
B.
Transparency .................................................................................................................... 37
C.
Conflicts of Interest.......................................................................................................... 40
ACTIVITIES RELATING TO NRSROs .............................................................................. 42
A.
Commission Orders ......................................................................................................... 42
B.
Staff Publication............................................................................................................... 43
VI. APPENDIX: SUMMARY OF STATUTORY FRAMEWORK AND RULES................... 43
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CHARTS
Chart 1. Table of NRSROs .............................................................................................................. 3
Chart 2. Number of Outstanding Credit Ratings as of December 31, 2023,
by Rating Category .......................................................................................................... 20
Chart 3. Percentage by Rating Category of Each NRSRO’s Outstanding Credit Ratings
of the Total Outstanding Credit Ratings of all NRSROs as of December 31, 2023 ........ 20
Chart 4. Breakdown of Ratings Reported Outstanding by Rating Category
as of December 31, 2023 ................................................................................................. 22
Chart 5. Breakdown of Ratings Reported Outstanding by NRSRO as of December 31, 2023 ..... 22
Chart 6. Breakdown of Non-Government Securities Ratings Reported Outstanding
by NRSRO as of December 31, 2023 .............................................................................. 23
Chart 7. Breakdown of Government Securities Ratings Reported Outstanding
on December 31, 2023 ..................................................................................................... 23
Chart 8. Total Non-Government Ratings Issued by All NRSROs (2019-2023)............................ 24
Chart 9. Total Non-Government Ratings Issued by Medium and Small
NRSROs (2019-2023)...................................................................................................... 25
Chart 10. Total ABS Ratings Issued by All NRSROs (2019-2023) ............................................... 26
Chart 11. NRSRO Credit Analysts and Credit Analyst Supervisors ............................................... 27
Chart 12. NRSRO Fiscal Year Revenue as a Percentage of Aggregate Reported Revenue ........... 28
Chart 13. Rating Agency Market Shares for Total Non-Agency U.S. CMBS Issued in 2022,
2023, and First Half of 2024 .......................................................................................... 30
Chart 14. Rating Agency Market Shares for U.S. Conduit CMBS Issued in 2022, 2023,
and First Half of 2024 ...................................................................................................... 31
Chart 15. Rating Agency Market Shares for U.S. Single-Borrower CMBS Issued in 2022,
2023, and First Half of 2024 ............................................................................................ 31
Chart 16. Rating Agency Market Shares for Agency CMBS Issued in 2022, 2023,
and First Half of 2024 ...................................................................................................... 31
Chart 17. Rating Agency Market Shares for U.S. ABS Issued in 2022, 2023,
and First Half of 2024 ...................................................................................................... 32
Chart 18. Rating Agency Market Shares for U.S. MBS Issued in 2022, 2023,
and First Half of 2024 ...................................................................................................... 33
Chart 19. Rating Agency Market Shares for U.S. CLOs Issued in 2022, 2023,
and First Half of 2024 ...................................................................................................... 33
ii
I.
INTRODUCTION
The Staff of the U.S. Securities and Exchange Commission (Commission or SEC)
provides this Report regarding nationally recognized statistical rating organizations (NRSROs)
pursuant to Section 6 of the Credit Rating Agency Reform Act of 2006 (Rating Agency Act) 1
and Section 15E(p)(3)(C) of the Securities Exchange Act of 1934 (Exchange Act). 2
Section 6 of the Rating Agency Act requires the Commission to submit an annual report
to the Committee on Banking, Housing, and Urban Affairs of the U.S. Senate and the Committee
on Financial Services of the U.S. House of Representatives that, with respect to the year to which
the report relates:
Identifies applicants for registration as NRSROs under Section 15E;
Specifies the number of, and actions taken on, such applications; and
Specifies the views of the Commission on the state of competition, transparency, and
conflicts of interest among NRSROs.
Section 15E(p)(3)(C) requires the Commission to make available to the public an annual
report summarizing:
Essential findings of all Section 15E examinations, as deemed appropriate by the
Commission;
NRSROs’ responses to any material regulatory deficiencies identified by the
Commission; and
Whether the NRSROs have appropriately addressed the recommendations of the
Commission contained in previous annual reports.
This Report addresses the items specified in Section 6 of the Rating Agency Act and
Section 15E(p)(3). This is a report of the Staff and, as such, reflects solely the Staff’s views.
Information regarding the topics covered in this Report with respect to prior periods can
be found on the Office of Credit Ratings (OCR) page of the Commission’s website under
“Reports and Studies.”
II.
STATUS OF REGISTRANTS AND APPLICANTS
In 2007, the Commission began granting registrations to credit rating agencies that
applied to be registered as an NRSRO. Section 3(a)(62) defines a “nationally recognized
statistical rating organization” as a credit rating agency that is registered under Section 15E and
1
Pub. L. No. 109-291, 120 Stat. 1327 (Sept. 29, 2006).
2
Unless otherwise noted, all section and rule references in this report are to the Exchange Act and rules under the
Exchange Act.
1
issues credit ratings certified by qualified institutional buyers, in accordance with Section
15E(a)(1)(B)(ix), with respect to:
(i)
Financial institutions, brokers, or dealers;
(ii)
Insurance companies;
(iii) Corporate issuers;
(iv) Issuers of asset-backed securities; 3
(v)
Issuers of government securities, municipal securities, or securities issued by a
foreign government; or
(vi) A combination of one or more categories of obligors described in any of clauses (i)
through (v) above.
Section 15E(a) sets out registration procedures for a credit rating agency to voluntarily
apply to be registered with the Commission as an NRSRO. As of December 31, 2024, there
were ten credit rating agencies registered as NRSROs. Chart 1 below lists each NRSRO
registered with the Commission as of such date, the categories of credit ratings described in
clauses (i) through (v) of Section 3(a)(62)(A) in which each NRSRO is registered, and the
location of each NRSRO’s principal office.
For the most current information disclosed by each NRSRO, refer to such NRSRO’s
current Form NRSRO. NRSROs are required to file an annual certification on Form NRSRO,
which includes updates to certain information, such as the number of ratings outstanding and
performance measurement statistics. They are also required to file updates to Form NRSRO
promptly if any information becomes materially inaccurate. Other than with respect to an initial
application for registration, Form NRSRO filings are available on the Commission’s EDGAR
system, and each NRSRO is required to make its current Form NRSRO publicly and freely
available on its website.
3
“Asset-backed securities” has the meaning set forth in 17 CFR 229.1101(c), as in effect on September 29, 2006
(the date of enactment of the Rating Agency Act).
2
Chart 1. Table of NRSROs
NRSRO
Categories of Credit Ratings
Principal Office
A.M. Best Rating Services, Inc. (AMB)
(ii), (iii ), and ( iv)
U.S.
DBRS, Inc. (DBRS)
(i) thro ug h (v)
U.S.
( ii)
U.S.
Egan-Jones Ratings Company (EJR)
( i) thro ug h ( iii)
U.S.
Fitch Ratings, Inc. (Fitch)
( i) thro ug h (v)
U.S.
HR Ratings de Mexico, S.A. de C.V. (HR)
(i), (iii ), and (v)
Mexico
Japan Credit Rating Agency, Ltd. (JCR)
( i), ( ii ), ( iii), and (v)
Jap an
Kroll Bond Rating Agency, LLC (KBRA)
( i) thro ug h (v)
U.S.
Moody's Investors Service, Inc. (Moody's)
(i) thro ug h (v)
U.S.
S&P Global Ratings (S&P)
( i) thro ug h (v)
U.S.
Demotech, Inc. (Demotech)
Solely for purposes of this Report: Fitch, Moody’s, and S&P are categorized as “large
NRSROs;” AMB, DBRS, and KBRA are categorized as “medium NRSROs;” and Demotech,
EJR, HR, and JCR are categorized as “small NRSROs.” These categorizations are based on
revenue. For the percentage of total NRSRO revenues attributable to the large, medium, and
small NRSROs over the past few years, refer to Chart 12.
Pursuant to Section 15E(a)(2)(C), the Commission grants registration as an NRSRO if it
finds the requirements of Section 15E are satisfied and so long as it does not find: (1) that the
applicant does not have adequate financial and managerial resources to produce credit ratings
with integrity, to materially comply with its procedures and methodologies for determining credit
ratings disclosed on Form NRSRO, and to materially comply with provisions of Section 15E
related to the prevention of the misuse of non-public information, management of conflicts of
interest, prohibited conduct, and designation of a compliance officer; or (2) that, if the applicant
were to be registered, its registration would be subject to suspension or revocation.
Pursuant to Section 15E(a) and Rule 17g-1, applications for initial registration by a credit
rating agency and for registration by a current NRSRO in additional rating categories are filed on
Form NRSRO. In addition, Section 15E(b) requires NRSROs to promptly amend Form NRSRO
if any information or document provided therein becomes materially inaccurate. A credit rating
agency may choose not to apply for registration as an NRSRO, in which case it may issue credit
ratings as a credit rating agency, but it may not issue credit ratings as an NRSRO. In addition, a
credit rating agency may choose to apply for registration as an NRSRO in one or more rating
categories. As noted in Chart 1 above, certain NRSROs are registered in all of the rating
categories, and certain NRSROs are registered in fewer than all of the rating categories.
In calendar year 2024, no applications for initial registration as an NRSRO, or
applications for registration by a current NRSRO in additional rating categories, were filed with
the Commission.
The SEC oversees and, as discussed below, examines NRSROs. However, pursuant to
Section 15E(c)(2), the Commission is prohibited from regulating the substance of credit ratings
or the procedures and methodologies the NRSROs use to determine credit ratings. As a result,
OCR does not assess the quality, reliability, or credibility of an NRSRO’s methodologies,
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models, or ratings in connection with its examinations or otherwise, and registration as an
NRSRO is not a Commission “seal of approval.” It is up to users of credit ratings to assess for
themselves the quality, credibility, and reliability of an NRSRO’s credit ratings.
III.
EXAMINATIONS AND MONITORING
A.
Overview
Section 17 authorizes the Staff to conduct examinations of NRSROs. Section 15E(p)(3)
requires the Staff to conduct an examination of each NRSRO at least annually (Section 15E
examinations). Generally, the purpose of these examinations is to promote compliance with
applicable federal securities laws and rules by identifying potential instances of non-compliance
by NRSROs with their statutory and regulatory obligations and recommending remedial action.
Information obtained during an examination can also inform Staff of noteworthy industry
developments.
To facilitate and promote compliance by NRSROs with their statutory and regulatory
obligations, the Staff sends each NRSRO an examination summary letter that discusses the
Staff’s findings related to that NRSRO and recommends remedial measures. When appropriate,
Staff may refer findings to the Commission’s Division of Enforcement for investigation.
Section 15E(p)(3)(B) provides that each NRSRO examination shall include a review of
the following eight topic areas (Section 15E Review Areas):
Whether the NRSRO conducts business in accordance with its policies, procedures,
and rating methodologies;
Management of conflicts of interest by the NRSRO;
Implementation of ethics policies by the NRSRO;
Internal supervisory controls of the NRSRO;
Governance of the NRSRO;
Activities of the Designated Compliance Officer (DCO) of the NRSRO;
Processing of complaints by the NRSRO; and
Policies of the NRSRO governing the post-employment activities of its former staff.
This Section III discusses the annual examinations that commenced in late 2023 and
concluded in late September 2024 (2024 Section 15E examinations).
B.
Risk Assessment
The 2024 Section 15E examinations encompassed all of the statutorily required Section
15E Review Areas. The Staff also determined areas of emphasis and issues of focus for each
examination based upon an NRSRO-specific risk assessment performed by the Staff, while also
4
considering how to limit the amount of personal data collected in the examination process. The
NRSRO-specific risk assessments considered a number of factors, including, but not limited to:
The NRSRO’s rating activities and operations;
Staff’s findings, recommendations, and other observations from prior examinations;
Impact of a potential or actual internal control or compliance failure by the NRSRO;
Recent industry developments affecting the NRSRO and the asset classes in which
the NRSRO is registered;
The NRSRO’s filings with the Commission and public disclosures;
The NRSRO’s self-identified weaknesses and instances of non-compliance;
Relevant Tips, Complaints, and Referrals (TCRs) received by the Commission; and
Risks identified in a risk assessment process.
Through its risk assessment process in connection with the 2024 Section 15E
examinations, the Staff identified a number of potential risks for consideration in the NRSROspecific risk assessments and incorporation into the examinations, as appropriate. The risks
identified include:
Methodology and Model Development: Each NRSRO determines its own
methodology and model development, review, and validation practices. The Staff
examined the process by which NRSROs assess whether their methodologies are
appropriately designed to gauge their view of the relevant credit risks as conditions
evolve. Among other things, the Staff examined NRSRO adherence to their policies
and procedures regarding the development, maintenance, and validation of
methodologies and models.
Surveillance Practices for Outstanding Ratings: NRSROs employ varying
approaches to the surveillance of outstanding credit ratings. As part of their
surveillance practices, some NRSROs require each outstanding rating to be reviewed
by a rating committee on a periodic basis. Other NRSROs instead perform less
formal periodic reviews to identify credit ratings that may need to be considered by a
committee. The Staff examined the surveillance practices of NRSROs to assess
compliance with statutory and rule requirements, such as the requirement to have an
effective internal control structure governing adherence to policies, procedures, and
methodologies for determining credit ratings.
Commercial Real Estate/CMBS: Many commercial real estate loans that were
originated in 2013 and 2014, when lending conditions were generally more favorable
than in 2023, were sold into CMBS vehicles. The loans were typically originated
with balloon payments due at maturity. Some of these loans come due over the next
few years and will need to be either repaid in full or refinanced. In the current
interest rate environment, commercial real estate borrowers with maturing loans may
need to contribute equity to refinance. Risks in the sector also include increased
5
vacancy rates in office buildings due to the growth of remote and hybrid work. The
Staff reviewed commercial real estate related rating activity of certain NRSROs to
examine adherence to their rating methodologies and surveillance requirements.
C.
Securities Ownership: NRSROs generally take similar approaches to address and
manage conflicts of interest that can arise from securities ownership. Under their
policies and procedures governing securities ownership by employees, NRSROs
prohibit employees from having direct interests in issuers or obligors of credit ratings
they help determine. NRSROs also typically monitor securities ownership by
employees, although the specific processes for doing so can vary. The Staff reviewed
the policies and procedures of each NRSRO related to securities ownership by its
employees and directors to assess whether such policies and procedures are
reasonably designed to address and manage the related potential conflict of interests.
Monitoring
To help inform its risk assessment process and examination program, the Staff in 2024
monitored credit rating activity, industry trends and developments, NRSRO operational
developments and plans, and relevant capital market, economic, and financial news and events.
The Staff’s monitoring activities included communications with NRSROs and reviewing sources
such as NRSRO publications, news reports, trade publications, academic papers, industry
conference information, and government reports.
For example, the Staff’s discussions with certain NRSROs covered the evolving state of
the commercial real estate market and its impact on CMBS ratings. NRSROs reported actively
monitoring the sector, noting a deterioration in the commercial real estate office sector due to
higher interest rates and vacancy rates. NRSROs conducted rating reviews, updated stress
assumptions, and issued downgrades, as the refinancing of office loans became more challenging
and, in some instances, loans defaulted. NRSROs indicated that they expected delinquencies to
peak at high single digits, assuming reduced interest rates and the absence of a significant
recession. Additionally, while office building valuations have generally been lower due to
higher vacancy rates, some NRSROs noted that there have been few office building sales which
could help establish valuations. There was agreement among NRSROs that the sector outlook
will remain unclear until rents and vacancies stabilize.
The Staff also discussed with certain NRSROs their activities in the private credit market,
including the launching of certain related initiatives and additions to staff. 4 These NRSROs
noted that private credit permeates across the rating business. They reported rating a variety of
instruments backed by collateral originated in the private credit market, including with respect to
private credit funds, business development companies, and collateralized loan obligations. Some
of these NRSROs also indicated that they rate certain companies, such as alternative asset
4
See, e.g., Moody’s Corporation, Moody’s creates new private credit analytical franchise, appoints Ana Arsov to
lead (Nov. 6, 2023); KBRA, KBRA Deepens Its Funds and Private Credit Teams With Three Senior-Level
Hires (Sept. 9, 2024).
6
managers, that are active in the private credit markets, as well as debt extended to individual
companies through direct lending efforts of non-bank lenders.
The increased activity in the private credit markets has also contributed to the
proliferation of private ratings, which are common in the context of private debt. Private ratings
are credit ratings that are communicated by the NRSRO to an issuer or a specified investor or
group of investors but that are not publicly disclosed on the NRSRO’s website or included in its
broadly disseminated data feeds.
Insurance companies are prominent users of private ratings. They commonly use
NRSRO ratings, including private ratings, to determine risk-based capital charges for eligible
investments. The National Association of Insurance Commissioners (NAIC) has noted that the
use of private ratings by insurance companies has grown considerably and that over 80% of the
private ratings on insurer investments are issued by small and medium NRSROs. 5 The Staff has
observed that EJR and KBRA issue the majority of these private ratings, followed by DBRS.
HR also issues private ratings of this type. Although it issues significantly fewer such ratings
than EJR, KBRA, or DBRS, these ratings represent the overwhelming majority of HR’s business
in the U.S.
More broadly, the NAIC has been engaged in efforts to reassess the way in which it uses
credit ratings (both published ratings and private ratings) for regulatory purposes. In August
2024, the NAIC Valuation of Securities Task Force adopted changes to the Purposes and
Procedures Manual of the NAIC Investment Analysis Office to provide a process for
determining whether an NRSRO credit rating is a “reasonable assessment of investment risk of
the security” for the purpose of determining capital charges. 6 The NAIC is also considering
developing a due diligence program with respect to the ongoing use of credit rating agencies for
regulatory purposes. In a request for proposal released in November 2024, 7 the NAIC
recognized that, given the statutory limitation on the SEC’s authority to regulate the substance of
credit ratings, the NAIC’s current process for recognizing credit rating agencies that can be used
for risk-based capital requirement purposes (which includes no criteria other than registration
with the SEC as an NRSRO) may result in “blind reliance” on credit ratings without any process
to assess whether such ratings are reasonable. Reducing or eliminating such “blind reliance” is
an objective of the due diligence program identified in the request for proposal. As discussed in
Section II of this Report, given the statutory limitation on the SEC’s authority, it is up to users of
credit ratings to assess for themselves the quality, credibility, and reliability of an NRSRO’s
credit ratings before choosing to use them.
5
See National Association of Insurance Commissioners, Growth in Private Ratings Among U.S. Insurer Bond
Investments and Credit Rating Differences (Jan. 2022). In a recent publication discussing U.S. insurers and
private credit, Fitch noted that the percentage was reported to be almost 86%. See Fitch Ratings, US Insurers
and Private Credit: Not All Private Ratings are the Same (Dec. 2024).
6
See National Association of Insurance Commissioners, Valuation of Securities (E) Task Force Memorandum
(July 30, 2024) (detailing the process by which a credit rating can be replaced with an assessment by the NAIC
Investment Analysis Office).
7
See National Association of Insurance Commissioners, RFP #2097 Credit Rating Provider Due Diligence (Nov.
22, 2024).
7
In 2024, the Staff continued to participate in meetings that involved rating agency
regulators globally. This includes meetings of the supervisory colleges that were formed to
enhance communication among credit rating agency regulators globally with respect to
examinations of the largest, internationally active credit rating agencies. 8 The SEC serves as
chair of the college for S&P, and the Staff represents the SEC in this regard. The European
Securities and Markets Authority serves as chair of the college for Fitch, and the Financial
Conduct Authority serves as chair of the college for Moody’s. Each college engaged in periodic
discussions during 2024 regarding supervisory activities related to the credit rating agencies.
The Staff also conducted additional discussions with foreign regulators, as appropriate.
D.
2024 Section 15E(p)(3) Examinations
1.
Overview
The 2024 Section 15E examinations generally focused on the NRSROs’ activities for the
period covering January 1, 2023, through December 31, 2023 (the Review Period). The
examinations also reviewed certain activities or credit rating actions from outside the Review
Period, as appropriate. For example, the Staff may review information relating to TCRs in a
current examination, even if the referenced activities occurred outside of the Review Period.
The 2024 Section 15E examinations included a review of the Section 15E Review Areas
as well as examination of each NRSRO’s compliance with Section 15E and Rules 17g-1 through
17g-10. For example, the Staff reviewed a sample of rating actions of each NRSRO to determine
whether the NRSRO operated in accordance with its policies, procedures, and rating
methodologies. The Staff also reviewed rating files and documentation to evaluate whether each
NRSRO adhered to recordkeeping requirements. As part of this review, the Staff uses a riskbased sampling process based upon its overall risk assessment approach described in this Report
to select rating actions and rating files to review. The process may include factors such as the
size of the rated asset class in the financial markets and the NRSRO’s business, the NRSRO’s
activity in the rated asset class, and the likelihood of impact on investors if a rating was not
determined in accordance with the NRSRO’s methodologies and procedures.
2.
Terms Used in This Report
Pursuant to Section 15E(p)(3)(C)(i)-(iii), this Report contains a summary of, respectively,
the essential findings of the Staff’s annual examinations, the NRSROs’ responses to any material
regulatory deficiencies, and whether the NRSROs have appropriately addressed the
recommendations contained in previous reports.
For purposes of this Report, the Staff considers an “essential finding” to be any instance
identified by the Staff of apparent non-compliance by an NRSRO with the federal securities laws
or related Commission rules applicable to NRSROs, except those instances attributable to a nonrecurring and non-significant clerical or ministerial error or omission. The essential findings
described in this Report reflect the Staff’s conclusions following examination of the NRSROs.
8
See The Board of the International Organization of Securities Commissions, Supervisory Colleges for Credit
Rating Agencies, Final Report (July 2013).
8
The essential findings are not findings or conclusions of the Commission and have not been
subject to adjudication.
For purposes of this Report, the Staff considers “material regulatory deficiencies” to be
essential findings that involve:
Conduct or a deficiency that could undermine the quality of a credit rating or impair
the objectivity of an NRSRO’s credit rating process; or
Conduct that may be inconsistent with the anti-fraud provisions of the federal
securities laws.
The Staff’s determination that an NRSRO appropriately addressed a recommendation
does not constitute its endorsement of that NRSRO or its policies, procedures, internal controls,
or operations. In a future examination, the Staff may reevaluate the NRSRO’s response to
recommendations that it previously deemed to be appropriately addressed by, for example,
assessing whether the NRSRO fully implemented remedial measures and whether those remedial
measures appear to be effective. The Staff may also review and make recommendations
concerning the NRSRO’s policies, procedures, internal controls, or operations related to the
general subject matter of a recommendation that it previously deemed to be appropriately
addressed.
The Staff’s assessment of whether an NRSRO has appropriately addressed a
recommendation depends on the specific facts and circumstances, including, but not limited to,
the promptness of the NRSRO’s response, the severity of the conduct at issue, and whether the
remedial action undertaken by the NRSRO is expected to fully resolve the Staff’s concerns. In
addition, the determination of whether an NRSRO appropriately addressed a recommendation
reflects solely the Staff’s view and does not necessarily reflect the views of the Commission.
3.
Summary of Essential Findings and Responses to Material Regulatory
Deficiencies
For purposes of the Report, the Staff grouped the essential findings of the 2024 Section
15E examinations by each applicable large NRSRO, medium NRSRO, and small NRSRO in a
random ordering. The 2024 Section 15E examinations did not identify any essential findings for
one small NRSRO and one medium NRSRO. Accordingly, the following list includes a
summary of essential findings with respect to eight NRSROs.
a.
Large NRSRO #1
(1) The NRSRO did not enforce certain of its policies and procedures designed to
address and manage conflicts of interest related to securities ownership, resulting
in several instances where analysts continued to own securities that they were
required to divest under such policies. In one of these instances, an analyst
participated in determining a credit rating by voting in the rating committee,
notwithstanding that the analyst owned securities of the obligor whose credit
rating was being determined. Participating in determining a credit rating under
such circumstances gives rise to a prohibited conflict of interest pursuant to Rule
9
17g-5(c)(2). The Staff recommended that the NRSRO enhance its procedures and
controls, established pursuant to Section 15E(h)(1), to address and manage
conflicts of interest related to securities holdings.
The Staff identified this essential finding as a material regulatory deficiency.
In its response, the NRSRO stated that, upon discovering that an analyst had
voted in a committee for credit ratings of an issuer while owning securities of the
issuer, it self-reported the issue to the Staff and took prompt remedial actions,
including convening a new committee and suspending, and ultimately
terminating, the analyst. It also stated that it conducted a review of the securities
holdings and trading of rating analysts hired in 2022 and 2023 and a sample of
analysts who transferred between practice groups in 2022. Further, it reviewed all
committee participation of individuals who had securities holdings that
overlapped with the individuals’ area of practice and did not identify any other
analyst who voted in a committee while owning shares of the company under
review. The NRSRO stated that it has enhanced its procedures and controls to
address and manage conflicts of interest related to securities holdings, including
by implementing automated tools, hiring additional compliance personnel,
updating notices sent to employees regarding divestment requirements, revising
its applicable policy, and updating related employee training.
(2) A non-independent director did not preclear three securities transactions or
subject their related brokerage accounts to monitoring by the NRSRO, both as
required by the NRSRO’s policies. The transactions involved shares of stock of
entities rated by the NRSRO. The Staff recommended the NRSRO establish,
maintain, and enforce written policies and procedures, as required by Section
15E(h)(1), reasonably designed to address and manage conflicts of interest with
respect to securities ownership by directors.
b.
Large NRSRO #2
(1) The NRSRO’s independent directors used their personal email accounts to
conduct NRSRO business, which included the transmission of nonpublic
information, including potentially material nonpublic information. Such use of
personal email accounts occurred despite the directors having been provided with
NRSRO email addresses and despite the NRSRO’s policies prohibiting such
personal email use. The Staff recommended that the NRSRO implement controls
and procedures, including for monitoring, to enforce its policies and procedures to
prevent the misuse of material nonpublic information, as required by Section
15E(g)(1).
(2) Prior to convening a rating committee, an analyst sent a draft rating report to an
issuer that inadvertently disclosed a contemplated rating action. Such disclosure
was contrary to the NRSRO’s policy regarding the treatment of confidential
information and its practice to redact material nonpublic information, including
contemplated rating actions, when providing draft reports to an issuer. The Staff
recommended that the NRSRO establish additional procedures reasonably
10
designed to prevent misuse of material nonpublic information, as required by
Section 15E(g)(1).
(3) The NRSRO did not disclose complete and correct credit rating histories in its
Rule 17g-7(b) disclosures. For several years, the NRSRO posted disclosures that
did not include a significant number of credit ratings of a particular rating
category. Further, for several months, the NRSRO’s posted disclosures did not
include a significant number of credit ratings of another rating category. The
Staff recommended that the NRSRO implement procedures or controls to enable
the accurate creation, maintenance, and monitoring of its credit rating history
disclosures.
c.
Large NRSRO #3
(1) The NRSRO did not make and retain a record of the rationale for the material
difference between the credit rating it assigned to a security issued as part of an
asset-backed securities transaction and the credit rating implied by a model that
was a substantial component in the process of determining the credit rating, as
required by Rule 17g-2(a)(2)(iii). Although the NRSRO requires records of this
type to be made and retained, and has internal control processes designed to help
the NRSRO comply with such requirement, it did not do so in this instance. In
addition, an internal review of documentation of other credit rating committees
conducted by the NRSRO found other instances of documentation shortfalls of
varying types. The Staff recommended that the NRSRO take measures, such as
providing additional training, designed to ensure that analysts provide all
documents required for rating committees.
(2) The NRSRO’s policies and procedures did not require that it promptly publish on
its website notice of the existence of a significant error identified in a procedure
or methodology used to determine credit ratings that may result in a change to
current credit ratings, as required by Rule 17g-8(a)(4)(ii). Although the NRSRO
had an error procedure that covered errors involving the information used by a
rating committee in determining a credit rating, including errors in the application
of methodologies and use of models and scorecards, the procedure did not address
all types of errors covered by the rule and did not provide for prompt publication
on the NRSRO’s website of notice of such errors, as required by the rule. The
Staff recommended that the NRSRO establish, maintain, enforce, and document
the policies and procedures required by the rule.
d.
Medium NRSRO #1
(1) Although the NRSRO established a process for users of credit ratings to submit
complaints anonymously, it was not apparent or intuitive how to do so. The
difficulty in submitting complaints anonymously may discourage users of credit
ratings from communicating complaints to the NRSRO. The Staff recommended
that the NRSRO establish clear and effective procedures for the submission and
receipt of confidential, anonymous complaints from users of credit ratings,
consistent with the requirements of Section 15E(j)(3).
11
(2) The NRSRO did not enforce a policy designed to ensure adequate records are
made and retained to allow for an effective after-the-fact review of a rating
action. Although the policy required its personnel to maintain written records
reflecting the steps and values used in the application of the NRSRO’s analytical
methodology and containing sufficient details to permit an after-the-fact review,
the NRSRO did not enforce this control in connection with the rating action. In
particular, the NRSRO did not document an explanation or rationale for an
adjustment to a quantitative factor made during the credit rating process that was
outside the range specified in the published rating methodology. The Staff
recommended that the NRSRO, consistent with its requirements under Section
15E(c)(3)(A), enforce its policy regarding credit rating documentation
requirements.
(3) The NRSRO’s board of directors did not approve the entirety of a methodology,
contrary to the policies and procedures established by the NRSRO pursuant to
Rule 17g-8(a)(1). In the course of approving a particular methodology, the
NRSRO’s board did not approve a quantitative tool that appears to be used in
applying the methodology and to have a significant impact on rating outcomes.
The Staff recommended that the NRSRO implement procedures or controls to
ensure that complete versions of all new or amended methodologies are approved
by its board of directors in accordance with its procedures.
(4) The NRSRO did not make and retain a record of the rationale for the material
difference between the credit rating it assigned to a security issued as part of an
asset-backed securities transaction and the credit rating implied by a model that
was a substantial component in the process of determining the credit rating, as
required by Rule 17g-2(a)(2)(iii). Although the NRSRO took the view that the
model used in the credit rating process was not a substantial component of the
determination process, it appeared to the Staff, based on its review of the credit
rating related documentation and its interviews with NRSRO analysts involved in
the credit rating determination, that the model was, in fact, a substantial
component of the credit rating determination process. The Staff recommended
that the NRSRO implement controls, such as by defining when a model
constitutes a substantial component of the rating process and providing
appropriate guidance and training to analysts, designed to ensure that it makes
and retains records required by the rule.
e.
Medium NRSRO #2
(1) The NRSRO did not apply all applicable methodologies when determining an
entity’s credit rating. The NRSRO did not detect its error over the course of
approximately five years, despite convening multiple rating committees to assess
the entity’s credit rating during this period. The NRSRO also published an
information disclosure form that did not identify the version of all methodologies
used, as required by Rule 17g-7(a). The Staff recommended that the NRSRO
enhance its internal controls required by Section 15E(c)(3)(A) that are designed to
ensure it applies all applicable methodologies when determining credit ratings.
12
The Staff also recommended that the NRSRO enhance its procedures that are
designed to ensure that it discloses in its information disclosure forms the versions
of the methodologies used to determine credit ratings.
The Staff identified this essential finding as a material regulatory deficiency.
In its response, the NRSRO noted that the issue was identified by the chair of the
rating committee held in 2023 in accordance with its error correction policy and
self-reported to the Staff. The NRSRO also indicated that it has enhanced its
internal controls in a number of ways, including designating a senior analytical
person to explicitly attest to the completeness of materials to be provided to the
relevant ratings committees and implementing an enhanced controls-checklist for
use by relevant ratings committees. Further, it revised materials used in rating
committees to standardize the process for recording the list of methodologies and
criteria used to determine the credit rating and the rationale for the choice of
relevant methodologies and criteria and to call for the review of information
disclosure forms by the rating committee chair. In addition, the NRSRO stated
that, for the affected analytical areas, it has mandated enhanced training for
employees who vote in rating committees and amended an applicable procedure
to increase the minimum number of voting participants in rating committees to
provide for a larger number of analysts reviewing rating committee materials.
The NRSRO also indicated that it has disciplined certain individuals involved in
the applicable rating process.
(2) An independent director of the NRSRO used a personal email account to conduct
NRSRO business, including to send and receive emails containing sensitive
information, including potentially material nonpublic information. This occurred
despite the director having been provided with an NRSRO-issued electronic
device and email account and the director having agreed to be subject to an
NRSRO policy prohibiting the use of personal email for NRSRO business. The
Staff recommended that the NRSRO enforce its policies and procedures, as
required by Section 15E(g)(1), to ensure its independent directors comply with the
requirement to protect material nonpublic information.
(3) In assigning certain credit ratings, the NRSRO did not conduct all analyses
required under its methodologies. The error occurred because NRSRO employees
did not properly identify and categorize the instruments to be rated. The Staff
recommended that the NRSRO enhance its internal controls, as required by
Section 15E(c)(3)(A), that are designed to ensure that it properly identifies the
type of security or instrument to be rated and uses the appropriate methodology.
(4) The NRSRO’s complaints policies and procedures did not adequately address the
receipt, retention, and treatment of employee complaints regarding credit ratings,
models, and methodologies, as required by Section 15E(j)(3)(A). The Staff
recommended that the NRSRO amend its policies and procedures to address the
receipt, retention, and treatment of these types of complaints.
13
f.
Small NRSRO #1
(1) The NRSRO did not appear to enforce its policy to withdraw ratings when it did
not receive required surveillance information. In one instance, financial
information needed for monitoring the ratings was not provided to the NRSRO for
three financial quarters, a period of time beyond what was permissible under the
NRSRO’s practice for the rating to be maintained. The Staff recommended that,
in accordance with the requirements of Section 15E(c)(3)(A), the NRSRO clarify
the operation of its policy and implement appropriate procedures or controls to
enforce the policy.
(2) The NRSRO did not appear to have effective internal controls to ensure that
annual surveillance reviews were conducted on a timely basis. Staff observed
instances where, contrary to the NRSRO’s policies and procedures for surveilling
outstanding credit ratings, surveillance reviews were not conducted within the
required annual timeframe. The Staff recommended that, in accordance with the
requirements of Section 15E(c)(3)(A), the NRSRO establish, maintain, enforce,
and document effective controls governing adherence to its policies and
procedures for conducting annual surveillance reviews.
g.
Small NRSRO #2
(1) A senior employee who participated in the sales and marketing of the NRSRO’s
ratings discussed with a credit rating analyst the need to take certain rating actions
with regard to numerous ratings. In apparent response to the discussion, a
previously unscheduled rating committee meeting was convened on an expedited
basis to take actions on the ratings. By seeking to influence ratings, the senior
employee who participated in sales and marketing activities participated in
determining the ratings, which is a prohibited conflict of interest under Rule 17g5(c)(8). The Staff recommended that the NRSRO enhance its controls to monitor
interactions between employees involved in sales and marketing activities and
analytical employees and consider whether enhancements to its policies are
necessary to avoid inappropriate participation in the determination or monitoring
of credit ratings.
The Staff identified this essential finding as a material regulatory deficiency.
In its response, the NRSRO disagreed that the senior employee’s communication
with the credit rating analyst was an attempt to influence ratings. However, the
NRSRO acknowledged that communications of this type could give rise to, at
least, an appearance of impermissible conduct. The NRSRO stated that,
following an investigation conducted by outside counsel, the independent
directors of the NRSRO put in place certain compliance and governance
enhancements, including issuing a warning letter to the senior employee,
administering additional training to the senior employee and others, enhancing the
NRSRO’s relevant policies and procedures, and increasing compliance/risk
staffing and resources. The NRSRO said it would continue to monitor diligently
14
controls designed and intended to prevent inappropriate participation in the
determination of credit ratings.
(2) The NRSRO’s independent directors were permitted to attend, and did attend,
some of the NRSRO’s rating committees. However, the NRSRO’s policies and
procedures did not contemplate that independent directors would be involved in
the day-to-day operations of the NRSRO and, as a result, were not reasonably
designed to address and manage the corresponding conflicts of interest that can
arise or to prevent the misuse of material nonpublic information. The Staff
recommended that the NRSRO establish, maintain, document, and enforce
policies and procedures for its independent directors which are reasonably
designed, taking into account the extent of the involvement of the independent
directors in the day-to-day operations of the NRSRO, to address and manage
conflicts of interest and to prevent the misuse of material nonpublic information.
(3) The NRSRO omitted responsive records from a request for records made by the
Staff. Instead of producing the actual records of model outputs used in
determining certain credit ratings retained by the NRSRO, the NRSRO generated
a summary report to provide to the Staff. In other instances, the NRSRO
produced records that did not contain all relevant information or were inaccurate.
The Staff recommended that the NRSRO promptly provide complete and current
copies of all records responsive to Staff requests, as required by Rule 17g-2(f),
and improve its recordkeeping practices, such as by instituting appropriate
controls, to minimize instances of incomplete or inaccurate records.
(4) Although the NRSRO had a procedure that required rating analysts to deliver
internal attestations as to the absence of conflicts of interest, the procedure did not
apply to all NRSRO personnel who participated in the determination of credit
ratings. All personnel who participate in the determination of credit ratings can
influence the outcome of rating decisions. As a result, the NRSRO’s procedure
did not appear to be reasonably designed to address and manage conflicts of
interest that can arise from the NRSRO’s business, as required by Section
15E(h)(1). The Staff recommended that the NRSRO amend its policies and
procedures designed to address and manage conflicts of interest so that they apply
to all persons who participate in determining a credit rating.
(5) Information disclosure forms accompanying certain rating actions did not adhere
to the requirements of Rule 17g-7(a)(1), resulting in them being in a format that
was not easy to use and helpful for users of credit ratings to understand the
information contained in them. For example, items disclosed in some of the
forms were not in the order required by Rule 17g-7(a)(1)(i)(A) and, in some of the
forms, disclosure items were included multiple times and were inconsistent from
one another. In some instances, the disclosures did not comprehensively address
all the requirements in Rule 17g-7(a)(1)(ii) and contained errors such as including
the wrong assigned rating and the wrong rated entity name. The Staff
recommended that the NRSRO implement and/or enhance controls, such as by
requiring an appropriate review of the forms before their release, reasonably
15
designed to ensure that the information therein is accurate, is presented clearly,
and adheres to Rule 17g-7(a).
(6) The NRSRO did not appear to adhere to the procedures it adopted pursuant to
Section 15E(j)(3) for the receipt, retention, and treatment of complaints regarding
credit ratings, models, methodologies, and compliance with the securities laws
and policies and procedures developed under Section 15E. Specifically, the
NRSRO did not document in its complaint log two complaints that were required
to be documented under its procedures. The Staff recommended that the NRSRO
adhere to its policies and procedures for the receipt, retention, and treatment of
complaints, clarify its definition of complaints, and conduct appropriate training
to facilitate compliance with its policies and procedures.
h.
Small NRSRO #3
(1) The NRSRO’s board of directors did not conduct a review of the NRSRO’s
compensation policies and practices on an annual basis, as required under the
NRSRO’s policies. The Staff recommended that the NRSRO should enforce its
policies to ensure the board of directors fulfills its oversight responsibilities under
Section 15E(t)(3) regarding the NRSRO’s compensation and promotion policies
and practices.
(2) The NRSRO did not disclose complete and correct credit rating histories in its
Rule 17g-7(b) disclosures. For two consecutive months, the NRSRO posted a
disclosure that did not include numerous credit ratings that were required to be
disclosed. The Staff recommended that the NRSRO implement appropriate
procedures or controls to ensure complete and accurate credit rating history
disclosures.
Additionally, one of the NRSROs appeared to not comply with certain requirements in a
Commission order. The Staff recommended that the NRSRO comply with these requirements.
4.
Responses to Recommendations from Prior Section 15E Examinations
To assess whether NRSROs appropriately addressed recommendations from the 2023
Section 15E examinations, the Staff reviewed each NRSRO’s written response describing its
planned remedial measures, participated in calls with each NRSRO to discuss its written
response, and requested additional documentation, as appropriate. The Staff also continued to
assess remedial measures taken to address recommendations from prior Section 15E
examinations that had not previously been determined to have been appropriately addressed.
NRSROs generally addressed the recommendations by taking remedial measures such as
adopting new or enhancing existing policies or procedures, internal controls, or systems and
processes, and by adding personnel and other resources in areas such as compliance, information
technology, or analytics. During the 2024 Section 15E examinations, the Staff assessed each
NRSRO’s progress in implementing remedial measures. The Staff took into account that
NRSROs may not be able to fully implement remedial measures and/or that the Staff may not be
16
able to fully assess the effectiveness of these measures during the 2024 Section 15E
examinations.
The Staff determined that most recommendations from prior Section 15E examinations
have been appropriately addressed. The recommendations that have not yet been appropriately
addressed are described below.
In one instance, the Staff determined that the remedial efforts taken by a small NRSRO
with respect to a recommendation from the Staff’s 2022 Section 15E examination did not
appropriately address the corresponding recommendation. In 2022, the Staff found that the small
NRSRO did not appear to acquire and analyze all material analytical facts when determining a
credit rating. The Staff recommended that the NRSRO enhance its internal controls governing
the implementation of and adherence to its policies, procedures, and methodologies for
determining credit ratings as they pertain to data quality control, transaction vetting, and
acquisition of information about its issuers. The Staff determined that the NRSRO did not
appropriately address the 2022 recommendation because the NRSRO’s remediation did not
enhance its internal controls around data quality, vetting new transactions, or acquiring
information about its issuers in a way that would prevent future ratings from being issued despite
a lack of consideration and understanding of all material analytical facts. Despite being
informed of the Staff’s determination in the examination summary letter provided to the NRSRO
following the Staff’s 2023 Section 15E examination, the NRSRO had not undertaken any
additional remedial efforts as of the conclusion of the 2024 Section 15E examination.
The instance described above is the only remaining recommendation from examinations
prior to the 2023 Section 15E examinations where the Staff has not yet determined its
recommendation has been appropriately addressed. With respect to the recommendations from
the 2023 Section 15E examinations, there were several instances where the Staff was unable to
determine whether its recommendations have been appropriately addressed either because the
NRSRO’s remediation is ongoing or because additional information is necessary to assess the
remediation. These instances relate to the following findings and recommendations from the
2023 Section 15E examinations:
An NRSRO appeared to not comply with certain requirements of a Commission
order, and the Staff recommended that the NRSRO comply with these requirements.
While this NRSRO did implement certain changes to related policies and procedures,
the Staff is continuing to evaluate whether these changes have appropriately
addressed the Staff’s recommendation.
A large NRSRO did not disclose complete and current credit rating histories in its
Rule 17g-7(b) disclosures, and the Staff recommended that the NRSRO implement
appropriate procedures or controls to ensure the accurate creation and maintenance of
such disclosures. In response to this recommendation, the NRSRO implemented
additional procedures to validate the content of its required disclosures. The Staff’s
review of the effectiveness of the new procedures is ongoing.
A medium NRSRO’s policies and procedures for addressing and managing conflicts
of interest related to securities holdings did not appear to be reasonably designed
given the exclusion of certain types of accounts from monitoring. The Staff
17
recommended that the NRSRO establish, maintain, and enforce reasonably designed
policies and procedures to address such conflicts of interest and that the NRSRO
review past account statements for the previously excluded accounts to identify any
instances where a prohibited conflict of interest may have existed. The NRSRO
implemented new procedures with respect to the previously excluded accounts in the
first quarter of 2024 and completed its review of past account statements in the third
quarter of 2024. The review of past account statements identified one instance where
an analyst participated in multiple rating committees, including committees held after
the implementation of the new procedures, while owning securities of the issuer. The
Staff’s review of the effectiveness of the new procedures is ongoing.
A small NRSRO maintained a performance measurement system which, in the Staff’s
view, established incentives for analysts to produce ratings as quickly as possible,
without regard to rating quality, and that such incentives made it difficult or
impossible for the NRSRO to manage certain conflicts of interest. The Staff also
found that the system appeared to be designed to achieve sales and marketing
objectives and to result in analytical employees being influenced by sales and
marketing considerations. The Staff recommended that the NRSRO eliminate
performance measures that promote sales and marketing considerations and
exacerbate conflicts of interest and that the NRSRO maintain adequate resources and
utilize those resources to implement and enforce policies, procedures, and controls
necessary to produce credit ratings with integrity. The NRSRO eliminated the
specific performance measurement system in question and indicated that its board of
directors would assume a more active role in the assessment of needed resources.
While the Staff did observe an increased focus on these issues at the board level that
is ongoing, the Staff also continued to observe apparent deficiencies in processes and
controls that could impact the production of credit ratings with integrity.
The Staff will continue to assess the remedial efforts of the respective NRSROs with respect
these findings and recommendations in its 2025 Section 15E examinations.
IV.
STATE OF COMPETITION, TRANSPARENCY, AND CONFLICTS OF
INTEREST
A.
Competition
1.
Select NRSRO Statistics
Sections IV.A.1.a through 1.c below summarize and discuss certain information reported
by NRSROs on Form NRSRO or pursuant to Rule 17g-3 that provides insight into the state of
competition among NRSROs. While this information indicates that the large NRSROs continue
to account for the highest percentages of outstanding ratings, it also shows that the small and
medium NRSROs continue to compete with the large NRSROs in certain rating categories. For
instance, the information shows that AMB has the greatest number of ratings outstanding in the
insurance category and that DBRS and KBRA have maintained a meaningful ratings share in the
asset-backed securities category.
18
a.
NRSRO Credit Ratings Outstanding
Pursuant to Rule 17g-1(f), each NRSRO must file with the Commission an annual
certification on Form NRSRO within 90 days of the end of each calendar year. Such filings are
publicly available on EDGAR and are also required to be made publicly available without cost
on each NRSRO’s website pursuant to Rule 17g-1(i).
Each NRSRO reports in Item 7A of the NRSRO’s annual certification on Form NRSRO
the number of outstanding credit ratings, as of the end of the preceding calendar year, for each
rating category for which it is registered. This information, for the calendar year ending
December 31, 2023, is summarized in Charts 2 through 7 below, and Charts 8 through 10
illustrate how the number of ratings outstanding at each NRSRO have changed over the past five
years. This information can be useful in determining the breadth of an NRSRO’s coverage with
respect to issuers, obligors, and securities or money market instruments within a particular rating
category and overall.
While comparing the number of ratings outstanding among NRSROs provides a
cumulative view on the state of competition over time, comparing the number of ratings issued
by such NRSROs in a given period provides a more current picture of competition among
NRSROs. Consequently, the information described in Charts 8 through 10 (which show changes
in ratings outstanding over a five-year period) may provide an indication of how NRSROs have
been competing in recent years. Additionally, the information described in Section IV.A.2 of
this Report (relating to recent market share developments in the asset-backed securities rating
category) may provide additional insight regarding the current competitive landscape among the
NRSROs in the asset-backed securities rating category.
There are additional limitations to assessing the state of competition in each rating
category and in the aggregate based on the number of outstanding ratings. For instance, some
NRSROs have pursued business strategies to specialize in particular rating categories or subcategories. For example, AMB has traditionally focused on rating insurance companies and their
affiliates. Also, the reported information does not reflect any credit ratings being issued by
NRSROs in rating categories in which they are not registered with the Commission, nor does it
reflect ratings issued by an affiliate of an NRSRO unless the affiliate is identified as a credit
rating affiliate on Item 3 of Form NRSRO.
Further, when reporting its outstanding ratings, each NRSRO makes its own
determination of the applicable rating category into which each of its ratings falls. The
classification of ratings into the five rating categories is not necessarily consistent across
NRSROs.
Chart 2 provides the number of outstanding credit ratings reported by each NRSRO in its
annual certification for the calendar year ending December 31, 2023, in each of the five rating
categories identified in Section 3(a)(62)(A) for which the NRSRO was registered as of
December 31, 2023. Chart 3 displays the percentage of each NRSRO’s outstanding credit
ratings of the total outstanding credit ratings of all NRSROs, for each rating category in which
the NRSRO was registered, as reported by each NRSRO in its annual certification for the
calendar year ending December 31, 2023.
19
Chart 2. Number of Outstanding Credit Ratings as of December 31, 2023, by Rating Category
NRSRO
.
.
F1~an~1al
lnst1tut1ons
lnsuran~e
Companies
Corporate
Issuers
AssetBacked
Securities
Govern_n:ient
Securities
To_tal
Ratings
Year-Over-Year Change
in Total Ratin s ( 2022
to 202~)
Demotech
N/ R
432
N/ R
N/ R
N/ R
432
-1.59 %
EJR
5,078
817
8,354
N/ R
N/ R
14,249
-6.98%
HR
797
N/ R
732
N/ R
469
1,998
7.48%
JCR
948
106
3,466
N/ R
401
4 ,921
4.99%
Total Small
6,823
1,355
12,552
N/R
870
21,600
AMB
N/ R
7,357
984
8
N/ R
8,349
-0.12%
DBRS
9,232
229
3,125
42,751
8,100
63,437
1.33%
KBRA
1,657
182
455
18,315
9,548
30,157
-12.22%
Total Medium
10,889
7,768
4,564
61,074
17,648
101,943
Fitch
37,383
3,245
21,073
36,382
165,140
263,223
0.48%
Moody's
39,543
2,707
32,669
51 ,256
544,445
670,620
-0.14%
S&P
61,360
6,967
54,545
37,720
895,230
1,055,822
-0.84%
Total Large
138,286
12,919
108,287
125,358
1,604,815
1,989,665
Total
155,998
22,042
125,403
186,432
1,623,333
2,113,208
-0.60%
N/ R indicates that the NRSRO was not registered in the applicable rating category as of the reporting date.
Percentages have been rounded to the nearest one-hundredth of one percent.
Sources: NRSRO annual certifications for the 2022 and 2023 calendar years, Item 7 A on Form NRSRO.
Chart 3. Percentage by Rating Category of Each NRSRO’s Outstanding Credit Ratings
of the Total Outstanding Credit Ratings of all NRSROs as of December 31, 2023
NRSRO
Fi~an~ial
lnst1tut1ons
lnsuran~e
Companies
Corporate
Issuers
Asset-B~~ked
Securities
Govern_n:ient
Securities
Total Ratin s
g
Demotech
N/ R
1.96%
N/ R
N/ R
N/ R
0.02%
EJR
3.26%
3.71 %
6.66 %
N/ R
N/ R
0.67%
HR
0.51 %
N/ R
0.58%
N/ R
0.03%
0.09%
JCR
0.61%
0.48%
2.76%
N/ R
0.02%
0.23%
Total Small
4.37%
6.15%
10.01%
N/R
0.05%
1.02%
AMB
N/ R
33.38%
0.78%
<0.01%
N/ R
0.40%
DBRS
5.92%
1.04%
2.49%
22.93%
0.50%
3.00%
KBRA
1.06%
0.83%
0.36%
9.82%
0.59%
1.43%
Total Medium
6.98%
35.24%
3.64%
32.76%
1.09%
4.82%
Fitch
23.96%
14.72%
16.80%
19.51%
10.17%
12.46%
Moody's
25.35%
12.28%
26.05%
27.49%
33.54%
31.73%
S&P
39.33%
31.61 %
43.50%
20.23%
55.15%
49.96%
Total Large
88.65%
58.61%
86.35%
67.24%
98.86%
94.15%
N/ R indicates that the NRSRO was not registered in the applicable rating category as of the reporting date.
Percentages have been rounded to the nearest one-hundredth of one percent.
Sources: NRSRO annual certifications for the 2022 and 2023 calendar years , Item 7 A on Form NRSRO.
20
The large NRSROs accounted for 94.15% of all the ratings outstanding as of December
31, 2023—virtually unchanged from their share as of December 31, 2022. For comparison, in
2007, the year when NRSROs began reporting outstanding ratings on Form NRSRO, the large
NRSROs accounted for 98.8% of all outstanding ratings.
Charts 2 and 3 also show that AMB, a medium NRSRO, had the most credit ratings
outstanding in the insurance category. In each of the past ten years, AMB reported more credit
ratings outstanding in the insurance category than any other NRSRO.
Also of note, when compared to the corresponding information as of December 31, 2022,
is the significant increase in the number of DBRS’ ratings outstanding in the asset-backed
securities rating category and the similarly-sized decrease in the government securities rating
category. These changes are largely attributable to a change in the classification of certain
ratings by DBRS.
Chart 4 depicts the percentages of outstanding credit ratings attributable to each rating
category, as reported by the NRSROs in their annual certifications for the calendar year ending
December 31, 2023.
As illustrated by Chart 4, the largest proportion of the aggregate credit ratings reported to
be outstanding were in the government securities category, which may be attributable to the large
number of government bond issuers (e.g., issuers of municipal securities) and their multiple debt
offerings. The government securities category accounted for 76.8% of the total number of credit
ratings reported across all categories and, as shown on Chart 3 and Chart 7, is also the most
concentrated rating category, with the large NRSROs accounting for 98.7% of all outstanding
government securities ratings.
Chart 5 depicts the percentages of the credit ratings outstanding that are attributable to
each NRSRO; Chart 6 depicts the percentages of the credit ratings outstanding that are
attributable to each NRSRO other than those in the government securities category; and Chart 7
depicts the percentages of the credit ratings outstanding that are attributable to each applicable
NRSRO in the government securities category, in each case, as reported by each NRSRO in its
annual certification for the calendar year ending December 31, 2023.
21
Chart 4. Breakdown of Ratings Reported
Outstanding by Rating Category as of December 31,
2023
Chart 5. Breakdown of Ratings Reported
Outstanding by NRSRO as of December 31, 2023
•
0.4%
111 t.fvM
~
L:~~7,~
-
Government Securit ies 76.8%
-
S&PS 0.1%
-
Asset-Backed Securities 8.8%
-
MIS31.7%
-
Financial Institutions 7.4%
-
Fitch 12.5%
-
Corporate Issuers 5.9%
-
DBRS3.0%
-
Insurance Com panies 1.0%
-
KBRA 1.4%
Percentages have been rounded to the nearest
one-tenth of one percent.
Sources: NRSRO annual certifi cations for the 2023
ca lendar year, Item 7A on Form NR SRO.
-
EJR 0.7%
AM B 0 .4%
-
JCR0.2%
HR 0 .1%
-
Demotech <0.1%
Percentages have been rounded to the nearest
one-tenth of one percent.
Sources: NRSRO annual certifica ti ons for the 2023
calendar year, Item 7A on Form NR SRO.
A comparison of Chart 5 to Chart 6 illustrates that there is less concentration in the nongovernment securities rating categories. S&P’s and Moody’s percentage share of all outstanding
ratings declines by 17.2 and 5.9 percentage points, respectively, when government securities are
excluded. Fitch’s percentage share of outstanding ratings, on the other hand, increases by 7.5
percentage points when government securities are excluded. The percentage share for all the
remaining NRSROs also increases when government securities are excluded.
22
Chart 6. Breakdown of Non-Government Securities
Ratings Reported Outstanding by NRSRO as of
December 31, 2023
Chart 7. Breakdown of Government Securities
Ratings Reported Outstanding on December 31,
2023
200%
. ;
17%
■
0.3%
~
L~~~~:o
0 .1 %
-
S&P 32.8%
-
MIS25.8%
-
Fitch 20.0%
-
DBRSll.3%
-
KBRA4.2%
-
EJR 2.9%
AMB l.7%
-
JCR0.9%
HR 0 .3%
-
-
S& PSS.15%
-
MIS 33.54 %
-
Fitch 10 .1 7%
-
KBRA0.59%
-
DBRS 0.50%
HR 0.03%
-
JCR0.02%
Demotech 0.1 %
Percentages have been rounded to the nearest
one-tenth of one percent.
Sources: NRSRO annual certifi ca tion s fo r the 2023
ca lendar yea r, Item 7 A o n Fo rm NRSRO.
Percentages have been rounded to the nearest
o ne-hundredth of one percent.
Thi s chart o nly includes the NRSROs that are regi stered
in th e government securities ca tegory.
Sources: NRSRO annual certifi ca tion s fo r the 2023
ca lendar yea r, Item 7 A on Fo rm NRSRO.
Further, it is difficult to graphically represent the relative rating shares of EJR, AMB,
HR, JCR, and Demotech given that they, in the aggregate, comprise less than 1.4% of all
outstanding ratings when government securities are included. When government securities are
excluded, a clearer picture of the relative percentage shares of the small and medium NRSROs in
the categories in which they are active can be observed, as illustrated in Chart 6.
Chart 8 depicts the change in ratings outstanding over a period of five years for all ratings
other than ratings in the government securities category reported outstanding by NRSROs, as
reported by each NRSRO in its annual certifications for the calendar years ending December 31,
2019, through December 31, 2023.
23
Chart 8. Total Non-Government Ratings Issued by All NRSROs (2019-2023)
180,000
160,000
S&P
140,000
Moody's
120,000
100,000
Fitch
----------------80,000
60,000
DBRS
40,000
20,000
_ _ _ _ _ _..___
=
KBRA
~ E J R
AMB
, - JCR
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - ,HR
0 L - - ----== =----- - -=====-- - - - -===--__,= = = = =~ - DEMOTECH
2019
2020
2021
2022
2023
Sources: NRSRO annual certifications for the 2019-2023 calendar years, Item 7A on Form NRSRO.
Demotech was registered as an NRSRO on July 11, 2022, and filed its first annual certification for the year
ending December 31, 2022. Year-over-year data is only available since 2022.
24
As illustrated in Chart 8, reported non-government ratings outstanding have remained
mostly steady across all NRSROs over the past five years and, consistent with the information
shown in Chart 3 for the year ending December 31, 2023, the larger NRSROs have significantly
more ratings outstanding than the medium and small NRSROs. Chart 8 shows relatively stable
rating levels at AMB, Demotech, HR, and JCR. The chart also shows that EJR’s rating level
appears to have stabilized following a decrease in 2021, that KBRA’s rating levels decreased this
year following several years of increases, and that DBRS had a sharp increase in ratings
outstanding in 2023. However, the large increase in ratings for DBRS is attributable to a change
made by DBRS in how it classifies certain ratings. A significant number of ratings that had been
categorized as part of the government securities rating category are now categorized as part of
the asset-backed securities category. Moreover, the total number of DBRS ratings (including
government ratings) did not significantly change from the previous year.
The changes in outstanding ratings over time for these NRSROs is more apparent when
viewing changes in ratings outstanding on a scale that includes only the medium and small
NRSROs, as illustrated in Chart 9.
Chart 9. Total Non-Government Ratings Issued by Medium and Small NRSROs (2019-2023)
60,000
DBRS
50,000
40,000
30,000
20,000
10,000
0
-----=
=
KBRA
- -
~EJR
AMB
_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __.r-- JCR
, HR
L _ ____:===========-- -----==============---~ = = = = = ~-~ DEMOTECH
2019
2020
2021
2022
2023
Sources: NRSRO annual certifications for the 2019-2023 calendar years, Item 7 A on Form NRSRO.
Demotech was registered as an NRSRO on July 11, 2022, and filed its first annual certification for the year
ending December 31, 2022. Year-over-year data is only available since 2022.
Chart 10 depicts the change in ratings outstanding over a period of five years for all
ratings in the asset-backed securities rating class reported outstanding by NRSROs registered
with the Commission in the asset-backed securities category (see Chart 1). While AMB is
registered to rate asset-backed securities, as shown in Chart 2, it only has eight outstanding asset-
25
backed securities ratings as of December 31, 2023. For these reasons, Chart 10 only includes
data from DBRS, Fitch, KBRA, Moody’s, and S&P.
Chart 10. Total ABS Ratings Issued by All NRSROs (2019-2023)
60,000
Moody's
50,000
DBRS
S&P
40,000
Fitch
30,000
KBRA
20,000
10,000
0
2019
2020
2021
2022
2023
Sources: NRSRO annual certifications for the 2019-2023 calendar years, Item 7 A on Form NRSRO.
As discussed in more detail in Section IV.A.2, medium NRSROs have been able to gain
market share in the asset-backed securities rating class. Chart 10 provides a graphic
representation of changes in ratings outstanding in this rating class since 2019. The chart
illustrates that KBRA had been steadily increasing the number of ratings reported outstanding,
but experienced a decrease during the most recent year. During this same period, the ratings
count for S&P has remained fairly steady. While Moody’s and Fitch had more variation than
S&P, their ratings counts have also remained relatively stable. Compared to last year, Fitch has
increased the number of ratings and Moody’s has experienced a slight decrease. As discussed in
more detail above, the large increase in DBRS’ ABS ratings includes the impact of a
reclassification of ratings that had previously been considered to be in the government securities
rating category but are now treated as ABS ratings.
b.
NRSRO Analytical Staffing Levels
Chart 11 reports the number of credit analysts (including credit analyst supervisors) and
the number of credit analyst supervisors employed by each of the NRSROs, as reported on
Exhibit 8 to Form NRSRO.
26
Chart 11. NRSRO Credit Analysts and Credit Analyst Supervisors
NRSRO
Credit Analysts (Including Credit Analyst Supervisors)
Credit Analyst Supervisors
Demotech
3
EJR
20
9
HR
60
9
JCR
65
30
Total Small
148
49
AMB
156
47
DBRS
505
145
KBRA
238
61
Total Medium
899
253
Fitch
1,133
339
Moody's
1,644
24 3
S&P
1,636
130
Total Large
4,413
712
TOTAL
5,460
1,014
I
Sources: Exhibit 8 t o Form NR SRO, in effect as of each NR SRO's annual certifica ti o n fo r the 2023 ca lendar year fil ed
o n o r befo re Marc h 31, 2024.
The large NRSROs report employing 4,413 credit analysts (including supervisors), which
is approximately 80.8% of the total number employed by all of the NRSROs. The small and
medium NRSROs, in the aggregate, employ approximately 19.2% of all credit analysts
employed by NRSROs. The percentage of credit analysts employed by the small and medium
NRSROs has increased steadily since 2014 when it was approximately 11.4% of all NRSRO
analysts. Total NRSRO analytical staff decreased by about 7.4% compared to the information
reported in the prior year annual certifications.
c.
NRSRO Revenue
Chart 12 shows the percentage of total NRSRO revenues attributable to the large, medium,
and small NRSROs since 2020. The percentage of aggregate NRSRO revenue reported by the
large NRSROs increased in 2023 but remains below the levels reported for fiscal year 2020 and
2021. Likewise, the revenue share of the medium NRSROs has increased from 2020, reaching a
high of 7.3% in 2022, before decreasing to 6.7% in 2023. The small NRSROs’ share of overall
NRSRO revenue has also increased since 2020 but experienced a small decrease in 2023, falling
by 0.1 percentage points in fiscal year 2023 compared with 2022.
27
Chart 12. NRSRO Fiscal Year Revenue as a Percentage of Aggregate Reported Revenue
2023
2022
2021
2020
Large NRSROs
91.9%
91.1 %
93.2%
94.1%
Medium NRSROs
6.7%
7.3%
5.6%
5.1%
Small NRSROs
1.5%
1.6%
1.1%
0.8%
Percentages have been rounded to the nearest one-tenth of one percent.
Sources: Nonpublic financial reports filed with the Commission under Rule 17g-3(a)(3) for fiscal years ended 2020
through 2023. For the preparation of this Report, if an NRSRO reported revenue in a foreign currency, the revenue
was co nverted to U.S. dollars using the average exchange rate over all U.S. banking days in the fiscal yea r of such
NRSRO.
Further revenue information is available for NRSROs that are owned by public
companies. The following discussion summarizes information described in the respective Annual
Reports on Form 10-K for the year ended December 31, 2023: 9
9
Moody’s Corporation, which is Moody’s parent company, reported $2.9 billion in
Moody’s external revenue for 2023, a 6% increase from 2022. This increase was
attributed to increased investment grade corporate debt issuance coupled with higher
infrastructure finance issuance relative to activity in the prior year. The corporate
finance group, financial institutions group, and public, project and infrastructure
finance group each had an increase in revenue compared to 2022 results. The
structured finance group had a decrease in revenue compared to the 2022 results.
S&P Global Inc., which is S&P’s parent company, reported $3.3 billion in S&P’s
revenue for 2023, a 9% increase from 2022. This increase, according to the report,
was primarily due to growth in transaction revenue from corporate bond ratings and
bank loan ratings attributed to higher refinancing activity. Non-transaction revenue
also increased in 2023. The report identifies an increase in surveillance revenue as a
key contributor to this increase but also notes that the increase was tempered by lower
new entity credit rating revenue. Revenue also benefited from improved contract
terms across product categories and a favorable impact form foreign exchange rates.
Morningstar, Inc., which is DBRS’ parent company, reported $215.4 million in
revenue in 2023 from its Morningstar Credit reportable segment that includes DBRS, a
9.1% decrease in revenue from 2022. This decrease, according to the report, was
primarily due to a sharp decline in CMBS ratings revenue, driven by ongoing softness
in the U.S. CMBS ratings activity. Additionally, and to a lesser extent, declines in
residential mortgage-backed securities related revenue also contributed to the decrease
See the following reports for further information:
(1) Moody’s Corporation, Annual Report on Form 10-K for the year ended December 31, 2023;
(2) S&P Global Inc., Annual Report on Form 10-K for the year ended December 31, 2023; and
(3) Morningstar, Inc., Annual Report on Form 10-K for the year ended December 31, 2023.
28
in revenue. These declines were partially offset by an increase in asset-backed
securities ratings revenues and modest gains in corporate ratings revenues.
Regulatory filings show an increase in revenues at Moody’s, DBRS, and S&P in the first
half of 2024 compared to the same period in 2023.10 Moody’s Corporation reported $2.0 billion
in Moody’s external revenue for the first half of 2024, a 35% increase compared with the same
period in 2023. This increase, according to the report, reflects issuance growth across all lines of
businesses due to tightening credit spreads and issuance ahead of potential market volatility later
in the year.
S&P Global Inc. reported $2.2 billion in revenue at S&P for the first half of 2024, a 31%
increase compared with the same period in 2023. Transaction revenue increased, according to the
report, due to growth in corporate bond ratings revenue and bank loan ratings revenue driven by
increased issuance volumes due to higher refinancing activity. According to the report, an
increase in structured finance revenue driven by increased CLO issuance also contributed to
transaction revenue growth. Non-transaction revenue increased due to an increase in surveillance
revenue and new entity credit ratings revenue and higher revenue driven by scenario testing and
credit rating profile evaluations.
Morningstar, Inc. reported $137.9 million in revenue in the first half of 2024 for its
Morningstar Credit reportable segment, a 36.5% increase compared with the same period in 2023.
This increase, according to the report, was supported by ratings-related revenue increasing across
asset classes and geographies.
2.
Market Share Observations in the Asset-Backed Securities Rating
Category
As noted in Section IV.A.1.a of this Report, the number of ratings recently issued by
NRSROs may give a clearer picture of competition than the number of ratings each NRSRO
currently has outstanding. The market share data discussed in this Section IV.A.2 provides
information about ratings issued in 2022, 2023, and the first half of 2024 and shows that DBRS
and KBRA have achieved meaningful market share percentages in recent years with respect to
certain types of asset-backed securities. Unless noted otherwise, all market share percentages in
this Section IV.A.2 are based on dollar amounts of issuance. Additionally, this section only
discusses observations related to DBRS, Fitch, KBRA, Moody’s, and S&P, which are the five
NRSROs registered in the asset-backed securities category with current asset-backed securities
rating activity.
Section IV.A.2.a and 2.b below discuss NRSRO market share information with respect to
certain asset-backed securities, based on information from the databases available on Green
10
See the following reports for further information:
(1) Moody’s Corporation, Quarterly Report on Form 10-Q for the period ended June 30, 2024;
(2) S&P Global Inc., Quarterly Report on Form 10-Q, for the period ended June 30, 2024; and
(3) Morningstar, Inc., Quarterly Report on Form 10-Q for the period ended June 30, 2024.
29
Street’s website. 11 Although analysis of the information from the databases may provide insight
into recent developments regarding the state of competition among NRSROs in the asset-backed
securities rating category, it has certain limitations. For instance, the information treats each
transaction as one undivided whole and counts an NRSRO as having rated the entire transaction
even if the NRSRO rated only a portion of it (e.g., the NRSRO may have rated only the most
senior tranche, yet is treated as having rated all of them).
a.
CMBS
Charts 13 through 16 provide information concerning U.S. CMBS ratings by NRSROs.
NRSRO market share varies between the conduit CMBS and single-borrower CMBS segments,
the two segments that account for most of the non-agency U.S. CMBS transactions rated by
NRSROs. The charts include reported market share information for total non-agency U.S.
CMBS transactions, U.S. conduit CMBS transactions, U.S. single-borrower CMBS transactions,
and agency CMBS transactions for the first half of calendar year 2024 and calendar years 2023
and 2022. Market share percentages are calculated for the charts using both dollar amounts of
issuance and numbers of deals. 12
Chart 13. Rating Agency Market Shares for Total Non-Agency U.S. CMBS
Issued in 2022, 2023, and First Half of 2024
NRSRO
lH-2024
Issuance
($Mil.)
N
f
do. 01
ea s
Market
Share %
($)/(#)
2023
Issuance
($Mil.)
N
f
do. 01
ea s
Market
Share %
($)/(#)
2022
Issuance
($Mil.)
N
f
do. 01
ea s
Market
Share %
($)/(#)
Fitch
25.594
32
62.5/ 54.2
27,047
38
68.8/ 62.3
38,114
37
54.3/ 4 5.7
2
Moody's
21,335
26
52.1/44.1
19,623
30
49.9/ 49.2
46,275
51
65.9/ 63.0
3
KBRA
19,711
25
48.1/42.4
24,957
34
63.4/ 55.7
28,249
28
40.2/ 34.6
4
S&P
9,597
15
23.4/ 25.4
14 ,976
22
38.1/36.1
14 ,976
21
21.3/ 25.9
5
DBRS
9,181
15
22.4/ 25.4
7,737
13
19.7/ 21.3
26,126
27
37.2/ 33.3
Total Rated Market
40,959
59
39,333
61
70,231
81
lH- 2024
R k
an
Source : Commercia l Mortgage A le rt CMBS da t abase as of A ug u st 30, 2024 .
11
Green Street publishes Asset-Backed Alert and Commercial Mortgage Alert and maintains the related ABS
database and CMBS database. The information in Charts 13 through 16 is based on information from the
Commercial Mortgage Alert CMBS database as of August 30, 2024, and the information in Charts 17 through
19 and the accompanying discussion is based on information from the Asset-Backed Alert ABS database as of
August 30, 2024. For more information on the databases, including inclusion and categorization criteria, see
Asset-Backed Alert ABS Database Methodology and Commercial Mortgage Alert CMBS Database
Methodology.
12
Because it is typical for more than one NRSRO to rate a particular transaction, the sum of the market share
percentages exceeds 100% and the sum of the amounts attributed to each NRSRO exceed the total rated market
amount.
30
Chart 14. Rating Agency Market Shares for U.S. Conduit CMBS Issued in 2022, 2023, and First Half of 2024
lH- 2024
NRSRO
lH-2024
Issuance
($Mil.)
No. of
d
ea Is
Market
Share%
($)/(#)
2023
Issuance
($Mil.)
No. of
d
ea Is
Market
Share%
($)/(#)
2022
Issuance
($Mil.)
No. of
d
ea Is
Market
Share%
($)/(#)
Fitch
11,412
13
100.0/100.0
19,748
26
100.0/100.0
23,750
25
100.0/100.0
2
KBRA
10,221
12
89.6/92.3
19,748
26
100.0/ 100.0
17,015
18
71.6/72.0
3
Moody's
5,768
6
50.5/46.2
9,636
13
48.8/50.0
13,615
14
57.3/56.0
4
S&P
5,643
7
49.5/53.8
10,111
13
51.2/50.0
9,646
10
40.6/40.0
5
DBRS
1,191
10.4/7.7
0
0
0.0/0.0
8,889
9
37.4/36.0
Total Rated Market
11,412
19,748
26
23,750
25
Ran k
13
Source: Commercial Mortgage Alert CMBS database as of August 30, 2024.
Chart 15. Rating Agency Market Shares for U.S. Single-Borrower CMBS Issued in 2022, 2023, and First Half of 2024
lH-
NRSRO
lH-2024
Issuance
($Mil.)
N
f
0
do.
1
ea s
Market
Share%
($)/(#)
2023
Issuance
($Mil.)
N
f
0
do.
1
ea s
Market
Share %
($)/(#)
2022
Issuance
($Mil.)
N
f
0
do.
1
ea s
Market
Share %
($)/(#)
Moody's
15,566
20
52.7/43.5
9,986
17
51.0/48.6
32,383
36
70.1/65.5
2
Fitch
14,182
19
48.0/41.3
7,299
12
37.3/34.3
14,364
12
31.1/21.8
3
KBRA
9,491
13
32.1/28.3
5,209
8
26.6/22.9
10,957
9
23.7/16.4
4
DBRS
7,989
14
27.0/30.4
7,737
13
39.5/37.1
17,237
18
37.3/32.7
5
S&P
3,954
8
13.4/ 17.4
4,865
9
24.8/25.7
7,943
11
17.2/20.0
29,547
46
19,585
35
46,204
55
2024
Ran k
Total Rated Market
Source: Commercial Mortgage Alert CMBS database as of August 30, 2024 .
Chart 16. Rating Agency Market Shares for Agency CMBS Issued in 2022, 2023, and First Half of 2024
lH- 2024
NRSRO
lH-2024
Issuance
($Mil.)
No. of
d
ea Is
Market
Share%
($)/(#)
2023
Issuance
($Mil.)
No. of
d
ea Is
Market
Share%
($)/(#)
2022
Issuance
($Mil.)
No. of
d
ea Is
Market
Share%
($)/(#)
KBRA
1,917
2
50.6/33.3
11,898
11
78.1/57.9
15,690
13
63.0/59.1
Fitch
1,917
2
50.6/33.3
8,224
8
54.0/42.1
14,240
12
57.1/54.5
2
S&P
1,868
4
49.4/66.7
5,159
9
33.9/47.4
696
2
2.8/9.1
3
DBRS
1,127
29.8/16.7
1,797
2
11.8/10.5
8,539
7
34.3/31.8
4
Moody's
0
0
0.0/0.0
1,847
2
12.1/10.5
9,989
8
40.1/36.4
3,785
6
15,230
19
24,925
22
Ran k
Total Rated Market
Source: Commercial Mortgage Alert CMBS database as of August 30, 2024.
Charts 13 through 16 show that in 2022, 2023, and the first half of 2024 the large
NRSROs generally held a large percentage of the market shares in rating U.S. CMBS rated
transactions, but DBRS and KBRA achieved significant market shares as well.
31
As illustrated in Chart 13, in the first half of 2024, KBRA had the third-highest market
share in the non-agency U.S. CMBS segment. In 2023, KBRA had the second-highest market
share, and in 2022, KBRA and DBRS had the third- and fourth-highest market shares,
respectively. KBRA has consistently attained a market share over 40% by issuance amount
since 2022, and in 2023 KBRA obtained a higher market share than each of Moody’s and S&P.
Since 2022, Fitch has maintained the highest market share in the U.S. conduit CMBS
segment, rating all rated transactions. However, as illustrated in Chart 14, KBRA also rated all
U.S. conduit CMBS rated transactions in 2022, and KBRA had the second-highest market share
in the U.S. conduit CMBS segment in 2022 and the first half of 2024.
As illustrated in Chart 15, DBRS achieved significant market share in the U.S. singleborrower CMBS segment, achieving the second-highest market share in 2022 and 2023. DBRS
has consistently maintained a market share in this segment over 25% since 2022.
As illustrated in Chart 16, KBRA had the highest market share in the agency CMBS
segment in 2022 and 2023, and is tied for the highest market share in the first half of 2024.
b.
ABS/MBS/CLO
Charts 17 through 19 provide information concerning U.S. ABS, U.S. MBS, and U.S.
CLO ratings by NRSROs, based on information from the Asset-Backed Alert ABS database.
The charts include reported market share information for these transactions for the first half of
calendar year 2024 and calendar years 2023 and 2022. Market share percentages are calculated
for the charts using both dollar amounts of issuance and numbers of deals. 13
Chart 17. Rating Agency Market Shares for U.S. ABS Issued in 2022, 2023, and First Half of 2024
lH-2024
Issuance
($Mil.)
No. of
d I
ea s
Market
Share %
2023
Issuance
($Mil.)
No. of
d I
ea s
Market
Share %
($)/(#)
2022
Issuance
($Mil.)
No. of
d I
ea s
Market
Share %
($)/(#)
S&P
98,337
125
54.5/ 45.3
146,354
206
55.2/ 47.2
146,119
183
56.9/ 43.5
2
Moody's
94,457
11 7
52.4/ 42.4
135,167
183
50.9/ 42.0
131,383
162
51.1/ 38.5
3
Fitch
88,626
10 1
49.1/36.6
146,841
171
55.3/ 39.2
116,645
145
45.4/ 34.4
4
KBRA
36,182
87
20.1/31.5
50,740
141
19.1/32.3
54,849
149
21.3/ 35.4
5
DBRS
23,254
47
12.9/ 17.0
35,147
80
13.2/ 18.3
33,688
79
13.1/18.8
Total Rated Market
180,387
276
265,336
436
257,000
421
lH- 2024
R k
an
NRSRO
($)/(#)
Source: Asset -Backed Alert A BS dat abase as of Aug ust 30, 2024.
13
Because it is typical for more than one NRSRO to rate a particular transaction, the sum of the market share
percentages exceeds 100% and the sum of the amounts attributed to each NRSRO exceed the total rated market
amount.
32
Chart 18. Rating Agency Market Shares for U.S. MBS Issued in 2022, 2023, and First Half of 2024
NRSRO
lH-2024
Issuance
($Mil.)
No. of
d I
ea s
Market
Share %
($)/(#)
2023
Issuance
($Mil.)
No. of
d I
ea s
Market
Share %
($)/(#)
2022
Issuance
($Mil.)
No. of
d I
ea s
Market
Share%
($)/(#)
Fitch
36.383
94
62.6/60.6
43,533
121
70.0/65.4
47,508
105
43.1/39.9
2
DBRS
26,693
69
4 6.0/44. 5
27,412
84
44.1/45.4
40,633
106
36.9/4 0 .3
3
KBRA
24,659
65
42.5/ 41.9
25,639
72
41.2/38 .9
58,505
127
53.1/48.3
4
S&P
8,567
19
14.8/ 12.3
7,011
22
11.3/ 11.9
21,638
57
19.6/21.7
5
Moody's
7,475
18
12.9/11.6
4,547
13
7.3/ 7.0
37,050
72
33.6/ 27.4
Total Rated Market
58,078
155
62,211
185
110,190
263
lH-2024
R k
an
Source: Asset-Backed A lert ABS database as of August 30, 2024 .
Chart 19. Rating Agency Market Shares for U.S. CLOs Issued in 2022, 2023, and First Half of 2024
NRSRO
lH-2024
Issuance
($Mil.)
No. of
d I
ea s
Market
Share %
($)/(#)
2023
Issuance
($Mil.)
No. of
d I
ea s
Market
Share %
($)/(#)
2022
Issuance
($Mil.)
No. of
d I
ea s
Market
Share%
($)/(#)
S&P
94,675
229
54.4/ 53.9
74,521
184
57.2/57.0
64,815
139
41.9/41.2
2
Moody's
82,669
201
47.5/47.3
65,333
157
50.2/48.6
92,633
200
59.9/59.3
3
Fitch
71,361
165
41.0/38.8
54,563
131
41.9/40.6
74,767
156
48.4/46 .3
4
KBRA
1,266
4
0 .7/0.9
1,963
7
1.5/2.2
3,590
10
2.3/3.0
5
DBRS
0
0
0 .0/0.0
0
0
0 .0/0.0
1,047
4
0 .7/1.2
174,035
425
130,274
323
154,558
337
lH-2024
R k
an
Total Rated Market
Source: Asset-Backed A lert ABS database as of Aug u st 30, 2024 .
Chart 17 shows that DBRS and KBRA have consistently achieved and maintained
meaningful U.S. ABS rating market shares. S&P, Moody’s, and Fitch have consistently achieved
the highest market shares based on issuance amount. KBRA has maintained market share of
approximately 20% or higher since 2022, while DBRS has maintained market share of over 10%
during the same period.
Chart 17 presents an overview of NRSRO market share for ABS overall, but an analysis
of the data underlying the chart shows that the market shares vary considerably across various
types of ABS products. For example, DBRS and KBRA have gained significant market share in
some newer or less traditional types of asset-backed securities. They are significant raters of
securities backed by unsecured consumer loans, including consumer loans originated through
marketplace lending platforms. 14 DBRS and KBRA have maintained a competitive position
with regards to consumer loans, achieving the two highest market shares in this category in 2022
14
The Asset-Backed Alert ABS database indicates that 75 unsecured consumer loan transactions totaling $26.1
billion were issued in 2022, 62 unsecured consumer loan transactions totaling $23.1 billion were issued in 2023,
and 43 unsecured consumer loan transactions totaling $20.3 billion were issued during the first half of 2024.
33
and 2023, with each rating between 42.7% to 55.1% of the issuance amount of the rated
transactions during this period. Comparatively, Moody’s, S&P, and Fitch each rated less than
25.5% of the issuance amount over the same time period. For the first half of 2024, DBRS has
maintained the highest market share, rating 46.9% of the issuance amount of the rated
transactions during this period. Moody’s and Fitch have gained market share during the first half
of 2024, rating 43.3% and 40.9% of the total issuance amount, respectively. Relative to 2022
and 2023, KBRA lost market share, rating 26.0% of total issuance amount in the first half of
2024. Another example is KBRA’s market share for rating whole business securitizations.
KBRA had the highest market share for these transactions in 2022, 2023, and the first half of
2024, 15 rating 92.1%, 100%, and 100%, respectively, of the issuance amount of such
transactions.
DBRS and KBRA have been able to gain market share rating some types of traditional
ABS as well. For example, DBRS rated 94.1%, 88.0%, and 94.2% of the issuance amount of
student loan transactions during 2022, 2023, and the first half of 2024, respectively, which
represented the highest market share during each time period. 16
Both DBRS and KBRA have maintained a significant market share rating subprime auto
loan transactions. 17 In 2022, 2023, and the first half of 2024, DBRS rated 30.6%, 32.2%, and
26.2% of subprime auto loan transactions, respectively. KBRA also maintained a significant
market share; in 2021, 2022, and the first half of 2023, KBRA rated 37.8%, 32.6%, and 31.7% of
the issuance amount of subprime auto loan transactions.
Chart 18 shows that the U.S. MBS segment remains competitive. DBRS’ market share
by issuance amount went from 36.9% in 2022 to 44.1% in 2023 and 46.0% in the first half of
2024, while KBRA’s market share by issuance amount decreased from 53.1% in 2022 to 41.2%
in 2023 and 42.5% in the first half of 2024. DBRS and KBRA have also achieved notable
market share in certain types of ABS related to the residential housing market, but not considered
to be MBS under the Asset-Backed Alert ABS database’s criteria and therefore included within
the data summarized in Chart 17. For example, in 2021, 2022, and the first half of 2023, DBRS
rated 85.0%, 97.1%, and 75.7% of the issuance amount of re-performing mortgage
transactions, 18 respectively, which represented the first- or second-highest market share in this
category. Additionally, KBRA and DBRS have maintained a significant market share in
15
The Asset-Backed Alert ABS database indicates that 14 whole-business securitization transactions totaling $6.3
billion were issued during 2022, 7 whole-business securitization transactions totaling $3.2 billion were issued
during 2023, and 10 whole business securitization transactions totaling $6.7 billion were issued during the first
half of 2024.
16
The Asset-Backed Alert ABS database indicates that 11 student loan transactions totaling $7.5 billion were
issued in 2022, 17 student loan transactions totaling $8.2 billion were issued in 2023, and 13 student loan
transactions totaling $7.3 billion were issued during the first half of 2024.
17
The Asset-Backed Alert ABS database indicates that 63 subprime auto loan transactions totaling $33.5 billion
were issued in 2022, 71 subprime auto loan transactions totaling $34.2 billion were issued in 2023, and 42
subprime auto loan transactions totaling $22.8 billion were issued during the first half of 2024.
18
The Asset-Backed Alert ABS database indicates that 29 re-performing mortgage transactions totaling $14.4
billion were issued in 2022, 17 re-performing mortgage transactions totaling $7.8 billion were issued in 2023,
and 17 re-performing mortgage transactions totaling $7.5 billion were issued during the first half of 2024.
34
subprime mortgage transactions 19 and risk transfer transactions. 20 For subprime mortgage
transactions from 2022 to the first half of 2024, KBRA rated between 32.3% and 51.9%, and
DBRS rated between 17.6% and 31.4% of the issuance amount; for risk transfer transactions,
KBRA rated between 50.6% and 69.7% and DBRS rated between 22.7% and 37.0% of the
issuance amount.
Finally, as shown in Chart 19, although DBRS and KBRA have attained a foothold in the
U.S. CLO segment, their individual market shares have decreased. In comparison, S&P,
Moody’s, and Fitch have maintained the highest market shares since 2022.
3.
Barriers to Entry
Barriers to entry continue to exist in the credit ratings industry, presenting competitive
challenges for the small and medium NRSROs.
The long history of investor acceptance and global nature of the largest NRSROs can
serve as impediments to new entrants. 21 Investor acceptance has been raised as a potential
barrier to entry by certain NRSROs in the context of the investment management contracts of
institutional fund managers and the investment guidelines of fixed income mutual fund
managers, pension plan sponsors, and endowment fund managers. Specifically, it is common for
these types of contracts and guidelines to require the use of ratings of specified NRSROs. 22 The
effect of these requirements can be to increase the demand for and liquidity of securities bearing
the ratings of specified rating agencies, which may provide an incentive for issuers to obtain
ratings from the specified agencies. Historically, many of these guidelines refer to the ratings
from the large NRSROs by name (i.e., Fitch, Moody’s, and S&P).
The inclusion requirements of some fixed income indices may pose a similar barrier to
entry. To be included in certain of these indices, securities must be rated by specified
NRSROs. 23 Certain investment companies (index funds) try to closely track the performance of
the indices by purchasing the securities included in them. Index funds have grown as a share of
the fund market, and they can increase the demand for securities bearing the ratings of particular
19
The Asset-Backed Alert ABS database indicates that 93 subprime mortgage transactions totaling $32.5 billion
were issued during 2022, 74 subprime mortgage transactions totaling $23.2 billion were issued during 2023, and
50 subprime mortgage transactions totaling $17.3 billion were issued during the first half of 2024.
20
The Asset-Backed Alert ABS database indicates that 36 risk transfer transactions totaling $24.3 billion were
issued during 2022, 31 risk transfer transactions totaling $11.0 billion were issued during 2023, and 13 risk
transfer transactions totaling $6.0 billion were issued during the first half of 2024.
21
See Fitch Ratings, Fitch Affirms S&P's Long-Term IDR at 'A-'; Outlook Stable (Apr. 12, 2024).
22
See Statement of Jim Nadler, President and CEO, Kroll Bond Rating Agency, Bond Rating Agencies:
Examining the “Nationally Recognized” Statistical Rating Organizations Hearing Before the Subcommittee on
Investor Protection, Entrepreneurship and Capital Markets of the House Committee on Financial Services,
117th Congress (July 21, 2021); see also Letter from KBRA to the Commission (Aug. 19, 2014).
23
See, e.g., Bloomberg Fixed Income Index Methodology, Bloomberg Fixed Income Indices (Aug. 24, 2021);
FTSE Fixed Income Index Guide, FTSE Russell an LSEG Business (June 2023).
35
NRSROs. 24 For instance, in 2018, Fitch announced that its ratings had been added to the J.P.
Morgan High-Yield Bond Indices, noting that investors rely on such indices to determine which
bonds suit their level of credit risk. 25 Similarly, KBRA testified that many companies
benchmark to such indices for investment purposes and thus will not purchase bonds that are
index ineligible and not rated by particular NRSROs. 26
Market participants and academics have identified various other barriers to entry in the
credit rating industry, including economic and regulatory barriers. 27 For instance, when the
Commission proposed new rules and rule amendments (the NRSRO Amendments) in accordance
with the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), 28
commenters expressed concerns that certain of the proposed requirements would be burdensome
for smaller NRSROs to implement and could raise barriers to entry for credit rating agencies to
seek to register as NRSROs. 29 In connection with the adoption of the NRSRO Amendments, the
Commission acknowledged that, despite efforts to limit the impact on small entities, the DoddFrank Act contained requirements, including those implemented by the NRSRO Amendments,
which impose costs on NRSROs and may consequently create barriers to entry and have negative
impacts on competition. 30
At the same time, the Commission recognized substantial benefits associated with the
NRSRO Amendments implementing Title IX, Subtitle C of the Dodd-Frank Act, which was
designed to address the causes of certain market failures that may impair the integrity and
24
See, e.g., Rating Firms Seek Changes to Index, Asset-Backed Alert, May 26, 2017; see also Investment
Company Institute, 2022 Investment Company Fact Book (2022), at 29 (index funds made up 21% of assets in
long-term funds at the end of 2011 and 43% at the end of 2021).
25
See Fitch Ratings Joins J.P. Morgan High Yield Bond Indices, Fitch Ratings, June 28, 2017. In a related
example, DBRS announced that its ratings would be included in the determination of index credit quality
classifications for CAD-denominated securities in the Bloomberg Barclays Canada Aggregate Index and the
Global Aggregate Index, resulting in approximately 49 securities being added to the Canadian Aggregate Index.
See Rules Changes for the Bloomberg Barclays Canada Aggregate Index Announced (Apr. 17, 2018).
26
See Written Testimony of Angela Liang, General Counsel and Executive Committee Member, Kroll Bond
Rating Agency, Bond Rating Agencies: Examining the “Nationally Recognized” Statistical Rating
Organizations Hearing Before the Subcommittee on Investor Protection, Entrepreneurship and Capital Markets
of the House Committee on Financial Services, 117th Congress (May 11, 2022).
27
See, e.g., Section IV.C of the March 2012 Annual Report. As discussed in the March 2012 Report, economic
barriers to entry include issuers and market participants favoring well-established NRSROs due to their
reputation, and economies of scale which may allow larger NRSROs to offer advantageous services or pricing.
Academic literature has continued to identify these as barriers to entry. See, e.g., Sangiorgi, F. and Spatt, C.,
The Economics of Credit Rating Agencies, Foundations and Trends in Finance, 12, 1-116 (2017).
28
Pub. L. No. 111-203, § 932, 124 Stat. 1376, 1872-83 (2010).
29
See Nationally Recognized Statistical Rating Organizations, Release No. 34-72936 (Aug. 27, 2014), 79 FR
55078, 55220-22 (Sept. 15, 2014) (2014 Adopting Release) at 55090, 55154, 55161, and 55254-55; see also
Comments on Proposed Rules for Nationally Recognized Statistical Rating Organizations, Release No. 3464514; File No. S7-18-11.
30
See 2014 Adopting Release, 79 FR at 55254.
36
transparency of NRSRO credit ratings. 31 For instance, certain provisions of the NRSRO
Amendments were designed primarily to enhance the integrity of how NRSROs determine credit
ratings by improving internal governance of NRSROs, managing potential principal-agent
problems and conflicts of interest in the credit rating process, and promoting adherence to the
NRSRO’s procedures and methodologies for determining credit ratings. 32 Other provisions of
the NRSRO Amendments were designed mainly to enhance the transparency of NRSRO credit
ratings by increasing disclosure and reducing information asymmetries that may adversely affect
users of credit ratings. 33
The NRSRO Amendments as adopted by the Commission include various changes from
the proposed amendments intended to address concerns regarding barriers to entry, including
standards allowing NRSROs to tailor particular requirements to their business models, size, and
rating methodologies. 34
Additionally, there are provisions for exemptions built into several rules and statutory
provisions if the Commission deems that these requirements may impose an unreasonable burden
on the NRSRO. NRSROs may also request exemptions under Section 36 to Exchange Act rules
or provisions. For example, KBRA was granted a temporary conditional exemption from Rule
17g-5(c)(1), which prohibits an NRSRO from issuing or maintaining a credit rating solicited by a
person that, in the most recently ended fiscal year, provided the NRSRO with net revenue
equaling or exceeding 10% of the total net revenue of the NRSRO for the fiscal year. The
Commission’s orders granting exemption requests can be found under “Exemption Orders” in
the “NRSRO Orders and Notices” section of the OCR website.
B.
Transparency
The Rating Agency Act’s preamble states that it is intended to improve ratings quality for
the protection of investors and in the public interest “by fostering accountability, transparency,
and competition in the credit rating agency industry.” Section 932 of the Dodd-Frank Act is
entitled “Enhanced regulation, accountability, and transparency of NRSROs.” Both acts contain
various provisions designed to increase the transparency—through clear disclosure open to
public scrutiny—of, among other things, NRSROs’ credit rating procedures and methodologies,
business practices, and credit ratings performance.
NRSROs are required to disclose:
Standardized performance statistics as Exhibit 1 to Form NRSRO;
31
See id. at 55091; see also Section 931 of the Dodd-Frank Act (articulating the findings of Congress, including
that the activities and performance of credit rating agencies are matters of national public interest and that
certain market failures necessitate increased accountability on the part of credit rating agencies).
32
See 2014 Adopting Release, 79 FR at 55091.
33
See id.
34
See Section IV.C of the December 2015 Annual Report.
37
A general description of the procedures and methodologies used to determine credit
ratings as Exhibit 2 to Form NRSRO;
Consolidated information about credit rating histories pursuant to Rule 17g-7(b);
Information about material changes and significant errors in the procedures and
methodologies used to determine credit ratings pursuant to Rule 17g-8(a)(4);
Information about specific rating actions pursuant to Rule 17g-7(a); and
Clear definitions of each symbol, number, or score in the rating scale used by the
NRSRO pursuant to Rule 17g-8(b)(2).
In addition to the required disclosure on Exhibit 2, it is standard practice for NRSROs to
disclose their methodologies for determining credit ratings on their websites, providing
additional transparency into their current approach to assessing creditworthiness. From time-totime, NRSROs also publish revisions and updates to their methodologies and commonly seek
public comment on proposed updates before they are adopted. NRSROs may also at times
publish revisions to the assumptions that are inputs to their methodologies and rating approaches,
including changes to their economic outlooks or default rate assumptions. Revised
methodologies and related assumptions may provide additional transparency into changes in the
NRSROs’ credit views and analyses.
Pursuant to Rule 17g-7(a), NRSROs must also disclose specified information in
connection with each rating action. Such information includes, among other things, the version
of the procedure or methodology used to determine the credit rating, a description of the types of
data that were relied upon for purposes of determining the credit rating, an assessment of the
quality of information available and considered in determining the credit rating, and information
on the sensitivity of the credit ratings to assumptions made by the NRSRO. NRSROs are
required to make this information available to the same persons who can receive or access the
related credit rating. As a result, there is broad market transparency with respect to published
ratings, but the required disclosures are made to a limited group of investors in the case of
private ratings and therefore are not generally available for public review.
In addition to or in connection with required disclosures, NRSROs often issue press
releases and reports at the time of a published rating action to describe the rationale behind such
rating action. The reports accompanying a published rating action are frequently available on a
paid subscription basis, although some NRSROs provide access to such reports at no cost. The
availability of underlying methodologies, together with a report discussing the analysis
supporting the rating action, may provide additional transparency into an NRSRO’s credit
analysis and credit rating process. While such reports are typically generated with respect to
private ratings, they are provided to a limited audience and therefore are not generally available
for public review.
NRSROs also provide transparency to the extent they publish commentaries or research.
NRSRO commentaries and research typically include data, analyses, or projections on market
sectors and economic outlooks, and may also make market and economic data separately
available. These publications may be helpful to investors to understand industry trends and the
NRSROs’ credit views.
38
For example, NRSROs published commentaries and research that provided their credit
perspectives on banks and the banking system. Fitch reported a ‘deteriorating’ outlook for the
U.S. banking sector, citing ongoing challenges for banks adjusting to a prolonged period of
higher interest rates. 35 Other contributing factors include ongoing risks associated with
weakened commercial real estate (CRE) office loan performance, which it attributes to sustained
higher interest rates, slower economic growth in the U.S., and a secular decline in office
demand. 36 A DBRS report noted that despite the adverse impact of CRE valuations due to
higher interest rates, vacancies, and operating cuts, its U.S. banks credit ratings are expected to
remain mostly stable given the staggered nature of CRE loan maturities and sound asset quality
metrics. 37 KBRA also published a report noting that despite select regional bank failures in 2023
and an increasing focus on banks with significant exposure to CRE, which has resulted in a wave
of stock price and debt instrument volatility, it expects the majority of its bank ratings to remain
largely unchanged.
NRSROs have continued publishing commentaries regarding the growing use of private
credit, the performance of private credit funds, and risks to private credit fund ratings. Moody’s
has attributed the growth of the private credit market to multiple factors, including private equity
and alternative asset firms’ acquisition of insurance companies. 38 The recent expansion of
private markets was viewed by Moody’s as offering potential benefits of increased portfolio
diversification and higher yielding investments, but also introducing risks and limitations due to
its inherently opaque nature, making it difficult to assess underlying credit risks such as liquidity
risk and the growing deterioration of asset quality. 39 Fitch has anticipated a challenging
environment for private credit due to elevated defaults, including a greater number of
restructurings, increased deal origination volumes and pressure on funds to deploy capital. 40
While origination and repayment activity is predicted to increase due to the stabilization of
interest rates, Fitch noted that growing competition, particularly from banks and syndicated loan
purchasers in the upper middle market, costly debt refinancing, and a rise in non-accruals may
impact the use of private credit. 41 S&P published research presenting its view that although
rising global defaults in corporate and middle-market credit may challenge the asset quality of
private funds, it anticipated that most ratings on private credit funds will withstand such
weakening asset quality and valuations. 42
35
See Fitch Ratings, Lingering Questions for U.S. Banks During 'The Calm After the Storm' (July 11, 2024).
36
See Fitch Ratings, US Commercial Real Estate Office Performance Will Worsen through 2025 (June 7, 2024).
37
See DBRS, Commercial Real Estate Rekindles Market Volatility at U.S. Regional Banks, but a Slow Burn Most
Likely (Feb. 15, 2024).
38
See Moody’s, Private credit rapidly evolving as regulators stay on the sidelines, at least for now (July 11,
2024).
39
Id.
40
See Fitch Ratings, What Investors Want to Know: U.S. Private Credit Growth and Challenges (Mar. 28, 2024).
41
Id.
42
See S&P, Rising Global Defaults Will Test Private Credit Funds In 2024 (May 1, 2024).
39
Several of the Staff’s findings and recommendations in connection with the 2024 Section
15E examinations related to transparency issues. These findings included disclosure and
reporting issues implicating Rule 17g-7(a) and Rule 17g-7(b). A description of these findings
can be found in Section III.D.3 of this report.
C.
Conflicts of Interest
NRSROs operate under one or more business models, each having conflicts of interest.
The primary business model of the NRSROs is the “issuer-pay” model, which is subject to a
conflict in that the credit rating agency may be influenced to determine more favorable (i.e.,
higher) ratings than warranted in order to retain the obligors or issuers as clients. Another
business model is the “subscriber-pay” model, under which investors pay a subscription fee to
access an NRSRO’s ratings. This model is also subject to conflicts of interest. For example, an
NRSRO may be aware that an influential subscriber holds a securities position (long or short)
that could be advantaged if a credit rating upgrade or downgrade causes the market value of the
security to increase or decrease or that a subscriber invests in newly issued bonds and may obtain
higher yields if the bonds were to have lower ratings.
In addition to being paid by issuers and subscribers, it is becoming increasingly common
for NRSROs to be paid to determine ratings by investors. Frequently these engagements
contemplate the issuance of the credit rating on a private basis. Private ratings can also be
solicited by an issuer in order to be provided to specific investors or a specific class of investors.
In these cases, the NRSRO provides the credit rating directly to its client but does not publish (or
make available to all its subscribers) the credit rating or a report detailing its credit analysis
(although such a report may be provided to the client with the rating). This business model is
subject to conflicts of interest, which are dependent on the objectives of the client for obtaining
the rating. For example, an NRSRO may be aware that the client intends to use the credit rating
to establish regulatory capital requirements for itself or its investors and would benefit from
receiving a higher credit rating.
The conflicts of interest associated with NRSRO business models could potentially be
aggravated by the process of “rating shopping,” which occurs when an issuer or user of credit
ratings seeks the highest credit rating available from multiple credit rating agencies. Rating
shopping has been raised as a concern by market participants and other market observers. In a
recent example, the NAIC identified the potential for rating shopping as a concern, noting
growing discrepancies between credit ratings of different NRSROs on the same security. 43 In
the past, academics have also identified rating shopping and the so called “race-to-the-bottom”
43
See National Association of Insurance Commissioners, Letter from Chlora Lindley-Myers, President, National
Association of Insurance Regulators, et al., to The Honorable Rep. Warren Davidson, Member of Congress, et
al. (July 25, 2023) (“Keeping in mind that the better the rating, the less capital an insurer is required to hold, the
potential for ‘rating shopping’ is a real concern and one with historical precedent. Indeed, because of such
discrepancies for residential and commercial mortgage-backed securities, revealed during the Great Financial
Crisis, we developed a separate credit analysis process for those securities that continues to this day.”)
40
competitive pressures it may foster as concerns. 44 The Staff believes that these competitive
pressures are more acute in the context of private ratings given a lack of transparency to the
broader market and the corresponding lack of outside scrutiny.
Section 15E and the related Commission rules address conflicts of interest, such as those
identified above. 45 The Rating Agency Act added Section 15E to the Exchange Act, including
Section 15E(h), which required NRSROs to establish, maintain, and enforce written policies and
procedures reasonably designed to address and manage any conflicts of interest that can arise
from their business and provided the Commission express authority to adopt related rules. In
2007, the Commission adopted Rule 17g-5(c), which identifies certain conflicts of interest that
are prohibited under all circumstances and other conflicts of interest that are prohibited unless an
NRSRO has publicly disclosed the existence of the conflict and has implemented policies and
procedures reasonably designed to address and manage such conflict. 46
In 2014, the Commission amended its rules applicable to NRSROs to implement
provisions of the Dodd-Frank Act. In part, these amendments were designed to enhance the
integrity of how NRSROs determine credit ratings by improving internal governance of
NRSROs, managing potential principal-agent problems and conflicts of interest in the credit
rating process, and promoting adherence to the procedures and methodologies for determining
credit ratings and compliance with laws and regulations. 47 Specifically, with respect to its
conflict of interest rules, the Commission added paragraph (c)(8) to Rule 17g-5 to implement a
requirement of the Dodd-Frank Act. 48 Under Rule 17g-5(c)(8), an NRSRO is prohibited from
issuing or maintaining a credit rating where a person within the NRSRO who participates in
determining or monitoring the rating, or developing or approving procedures or methodologies
used for determining the rating, also (i) participates in sales or marketing activities of the
NRSRO or its affiliate, or (ii) is influenced by sales or marketing considerations. 49
Other conflicts of interest identified in Rule 17g-5 involve individual credit analysts or
other employees of an NRSRO. For example, an NRSRO is prohibited from issuing or
44
See, e.g., John M. Griffin, Jordan Nickerson, Dragon Yongjun Tang, Rating Shopping or Catering? An
Examination of the Response to Competitive Pressure for CDO Credit Ratings, Rev. Fin. St. 2270– 2310 (2013)
(positing that rating shopping may cause credit rating agencies to not strictly adhere to their standards in order
to match more lenient competitors); Patrick Bolton, Xavier Freixas, and Joel Shapiro, The Credit Ratings Game,
67(1) J. of Finance 85–111 (2012) (finding that competition can reduce efficiency by facilitating rating
shopping).
45
See, e.g., Section 15E(h) and Rule 17g-5.
46
See Rule 17g-5(a)(1)-(2) and Rule 17g-5(b); Instructions for Exhibits 6 and 7 to Form NRSRO. In addition,
Section 15E(t)(3)(B) requires an NRSRO’s board of directors to oversee the establishment, maintenance, and
enforcement of policies and procedures to address, manage, and disclose any conflicts of interest.
47
2014 Adopting Release, 79 FR at 55091.
48
See Section 15E(h)(3)(A) (requiring the Commission to issue rules to prevent sales and marketing
considerations of an NRSRO from influencing the production of credit ratings by the NRSRO).
49
When adopting the rule, the Commission noted that the prohibition is designed to insulate credit analysts from
sales and marketing concerns and pressures that may arise from any channel, and that this could enhance the
integrity and quality of credit ratings. 2014 Adopting Release, 79 FR at 55116.
41
maintaining a credit rating where an employee of the NRSRO that participated in determining, or
is responsible for approving, the credit rating directly owns securities of, or is an officer or
director of, the person that would be subject to the credit rating. 50
Another statutory provision and related Commission rules address conflicts of interest
that may arise when a credit analyst seeks employment outside the NRSRO. Section
15E(h)(4)(A) requires each NRSRO to have policies and procedures in place to provide for an
internal “look-back” review process in order to determine whether any conflict of interest of a
former employee influenced a credit rating in certain instances. Rule 17g-8(c) requires an
NRSRO’s policies and procedures to address instances in which a “look-back” review
determined that a conflict of interest influenced a credit rating. Such policies and procedures are
required to be reasonably designed to ensure that the NRSRO will promptly determine whether a
credit rating must be revised and promptly publish a revised credit rating or an affirmation of the
credit rating, along with certain disclosures about the existence of the conflict.
A number of the Staff’s findings and recommendations in connection with the 2024
Section 15E examinations related to conflict of interest issues. Among other things, these
findings identified certain weaknesses related to policies and procedures to address and manage
conflicts of interest. A description of these findings and the related recommendations of the
Staff can be found in Section III.D.3 of this report.
V.
ACTIVITIES RELATING TO NRSROs
A.
Commission Orders
The Commission instituted settled administrative and cease-and-desist proceedings
against multiple NRSROs finding violations of Exchange Act Section 17(a)(1) and Rule 17g2(b)(7). The violations were in connection with the NRSROs failure to retain internal and
external electronic communications that included discussions of initiating, determining,
maintaining, monitoring, changing, or withdrawing credit ratings:
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In the Matter of A.M. Best Rating Services, Inc., Release No. 34-100902 (Sept. 3,
2024);
In the Matter of Demotech, Inc., Release No. 34-100905 (Sept. 3, 2024);
In the Matter of Fitch Ratings, Inc., Release No. 34-100903 (Sept. 3, 2024);
In the Matter of HR Ratings de México, S.A. de C.V., Release No. 34-100904 (Sept. 3,
2024);
In the Matter of Moody's Investors Service, Inc., Release No. 34-100906 (Sept. 3,
2024); and
In the Matter of S&P Global Ratings, Release No. 34-100907 (Sept. 3, 2024).
See Rule 17g-5(c)(2) and Rule 17g-5(c)(4).
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B.
Staff Publication
The Staff issued the following publication relating to NRSROs or credit ratings in general
in calendar year 2024:
VI.
Staff Report on Nationally Recognized Statistical Rating Organizations, dated
February 2024 (the 2023 Staff Report), as required by Section 6 of the Rating Agency
Act and Section 15E(p)(3)(C). The 2023 Staff Report addresses the matters described
in the second paragraph under Section II of this Report for the period January 1,
2023, through December 31, 2023, and summarizes the essential findings of the
examinations conducted by the Staff under Section 15E(p)(3)(C) for the review
period January 1, 2022, to December 31, 2022.
APPENDIX: SUMMARY OF STATUTORY FRAMEWORK AND RULES
Section 15E and Rules 17g-1 through 17g-10 govern the registration and oversight
program for credit rating agencies that are registered with the Commission as NRSROs. This
regulatory regime was established by the Rating Agency Act, Pub. L. No. 109-291, 120 Stat.
1327 (2006), and amended by the Dodd-Frank Act, Pub. L. No. 111-203, § 932, 124 Stat. 1376,
1872-83 (2010).
The Dodd-Frank Act mandated the creation of the OCR, which is responsible for
oversight of credit rating agencies registered with the Commission as NRSROs. OCR’s Staff
includes professionals with knowledge of and expertise in a variety of areas that relate to its
regulatory mission, such as corporate, municipal, and structured debt finance, pursuant to Section
15E(p)(2).
Pursuant to the Commission’s regulatory regime for NRSROs, an NRSRO is required to,
among other things:
File with the Commission an annual certification of its Form NRSRO registration,
pursuant to Section 15E(b)(2) and Rule 17g-1(f), promptly update its filing in certain
circumstances, pursuant to Section 15E(b)(1) and Rule 17g-1(e), and make its current
Form NRSRO filing and most of its current Form NRSRO Exhibits available on its
public website, pursuant to Section 15E(a)(3) and Rule 17g-1(i).
Disclose certain information, including information concerning the NRSRO’s
performance measurement statistics and its procedures and methodologies to
determine ratings, pursuant to Sections 15E(a)(1)(B)(i) and (ii).
Establish, maintain, enforce, and document an effective internal control structure
governing the implementation of and adherence to policies, procedures, and
methodologies for determining credit ratings, pursuant to Section 15E(c)(3)(A), and
retain records of its internal control structure, Rule 17g-2(b)(12).
Consider certain factors with respect to its establishment, maintenance, enforcement,
and documentation of an effective internal control structure, pursuant to Rule 17g8(d)(1)-(4).
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Establish, maintain, enforce, and document policies and procedures reasonably
designed to achieve certain objectives concerning its development and application of,
and disclosures related to, methodologies and models, pursuant to Rule 17g-8(a)(2)(5).
File an unaudited report containing an assessment by management of the
effectiveness during the fiscal year of the NRSRO’s internal control structure
governing the implementation of and adherence to policies, procedures, and
methodologies for determining credit ratings, pursuant to Rule 17g-3(a)(7)(i). The
report must be accompanied by a signed statement by the NRSRO’s chief executive
officer or an individual performing similar functions, pursuant to Rule 17g-3(b)(2).
Establish, maintain, enforce, and document policies and procedures that are
reasonably designed to: assess the probability that an issuer of a security or money
market instrument will default or fail to make required payments to investors,
pursuant to Rule 17g-8(b)(1), and ensure that it applies any rating symbol, number, or
score in a manner that is consistent for all types of obligors, securities, and money
market instruments for which the symbol, number, or score is used, pursuant to Rule
17g-8(b)(3).
Publish an information disclosure form when taking a rating action with respect to a
rating assigned to an obligor, security, or money-market instrument in a class for
which it is registered as an NRSRO, pursuant to Rule 17g-7(a). Rule 17g7(a)(1)(ii)(A)-(N) specifies the information that must be disclosed in the information
disclosure form, and with respect to the particular rating action. In addition, the
NRSRO must attach to the information disclosure form a signed statement by a
person within the NRSRO with responsibility for the rating action, pursuant to Rule
17g-7(a)(1)(iii).
Make and retain, or retain, certain records, including a record documenting its
established procedures and methodologies used to determine credit ratings, pursuant
to Rule 17g-2(a)(6), and records related to its ratings. 51 An NRSRO must promptly
furnish to the Commission or its representatives copies of required records, including
English translations of those records, upon request, pursuant to Section 15E(a) and (b)
and Rule 17g-2(f).
Establish, maintain, and enforce written policies and procedures reasonably designed
to prevent the misuse of material non-public information (MNPI), including the
inappropriate dissemination of MNPI both within and outside the NRSRO, the
inappropriate trading of securities using MNPI by a person within the NRSRO, and
The records that an NRSRO must make and retain, or retain, with respect to its ratings include the identity of
certain persons who participated in determining or approving the rating, records used to form the basis of a
rating, external and internal communications received or sent by the NRSRO and its employees related to a
rating, and for ABS ratings, a record of the rationale for any material difference between the final rating
assigned and the rating implied by a quantitative model that was a substantial component in determining the
rating. Rule 17g-2(a)(2)(i), (ii), and (iii); Rule 17g-2(b)(2) and (b)(7).
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the inappropriate dissemination of pending credit rating actions within and outside the
NRSRO before issuing the rating on the Internet or through another readily accessible
means, pursuant to Section 15E(g) and Rule 17g-4.
Establish, maintain, and enforce written policies and procedures reasonably designed
to address and manage conflicts of interest, pursuant to Section 15E(h) and Rule 17g5. Certain conflicts of interest are expressly prohibited, pursuant to Rule 17g-5(c),
and for other types of conflicts of interest, the NRSRO must disclose the conflicts and
have policies and procedures in place to manage them, pursuant to Rule 17g-5(a)(1)(2) and Rule 17g-5(b).
Refrain from engaging in specified unfair, coercive, or abusive practices, pursuant to
Rule 17g-6.
Provide information on whether it has in effect a code of ethics, and if not, the
reasons it does not have a code of ethics, pursuant to Section 15E(a)(1)(B)(v).
Establish procedures for the receipt, retention, and treatment of complaints regarding
credit ratings, models, methodologies, and compliance with the securities laws and its
policies and procedures developed under this regulatory regime, and of confidential,
anonymous complaints, pursuant to Section 15E(j)(3).
Designate a compliance officer (the DCO) responsible for administering policies and
procedures related to MNPI and conflicts of interest, ensuring compliance with the
securities laws and regulations, and establishing procedures for handling complaints
by employees or users of credit ratings, pursuant to Section 15E(j)(1) and (3). The
DCO must submit an annual report to the NRSRO on the compliance of the NRSRO
with the securities laws and the NRSRO’s policies and procedures, and the NRSRO
must file the report with the Commission, pursuant to Section 15E(j)(5).
Have a board of directors or similar governing body (collectively, the Board), certain
of whose members must be independent from the NRSRO, pursuant to Section
15E(t)(2). An NRSRO’s Board, or members thereof, are responsible for exercising
oversight of specified subjects related to the NRSRO’s rating business and for
approving the procedures and methodologies, including qualitative and quantitative
data and models, that the NRSRO uses to determine ratings, pursuant to Section
15E(t)(3) and Rule 17g-8(a)(1).
Establish, maintain, enforce, and document standards of training, experience, and
competence for the individuals it employs to participate in the determination of credit
ratings that are reasonably designed to achieve the objective that the NRSRO
produces accurate credit ratings, and retain a record of these standards, pursuant to
Rule 17g-9.
Establish policies and procedures regarding post-employment activities of certain
former personnel, pursuant to Section 15E(h)(4) and (5), and Rule 17g-8(c).
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This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.