# Amendments to Rules for Nationally Recognized Statistical Rating Organizations

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URL: https://www.frixlaw.com/law-library/documents/fr%3AE9-28496

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** December 4, 2009
- **Citation:** 74 FR 63832

## Text

SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 240 and 243
[Release No. 34-61050; File No. S7-04-09]
RIN 3235-AK14
Amendments to Rules for Nationally Recognized Statistical Rating Organizations

AGENCY:

Securities and Exchange Commission (“Commission”).

ACTION:

Final rules.

SUMMARY:

The Commission is adopting rule amendments that impose additional disclosure and conflict of interest requirements on nationally recognized statistical rating organizations (“NRSROs”) in order to address concerns about the integrity of the credit rating procedures and methodologies at NRSROs.

DATES:

Effective Date:
February 1, 2010.

Compliance Date:
June 2, 2010.

FOR FURTHER INFORMATION CONTACT:

Michael A. Macchiaroli, Associate Director, at (202) 551-5525; Thomas K. McGowan, Deputy Associate Director, at (202) 551-5521; Randall W. Roy, Assistant Director, at (202) 551-5522; Joseph I. Levinson, Special Counsel, at (202) 551-5598; Rebekah E. Goshorn, Attorney, at (202) 551-5514; Division of Trading and Markets, Securities and Exchange Commission; 100 F Street, NE., Washington, DC 20549-7010 or, with respect to questions involving the amendments to Regulation FD, Eduardo Aleman, Special Counsel, at (202) 551-3646; Division of Corporation Finance, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549-3628.

SUPPLEMENTARY INFORMATION:

I. Background

A. Prior Commission Actions

On June 16, 2008, the Commission, in the first of three related actions, proposed a series of amendments to its existing rules governing the conduct of NRSROs under the Securities Exchange Act of 1934 (“Exchange Act”) as well as a new rule mandating additional requirements for NRSROs.
1

The proposed amendments in the
June 2008 Proposing Release
were designed to further the purposes of the Credit Rating Agency Reform Act of 2006 (“Rating Agency Act”) to improve ratings quality for the protection of investors and in the public interest by fostering accountability, transparency, and competition in the credit rating industry.
2

More particularly, they were designed to enhance the transparency and objectivity of the NRSRO credit rating process generally and in particular with respect to rating structured finance products,
3

to increase competition among NRSROs, and to make it easier for market participants to assess the credit ratings performance of NRSROs. For example, the amendments, as proposed, would have required NRSROs to make additional public disclosures about their methodologies for determining structured finance ratings, publicly disclose the histories of their ratings, and make additional internal records and furnish additional information to the Commission in order to assist staff examinations of NRSROs. The proposals also would have prohibited NRSROs and their analysts from engaging in certain activities that could impair their objectivity, such as recommending how to obtain a desired rating and then rating the resulting security.

1

See Proposed Rules for Nationally Recognized Statistical Rating Organizations,
Exchange Act Release No. 57967 (June 16, 2008), 73 FR 36212 (June 25, 2008) (“
June 2008 Proposing Release”
). The Commission adopted the initial set of NRSRO rules in June 2007.
See Oversight of Credit Rating Agencies Registered as Nationally Recognized Statistical Rating Organizations,
Exchange Act Release No. 55857 (June 5, 2007), 72 FR 33564 (June 18, 2007) (“
June 2007 Adopting Release”
). The second action taken by the Commission (also on June 16, 2008) was to propose a new rule that would require NRSROs to distinguish their ratings for structured finance products from other classes of credit ratings by publishing a report with the rating or using a different rating symbol.
See June 2008 Proposing Release.
The third action taken by the Commission was to propose a series of amendments to rules under the Exchange Act, the Securities Act of 1933 (“Securities Act”), the Investment Company Act of 1940 (“Investment Company Act”), and the Investment Advisers Act of 1940 that would eliminate references to NRSRO credit ratings in certain rules.
See References to Ratings of Nationally Recognized Statistical Rating Organizations,
Exchange Act Release No. 58070 (July 1, 2008), 73 FR 40088 (July 11, 2008);
Securities Ratings,
Securities Act Release No. 8940 (July 1, 2008), 73 FR 40106 (July 11, 2008);
References to Ratings of Nationally Recognized Statistical Rating Organizations,
Investment Company Act Release No. 28327 (July 1, 2008), 73 FR 40124 (July 11, 2008).

2

See Credit Rating Agency Reform Act of 2006,
Pub. L. No. 109-291;
Report of the Senate Committee on Banking, Housing, and Urban Affairs to Accompany S. 3850, Credit Rating Agency Reform Act of 2006,
S. Report No. 109-326, 109th Cong., 2d Sess. (Sept. 6, 2006) (“Senate Report”), p. 2.

3
The term “structured finance product” as used throughout this release refers broadly to any security or money market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction. This broad category of financial instrument includes, but is not limited to, asset-backed securities such as residential mortgage-backed securities (“RMBS”) and to other types of structured debt instruments such as collateralized debt obligations (“CDOs”), including synthetic and hybrid CDOs, or collateralized loan obligations (“CLOs”).

On February 2, 2009, the Commission adopted, with revisions, a majority of the rule amendments proposed in the
June 2008 Proposing Release.
4

Concurrently with the adoption of those final rule amendments, the Commission proposed additional amendments to paragraph (d) of Rule 17g-2 with respect to the disclosure of ratings histories. The Commission also re-proposed with substantial modifications amendments to paragraphs (a) and (b) of Rule 17g-5, a new paragraph (e) to Rule 17g-5, and a conforming amendment to Regulation FD.
5

4

See Amendments to Rules for Nationally Recognized Statistical Rating Organizations,
Exchange Act Release No. 59342 (February 2, 2009), 74 FR 6456 (February 9, 2009) (“
February 2009 Adopting Release”
).

5

See Re-proposed Rules for Nationally Recognized Statistical Rating Organizations,
Exchange Act Release No. 59343 (February 2, 2009), 74 FR 6485 (February 9, 2009) (“
February 2009 Proposing Release”
).

Today, the Commission is adopting, with revisions, the rule amendments proposed in the
February 2009 Proposing Release.

B. Summary of the Comments and Final Rules

In enacting the Rating Agency Act, which provides the Commission with the authority to establish a registration and oversight program for NRSROs, Congress cited as its purpose “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.”
6

The Commission seeks to further the purposes of Congress in enacting the Rating Agency Act. The rule amendments being adopted today are designed 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. In the
June 2008 Proposing Release,
the Commission cited concerns about the integrity of NRSROs' credit rating procedures and methodologies in light of the role they played in the credit market turmoil.
7

As discussed throughout this release, the amendments being adopted today continue the Commission's process of addressing concerns about the integrity of the credit rating procedures and methodologies at NRSROs. The amendments incorporate most aspects

of the proposed and re-proposed amendments but include several revisions based on the comments received.

6

See Senate Report
p. 2;
Rating Agency Act
§ 2 (Finding 5).

7

See June 2008 Proposing Release,
73 FR at 36213-36218.

The Commission received letters from 31 commenters
8

on the proposed and re-proposed amendments set forth in the
February 2009 Proposing Release.
9

Several commenters expressed general support for the proposed measures and the goals they were designed to achieve.
10

Commenters expressed support, for example, for the Commission's efforts to increase transparency
11

and foster competition within the credit ratings industry.
12

Other commenters, however, expressed concerns about the potential negative effects of the proposed and re-proposed rule amendments.
13

Those comments included concerns that action more vigorous than that proposed by the Commission was needed to improve the quality of credit ratings
14

and to facilitate investors' independent analysis of the products underlying such ratings,
15

as well as the concern that increased competition would not necessarily increase the quality of credit ratings.
16

8
On April 15, 2009, the Commission held a Roundtable to Examine Oversight of Credit Rating Agencies (“Roundtable”). A number of the letters and statements submitted in connection with the Roundtable commented on the proposed rule amendments contained in the
February 2009 Proposing Release
and are discussed herein. All comments submitted in connection with the Roundtable are available on the Commission's Internet Web site, located at:
http://www.sec.gov/comments/s7-04-09/s70409.shtml
and in the Commission's Public Reference Room in its Washington, DC headquarters.

9
Letter dated February 26, 2009 from Mike Marchywka (“Marchywka Letter”); letter dated March 5, 2009 from Shawn S. Fahrer, Student, CUNY (“Fahrer Letter”); letter dated March 8, 2009 from Russell D. Sears (“Sears Letter”); letter dated March 18, 2009 from Takefumi Emori, Managing Director, Japan Credit Rating Agency, Ltd. (“JCR Letter”); letter dated March 25, 2009 from Laurel N. Leitner, Analyst, Council of Institutional Investors (“Council Letter”); letter dated March 25, 2009 from Mary Keogh, Managing Director, Regulatory Affairs and Daniel Curry, President, DBRS, Inc. (“DBRS Letter”); letter dated March 25, 2009 from Richard Whiting, Executive Director and General Counsel, Financial Services Roundtable (“FSR Letter”); letter dated March 25, 2009 from Charles D. Brown, General Counsel, Fitch Ratings (“Fitch Letter”); letter dated March 26, 2009 from Gregory W. Smith, General Counsel, Colorado Public Employees' Retirement Association (“Colorado PERA Letter”); letter dated March 26, 2009 from Douglas Adamson, Executive Vice President, American Bankers Association (“ABA Letter”); letter dated March 26, 2009 from George Miller, Executive Director and Sean C. Davy, Managing Director, American Securitization Forum and Securities Industry and Financial Markets Association (“ASF/SIFMA Letter”); letter dated March 26, 2009 from Karrie McMillan, General Counsel, Investment Company Institute (“ICI Letter”); Letter dated March 26, 2009 from John P. Hunt, Acting Professor of Law, University of California, Davis (“Hunt Letter”); letter dated March 26, 2009 from Cate Long, Multiple-Markets (“Multiple-Markets Letter”); letter dated March 26, 2009 from Hidetaka Tanaka, Senior Executive Managing Director, Rating and Investment Information, Inc. (“R&I Letter”); letter dated March 27, 2009 from Vickie A. Tillman, Executive Vice President, Standard and Poor's Investment Ratings Services (“S&P Letter”); letter dated March 28, 2009 from Michel Madelain, Chief Operating Officer, Moody's Investor Service, Moody's (“Moody's Letter”); letter dated March 31, 2009 from Robert G. Dobilas, CEO and President, Realpoint, LLC. (“Realpoint Letter”); letter dated April 2, 2009 from Keith F. Higgins, Chair, Committee on Federal Regulation of Securities, American Bar Association Section of Business Law (“ABA Committee Letter”) (representing views of the Committee, not the American Bar Association); letter dated April 3, 2009 from Dottie Cunningham, CEO, Commercial Mortgage Securities Association (“CMSA Letter”); letter dated May 19, 2009 from Lawrence A. Pingree, SiliconValleyForex.com (“Pingree Letter”); statement by Gregory W. Smith, General Counsel, Colorado Public Employees' Corporation, submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“Colorado PERA Statement”); statement by Deborah A. Cunningham, Executive Vice President, Chief Investment Officer, Federated Investors, Inc., submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“Federated Statement”); statement by Glenn Reynolds, CEO, CreditSights, Inc., submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“CreditSights Statement”); statement by Alex J. Pollock, Resident Fellow, American Enterprise Institute, submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“AEI Statement”); statement by Raymond W. McDaniel, CEO and President, Moody's Investor Service submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“Moody's Statement”); statement by Robert G. Dobilas, President and CEO, Realpoint, Inc., submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“Realpoint Statement”); statement by Ethan Berman, RiskMetrics Group, submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“RiskMetrics Statement”); statement by Daniel Curry, President, DBRS Inc., submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“DBRS Inc. Statement”); statement by Paul Schott Stevens, President and CEO, Investment Company Institute, submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“ICI Statement”); statement by Sean Egan, Co-Founder and Managing Director, Egan-Jones Rating Co., submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“Egan-Jones Statement”); statement by James A. Kaitz, President and CEO, Association for Financial Professionals, submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“AFP Statement”); statement by George P. Miller, Executive Director, American Securitization Forum, submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“ASF Statement”); statement by James H. Gellert, President and CEO, and Dr. Patrick James Caragata, Founder and Executive Vice Chairman, Rapid Ratings International, Inc., submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“Rapid Ratings Statement”); statement by Richard H. Baker, Managed Funds Associates, submitted for U.S. Securities and Exchange Commission Roundtable to Examine Oversight of Credit Rating Agencies (April 15, 2009) (“MFA Statement”); letter dated June 1, 2009 from Christine DiFabio, Vice President, Advocacy and Accounting Policy, Financial Executives International (“FEI Letter”); letter dated June 12, 2009 from Curtis C. Verschoor, L Q Research Professor, School of Accountancy, DePaul University (“Verschoor Letter”). These comments are available on the Commission's Internet Web site, located at
http://www.sec.gov/comments/s7-04-09/s70409.shtml
and in the Commission's Public Reference Room in its Washington, DC headquarters.

10

See, e.g.,

Marchywka Letter; Council Letter; Colorado PERA Letter; R&I Letter; ABA Committee Letter; Pingree Letter; Realpoint Statement; FEI Letter.

11

See
ABA Committee Letter; Pingree Letter; Realpoint Statement.

12

See
Colorado PERA Letter.

13

See, e.g.,
Fahrer Letter; DBRS Letter; ICI Letter; Hunt Letter; Moody's Letter; DBRS Statement; Verschoor Letter.

14

See
Hunt Letter.

15

See
ICI Letter.

16

See
Fahrer Letter; Hunt Letter.

The Commission notes that in addition to citing fostering competition in the credit rating industry as one of the purposes of the Rating Agency Act, Congress stated its finding in the Rating Agency Act that “additional competition [among credit rating agencies] is in the public interest.”
17

In seeking to increase competition, the Commission seeks to further the purposes of Congress in enacting the Rating Agency Act.

17

See Rating Agency Act § 2.

In summary, the Commission is adopting amendments to paragraph (d) of Rule 17g-2 and paragraphs (a) and (b) of Rule 17g-5 as well as a new paragraph (e) of Rule 17g-5 and a conforming amendment to Regulation FD.
18

The amendments to paragraph (d) of Rule 17g-2 require a broader disclosure of credit ratings history information. Specifically, as adopted in the
February 2009 Adopting Release,
paragraph (d) of Rule 17g-2 requires the disclosure of ratings actions histories, in eXtensible Business Reporting Language (“XBRL”) format, for 10% of the ratings in each class for which the NRSRO has registered and for which it has issued 500 or more credit ratings paid for by the issuer, underwriter, or sponsor of the security being rated (“issuer-paid” credit ratings), with each required disclosure of a new ratings action to be made no later than six months after the ratings action is taken (hereinafter sometimes referred to as the “10% requirement”).
19

The amendments being

adopted today add the requirement that an NRSRO disclose ratings action histories for all credit ratings initially determined on or after June 26, 2007 in an interactive data file that uses a machine-readable format (hereinafter sometimes referred to as the “100% requirement”). In the case of issuer-paid credit ratings, each new ratings action will be required to be reflected in such publicly disclosed histories no later than twelve months after it is taken, while in the case of ratings actions that are not issuer-paid, each new ratings action will be required to be reflected no later than twenty-four months after it is taken.
20

An NRSRO will be allowed to use any machine-readable format to make this data publicly available until 60 days after the date on which the Commission publishes a List of XBRL Tags for NRSROs on its Internet Web site, at which point the NRSRO will be required to make the information available in the XBRL format using the Commission's List of XBRL Tags for NRSROs. This new disclosure requirement applies to all NRSRO credit ratings regardless of the business model under which they are determined. Consequently, the new requirement applies to all types of credit ratings regardless of whether they are issuer-paid credit ratings, credit ratings made available only to subscribers (“subscriber-paid” credit ratings), or credit ratings generated on an unsolicited basis and made publicly available (“unsolicited” credit ratings).

18
17 CFR 243.100, 243.101, 243.102 and 243.103.

19

See February 2009 Adopting Release,
74 FR at 6460-6462. As discussed in greater detail below, due to the fact that the Commission has not yet

published the List of XBRL Tags for NRSROs on its Internet Web site, on August 5, 2009, the Commission provided notice that an NRSRO subject to those disclosure provisions can satisfy the requirement to make publicly available ratings history information in an XBRL format by using an XBRL format or any other machine-readable format, until such time as the Commission provides further notice.
See infra,
note 99 and accompanying text.

20

See
17 CFR 240.17g-2(d).

The amendments to paragraphs (a) and (b) of Rule 17g-5 being adopted today, substantially as proposed in the
February 2009 Proposing Release,
require an NRSRO that is hired by issuers, sponsors, or underwriters (hereinafter collectively “arrangers”) to determine an initial credit rating for a structured finance product to (1) disclose to non-hired NRSROs that have furnished the Commission with the certification described below that the arranger is in the process of determining such a credit rating and (2) to obtain representations from the arranger that the arranger will provide information given to the hired NRSRO to the non-hired NRSROs that have furnished the Commission with the certification described below.
21

In addition, the new paragraph (e) of Rule 17g-5 being adopted today, as proposed in the
February 2009 Proposing Release,
requires an NRSRO seeking to access information provided by an arranger to a hired NRSRO and made available to other NRSROs pursuant to the amended rule to furnish the Commission with an annual certification that the NRSRO is accessing the information solely to determine credit ratings and will determine a minimum number of credit ratings using that information.
22

Finally, the amendment to Rule 100(b)(2)(iii) of Regulation FD being adopted today, substantially as proposed in the
February 2009 Proposing Release,
accommodates the new disclosure requirements under Rule 17g-5 by permitting the disclosure of material non-public information to an NRSRO regardless of whether the NRSRO makes its ratings publicly available.
23

21

See
17 CFR 240.17g-5(a)(3) and (b)(9).

22

See
17 CFR 240.17g-5(e).

23

See
17 CFR 243.100(b)(2)(iii).

In order to allow NRSROs sufficient time to implement the new disclosure requirements, the compliance date of the amendments is delayed until 180 days after publication in the
Federal Register
. The Commission notes that it used the same time period for compliance with the 10% disclosure requirement pursuant to Rule 17g-2.
24

While certain NRSROs already are complying with the 10% disclosure requirement, the Commission notes that the 100% disclosure requirements being adopted are an expansion of the current 10% disclosure requirements for issuer-paid credit ratings and for the first time will require all NRSROs to disclose ratings history. Therefore, with respect to the requirements under Rule 17g-5, the Commission believes the compliance date is appropriate in order to allow the NRSROs and arrangers sufficient time to implement the new disclosure requirements.

24

See February 2009 Adopting Release,
74 FR at 6461.

II. Final Amendments to Rule 17g-2

A. Summary and Background

Rule 17g-2 requires an NRSRO to make and retain certain records relating to its business and to retain certain other records made in the normal course of business operations. The rule also prescribes the time periods and manner in which these records are required to be retained and, as described below, requires certain of those records regarding ratings histories to be publicly disclosed.
25

The Commission is adopting today additional amendments to paragraph (d) of Rule 17g-2 to enhance the requirements in the rule to publicly disclose these records of credit rating histories for the purpose of providing users of credit ratings, investors, and other market participants and observers the raw data with which to compare the credit ratings performance of NRSROs by showing how different NRSROs initially rated an obligor or security and, subsequently, adjusted those ratings, including the timing of the adjustments.

25

See
17 CFR 240.17g-2.

Paragraph (a)(8) to Rule 17g-2 requires an NRSRO to make and retain, as part of its internal records that are available to Commission staff, a record of the ratings history of each outstanding credit rating it maintains showing all rating actions (initial rating, upgrades, downgrades, placements on watch for upgrade or downgrade, and withdrawals) and the date of such actions identified by the name of the security or obligor rated and, if applicable, the CUSIP for the rated security or the Central Index Key (CIK) number for the rated obligor.
26

Paragraph (d) of Rule 17g-2 requires an NRSRO to make publicly available in an XBRL format ratings action histories for 10% of the outstanding issuer-paid credit ratings required to be retained pursuant to paragraph (a)(8), selected on a random basis, for each class of credit rating for which it is registered and for which it has issued 500 or more issuer-paid credit ratings, with each required disclosure of a new ratings action to be made no later than six months after the ratings action is taken.
27

Exhibit 1 of Form NRSRO requires an NRSRO subject to the public disclosure requirements of Rule 17g-2(d) to indicate in the exhibit the Web address where the XBRL Interactive Data File with the required information can be accessed.
28

26

See February 2009 Adopting Release;
17 CFR 240.17g-2(a)(8).

27

See February 2009 Adopting Release;
17 CFR 240.17g-2(d).

28

See February 2009 Adopting Release;
Instructions to Form NRSRO.

While paragraph (a)(8) of Rule 17g-2 and the amendments to Exhibit 1 were adopted in the
February 2009 Adopting Release
substantially as proposed, paragraph (d) of Rule 17g-2, as adopted, reflected modifications from the originally proposed amendment. Specifically, as proposed, the rule would have required an NRSRO to make ratings actions histories publicly available on its corporate Web site in XBRL format for 100% of outstanding credit ratings six months after the date of the rating action, regardless of whether the credit ratings were issuer-

paid, subscriber-paid, or unsolicited.
29

The rule as adopted, however, limited this required ratings history disclosure to 10% of the outstanding issuer-paid credit ratings required to be retained pursuant to paragraph (a)(8) of Rule 17g-2 for each class of credit rating for which the NRSRO is registered and for which it has issued 500 or more issuer-paid credit ratings, with each required disclosure of a new ratings action to be disclosed no later than six months after the ratings action is taken.
30

29

See June 2008 Proposing Release,
73 FR at 36228-36230.

30
17 CFR 240.17g-2(d).

In the
February 2009 Proposing Release,
the Commission stated that the amendments to paragraph (d) of Rule 17g-2 adopted in the
February 2009 Adopting Release
would provide users of credit ratings with information to begin assessing the performance of NRSROs subject to the rule.
31

The Commission also stated in the
February 2009 Proposing Release
that it continued to believe that the proposed amendments to paragraph (d) of Rule 17g-2 set forth in the
June 2008 Proposing Release,
which would have required public disclosure of ratings action histories for all outstanding credit ratings, could provide substantial benefits to users of credit ratings.
32

However, the Commission wanted to solicit further comment on the proposed amendments to the rule in order to gain a better understanding of how they would impact NRSROs operating under the issuer-paid and subscriber-paid business models.
33

31

See February 2009 Proposing Release,
74 FR at 6487-6488.

32

See February 2009 Proposing Release,
74 FR at 6487-6488.

33

See February 2009 Proposing Release,
74 FR at 6487-6490.

Consequently, the Commission re-proposed amendments to paragraph (d) that would require disclosure of ratings histories for 100% of the issuer-paid credit ratings outstanding. In addition, the Commission asked a series of detailed questions to elicit information about how the rule proposal would impact issuer-paid NRSROs and whether the rule should be expanded to apply to all credit ratings: issuer-paid, subscriber-paid, and unsolicited.
34

34

See February 2009 Proposing Release,
74 FR at 6488-6490.

The amendments proposed in the
February 2009 Proposing Release
would have created three new subparagraphs to paragraph (d) of Rule 17g-2: (d)(1), (d)(2), and (d)(3). Paragraphs (d)(1) and (d)(2) would have contained the text of paragraph (d) as adopted in the
February 2009 Adopting Release.
Specifically, paragraph (d)(1) would have contained the record retention requirements of paragraph (d) as originally adopted by the Commission in the
June 2007 Adopting Release.
35

Paragraph (d)(2) would have contained the 10% ratings history disclosure requirements adopted by the Commission in the
February 2009 Adopting Release.
36

Finally, paragraph (d)(3) would have contained the new requirement that NRSROs disclose, in XBRL format, ratings history information for 100% of their outstanding issuer-paid credit ratings initially determined on or after June 26, 2007 (the effective date of the Rating Agency Act). Under the proposed amendment, a credit rating action would not have needed to be disclosed until twelve months after the action was taken.
37

35

See June 2007 Adopting Release,
72 FR at 33622;
see also
17 CFR 240.17g-2(d).

36

See February 2009 Adopting Release,
74 FR at 6460-6463.

37

See February 2009 Proposing Release,
74 FR at 6487-6488.

The Commission received responses from twenty-three commenters addressing various aspects of the proposed amendments to paragraph (d) of Rule 17g-2 and responding to some of the questions posed by the Commission.
38

A substantial number of commenters expressed general support for expanding the public disclosure requirements for ratings history information.
39

One NRSRO, for example, stated that the proposed amendment “balances the need for adequate disclosure of historical information with the legitimate commercial concerns of the NRSROs.”
40

Some commenters, however, expressed general opposition to the proposed amendments.
41

Two NRSROs, for example, questioned the Commission's authority to adopt the proposed disclosure requirements, contending that the amendments were not “narrowly tailored” and expressing concern over the potential impact the proposed requirements would have on their intellectual property interests and rights in their ratings data.
42

As discussed below, the Commission is adopting the amendments to paragraph (d) of Rule 17g-2 under its authority to require NRSROs to make and keep for specified periods such records as the Commission prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act.
43

In addition, the amendments as adopted are intended to further the goals of the Rating Agency Act, fostering competition, transparency, and accountability in the credit rating industry, by striking an appropriate balance between providing users of credit ratings, investors, and other market participants and observers with a sufficient volume of raw data with which to gauge the accuracy of different NRSROs' ratings over time while at the same time addressing concerns raised by NRSROs regarding their ability to derive revenue from granting market participants access to their credit ratings and downloads of their credit ratings.

38

See
JCR Letter; Council Letter; DBRS Letter; Fitch Letter; Colorado PERA Letter; ABA Letter; ASF/SIFMA Letter; ICI Letter; Hunt Letter; Multiple-Markets Letter; R&I Letter; S&P Letter; Moody's Letter; Realpoint Letter; ABA Committee Letter; CMSA Letter; Colorado PERA Statement; Federated Statement; AEI Statement; Risk Metrics Statement; DBRS Statement; ICI Statement; AFP Statement; ASF Statement; Rapid Ratings Statement; MFA Statement.

39

See, e.g.,
Council Letter; Fitch Letter; ASF/SIFMA Letter; ICI Letter; Hunt Letter; Multiple-Markets Letter; Colorado PERA Statement; Federated Statement; Risk Metrics Statement; AFP Statement; ASF Statement.

40

See
Fitch Letter.

41

See, e.g.,
DBRS Letter; R&I Letter; S&P Letter; Moody's Letter.

42

See
S&P Letter; Moody's Letter.

43

See
Section 17(a)(1) of the Exchange Act (15 U.S.C. 78q(a)(1)).

As discussed in detail below, the Commission is adopting paragraphs (d)(1) and (d)(2) substantially as proposed. However, in response to the comments received and to facilitate the ability of users of credit ratings to directly compare the ratings performance of all NRSROs, the Commission is expanding the ratings history disclosure requirement in new paragraph (d)(3) to include ratings history information for all NRSRO credit ratings initially determined on or after June 26, 2007 (the effective date of the Rating Agency Act), whether issuer-paid, subscriber-paid, or unsolicited. The amendment as adopted requires a ratings action on an issuer-paid credit rating to be publicly disclosed no later than twelve months after it is taken, as proposed in the
February 2009 Proposing Release.
For ratings actions taken on ratings that are not issuer-paid, however, the amendment as adopted allows a delay of twenty-four months between the time a credit rating action is taken and the time it must be disclosed. The Commission is structuring the amendment as adopted in this manner in order to address commenters' concerns regarding the potentially disproportionate negative effects such a disclosure requirement could have on NRSROs operating under the subscriber-paid business model in the absence of a sufficiently long delay

between the time a ratings action is taken—and made available to paid subscribers—and the time that ratings action must be made public.

In addition, as discussed in detail below, the Commission has not yet published the List of XBRL Tags for NRSROs on its Internet Web site. Consequently, the Commission is clarifying in the rule text of new paragraph (d)(3) of Rule 17g-2 that an NRSRO can make the required ratings history data publicly available in any machine-readable format, including XBRL, until 60 days after the date on which the Commission publishes a List of XBRL Tags for NRSROs on its Internet Web site, at which point the NRSRO will be required to make the information available in XBRL format using the List of XBRL Tags for NRSROs.

B. Paragraph (d)(1) of Rule 17g-2

As adopted, paragraph (d)(1) of Rule 17g-2 consists of the record retention requirements of paragraph (d) as originally adopted by the Commission in the
June 2007 Adopting Release.
These requirements mandate that an NRSRO maintain an original, or a true and complete copy of the original, of each record required to be retained pursuant to paragraphs (a) and (b) of Rule 17g-2 in a manner that, for the applicable retention period specified in paragraph (c) of Rule 17g-2, makes the original record or copy easily accessible to the principal office of the NRSRO and to any other office that conducted activities causing the record to be made or received.
44

The purpose of these requirements is to facilitate Commission examination of the NRSRO and to avoid delays in obtaining the records during an on-site examination.

44

See June 2007 Adopting Release,
72 FR at 33622.

The Commission did not receive any comments on this proposal to codify the existing requirements of paragraph (d) as new paragraph (d)(1) and is adopting it as proposed.

C. Paragraph (d)(2) of Rule 17g-2

Paragraph (d)(2) of Rule 17g-2, as adopted, consists of the ratings history disclosure requirements adopted by the Commission in the
February 2009 Adopting Release
(
i.e.,
the 10% requirement). As noted above, this provision requires an NRSRO to make publicly available, in an XBRL format, ratings action histories for 10% of the outstanding issuer-paid credit ratings required to be retained pursuant to paragraph (a)(8) of Rule 17g-2, selected on a random basis, for each class of credit rating for which it is registered and for which it has issued 500 or more issuer-paid credit ratings, with each required disclosure of a new ratings action to be made no later than six months after the ratings action is taken. Several commenters raised questions about whether it was appropriate or necessary to have both a 10% requirement and a 100% requirement. In particular, two commenters stated that the proposed 100% disclosure requirement of paragraph (d)(3) to Rule 17g-2 would be duplicative of the existing 10% disclosure requirement for issuer-paid ratings in new paragraph (d)(2).
45

In addition, both of those commenters as well as a third suggested that the Commission consider the results of the 10% disclosure requirement before adopting the proposed 100% disclosure.
46

These three commenters also argued that in light of the existing 10% disclosure requirement, the amendment as proposed, including the 100% disclosure requirement, was not narrowly tailored.
47

One commenter noted that the Commission has not allowed any time to pass to be able to judge whether the existing 10% disclosure requirement will operate effectively to facilitate comparisons of the aggregate performance of issuer-paid ratings.
48

Another commenter suggested extending the 10% requirement in paragraph (d)(2) of Rule 17g-2 to all NRSROs first before adopting the 100% disclosure requirement.
49

A third commenter stated that the Commission should withdraw the 10% disclosure obligation altogether if it should decide to adopt the 100% requirement.
50

45

See
DBRS Letter; S&P Letter.

46

See
DBRS Letter; Moody's Letter; S&P Letter.

47

See
DBRS Letter; Moody's Letter; S&P Letter.

48

See
Moody's Letter.

49

See
DBRS Letter.

50

See
S&P Letter.

The Commission notes that the 10% requirement and 100% requirement will provide different types of data sets with which to analyze and compare the performance of NRSROs' credit ratings. For example, the 10% requirement applies to all outstanding and future credit ratings that fall within the rule's scope (
i.e.,
an NRSRO is required to draw its random selection of a 10% sample from its entire pool of issuer-paid credit ratings, regardless of when the obligor or instrument was initially rated) whereas the 100% requirement is limited to outstanding credit ratings initially determined on or after June 26, 2007. Therefore, initially, the 10% requirement will provide ratings history information that is much more retrospective and will include ratings histories for credit ratings that have been outstanding for much longer periods of time. In addition, ratings actions subject to the 10% disclosure requirement must be disclosed more promptly (within six months) than ratings actions subject to the 100% requirement. The data generated by the 10% requirement will involve a longer time series of information and, therefore, is designed to aid statistical research on credit ratings performance.

The 100% ratings history disclosure requirement will result in a different data set. It will be broader in scope but more limited in time, applying only to credit ratings initially determined on or after June 26, 2007. The 100% disclosure requirement also allows for a longer delay between the time a ratings action is taken and the time it must be disclosed—twelve months for ratings actions on issuer-paid credit ratings and twenty-four months for ratings actions on ratings not issuer-paid—as opposed to the six month delay allowed under the 10% disclosure requirement. The 100% ratings disclosure will provide for a more granular comparison of the performance of an NRSRO's credit ratings. In particular, it will require ratings history disclosure for every outstanding credit rating of each NRSRO. This will permit users of credit ratings and others to take a specific debt instrument and compare the ratings history for the instrument of each NRSRO that rated it. Thus, whereas the 10% requirement will be limited to analyses using a statistical sampling, the 100% requirement will facilitate analyses of how the NRSROs each rated a specific obligor, security, or money market instrument. In addition, as discussed further below, whereas the 10% requirement is limited to issuer-paid credit ratings, the 100% requirement covers all credit ratings regardless of the business model under which they are issued, thereby allowing comparisons across and among a broader set of NRSROs. Thus, the comprehensive disclosure of ratings histories for all outstanding credit ratings will facilitate a more fundamental ratings-by-ratings comparisons across NRSROs, and will also generate data that can be used to develop independent statistical analyses of the overall performance of an NRSRO's credit ratings in total and within classes and subclasses of credit ratings (e.g., within product or industry types). This will provide users of credit ratings with more ways to analyze the performance of the NRSROs' credit ratings. The increased ability to

understand how an NRSRO's credit ratings perform will further the goals of the Rating Agency Act to foster accountability, transparency, and competition in the credit rating industry.
51

51

See Credit Rating Agency Reform Act of 2006,
Pub. L. No. 109-291; Senate Report, p. 2.

Furthermore, the Commission notes that while the 100% requirement will be useful to market participants and observers within a short period of the rule being effective (the vast majority will be available at twelve months) for the purposes of comparing the performance of different NRSROs rating the same obligors or instruments, due to the June 26, 2007 cutoff date and the longer grace periods, it will take time for the new 100% disclosure requirement to generate the comprehensive data pool necessary for thorough independent analysis and comparison of the long-term ratings performance of the NRSROs. In the meantime, the 10% requirement will provide ratings performance information on issuer-paid credit ratings (the vast majority of outstanding NRSRO credit ratings). Thus, in addition to the other benefits of retaining the 10% requirement, the ratings performance and information it provides will help bridge the gap until the 100% requirement has generated a robust set of data.
52

52
According to Form NRSRO submissions by the NRSROs, issuer-paid credit ratings account for over 98% of the current credit ratings issued by NRSROs.

In light of the different structures of the two ratings history disclosure requirements as well as the different data sets which they will provide, and the corresponding complimentary ways in which they will advance the goals of the Rating Agency Act and the Commission's rules, the Commission believes that it would be beneficial to retain the 10% ratings history disclosure requirement alongside the new 100% disclosure requirement being adopted today.

Accordingly, the Commission is adopting new paragraph (d)(2) to Rule 17g-2 as proposed.

D. Paragraph (d)(3) of Rule 17g-2

As adopted, new paragraph (d)(3) to Rule 17g-2 requires each NRSRO to disclose ratings history information for 100% of its credit ratings initially determined on or after June 26, 2007, with each ratings action to be disclosed no later than twelve months or twenty-four months after it is taken, depending on whether the rating is issuer-paid. Any ratings action information required under the 100% disclosure requirement with respect to issuer-paid credit ratings need not be made public less than twelve months from the date such ratings action is taken. A ratings action on a rating that is not issuer-paid need not be made public less than twenty-four months from the date it is taken. As noted above, this represents a modification of the proposed amendment, which would have applied the 100% disclosure requirement only to issuer-paid ratings with a twelve month grace period. The Commission requested comments on a number of specific questions pertaining to this provision of the proposed amendment, and the modifications are designed to address the comments received in response to those questions.

The Commission specifically requested comment on whether the proposed 100% disclosure requirement should apply equally to issuer-paid and subscriber-paid credit ratings.
53

The Commission received letters from seventeen commenters in response to this inquiry,
54

with twelve of those commenters answering in the affirmative.
55

Several commenters argued that excluding subscriber-paid credit ratings from the proposed disclosure requirements would be inconsistent with the Commission's goals in proposing the amendment—enhancing NRSRO accountability, transparency, and competition.
56

In addition, several commenters stated that limiting the disclosure requirement to issuer-paid ratings would deprive users of the ability to assess the accuracy and integrity of subscriber-paid credit ratings.
57

Two commenters argued that limiting the rule to issuer-paid credit ratings would result in a lack of uniformity in regulatory approach and create a lack of transparency for subscriber-paid credit ratings, and therefore would not be in the best interests of investors or the capital markets.
58

One commenter in favor of expanding the disclosure requirement to include subscriber-paid credit ratings suggested allowing a longer posting delay for subscriber-paid ratings actions than for issuer-paid credit ratings.
59

53

February 2009 Proposing Release,
74 FR at 6489

54

See
Council Letter; DBRS Letter; Fitch Letter; Colorado PERA Letter; ASF/SIFMA Letter; ICI Letter; Hunt Letter; Multiple-Markets Letter; S&P Letter; Moody's Letter; Realpoint Letter; ABA Committee Letter; Colorado PERA Statement; AEI Statement; RiskMetrics Statement; DBRS Statement; ICI Statement; AFP Statement; Rapid Ratings Statement; MFA Statement.

55

See
Council Letter; DBRS Letter; Fitch Letter; Colorado PERA Letter; ASF/SIFMA Letter; Multiple-Markets Letter; S&P Letter; Moody's Letter; Colorado PERA Statement; RiskMetrics Statement; DBRS Statement; ICI Statement; AFP Statement; MFA Statement.

56

See, e.g.,
Council Letter; Fitch Letter; Colorado PERA Letter; ASF/SIFMA Letter; S&P Letter; Moody's Letter; ICI Statement.

57

See, e.g.,
Council Letter; Fitch Letter; Colorado PERA Letter; ASF/SIFMA Letter; Moody's Letter; Colorado PERA Statement; MFA Statement.

58

See
DBRS Statement; Moody's Letter.

59

See
Multiple-Markets Letter.

Five commenters argued that the rule should not apply to subscriber-paid credit ratings.
60

Concerns expressed by these commenters included a higher likelihood of substantial financial harm to subscriber-paid NRSROs that would arise from the required disclosures
61

and the threat of overly burdensome and costly requirements.
62

One commenter, arguing that “Subscriber-Paid competition introduces credibility back into the ratings business,” warned that the Commission should be “careful not to, in the interest of being overly fair * * * quash the very solutions to the problems so plaguing the industry.”
63

60

See
Hunt Letter; Realpoint Letter; ABA Committee Letter; AEI Statement; Rapid Ratings Statement.

61

See e.g.,
Hunt Letter; Realpoint Letter.

62

See e.g.,
Realpoint Letter; Rapid Ratings Statement.

63
Rapid Ratings Statement.

The Commission also asked whether the rule should apply to unsolicited credit ratings.
64

The Commission received letters from nine commenters in response to this inquiry,
65

with seven responding generally in the affirmative.
66

One commenter noted that any distinction between solicited and unsolicited ratings would stigmatize unsolicited ratings and undercut the ability to foster competition,
67

while others noted that the disclosure of unsolicited ratings provides a point of comparison facilitating efforts to identify those NRSROs with conflicts of interests.
68

In contrast, one commenter stated that requiring unsolicited NRSROs to publish their ratings would “put them out of business.”
69

64

See February 2009 Proposing Release,
74 FR at 6490.

65

See
Council Letter; DBRS Letter; Fitch Letter; Colorado PERA Letter ASF/SIFMA Letter; Hunt Letter; Multiple-Markets Letter; Realpoint Letter; ABA Committee Letter.

66

See
Council Letter; DBRS Letter; Fitch Letter; Colorado PERA Letter; ASF/SIFMA Letter; Hunt Letter; ABA Committee Letter.

67

See
Fitch Letter.

68

See e.g.,
Council Letter; Colorado PERA Letter.

69

See
Realpoint Letter.

The Commission believes the rule should apply to all types of credit ratings, whether issuer-paid, subscriber-paid, or unsolicited. The intent of the rule is to facilitate comparisons of credit rating accuracy across all NRSROs—including direct comparisons of different NRSROs' treatment of the same obligor or instrument—in order to enhance NRSRO accountability,

transparency, and competition. Excluding certain types of credit ratings issued by NRSROs from the rule's scope could undermine this goal, particularly where the exclusion effectively would remove an NRSRO entirely from the rule's scope because that NRSRO issues only the types of credit ratings not covered by the rule. Ratings history information for outstanding credit ratings is the most direct means of comparing the performance of two or more NRSROs. It allows an investor or other user of credit ratings to compare how all NRSROs that maintain a credit rating for a particular obligor or instrument initially rated that obligor or instrument and, thereafter, how and when they adjusted their credit rating over time. This will allow the person reviewing the credit rating histories of the NRSROs to reach conclusions about which NRSROs did the best job in determining an initial rating and, thereafter, making appropriate and timely adjustments to the credit rating.

For example, if three hypothetical NRSROs—X Credit Ratings Company, Y Credit Ratings Company, and Z Credit Ratings Company—each rated a hypothetical ABC Security, the 100% requirement would allow an investor to directly compare the ratings performance of those three NRSROs for that security. To illustrate, assume that when ABC Security was issued in August 2007, X Credit Ratings Company and Y Credit Ratings Company initially gave it their highest rating of `AAA,' while Z Credit Ratings Company initially rated it as `A.' Assume further that in March 2008, X Credit Ratings Company downgraded ABC Security to `AA,' followed by a June 2008 downgrade to `A,' while Y Credit Ratings Company maintained its `AAA' rating for ABC Security until August 2008, at which point it downgraded it to `A.' Assume also that Z Credit Ratings Company maintained its `A' rating for ABC Security without change. Under the 100% disclosure requirement adopted today, an investor reviewing the ratings histories in August 2009 would be able to see that X Credit Ratings Company and Y Credit Rating Companies had, by August 2008, arrived at the same `A' rating for ABC Security—but they will have taken significantly different paths to get to that rating:

X Credit ratings
company

Y Credit ratings
company

Z Credit ratings company

August 2007
AAA
AAA
A

March 2008
AA
AAA
A

June 2008
A
AAA
A

August 2008
A
A
A

By examining the credit rating histories of the three hypothetical NRSROs for ABC Security, an investor will be able to perform an individual analysis of which NRSROs did the best job in determining an initial rating and in making appropriate and timely adjustments to the credit rating.

The Commission believes that the new disclosure requirements will foster greater accountability and transparency for ratings performance for NRSROs as well as competition among NRSROs by making it easier for persons to analyze the actual credit ratings performance of NRSROs in assessing creditworthiness, regardless of the business model under which an NRSRO operates. These disclosures may also enhance competition by making it easier for smaller and less established NRSROs to develop proven track records when determining credit ratings and for potential users of their ratings to evaluate the relative quality and performance of these NRSROs.

In addition to facilitating individual comparisons of NRSRO ratings performance, disclosure of ratings histories will allow market observers to generate statistics about NRSRO performance by compiling and processing the information in the aggregate. Currently, NRSROs are required to publicly disclose internally generated default and transition performance statistics in Exhibit 1 of Form NRSRO. The existing disclosure requirements of Exhibit 1, as amended in the
February 2009 Adopting Release,
70

provide investors and other users of credit ratings with useful, standardized performance statistics with which to compare the performance of NRSROs. The raw data to be provided by NRSROs pursuant to the new ratings history disclosure requirements, however, will enable market participants to develop performance measurement statistics that would supplement those required to be published by the NRSROs themselves in Exhibit 1, tapping into the expertise of credit market observers and participants in order to create better and more useful means to compare the credit ratings performance of NRSROs. The ratings history disclosure requirements adopted today will facilitate the ability of individual users of credit ratings to design their own performance metrics to generate the performance statistics most meaningful to them. Users of credit ratings will benefit from the ability to generate performance statistics best suited to their individual needs.

70

See February 2009 Adopting Release,
74 FR at 6457-6459.

As discussed above, the arguments raised by commenters for excluding particular types of credit ratings from the rule's scope focused largely on the potential that the disclosure requirement will result in undue costs to, or have a disproportionate negative impact on the revenues of, NRSROs that issue that type of credit rating.
71

For example, NRSROs that primarily determine subscriber-paid credit ratings argued that these ratings should not be subject to the rule because it will cause subscribers to stop paying them for access to current outstanding credit ratings.
72

NRSROs that primarily determine issuer-paid and unsolicited credit ratings argued that these ratings should not be subject to a 100% disclosure requirement because it would cause persons who pay for downloadable access to their current ratings to stop paying for the service.
73

They also argued that they derive separate revenue from selling access to historical information about their outstanding credit ratings.
74

71

See e.g.,
Hunt Letter; Realpoint Letter.

72

See e.g.,
Realpoint Letter.

73

See e.g.,
JCR Letter; R&I Letter.

74

See e.g.,
Moody's Letter; S&P Letter.

In the
February 2009 Proposing Release,
the Commission asked a series of detailed questions to elicit information about whether the rule would have the impacts described above. The intent was to provide interested persons with the chance to provide more detailed comments and supply supporting quantitative data if appropriate. Although, as noted above, commenters expressed concern over the potential costs, they did not provide

quantitative data as requested by the Commission.

After careful review of the comments, the Commission believes that expanding the rule to include all types of credit ratings (
i.e.,
the ability to compare the performance of all NRSROs) will maximize its benefits to users of credit ratings. The Commission acknowledges commenters' concerns over potential loss of NRSRO revenue, and notes that an overall drop in subscription revenues across the credit rating industry could be a sign that the rule's requirement that NRSROs publicly disclose their credit ratings histories is having the unintended effect of causing users of credit ratings to cease purchasing access to current credit ratings or downloads of current credit ratings due to the availability of ratings histories disclosed on a delayed basis.

As discussed further below, however, it is the Commission's belief that increasing the grace period between the time a ratings action is taken on a rating issued that is not issuer-paid and the time it is required to be disclosed to twenty-four months will address these concerns and mitigate any potential negative impact on such NRSRO revenues. To the extent that users of credit ratings are paying subscription fees in significant part to obtain current ratings information, ratings that are twenty-four months old likely will not constitute a sufficient substitute for current ratings information such that existing subscribers would cease to pay such subscription fees for access to current ratings information. In addition, while several NRSROs whose ratings are issuer-paid also earn revenue from payments for downloads of their ratings, the Commission understands that this revenue is a relatively small percentage of their overall revenue. The Commission believes that the twelve month delay in publication will help mitigate any effect on these revenues for the 100% disclosure requirement. As with the credit ratings that are not issuer-paid, ratings that are twelve months old likely will not constitute a sufficient substitute for current ratings information such that existing customers would cease to pay fees for access to current ratings information. Furthermore, the amended rule, as adopted, does not require the disclosure of the analysis and report that typically accompany the publication of a credit rating. NRSROs will continue to be able to distribute such information as they see fit, including selling such information to subscribers, which should also serve to mitigate any potential loss of subscribers.

Nonetheless, the Commission intends to closely monitor the impact, if any, the new disclosure requirements of the rule, as amended, have on the revenues NRSROs obtain from users purchasing access to current credit ratings or downloads of current credit ratings. Depending on what, if anything, this monitoring reveals, the Commission may re-examine the rule and, if appropriate, consider modifications designed to address the concerns of harm to NRSRO revenue derived from selling current ratings information, balanced against the concerns expressed by other commenters regarding the usefulness of ratings history disclosure to investors when such disclosure does not include more recent (and perhaps more relevant) ratings. For example, the Commission's monitoring may reveal that users of credit ratings are ceasing to purchase access to current credit ratings or downloads of current credit ratings because of the public disclosure of the histories of those ratings. Alternatively, it may reveal that investors and other users of credit ratings are continuing to pay subscription fees for access to current ratings information, thus confirming that they do not view historical ratings as an adequate substitute for such current ratings. To complement the Commission's monitoring, the Commission encourages interested persons to notify the Commission of relevant developments under the new rules. For example, NRSROs should notify the Commission if they believe they are losing revenues because users of credit ratings view the twenty-four months delayed ratings action history disclosure as an adequate substitute for purchasing access to up-to-date credit ratings or downloads of up-to-date credit ratings.

The Commission notes, however, that the rule is intended to foster greater accountability and transparency of credit rating performance for NRSROs and to increase competition by allowing users of credit ratings to better assess and compare the performance of NRSROs, and other Commission rules are designed to reduce undue reliance on ratings by investors and other market participants. The increased accountability and transparency provided by the rule could cause users of credit ratings to shift their business from one NRSRO to another based on their views as to which entity provides the most accurate credit ratings. A loss of revenues by some NRSROs resulting in the gain of revenues by other NRSROs occasioned by a shift in business would not be a reason to consider modifying the rule as discussed above; indeed, it could be evidence that the rule is serving its intended purpose. A steep decrease in subscription revenues across the credit rating industry, however, could be the result of a number of factors, and the Commission would carefully examine such a decrease. Although a general decline in subscription revenue likely would reflect that investors and other market participants have less demand for ratings, such a decrease in demand would be expected if regulatory emphasis on credit ratings is reduced, investors are performing their own independent analyses, and investors had less confidence in the quality of ratings. However, a decrease in demand also could be a sign that the rule is having the unintended effect of causing users of credit ratings to cease purchasing access to current credit ratings or downloads of current credit ratings due to the availability of ratings histories disclosed on a twenty-four month delay.

To the extent NRSROs derive revenues from selling access to their ratings histories, the Commission acknowledges that the new rule may well have a negative impact on this revenue stream. As noted earlier, the amended rule, as adopted, does not require NRSROs to disclose the analysis or report that typically accompany a credit rating, which should also serve to mitigate any potential loss of subscribers to NRSROs' credit ratings histories. The Commission asked questions designed to quantify the amount of revenues derived by NRSROs from this activity but did not receive any revenue figures. However, information gathered by Commission staff over the course of discussions with NRSROs indicates that the amount of revenues they derived from selling access to ratings histories is not significant when compared to the revenues derived from other credit rating services. Nonetheless, the Commission encourages an NRSRO to notify the Commission if the rule causes a loss of this revenue source that is significant when compared to its total revenues. If that is the case, the Commission will re-examine the rule and review whether any action is appropriate.

The Commission also proposed, and requested comment on the appropriateness of, limiting the application of the proposed new disclosure requirements of paragraph (d)(3) of Rule 17g-2 to ratings initially determined on or after June 26, 2007, as well as comment on whether the data for ratings determined on or after that date would provide meaningful

information to users of credit ratings. The Commission asked, alternatively, whether the final rule should apply to ratings determined on or after a different date, such as the date of enactment of the Rating Agency Act, or to all outstanding credit ratings regardless of when issued.
75

Several commenters argued in favor of expanding the rule to cover all outstanding credit ratings,
76

with two stating that limiting disclosure to products initially rated on or after June 26, 2007 would exclude many of the structured finance products that contributed to the current financial crisis.
77

One commenter suggested that the rule be applied to all outstanding credit ratings starting three to five years ago,
78

while another stated that the disclosure required under the rule should include, at a minimum, the “2005 underwriting cohort.”
79

One commenter, stating that there is nothing in the Rating Agency Act that imposes a time-based limit on the Commission's authority to require disclosure, argued that rating history disclosure should be required for as many ratings as possible and suggested a starting date “as early as the early 2000s” as “an absolute minimum.”
80

Another commenter stated that the costs for issuer-paid NRSROs to provide ratings histories for all outstanding credit ratings would not be substantial, arguing that the data was already available in digitized form and that the conversion to the XBRL format would require relatively simple technology.
81

75

February 2009 Proposing Release,
74 FR at 6488.

76

See, e.g.,
Council Letter; Fitch Letter; Colorado PERA Letter; ASF/SIFMA Letter; Hunt Letter; Multiple-Markets Letter.

77

See
Colorado PERA Letter; Council Letter.

78

See
ASF/SIFMA Letter.

79

See
Multiple-Markets Letter.

80

See
Hunt Letter.

81

See
Multiple-Markets Letter.

Two commenters expressed their opposition to applying the proposed new disclosure rule to all outstanding credit ratings, arguing that such a requirement would entail undue costs and burdens.
82

One added that the benefit received from applying the disclosure requirements to all outstanding credit ratings would be of limited value.
83

82

See
DBRS Letter; ABA Committee Letter.

83

See
ABA Committee Letter.

The Commission believes that using the date of effectiveness of the Rating Agency Act strikes an appropriate balance between the Commission's desire to maximize the amount of raw data to be disclosed and the potential costs of the disclosure. The amendment as adopted limits the application of the rule's new disclosure requirements to credit ratings issued after credit rating agencies were put on notice of the effectiveness of the Commission's new regulatory authority over NRSROs. The Commission believes that using the date of effectiveness of the Rating Agency Act will permit, on a reasonable timeline, the development of a robust set of data while limiting the burden on NRSROs.

The Commission also requested comments as to whether the proposed twelve-month grace period between the time a ratings action was taken and the time it would be required to be disclosed under proposed paragraph (d)(3) of Rule 17g-2 would be sufficient to address concerns regarding the revenues NRSROs derive from selling downloads of, and data feeds to, their current issuer-paid credit ratings.
84

The Commission received twelve comments in response to these inquiries.
85

Of these, three commenters expressed agreement with the proposed twelve-month grace period,
86

with one noting that a six-month grace period would also be sufficient.
87

84

February 2009 Proposing Release,
74 FR at 6488.

85

See
JCR Letter; DBRS Letter; Fitch Letter; ASF/SIFMA Letter; ICI Letter; Hunt Letter; Multiple-Markets Letter; R&I Letter; S&P Letter; Realpoint Letter; ABA Committee Letter; Rapid Ratings Statement; ICI Statement.

86

See
DBRS Letter; Fitch Letter; ABA Committee Letter.

87

See
DBRS Letter.

The commenters expressing disagreement with the proposed time lag offered a variety of suggestions as to the appropriate period. Three commenters argued for a longer grace period, citing the negative effects on revenue they expected would arise from a twelve-month period.
88

One commenter, arguing that the required disclosure would negatively impact sales of its historical database, expressed its belief that its database sales business would not be as negatively impacted if the Commission extended the time lag to at least 18 months. That commenter further expressed the belief that such a time lag would not impede third-party review of credit ratings performance.
89

One commenter suggested 36 months as the shortest possible delay to protect its subscription fees.
90

A third commenter, while stating that subscriber-paid NRSROs should never be required to disclose their ratings information, suggested a 2 to 3 year period as an alternative.
91

Two commenters argued that no grace period would be sufficient to avoid negatively impacting the revenues they derived from selling access to ratings history data.
92

88

See
JCR Letter; R&I Letter; Realpoint Letter.

89

See
R&I Letter.

90

See
JCR Letter.

91

See
Realpoint Letter.

92

See
S&P Letter; Rapid Ratings Statement.

Other commenters suggested a shorter grace period,
93

with one suggesting a six-month time-lag,
94

another two suggesting a three month time-lag,
95

and one suggesting immediate disclosure.
96

As noted above, one commenter supported either a six-month or twelve-month lag.
97

One commenter that supported the six-month time lag expressed the belief that six months represented an appropriate balance between the private commercial interests of the NRSROs impacted and the wider public interests.
98

One commenter that supported the three-month time lag stated that the twelve-month time would not meet the stated goal of the proposal to make it easier for persons to analyze the actual performance and accuracy of NRSROs' credit ratings.
99

The other commenter supporting a three-month lag, noting that “rating information that is even three months old is extremely stale by market standards,” stated that a three-month lag would be more than adequate to protect NRSROs' interest in selling data feeds and may be adequate to serve the purposes of the disclosure regime.
100

The commenter suggesting immediate disclosure argued that such disclosure was necessary to serve as a market check for “rating shopping.”
101

93

See
DBRS Letter; ASF/SIFMA Letter; ICI Letter; Hunt Letter; Multiple-Markets Letter.

94

See
DBRS Letter; ASF/SIFMA Letter.

95

See
ICI Letter; Hunt Letter.

96

See
Multiple-Markets Letter.

97

See
DBRS Letter.

98

See
ASF/SIFMA Letter.

99

See
ICI Letter.

100

See
ICI Letter; Hunt Letter.

101

See
Multiple-Markets Letter.

The amendment, as adopted, includes different grace periods depending on whether a rating is issuer-paid or not. For issuer-paid credit ratings, the amendment, as adopted, retains the proposed twelve-month grace period between the time a ratings action is taken and the time it must be disclosed. This twelve-month grace period is intended to provide a sufficient volume of historical credit ratings information to permit comparison of credit ratings performance without unduly affecting the revenues NRSROs derive from selling downloads of their current credit ratings and access to historic information about their outstanding credit ratings. As noted above, the Commission asked questions designed to quantify the amount of revenues derived by NRSROs from this activity

but did not receive any revenue figures in response. The Commission notes, however, that one large NRSRO which primarily issues ratings under the issuer-paid business model stated that a twelve-month delay would be “sufficient to protect the commercialization of ratings of any type.”
102

102

See
Fitch Letter.

Based on the comments received, however, the Commission believes that a longer grace period is appropriate for ratings actions on ratings that are not issuer-paid. As such, the amendment, as adopted, allows for a delay of up to twenty-four months on ratings actions taken on such credit ratings. Issuer-paid credit ratings are generally made available on an NRSRO's Internet Web site free of charge for a designated period of time. For the NRSROs issuing such ratings, therefore, the 100% disclosure requirement adds a requirement that the NRSRO take data that has already been made public and, after a twelve-month grace period, make it permanently available in an aggregated form and in machine-readable (or later XBRL) format. In contrast, NRSROs operating under the subscriber-paid business model may only make their ratings available to paying subscribers. For these NRSROs, the 100% disclosure requirement will constitute a new disclosure, since it will require them to put into the public domain information that they generally do not make publicly available without collecting a fee.

In addition, although the Commission believes that the amended rule, as adopted, addresses the concerns raised by NRSROs regarding their ability to derive revenue from granting market participants access to their current credit ratings, the Commission also recognizes the possibility that this revenue may be negatively affected. If there were to be a negative impact, it will likely be disproportionately more significant for NRSROs that primarily or exclusively determine ratings paid for by subscribers compared to NRSROs that primarily or exclusively determine issuer-paid credit ratings. NRSROs that determine issuer-paid credit ratings earn the majority of their revenues from fees paid by issuers, underwriters, or sponsors. On the other hand, NRSROs that primarily or exclusively issue ratings paid for by subscribers derive their revenues almost entirely from the fees they charge subscribers. If subscribers consider non-current credit ratings as a reasonable substitute for current credit ratings, they may reconsider their subscriptions. In this case, NRSROs that primarily or exclusively issue ratings paid for by subscribers are more likely to lose a more significant proportion of their revenue than NRSROs that determine issuer-paid credit ratings. The twenty-four month grace period for the disclosure of ratings actions on non-issuer paid credit ratings is designed to counterbalance this potentially disproportionate “substitution” effect. The Commission anticipates that the longer delay between the time a ratings action is taken on a non-issuer paid credit rating and the time it must be disclosed will significantly reduce the chances of users of credit ratings viewing the ratings histories to be disclosed as a viable substitute for subscribing to current credit ratings.

The parties that pay subscription fees for access to NRSRO credit ratings and who pay for access to downloadable packages of issuer-paid and unsolicited credit ratings obtain access to the NRSRO's current views on the creditworthiness of obligors and debt instruments. Based on the comments of credit rating users and staff discussions with investors, the Commission believes that it would be unlikely that those parties would reconsider their purchase of those products due to the public availability of non-current ratings action information. The ability to receive data on a ratings action twenty-four months after it takes place would not appear to be an adequate substitute for subscribing to an NRSRO's current credit ratings, nor would the ability to download current credit ratings be a substitute for downloading credit ratings that are 12 months old. The Commission further believes, however, that while increasing the length of the grace period from twelve to twenty-four months for credit ratings that are not issuer-paid will delay the emergence of the robust data set generated by the 100% disclosure requirement, the 100% disclosure requirement as adopted will have a positive effect on furthering the purposes of the Rating Agency Act to improve ratings quality for the protection of investors and in the public interest by fostering accountability, transparency, and competition in the credit rating industry.

Increasing the length of the grace period even further as suggested by some commenters would delay the development of a robust set of ratings history data and further reduce the ability to include more recent (and potentially relevant) ratings actions in an evaluation of ratings quality. Decreasing the grace period would increase the risk that NRSROs would lose revenues from subscribers to their current credit ratings and downloads of their current credit ratings, as well as increase the risk of lost revenues from selling access to historic information about outstanding credit ratings. The grace periods adopted (twelve and twenty-four months) are intended to strike a balance between these two concerns, taking into account the particular effects with respect to issuer-paid and non issuer-paid credit ratings as discussed above. Furthermore, as noted above, the amended rule does not require NRSROs to disclose the analysis and report that typically accompany the publication of credit ratings, which should serve to further mitigate any potential loss of subscriber revenues or downloads. However, as noted above, the Commission intends to monitor the impact on revenues resulting from this disclosure requirement, as well as the benefits generated by this requirement.

As noted above, several commenters argued that the proposed 100% disclosure requirement was not narrowly tailored.
103

The Commission notes in response that the grace periods as well as the restriction of applicability of the new disclosure requirement to ratings initially determined on or after June 26, 2007, the effective date of the Ratings Agency Act, serve to appropriately narrow the application of the new disclosure requirement. Furthermore, as discussed above, the 100% disclosure requirement will provide different information and, as a result, differing types and customization of analysis, than the 10% disclosure requirement. The 100% disclosure requirement will, for example, allow a more granular analysis of how NRSROs each rated a specific obligor, security, or money market instrument, thereby furthering the goals of the Rating Agency Act to foster accountability, transparency, and competition in the credit rating industry. The Commission therefore believes that the amendment, as adopted, is narrowly tailored to meet the purposes of the Exchange Act and the Rating Agency Act.

103

See, e.g.,
DBRS Letter; Moody's Letter; S&P Letter.

Finally, the Commission notes that it has not yet published the List of XBRL Tags for NRSROs on its Internet Web site. The disclosure requirements of paragraph (d) of Rule 17g-2 as adopted in the
February 2009 Adopting Release,
which require NRSROs to make publicly available, in XBRL format and on a six-month delayed basis, the ratings histories for a random sample of 10% of issuer-paid credit ratings, became effective on August 10, 2009. On August 5, 2009, the Commission provided

notice that an NRSRO subject to those disclosure provisions can satisfy the requirement to make publicly available ratings history information in an XBRL format by using an XBRL format or any other machine-readable format, until such time as the Commission provides further notice.
104

Consistent with this approach, new paragraph (d)(3) as adopted will allow an NRSRO to make the required data available in an interactive data file in any machine-readable format, including XBRL, until 60 days after the date on which the Commission publishes a List of XBRL Tags for NRSROs on its Internet Web site, at which point the NRSRO will be required to make the information available in XBRL format using the List of XBRL Tags for NRSROs published by the Commission.

104

See Notice Regarding the Requirement to Use eXtensible Business Reporting Language Format to Make Publicly Available the Information Required Pursuant to Rule 17g-2(d) of the Exchange Act,
Exchange Act Release No. 60451 (August 5, 2009), 74 FR 40246 (August 11, 2009).

For the reasons discussed above, the Commission is adopting the proposed new paragraph (d)(3) with the following modifications: (1) The disclosure requirement is not limited to issuer-paid credit ratings but rather applies to any type of NRSRO credit rating (
i.e.,
issuer-paid, subscriber-paid, and unsolicited), (2) the grace period between the time a ratings action is taken and the time by which it must be disclosed has been increased from the proposed twelve months to twenty-four months for ratings actions related to non issuer-paid credit ratings, and (3) an NRSRO may make the required data available in an interactive data file in any machine-readable format, including XBRL, until 60 days after the date on which the Commission publishes a List of XBRL Tags for NRSROs on its Internet Web site, at which point the NRSRO will be required to make the information available in XBRL format using the List of XBRL Tags for NRSROs.

As adopted, paragraph (d)(3)(i)(A) of Rule 17g-2 requires an NRSRO to make publicly available on its corporate Internet Web site in an interactive data file that uses a machine-readable format the ratings action information required to be retained pursuant to paragraph (a)(8) of Rule 17g-5 (the ratings history information for all current credit ratings) for any credit rating initially determined by the nationally recognized statistical rating organization on or after June 26, 2007. Paragraph (d)(3)(i)(B) of Rule 17g-2, as adopted, provides that any ratings action information required to be made and kept publicly available on the NRSRO's corporate Internet Web site pursuant to paragraph (d)(3)(i)(A) with respect to credit ratings paid for by the obligor being rated or by the issuer, underwriter, or sponsor of the security being rated need not be made public less than twelve months from the date such ratings action is taken. Consequently, under this provision, the grace period for disclosing ratings history information for issuer-paid credit ratings is twelve months. Paragraph (d)(3)(i)(C), as adopted, provides that any ratings action information required to be made and kept publicly available on the NRSRO's corporate Internet Web site pursuant to paragraph (d)(3)(i)(A) with respect to credit ratings other than those referred to in paragraph (d)(3)(i)(B) need not be made public less than twenty-four months from the date such ratings action is taken. Consequently, under this provision, the grace period for disclosing ratings history information for any credit rating other than issuer-paid credit ratings is twenty-four months. This includes subscriber-paid credit ratings. Finally, as adopted, paragraph (d)(3)(ii) of Rule 17g-2 provides that in making the information required under paragraph (d)(3)(i)(A) available in an interactive data file on its corporate Internet Web site, the NRSRO shall use any machine-readable format, including but not limited to XBRL format, until 60 days after the date on which the Commission publishes a List of XBRL Tags for NRSROs on its Internet Web site, at which point the NRSRO shall make this information available in an interactive data file on its corporate Internet Web site in XBRL format using the List of XBRL Tags for NRSROs as published by the Commission on its Internet Web site.

The Commission is adopting these amendments, in part, under authority to require NRSROs to make and keep for specified periods such records as the Commission prescribes as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act.
105

The Commission believes the new recordkeeping and disclosure requirements are necessary and appropriate in the public interest and for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act.

105

See
Section 17(a)(1) of the Exchange Act (15 U.S.C. 78q(a)(1)).

As discussed above, the Commission recognizes that the amended rule could affect the revenues of NRSROs. Nevertheless, the Commission believes that the amended rule, as adopted, strikes an appropriate balance in furthering the purposes of the Rating Agency Act to increase transparency, accountability, and competition in the credit rating industry by providing users of credit ratings, investors, and other market participants and observers with the maximum amount of raw data with which to gauge the performance of NRSROs over time without unduly affecting NRSROs' ability to derive revenue from granting market participants access to their credit ratings and downloads of their credit ratings.

Accordingly, the Commission is adopting the amendments to paragraph (d) of Rule 17g-2 with the modifications discussed above.

III. Final Amendments to Rule 17g-5 and Regulation FD

A. Summary and Background

Rule 17g-5
106

identifies a series of conflicts of interest arising from the business of determining credit ratings. Under the rule, some of these conflicts must be disclosed and managed, while others are prohibited outright. In the
June 2008 Proposing Release,
the Commission proposed amending the rule to place additional requirements with respect to the conflict of being paid by the arranger of a structured finance product to rate the product as well as three new categories of conflicts of interest to be prohibited outright.
107

In the
February 2009 Adopting Release,
the Commission adopted the three new categories of prohibited conflicts of interest.
108

The Commission did not,

however, adopt the new requirements that would have been triggered by the conflict of being paid by an arranger to rate a structured finance product. Instead, in the
February 2009 Proposing Release,
the Commission re-proposed the amendments with substantial modifications.
109

As discussed in detail below, the Commission is adopting the amendments substantially as re-proposed.

106
17 CFR 240.17g-5.

107

See June 2008 Proposing Release,
73 FR at 36128-36228. The Commission's set of initial regulations implementing the Rating Agency Act designated eight types of conflicts of interest required to be disclosed and managed and prohibited outright four types of conflicts of interest.
See June 2007 Adopting Release,
72 FR at 33595-33599.

108

See February 2009 Adopting Release,
74 FR at 6465-6469. The three new categories of conflicts of interest prohibited outright are (1) issuing or maintaining a credit rating with respect to an obligor or security where the NRSRO or a person associated with the NRSRO made recommendations to the obligor or the issuer, underwriter, or sponsor of the security about the corporate or legal structure, assets, liabilities, or activities of the obligor or issuer of the security, (2) issuing or maintaining a credit rating where the fee paid for the rating was negotiated, discussed, or arranged by a person within the NRSRO who has responsibility for participating in determining or approving credit ratings or for developing or approving procedures or methodologies used for determining credit ratings, including qualitative and quantitative models, and (3) issuing or maintaining a credit rating where a credit analyst who participated in determining or monitoring the credit rating, or a person responsible for approving the credit rating received gifts, including entertainment, from the obligor being rated, or from the issuer, underwriter, or sponsor of the securities being rated, other than items provided in the context of normal business

activities such as meetings that have an aggregate value of no more than $25.

109

See February 2009 Proposing Release,
74 FR at 6493-6497.

In the
June 2008 Proposing Release,
the Commission proposed to amend paragraph (b) of Rule 17g-5 by re-designating the existing paragraph (b)(9) of the rule as (b)(10) and creating a new paragraph (b)(9) identifying the conflict: Issuing or maintaining a credit rating for a security or money market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction that was paid for by the issuer, sponsor, or underwriter of the security or money market instrument.
110

In connection with specifying this type of conflict, the Commission proposed amendments to paragraph (a) of Rule 17g-5 that would have established additional conditions—beyond disclosing the conflict and establishing procedures to manage it—that would need to be met for an NRSRO to issue or maintain a credit rating subject to this conflict.
111

110

See June 2008 Proposing Release,
73 FR at 36219-36226, 36251.

111

See id.

Specifically, the Commission proposed a new paragraph (a)(3) in the
June 2008 Proposing Release
that would have required, as a condition to the NRSRO rating a structured finance product, that the information provided to the NRSRO and used by the NRSRO in determining an initial credit rating and, thereafter, performing surveillance on the credit rating be disclosed through a means designed to provide reasonably broad dissemination of the information. The proposed amendments did not specify which entity—the NRSRO or the arranger—would need to disclose the information. The proposed amendments would have required further that, for offerings not registered under the Securities Act, the information would need to be disclosed only to investors and credit rating agencies on the day the offering price is set and, subsequently, publicly disclosed on the first business day after the offering closes.
112

The Commission also provided in the
June 2008 Proposing Release
three proposed interpretations of how the information could be disclosed under the requirements of the proposed rule in a manner consistent with the provisions of the Securities Act. These interpretations addressed disclosure under the proposed amendment in the context of public, private, and offshore securities offerings.
113

112

See id.
This proposed requirement would have been in addition to the current requirements of paragraph (a) that an NRSRO disclose the type of conflict of interest in Exhibit 6 to Form NRSRO; and establish, maintain and enforce written policies and procedures to address and manage the conflict of interest. 17 CFR 240.17g-5(a)(1) and (2).

113

See June 2008 Proposing Release,
73 FR at 36222-36226.

As discussed in the
February 2009 Proposing Release,
the majority of commenters addressing the proposal to amend paragraphs (a) and (b) of Rule 17g-5 set forth in the
June 2008 Proposing Release
opposed the proposed amendments or raised substantial practical or legal questions about how they would operate, particularly with respect to publicly disclosing the information.
114

In response to the concerns raised by commenters, the Commission made significant changes to the proposed amendments and re-proposed them for further comment. Under the re-proposed amendments: (1) NRSROs that are hired by arrangers to perform credit ratings for structured finance products would have been required to disclose on a password-protected Internet Web site the deals for which they have been hired and provide access to that site to non-hired NRSROs that have furnished the Commission with the certification described below; (2) NRSROs that are hired by arrangers to perform credit ratings for structured finance products would have been required to obtain representations from those arrangers that the arranger would provide information given to the hired NRSRO to non-hired NRSROs that have furnished the Commission with the certification described below as well; and (3) NRSROs seeking to access information maintained by the NRSROs and the arrangers pursuant to the new rule would have been required to furnish the Commission an annual certification that they are accessing the information solely to determine credit ratings and would determine a minimum number of credit ratings using the information.
115

114

See February 2009 Proposing Release,
74 FR at 6491-6492.

115

See February 2009 Proposing Release,
74 FR at 6492-6497.

The Commission received letters from nineteen commenters in response to the re-proposed amendments to Rule 17g-5.
116

A majority of those commenters expressed their general support for the proposal,
117

with several commenters expressing their belief that the disclosure required under the amendments would have a positive effect on competition within the credit rating industry.
118

One commenter favoring the re-proposed amendments noted the benefit of a “level playing field,”
119

while another expressed a belief that the proposed disclosure requirement would result in “true competition” in the credit rating industry.
120

116

See
Marchywka Letter; JCR Letter; Council Letter; DBRS Letter; FSR Letter; Fitch Letter; Colorado PERA Letter; ASF/SIFMA Letter; ICI Letter; Hunt Letter; R&I Letter; S&P Letter; Moody's Letter; Realpoint Letter; ABA Committee Letter; CMSA Letter; CreditSights Statement; Moody's Statement; Realpoint Statement; RiskMetrics Statement; Egan-Jones Statement; ASF Statement.

117

See e.g.,
Marchywka Letter; Council Letter; FSR Letter; Colorado PERA Letter; Hunt Letter; Realpoint Letter; ABA Committee Letter; CreditSights Statement; Realpoint Statement; Riskmetrics Statement; Egan-Jones Statement.

118

See e.g.,
Hunt Letter, Riskmetrics Statement, Egan-Jones Statement.

119

See
Riskmetrics Statement.

120

See
Egan-Jones Statement.

A smaller number of commenters, however, expressed their general disagreement with the re-proposed amendments.
121

One commenter argued that the re-proposed amendments would result in non-hired NRSROs being motivated to offer the most favorable preliminary ratings that the disclosed data would permit in order to encourage arrangers to abandon the originally hired NRSRO in favor of the non-hired NRSRO in order to obtain a “sweeter” final rating. The same commenter also argued that the proposal would favor large NRSROs with market power at the expense of smaller NRSROs.
122

Another commenter expressed concerns that the proposed new requirements would cause small originators of structured finance products to abandon that market due to the costs associated with the proposed disclosure requirements.
123

121

See e.g.,
JCR Letter; ASF/SIFMA Letter; Moody's Letter; Moody's Statement; ASF Statement.

122

See
JCR Letter.

123

See
R&I Letter.

One commenter cautioned that the proposal could reinforce, rather than diminish, an issuer's ability to engage in “ratings shopping” by creating incentives for issuers to shop for the NRSRO that will demand the least information in the initial rating process.
124

The Commission has expressed its concern over the practice of “ratings shopping” in the past.
125

In

both the
June 2008 Proposing Release
and the
February 2009 Proposing Release,
the Commission noted that the amendments to Rule 17g-5 as proposed in the former release and re-proposed in the latter could help address ratings shopping by exposing an NRSRO that employed less conservative ratings methodologies in order to gain business.
126

In addition, the Commission has noted, the proposed amendments also could mitigate the impact of rating shopping, since NRSROs not hired to rate a deal could nonetheless issue a credit rating.
127

124

See
Moody's Letter.

125

See e.g., June 2008 Proposing Release,
73 FR at 36218.

126

See June 2008 Proposing Release,
73 FR at 36243;
February 2009 Proposing Release,
74 FR 6506.

127

Id.

The Commission recognizes that an increase in the number of credit ratings available to investors by definition entails an increase in the number of NRSROs issuing those ratings, thereby giving issuers a broader pool of NRSROs among which to “shop” for a rating. The Commission also recognizes the concern that NRSROs not hired by the arranger might have the incentive to use information accessed pursuant to Rule 17g-5 as amended to issue an unduly favorable rating in an attempt to procure future business from a particular arranger. The Commission believes that there are several factors counteracting this incentive. First, the 100% disclosure requirement set forth in Rule 17g-2(d), as amended, will facilitate the ability of investors, academics and other users of credit ratings to directly compare the credit rating performance of all NRSROs issuing a credit rating for a given structured finance product, whether the NRSROs are hired by the arranger to do so or instead are issuing unsolicited ratings based on information obtained under the disclosure requirements of Rule 17g-5 as amended. This will likely enhance both hired and non-hired NRSRO's accountability for the ratings they issue. Second, the information available pursuant to Rule 17g-5 will be accessible to all NRSROs, including NRSROs operating under the subscriber-paid model. Since the latter are not compensated by the structured products' arrangers, they can issue unsolicited ratings without the pressure of worrying about the effect that the unsolicited ratings might have on their future revenue stream from arrangers of structured finance. Finally, by facilitating the issuance of unsolicited ratings, the amendments to Rule 17g-5 may serve to mitigate the potential for ratings shopping, since an arranger that “shopped” in order to obtain a higher rating would still face the possibility of non-hired NRSROs issuing lower ratings.

The Commission is adopting the re-proposed amendments substantially as proposed in order to address conflicts of interest and improve the quality of credit ratings for structured finance products by making it possible for more NRSROs to rate structured finance products. Currently, when an NRSRO is hired to rate a structured finance product, some of the information it relies on to determine the rating is generally not made public. As a result, structured finance products frequently are issued with ratings from only one or two NRSROs that have been hired by the arranger, with the attendant conflict of interest that creates. The amendments to Rule 17g-5 are designed to increase the number of credit ratings extant for a given structured finance product and, in particular, to promote the issuance of credit ratings by NRSROs that are not hired by the arranger. This will provide users of credit ratings with more views on the creditworthiness of the structured finance product. In addition, the amendments are designed to reduce the ability of arrangers to obtain better than warranted ratings by exerting influence over NRSROs hired to determine credit ratings for structured finance products. Specifically, opening up the rating process to more NRSROs will make it easier for the hired NRSRO to resist such pressure by increasing the likelihood that any steps taken to inappropriately favor the arranger could be exposed to the market through the credit ratings issued by other NRSROs.

B. Paragraph (b)(9) of Rule 17g-5

New paragraph (b)(9) of Rule 17g-5 identifies the following conflict required to be disclosed and managed under paragraph (a) of the rule: Issuing or maintaining a credit rating for a security or money market instrument issued by an asset pool or as part of any asset-backed or mortgage-backed securities transaction that was paid for by the issuer, sponsor, or underwriter of the security or money market instrument.
128

The Commission intends this provision, which mirrors, in part, the text of Section 15E(i)(1)(B) of the Exchange Act (enacted as part of the Rating Agency Act),
129

to cover the full range of structured finance products, including, but not limited to, securities collateralized by static and actively managed pools of loans or receivables (
e.g.,
commercial and residential mortgages, corporate loans, auto loans, education loans, credit card receivables, and leases), collateralized debt obligations, collateralized loan obligations, collateralized mortgage obligations, structured investment vehicles, synthetic collateralized debt obligations that reference debt securities or indexes, and hybrid collateralized debt obligations.

128
In connection with the adoption of new paragraph (b)(9) of Rule 17g-5, the Commission is re-designating the pre-existing paragraph (b)(9) as paragraph (b)(10).

129
15 U.S.C. 78o-7(i)(1)(B).

As the Commission noted when initially proposing new paragraph (b)(9) in the
June 2008 Proposing Release,
the conflict identified in new paragraph (b)(9) is a subset of the broader conflict already identified in paragraph (b)(1) of Rule 17g-5; namely, “being paid by issuers and underwriters to determine credit ratings with respect to securities or money market instruments they issue or underwrite.”
130

In the case of structured finance products, the Commission believes this “issuer/underwriter-pay” conflict is particularly acute because certain arrangers of structured finance products repeatedly bring ratings business to the NRSROs.
131

As sources of frequent, repeated deal-based revenue, some arrangers have the potential to exert greater undue influence on an NRSRO than, for example, a corporate issuer that may bring far less ratings business to the NRSRO.
132

130
17 CFR 240.17g-5(b)(1). As the Commission noted when adopting Rule 17g-5, the concern with the conflict identified in paragraph (b)(1) “is that an NRSRO may be influenced to issue a more favorable credit rating than warranted in order to obtain or retain the business of the issuer or underwriter.”
June 2007 Adopting Release,
72 FR at 33595.

131

See e.g.,
Testimony of Professor John C. Coffee, Jr., Adolf A. Berle Professor of Law, Columbia University Law School, before the U.S. Senate Committee on Banking, Housing, and Urban Affairs (April 22, 2008) pp. 4-6.

132

Id.; see

also, June 2008 Proposing Release,
73 FR at 36219.

In the
February 2009 Proposing Release,
the Commission requested comment both generally on proposed new paragraph (b)(9) of Rule 17g-5 and on the specific question of whether the definition of the securities and money market instruments giving rise to the specific conflict—instruments issued by an asset pool or as part of an asset-backed or mortgage-backed securities transaction—should be broadened or narrowed.
133

One commenter argued that the definition as proposed was too broad and suggested that structured finance products should be defined identically to “asset-backed securities” in Regulation AB
134

or “expanded with sufficient precision to clarify the intended scope.”
135

In both the

June

2008 Proposing Release

and the
February 2009 Proposing Release,
however, the Commission explicitly stated its intention to broaden the scope of the proposed amendments rather than restrict it to structured finance products meeting narrower definitions such as the one set forth in Regulation AB.
136

133

See February 2009 Proposing Release,
74 FR at 6493.

134

See
17 CFR 1101(c).

135

See
ABA Committee Letter.

136

See June 2008 Proposing Release,
73 FR at 36213 note 15;
February 2009 Proposing Release,
74 FR 6493.

In the
February 2009 Proposing Release, the
Commission stated that its intent is to have the definition be sufficiently broad to cover all structured finance products and noted that Section 15E(i)(1)(B) of the Exchange Act (adopted as part of the Rating Agency Act) uses identical language to describe a potentially unfair, coercive or abusive practice relating the ratings of securities or money market instruments.
137

Furthermore, the Commission adopted Rule 17g-6(a)(4),
138

in part, under this statutory authority, and Rule 17g-6(a)(4) uses the same language—securities or money market instruments “issued by an asset pool or mortgage-backed securities transaction”—to describe the prohibitive practice. As used in Rule 17g-6 and Rule 17g-5, the Commission intends this definition to cover the broad range of structured finance products, including, but not limited to, securities collateralized by pools of loans or receivables (
e.g.,
mortgages, auto loans, school loans, credit card receivables), collateralized debt obligations, collateralized loan obligations, synthetic collateralized debt obligations that reference debt securities or indexes, and hybrid collateralized debt obligations. The Commission continues to believe that the broader definition will appropriately result in the amended rules' application to a larger segment of credit ratings.

137

See
15 U.S.C. 780-7(i)(1)(B); s
ee also

February 2009 Proposing Release,
74 FR 6493.

138
17 CFR 240.17g-6(a)(4).

The Commission is adopting new paragraph (b)(9) of Rule 17g-5 as proposed.

C. Paragraph (a)(3) of Rule 17g-5

The Commission also is adopting new paragraphs (a)(3)(i), (ii), and (iii) of Rule 17g-5 substantially as proposed. New paragraph (a)(3)(i) requires an NRSRO subject to the conflict set forth in new paragraph (b)(9) to maintain a password-protected Internet Web site containing a list of each structured finance security or money market instrument for which it currently is in the process of determining an initial credit rating in chronological order and identifying the type of security or money market instrument, the name of the issuer, the date the rating process was initiated, and the Internet Web site address where the issuer, sponsor, or underwriter of the security or money market instrument represents that the information described in paragraphs (a)(3)(iii), as discussed below, can be accessed.
139

139
As noted in the
February 2009 Proposing Release,
the text of proposed paragraph (a)(3)(i) refers to transactions where the NRSRO is in the process of determining an “initial” credit rating. The Commission does not intend that the rule require the NRSRO to include on the Internet Web site information about securities or money market instruments for which the NRSRO has published an initial rating and is monitoring the rating. Consequently, upon publication of the initial rating, the NRSRO can remove the information about the security or money market instrument from the list it maintains on the Internet Web site. The Commission notes that the information on the arranger's Web site would remain available. If, however, the arranger decides to terminate the rating process before the hired NRSRO published an initial rating, the NRSRO would be permitted to remove the information from the list.
See February 2009 Proposing Release,
74 FR at 6493-6494.

New paragraph (a)(3)(ii) requires an NRSRO subject to the conflict to provide free and unlimited access to such password-protected Internet Web site during the applicable calendar year to any NRSRO that provides it with a copy of the certification described in new paragraph (e) of Rule 17g-5 (discussed below) that covers that calendar year.
140

Taken together, new paragraphs (a)(3)(i) and (ii) of Rule 17g-5 create a mechanism requiring NRSROs hired to rate structured finance products to alert other NRSROs that an arranger has initiated the rating process and to promptly inform the other NRSROs where information being provided by the arranger to the hired NRSRO to determine the credit rating may be obtained.

140
The Commission notes that, pursuant to Section 17 of the Exchange Act as well as the rules thereunder (including Rule 17g-2), representatives of the Commission will have access to the information required to be disclosed on the NRSRO's Internet Web site pursuant to Rule 17g-5.

Several commenters addressed the issue of the password protected Internet Web site to be maintained by hired NRSROs.
141

Three commenters expressed support for the concept,
142

with one noting that the requirements “to establish and maintain such web sites and to post very limited information on such web sites do not appear to be unduly burdensome to NRSROs.”
143

Three other commenters opposed the requirement, arguing that the costs of creating and maintaining a Web site are significant and would negatively impact smaller NRSROs in addition to potentially creating security risks.
144

The Commission is sensitive to the costs of the new requirement but does not believe they are significant. All of the NRSROs currently maintain Internet Web sites, in most cases with password-protected portals that their subscribers and registered users can access to obtain information posted by the NRSRO. Consequently, adding a portal for other NRSROs to access pending deal information is not expected to require significant additional Internet Web site design and maintenance.

141

See, e.g.,
DBRS Letter, ASF/SIFMA Letter, S&P Letter, Realpoint Letter, ABA Committee Letter, CMSA Letter.

142

See
Realpoint Letter; RiskMetrics Statement; ABA Committee Letter.

143

See
ABA Committee Letter.

144

See
DBRS Letter; ASF/SIFMA Letter; Moody's Letter.

The Commission requested comment as to whether the information required to be maintained on the NRSRO's Internet Web site would be sufficient to alert other NRSROs that the rating process has commenced and where they can locate information to determine an unsolicited rating, or whether the Commission should, for example, require an e-mail alert to be sent to all NRSROs that have access to the site as well.
145

One commenter suggested that instead of requiring NRSROs to maintain the list of deals, the Commission require arrangers to notify non-hired NRSROs of new deals by e-mail or, alternatively, that the Commission implement a pilot project to set up and maintain a Web site with information provided by the NRSROs and/or arrangers.
146

Two commenters, however, expressed their opposition to requiring NRSROs to send e-mails in addition to or in lieu of requiring them to maintain the Web site described in new paragraph (a)(3)(i), noting that monitoring such a Web site would be a simple and a non-time-consuming process for non-hired NRSROs.
147

One further noted that if e-mails were required, an NRSRO interested in determining its own ratings would have to monitor their e-mail for update messages from other NRSROs and still check other NRSROs' Web sites in order to obtain the relevant information before checking the relevant issuer portals.
148

The second commenter also argued that an NRSRO should not have to send an e-mail to other NRSROs that may have no interest in rating a particular transaction.
149

145

See February 2009 Proposing Release,
74 FR at 6494.

146

See
DBRS Letter.

147

See
S&P Letter; Moody's Letter.

148

See
Moody's Letter.

149

See
S&P Letter.

The Commission is adopting the requirement that the hired NRSRO

maintain an Internet Web site identifying pending deals as proposed. The Commission agrees with those commenters that are of the view that it is not necessary to require a hired NRSRO to send e-mail alerts to other NRSROs every time it is hired to rate a new transaction, either in addition to or in lieu of the hired NRSRO maintaining a list of its transactions on a password-protected Internet Web site. Concentrating the information about pending deals at the Internet Web site maintained by the hired NRSRO will permit other NRSROs to sort through the list of pending transactions and decide which arranger Web sites they want to access to obtain the information necessary to determine a credit rating. Further, the Commission requires the hired NRSRO to promptly disclose the required information on its Internet Web site, thereby notifying the non-hired NRSROs of the pending deal as soon as possible.
150

The Commission believes that the non-hired NRSRO will be better served by the ability to access, periodically at their own convenience, the lists of all pending transactions maintained on the hired NRSROs' Internet Web sites in order to determine whether any new deals have been initiated. The Commission does not believe that one-time notice e-mails are an adequate alternative in lieu of hired NRSROs maintaining lists of pending transactions. While the Commission does not believe it necessary to require hired NRSROs to send e-mail notices in addition to maintaining such lists, the Commission encourages hired NRSROs to voluntarily supplement maintaining the required lists of pending transactions by offering to notify other registered NRSROs by e-mail alert whenever they are hired to rate new transactions. This way the other NRSROs can decide for themselves whether they want to receive e-mail alerts or monitor the Internet Web sites.

150
The Commission will take seriously any indications that the hired NRSRO is not complying with the requirement to promptly disclose the information pursuant to new paragraph (a)(3)(i) of Rule 17g-5.

As the Commission noted in the
February 2009 Proposing Release,
the text of paragraph (a)(3)(i) refers to transactions where the NRSRO is in the process of determining an “initial” credit rating.
151

The rule does not require the NRSRO to include on the Internet Web site information about securities or money market instruments once the NRSRO has published the initial rating and is monitoring the rating. The amendment is designed to alert other NRSROs about new deals and direct them to the Internet Web site of the arranger where information to determine initial ratings and monitor the ratings can be accessed. Consequently, upon publication of the initial rating, the NRSRO can remove the information about the security or money market instrument from the list it maintains on the Internet Web site. Similarly, if the arranger decides to terminate the rating process before a hired NRSRO publishes an initial rating, the NRSRO would be permitted to remove the information from the list. As discussed in more detail below, however, the representations a hired NRSRO will be required to obtain from an arranger include a representation that once an instrument is rated, the arranger will be required to post on its password-protected Internet Web site any information provided to the hired NRSRO for surveillance purposes.

151

See February 2009 Proposing Release,
74 FR at 6493.

The Commission is making clarifying changes to the text of new paragraphs (a)(3)(ii) and (a)(3)(iii) of Rule 17g-5 as proposed. As discussed above, that paragraph requires an NRSRO subject to the conflict set forth in new paragraph (b)(9) of Rule 17g-5 to provide free and unlimited access to such password-protected Internet Web site during the applicable calendar year to any NRSRO that provides it with a copy of the certification described in new paragraph (e) of Rule 17g-5 (discussed below) that covers that calendar year. The Commission is revising the proposed amendment to clarify that the hired NRSRO need only provide access to its password-protected Internet Web site to a non-hired NRSRO whose certification indicates that it has either (1) determined and maintained credit ratings for at least 10% of the issued securities and money market instruments for which it accessed information pursuant to Rule 17g-5(a)(3) as amended in the calendar year prior to the year covered by the certification, if it accessed such information for 10 or more issued securities or money market instruments; or (2) has not accessed information pursuant to Rule 17g-5(a)(3) as amended 10 or more times in the calendar year prior to the year covered by the certification. This revision ensures that hired NRSROs will only be required to provide access to their password-protected Internet Web sites to non-hired NRSROs that have met the requirements set forth in the certification to be provided to the Commission pursuant to new paragraph (e) of Rule 17g-5 as amended. The Commission is further clarifying that a non-hired NRSRO would not be precluded from accessing the hired-NRSRO's Internet Web site if at some point prior to the most recently ended calendar year the NRSRO accessed the Web site 10 or more times. For example, if a non-hired NRSRO accessed the Web site 10 or more times in year 1, but did not access the Web site in year 2, the non-hired NRSRO would then be permitted to access the Internet Web site in year 3.

Accordingly, the Commission is adopting the amendments establishing new paragraphs (a)(3)(i) and (ii) of Rule 17a-5 substantially as proposed, with the revisions to the text as proposed as discussed above.

New paragraph (a)(3)(iii) of Rule 17g-5, adopted substantially as proposed, requires an NRSRO subject to the conflict set forth in new paragraph (b)(9) to obtain four representations from an arranger that hires it to rate a structured finance product: (1) Pursuant to paragraph (a)(3)(iii)(A) the arranger must represent that it will maintain the information described in paragraphs (a)(3)(iii)(C) and (a)(3)(iii)(D) of Rule 17g-5 available on an identified password-protected Internet Web site that presents the information in a manner indicating which information currently should be relied on to determine or monitor the credit rating; (2) pursuant to paragraph (a)(3)(iii)(B) of Rule 17g-5 the arranger must represent that it will provide access to that password-protected Internet Web site to any NRSRO that provides it with a copy of the certification described in new paragraph (e) of Rule 17g-5 (discussed below) that covers the current calendar year; (3) pursuant to paragraph (a)(3)(iii)(C) of Rule 17g-5 the arranger must represent that it will post on that password-protected Internet Web site all information the arranger provides to the NRSRO for the purpose of determining the initial credit rating for the security or money market instrument, including information about the characteristics of the assets underlying or referenced by the security or money market instrument, and the legal structure of the security or money market instrument, at the same time such information is provided to the NRSRO;
152

and (4) pursuant to paragraph (a)(3)(iii)(D) of Rule 17g-5 the

arranger must represent that it will post on the password-protected Internet Web site all information the arranger provides to the NRSRO for the purpose of undertaking credit rating surveillance on the security or money market instrument, including information about the characteristics and performance of the assets underlying or referenced by the security or money market instrument at the same time such information is provided to the NRSRO.

152
The Commission expects that all the information will be provided in the same format. For example, if the arranger provides information to the hired NRSRO in downloadable and/or searchable format, the Commission expects the arranger to provide the same information in the same format on its Internet Web site. The Commission will take seriously any concerns raised in this regard.

The representations required to be obtained by an NRSRO, as described in new paragraphs (a)(3)(iii)(A) through (D) of Rule 17g-5, taken together, provide that an arranger of a structured finance product agrees to make the information it provides to hired NRSROs, whether provided for the purpose of determining an initial rating or for monitoring a rating, available to other NRSROs. The hired NRSRO must obtain from the arranger a representation that the arranger will post that information on the arranger's Internet Web site at the same time it is given to the hired NRSRO, and that any time the information is updated or new information is given to the hired NRSRO, the arranger will post that information on its Internet Web site contemporaneously. An NRSRO also will be required to obtain from the arranger a representation that the arranger will tag the information in a manner that informs NRSROs accessing the Web site which information currently is operative for the purpose of determining the credit rating in order to ensure that NRSROs accessing the Internet Web site use the correct information to determine their credit ratings. Paragraph (a)(3)(iii) of Rule 17a-5, as adopted, adds the word “written” to the proposed text in order to clarify that these representations must be obtained in writing in order to ensure that they are formally documented and executed.

An NRSRO will violate Rule 17a-5(a)(3) if it determines an initial credit rating or maintains an existing credit rating for a structured finance product that is paid for by an arranger unless that NRSRO obtains a written representation from the arranger, upon which the NRSRO can reasonably rely, that the arranger will take the steps set forth in paragraph (a)(3)(iii)(A) through (D). One commenter expressed concern over the proposed amendment's standard of “reasonable” reliance on an arranger's representations.
153

The question of whether reliance was reasonable will depend on the facts and circumstances of a given situation. Factors relevant to this analysis would include, but not be limited to: (1) Ongoing or prior failures by the arranger to adhere to its representations; or (2) a pattern of conduct by the arranger where it fails to promptly correct breaches of its representations. Further, the Commission recognizes that Internet Web sites periodically malfunction. Depending on the facts, a limited Internet Web site malfunction by itself would not cause the NRSRO to no longer be able to rely reasonably on a written representation from that arranger.

153

See
Fitch Letter.

In addition to the scope of the safe harbor, commenters raised a number of other concerns in connection with paragraph (a)(3)(iii) as proposed.
154

Several commenters objected to the requirement that NRSROs obtain representations from arrangers, arguing that doing so inappropriately places NRSROs in the position of enforcing arranger compliance with disclosure requirements.
155

One commenter suggested that the required representat

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3AE9-28496. Public record. Not legal advice.