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

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

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

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

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

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

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

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

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

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

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

    Section 15E(h)(1) of the Exchange Act requires an NRSRO to
establish, maintain, and enforce policies and procedures reasonably
designed, taking into consideration the nature of its business, to
address and manage conflicts of interest.\354\ Section 15E(h)(2) of the
Exchange Act requires the Commission to adopt rules to prohibit or
require the management and disclosure of conflicts of interest relating
to the issuance of credit ratings.\355\ The statute also identifies
certain types of conflicts relating to the issuance of credit ratings
that the Commission may include in its rules.\356\ It also contains a
catchall provision for any other potential conflict of interest the
Commission deems is necessary or appropriate in the public interest or
for the protection of investors to include in its rules.\357\ Rule 17g-
5 implements these statutory provisions by prohibiting the conflicts
identified in the statute and certain additional conflicts either
outright or if the NRSRO has not disclosed them and established
policies and procedures to manage them.
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    \354\ 15 U.S.C. 78o-7(h)(1).
    \355\ 15 U.S.C. 78o-7(h)(2).
    \356\ See 15 U.S.C. 78o-7(h)(2)(A)-(D).
    \357\ See 15 U.S.C. 78o-7(h)(2)(E).
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    \379\ 15 U.S.C. 77b(a)(11).
---------------------------------------------------------------------------

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

Section 15E(a)(1)(B)(vi) of the Exchange Act \380\ and Rule 17g-1. The
Commission believes the inclusion of this provision is necessary or
appropriate in the public interest or for the protection of investors.
This catchall provision will capture conflicts not specifically listed
in the instructions for Exhibit 6 and Rule 17g-5 that the NRSRO has
identified on Exhibit 6 to Form NRSRO as arising from its business
activities.\381\ The Commission did not receive any comments on the
proposal that this type of conflict be prohibited unless it is
disclosed and managed as required pursuant to Section 15E of the
Exchange Act \382\ and Rule 17g-1 and is adopting the requirement
substantially as proposed.
---------------------------------------------------------------------------

    \380\ 15 U.S.C. 78o-7(a)(1)(B)(vi).
    \381\ See 15 U.S.C. 78o-7(h)(2)(E).
    \382\ 15 U.S.C. 78o-7.
---------------------------------------------------------------------------

3. Paragraph (c) of Rule 17g-5
    Section 15E(h)(2) of the Exchange Act requires the Commission to
adopt rules to prohibit or require the management and disclosure of
conflicts of interest relating to the issuance of credit ratings.\383\
Paragraph (c) of proposed Rule 17g-5 specifically prohibits outright
four types of conflicts of interest. The Commission believes
prohibiting these conflicts is necessary or appropriate in the public
interest or for the protection of investors. These are conflicts that
are not a necessary consequence of how credit rating agencies operate.
They would be difficult to manage given the risk that they could cause
undue influence. Therefore, the Commission is prohibiting them; rather
than requiring they be disclosed and managed. Nonetheless, the
Commission intends to monitor how the prohibitions operate in practice
and, if it appears a prohibition is interfering inappropriately, the
Commission will re-evaluate whether it should be subject to disclosure
and management (rather than prohibited).\384\
---------------------------------------------------------------------------

    \383\ 15 U.S.C. 78o-7(h)(2).
    \384\ See, e.g., S&P Letter stating that all the conflicts
identified in paragraph (c) of Rule 17g-5 should not be prohibited
as they can be managed.
---------------------------------------------------------------------------

a. Paragraph (c)(1) of Rule 17g-5
    As adopted, paragraph (c)(1) prohibits an NRSRO from having a
conflict relating to the issuance of a credit rating where the person
soliciting the credit rating was the source of 10% or more of the total
net revenue of the NRSRO during the most recently ended fiscal
year.\385\ Such a person will be in a position to exercise substantial
influence on the NRSRO.\386\ Consequently, it will be difficult for the
NRSRO to remain impartial, given the impact on the NRSRO's income if
the person withdrew its business. Given the Commission's understanding
that fees from a single entity generally compose a very small
percentage of the revenues of entities currently identified as NRSROs,
the Commission believes that a 10% threshold is a reasonable threshold
for registered NRSROs.\387\
---------------------------------------------------------------------------

    \385\ The determination of ``net revenue'' is same as the
determination of net revenue for purposes of Form NRSRO and Rule
17g-3.
    \386\ As noted in the Commission 2003 CRA Report, some
participants in the Commission 2002 CRA Hearings expressed concern
that ancillary services could become much greater in the future and
suggestions were made that their percentage contribution to total
revenue be capped.
    \387\ As noted in the Commission 2003 CRA Report, fees from any
single issuer typically comprise a very small percentage, less than
1%, of an NRSRO's total revenue.
---------------------------------------------------------------------------

    Several commenters stated that this conflict should not be
prohibited but rather subject to procedures to manage it.\388\ One
commenter, while not requesting that the proposal be changed, noted
that in an atypical circumstance such as issuing credit ratings for
structured products sponsored by a large client an NRSRO may be
required to request a waiver of the prohibition.\389\ Another commenter
also mentioned structured product sponsors as clients that potentially
could approach the 10% revenue threshold and, therefore, that exemptive
relief may be appropriate in such circumstances.\390\ The Commission
continues to believe that 10% of net revenues is a very high threshold.
Moreover, the definition of net revenues has been narrowed to exclude
revenues earned by affiliates that are not persons within the NRSRO.
Therefore, the threshold will be higher than that proposed for NRSROs
with affiliates engaged in activities unrelated to credit ratings.
Consequently, the Commission does not believe the conflict should be
subject to a requirement that it be managed (rather than prohibited).
---------------------------------------------------------------------------

    \388\ See R&I Letter; Fitch Letter; S&P Letter; AEI Letter;
Langohr Letter; AST Letter; ASF Letter.
    \389\ See LACE Letter.
    \390\ See R&I Letter.
---------------------------------------------------------------------------

    Nonetheless, as noted above, the Commission intends to monitor how
the prohibition operates in practice, particularly with respect to
structured products. The intent behind all the prohibitions in
paragraph (c) is not to prohibit a business practice that is a normal
part of an NRSRO's activities. Rather, the intent is to prohibit
conflicts that are not a necessary consequence of providing credit
rating services. If the prohibition in paragraph (c)(1) interferes with
how NRSROs as a matter of course deal with structured product sponsors,
the Commission will evaluate whether the rule should be modified to
accommodate this business practice or whether--as suggested by the
commenter--an exemption would be appropriate.
    For these reasons, the Commission is adopting the prohibition
substantially as proposed.
b. Paragraph (c)(2) of Rule 17g-5
    As adopted, paragraph (c)(2) prohibits an NRSRO from having a
conflict relating to the issuance of a credit rating with respect to a
person (excluding a sovereign governments nation or an agency of a
sovereign nation) where the nationally recognized statistical rating
organization, a credit analyst who participated in determining the
credit rating, or a person responsible for approving the credit rating,
directly owns securities of, or has any other direct ownership interest
in, the rated person. This conflict as it relates to obligors is
identified in Section 15E(h)(2)(C) of the Exchange Act.\391\ The
Commission believes prohibiting these conflicts, including with respect
to issuers, is necessary or appropriate in the public interest or for
the protection of investors. An NRSRO and persons within the NRSRO that
participate in the credit rating should not have a direct financial
interest in the issuer or obligor subject to the credit rating. It will
be difficult for these persons to remain impartial and issue an
objective credit rating in this circumstance.\392\
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    \391\ 15 U.S.C. 78o-7(h)(2)(C).
    \392\ The Senate Report notes that rating agencies argue that
although the pay-for-rating business model presents inherent
conflicts of interest, the conflict is effectively managed inasmuch
as credit analysts do not benefit financially from any of their
ratings decisions. The Senate Report further notes that credit
analysts are not permitted to own any of the securities they follow.
---------------------------------------------------------------------------

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

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

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

    For the reasons, the Commission is adopting the prohibition with
the modifications discussed above.
c. Paragraph (c)(3) of Rule 17g-5
    Paragraph (c)(3) prohibits an NRSRO from having a conflict relating
to the issuance of a credit rating where the rated entity is a person
associated with the NRSRO (i.e., a company directly or indirectly
controlling, controlled by, or under common control with, the
NRSRO).\394\ This conflict as it relates to obligors is identified in
Section 15E(h)(2)(C) of the Exchange Act.\395\ The Commission believes
prohibiting this conflict, including with respect to issuers, is
necessary or appropriate in the public interest or for the protection
of investors. The Commission believes that it is appropriate to
prohibit such conflicts because of the degree of difficulty the
Commission foresees in maintaining an appropriate level of
impartiality, when issuing a credit rating with respect to an
affiliated entity.
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    \394\ See Section 3(a)(63) of the Exchange Act (15 U.S.C.
78c(a)(63)) defining ``person associated with an NRSRO.''
    \395\ 15 U.S.C. 78o-7(h)(2)(C).
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    Two commenters stated that this conflict can be managed and should
not be prohibited.\396\ The Commission believes that for a credit
analyst to determine a credit rating for the company where the analyst
works or an affiliate of that company would place the analyst in an
untenable position. Moreover, the Commission does not believe there
will be a need for such a credit rating as long as other NRSROs are
available to determine credit ratings for these companies. The
Commission will entertain requests for exemptive relief from this
prohibition where appropriate, such as if circumstances develop to a
point where an NRSRO or its affiliate requires a public credit rating
and cannot obtain one from another NRSRO. For these reasons, the
Commission is adopting this prohibition substantially as proposed.
---------------------------------------------------------------------------

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

d. Paragraph (c)(4) of Rule 17g-5
    Paragraph (c)(4) prohibits an NRSRO from having a conflict relating
to the issuance of a credit rating where the credit analyst who
participated in determining the credit rating, or a person responsible
for approving the credit rating, also is an officer or director of the
person that is the subject of the credit rating.\397\ This conflict as
it relates to obligors is identified in Section 15E(h)(2)(C) of the
Exchange Act.\398\ The Commission believes prohibiting this conflict,
including with respect to issuers, is necessary or appropriate in the
public interest or for the protection of investors. The Commission
believes that an NRSRO or person associated with the NRSRO having such
a position will have difficulty remaining objective in these
circumstances.
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    \397\ Cf. Rule 2711 of the National Association of Securities
Dealers, Inc. (``NASD'') allowing a securities research analyst to
be an officer or director of a subject company if proper disclosure
is made.
    \398\ 15 U.S.C. 78o-7(h)(2)(C).
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    The Commission did not receive any comments on this specific
prohibition and is adopting it substantially as proposed.

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

    Section 15E(i)(1) of the Exchange Act \399\ provides that the
Commission shall adopt rules prohibiting any act or practice by an
NRSRO that the Commission determines is unfair, abusive, or coercive,
including certain acts and practices set forth in paragraphs (i)(1)(A)-
(C) of Section 15E of the Exchange Act.\400\ In explaining this
statutory provision, the Senate Report stated that ``the Commission, as
a threshold consideration, must determine that the practices subject to
prohibition under this section are unfair, coercive or abusive before
adopting rules prohibiting such practices.''
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    \399\ 15 U.S.C. 78o-7(i)(1).
    \400\ 15 U.S.C. 78o-7(i)(1)(A), (B) and (C).

    In the proposing release, the Commission made a preliminary
determination that the acts and practices described in paragraphs
(i)(1)(A)-(C) of Section 15E of the Exchange Act \401\ would be unfair,
coercive, or abusive. Consequently, the Commission proposed that they
be prohibited through provisions in paragraphs (a)(1) through (a)(4) of
Rule 17g-6, with one conditional exception. The Commission also made a
preliminary determination in the proposing release that using an
unsolicited credit rating to pressure an issuer or obligor into paying
for the rating or another service would be unfair, coercive, or
abusive. Consequently, the Commission proposed to use its authority
under Section 15E(i)(1) of the Exchange Act \402\ to prohibit such act
and practice through the provisions in paragraph (a)(5) of Rule 17g-
6.\403\
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    \401\ Id.
    \402\ 15 U.S.C. 78o-7(i)(1).
    \403\ See Commission 2003 CRA Report, which noted that some
participants in the Commission 2002 CRA Hearings questioned the
appropriateness of unsolicited credit ratings because they could
used to engage in ``strong-arm'' tactics to induce payment for a
credit rating the issuer did not request.
---------------------------------------------------------------------------

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

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

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

In the proposing release, the Commission preliminarily determined that
this practice would be unfair, coercive, or abusive. Consequently, the
Commission proposed to prohibit it in paragraph (a)(1) of Rule 17g-6.
Specifically, this paragraph, as proposed, would have prohibited an
NRSRO from conditioning or threatening to condition the issuance of a
credit rating on the purchase of other products or services, including
pre-credit rating assessment products.\405\
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    \405\ See Commission 2003 CRA Report, which noted that some
participants in the Commission's 2002 CRA Hearings worried that
issuers could be unduly pressured to purchase advisory services,
particularly in cases where they were solicited by the credit rating
analyst.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    \428\ Fitch Letter.

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

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

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

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

    The commenters that support prohibiting the practices of S&P and
Moody's believe that the remedy is to require an NRSRO to rely on the
credit ratings of another NRSRO without employing any mapping
methodology that would lower the credit rating.\435\ For example, Fitch
argues that historical default, transition rate, and rating
comparability studies indicate that the credit ratings of S&P, Moody's,
and Fitch for structured products are comparable.\436\ Therefore, Fitch
asserts that NRSROs should rely on the credit ratings of other NRSROs
at face value.\437\ Fitch suggested that the proposed rule be modified
to provide that if an NRSRO has rated 66% of the par value of an asset
pool, and all assets in the pool are publicly rated by two or more
NRSROs, for those assets the NRSRO has not itself rated, the NRSRO be
required to use one of the two or more public ratings assigned to the
underlying asset.\438\
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    \435\ See, e.g., Fitch Letter.
    \436\ Id.
    \437\ See Fitch Letter.
    \438\ See Fitch 2nd Letter.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

V. Paperwork Reduction Act

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

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

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

A. Collections of Information in the Rules

    The rules being adopted implement registration, recordkeeping,
financial reporting, and oversight provisions of the Credit Rating
Agency Reform Act of 2006 (the ``Rating Agency Act'').\486\ The rules
contain recordkeeping and disclosure requirements that are subject to
the PRA for registered NRSROs and impose mandatory collection of
information obligations.
---------------------------------------------------------------------------

    \486\ Pub. L. 109-291 (2006).
---------------------------------------------------------------------------

    In summary, the rules require a credit rating agency that wishes to
register as an NRSRO to furnish an initial application to the
Commission for registration on Form NRSRO; \487\ and a credit rating
agency or NRSRO to furnish a written notice to the

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

    \487\ Section 15E(a)(1) of the Exchange Act (15 U.S.C. 78o-
7(a)(1)) and Rule 17g-1(a).
    \488\ Rule 17g-1(d); see also Section 15E(a)(1) of the Exchange
Act (15 U.S.C. 78o-7(a)(1)).
    \489\ Rule 17g-1(b).
    \490\ Rule 17g-1(c).
    \491\ Section 15E(b)(1) of the Exchange Act (15 U.S.C. 78o-
7(b)(1)) and Rule 17g-1(e).
    \492\ Section 15E(b)(2) of the Exchange Act (15 U.S.C. 78o-
7(b)(2)) and Rule 17g-1(f).
    \493\ Section 15E(e)(1) of the Exchange Act (15 U.S.C. 78o-
7(e)(1)) and Rule 17g-1(g).
    \494\ Section 15E(a)(3) of the Exchange Act (15 U.S.C. 78o-
7(a)(3)) and Rule 17g-1(i).
    \495\ Rule 17g-2 under authority in Section 17(a)(1) of the
Exchange Act (15 U.S.C. 78q(a)(1)).
    \496\ Rule 17g-2(e) under authority in Section 17(a)(1) of the
Exchange Act (15 U.S.C. 78q(a)(1)).
    \497\ Section 15E(k) of the Exchange Act (15 U.S.C. 78o-7(k))
and Rule 17g-3.
    \498\ Section 15E(g) of the Exchange Act (15 U.S.C. 78o-7(g))
and Rule 17g-4.
    \499\ See 15 U.S.C. 78o-7.
---------------------------------------------------------------------------

B. Use of the Information

    Rules 17g-1 through 17g-6, Form NRSRO, and the Instructions for
Form NRSRO establish a framework for Commission oversight of NRSROs.
The collections of information in the rules are designed to allow the
Commission to determine whether an entity should be registered as an
NRSRO. Further, they will assist the Commission in effectively
monitoring, through its examination function, whether an NRSRO is
conducting its activities in accordance with Section 15E of the
Exchange Act \500\ and the rules thereunder. The rules also are
designed to assist users of credit ratings by requiring the disclosure
of information that may be used to compare the credit ratings quality
of different NRSROs. The disclosures include information about methods
for determining credit ratings, organizational structure, policies for
safeguarding non-public information, conflicts of interest, policies
for managing conflicts of interest, and credit analyst qualifications.
As noted in the Senate Report accompanying the Rating Agency Act, this
information ``will facilitate informed decisions by giving investors
the opportunity to compare ratings quality of different firms.'' \501\
---------------------------------------------------------------------------

    \500\ 15 U.S.C. 78o-7.
    \501\ See Report of the Senate Committee on Banking, Housing,
and Urban Affairs to Accompany S. 3850, Credit Rating Agency Reform
Act of 2006, S. Report No. 109-326, 109th Cong., 2d Sess. (Sept. 6,
2006) (``Senate Report'').
---------------------------------------------------------------------------

C. Respondents

    The number of respondents will depend, in part, on the number of
entities that meet the statutory requirements to be eligible for
registration. The Rating Agency Act, by adding definitions to Section 3
of the Exchange Act,\502\ identifies the types of entities that may
apply for registration with the Commission as an NRSRO.\503\ First, it
defines an ``NRSRO'' as a ``credit rating agency'' that, in pertinent
part, has been in business as a credit rating agency for at least three
consecutive years immediately preceding the date of its application for
registration; issues credit ratings certified by 10 QIBs (unless
exempted from that requirement) with respect to financial institutions,
brokers, dealers, insurance companies, corporate issuers, issuers of
asset-backed securities (as that term defined in 17 CFR 229.1101(c)),
issuers of government securities, issuers of municipal securities, or
issuers of foreign government securities; and is registered with the
Commission.\504 \
---------------------------------------------------------------------------

    \502\ 15 U.S.C. 78c.
    \503\ See Section 3 of the Rating Agency Act.
    \504\ Section 3(a)(62) of the Exchange Act (15 U.S.C.
78c(a)(62)). Section 3(a)(64) of the Exchange Act (15 U.S.C.
78c(a)(64)) defines the term ``qualified institutional buyer''
(``QIB'') as having the ``meaning given such term in [17 CFR
230.144A(a)] or any successor thereto.''
---------------------------------------------------------------------------

    Section 3 of the Exchange Act also defines the term ``credit rating
agency'' as, in pertinent part, any person engaged in the business of
issuing credit ratings on the Internet or through another readily
accessible means, for free or for a reasonable fee; employing either a
quantitative or qualitative model, or both, to determine credit
ratings; and receiving fees from either issuers, investors, or other
market participants, or a combination of these persons.\505\ The
definition specifically excludes a commercial credit reporting
company.\506\ Finally, Section 3 of the Exchange Act defines the term
``credit rating'' to mean ``an assessment of the creditworthiness of an
obligor as an entity or with respect to specific securities or money
market instruments.'' \507\
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    \505\ Section 3(a)(61) of the Exchange Act (15 U.S.C.
78c(a)(61)).
    \506\ Section 3(a)(61)(A) of the Exchange Act (15 U.S.C.
78c(a)(61)(A)).
    \507\ Section 3(a)(60) of the Exchange Act (15 U.S.C.
78c(a)(60)).
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    These definitions create threshold eligibility requirements with
respect to the entities that are eligible to apply for registration as
an NRSRO. Because NRSROs have not previously been supervised as such,
and because credit rating agencies include publicly and privately held
companies located throughout the world, it is difficult to estimate the
number of entities that are eligible to register as NRSROs.
    In 2000, a working group of the Basel Committee on Banking
Supervision \508\ issued a report on credit rating agencies that was
based, in part, on surveys of 28 credit rating agencies located around
the world, including the five credit rating agencies currently
identified as NRSROs through the Commission's no-action letter
process.\509\ In its report, the working group estimated that there
were approximately 150 credit rating agencies located world-wide.\510\
The working group also noted that there was a wide disparity in size
among credit rating agencies in terms of number of employees and credit
ratings issued.\511\ In addition, the working group noted that some
credit rating agencies focus exclusively on issuers in the countries
where they are located.\512\
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    \508\ The Basel Committee on Banking Supervision is comprised of
members from Belgium, Canada, France, Germany, Italy, Japan,
Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United
Kingdom and the United States. Countries are represented by their
central bank and also by the authority with formal responsibility
for the prudential supervision of banking business where this is not
the central bank. More information about the Basel Committee for
Banking Supervision can be found at: http://www.bis.org/.

    \509\ Credit Ratings and Complementary Sources of Credit Quality
Information, Working group of the Basel Committee on Banking
Supervision, No. 3--August 2000 (``Basel Report'').
    \510\ Id.
    \511\ Id.
    \512\ Id.
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    The Web site http://www.DefaultRisk.com, which has

tracked the number of credit rating agencies, identifies 57 credit
rating agencies as of February 2006 and indicates that this count
reflects a decrease from a previous count of 74.\513\ The Web site
attributed the decrease to smaller firms either being consolidated into
larger firms or ceasing operations.\514\
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    \513\ See http://www.defaultrisk.com (``DefaultRisk.com'').

    \514\ Id.
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    The estimates in the 2000 Basel Report and by DefaultRisk.Com
provide some basis upon which to estimate the number of entities
engaging in the business of issuing credit ratings. We cannot determine
how many of the entities included in these estimates meet the statutory
requirements to apply for, and be registered as, an NRSRO.
    In addition, it is difficult to estimate with certitude how many
credit rating agencies ultimately would volunteer to be registered as
NRSROs.\515\ Some credit rating agencies may decide not to seek
registration because, for example, they do not believe that being an
NRSRO would benefit them based on their business model. The Commission
staff's experience with the expiring no-action letter process of
identifying NRSROs provides some support for the conclusion that a
substantial number of credit rating agencies may not apply for
registration. Specifically, if the number of credit rating agencies has
fluctuated over the years from between approximately 150 as of 2000
(Basel Report) and 57 as of February 2006 (DefaultRisk.com), then a
large majority of these firms have not applied to the Commission to be
identified as NRSROs under the no-action letter process. It is possible
that certain firms that did not seek NRSRO status previously will seek
it under Section 15E of the Exchange Act.\516\ In addition, the use of
QIB certifications as a prerequisite to registration (as opposed to the
no-action letter process which evaluated national recognition) also may
increase the number of credit rating agencies that are eligible for
registration as an NRSRO.
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    \515\ Section 15E(a)(1) of the Exchange Act makes registration
voluntary (15 U.S.C. 78o-7(a)(1)).
    \516\ 15 U.S.C. 78o-7.
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    For all these reasons, we estimated that the number of credit
rating agencies applying for registration would be larger than the sum
of the number of credit rating agencies currently identified as NRSROs
plus the handful of entities that requested no-action letters. At the
same time, the Commission did not believe that all of the 57 credit
rating agencies identified by DefaultRisk.Com would apply for, or be
granted, registration. Consequently, the Commission estimated that
approximately 30 credit rating agencies would be registered as NRSROs
under Section 15E of the Exchange Act.\517 \
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    \517\ 15 U.S.C. 78o-7.
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    The Commission requested comment on this estimate and whether more
or fewer credit rating agencies would be registered as NRSROs. The
Commission also requested comment on whether the sources of industry
information referenced in the proposing release (the Basel Report and
the DefaultRisk.Com Web site) provided a reasonable basis for arriving
at the estimate of 30 NRSROs. The Commission further requested comment
on whether there were other industry sources that could provide
credible statistics that could be used to determine the number of
credit rating agencies that would be registered as NRSROs.
    The Commission did not receive any comments in response to these
requests. The Commission continues to estimate, for purposes of this
PRA, that approximately 30 credit rating agencies will be registered as
NRSROs.

D. Total Annual Recordkeeping and Reporting Burden

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

implements this statutory provision by requiring a credit rating agency
to furnish a completed initial application on Form NRSRO to the
Commission to apply to be registered under Section 15E of the Exchange
Act.\525\ The Commission estimated that the average time necessary to
complete the initial Form NRSRO, and compile the various attachments,
would be approximately 300 hours per applicant. This estimate was based
on staff experience with the current NRSRO no-action letter
process.\526\ The Commission, therefore, estimated that the total one-
time burden to the industry as a result of this requirement would be
approximately 9,000 hours.\527\
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    \523\ 15 U.S.C. 78o-7(a)(1).
    \524\ See paragraphs (a), (c), and (h) of Rule 17g-1.
    \525\ 15 U.S.C. 78o-7.
    \526\ As a comparison, the proposing release noted that Form
ADV, the registration form for investment advisers, is estimated to
take approximately 22.25 hours to complete. See Investment Advisor
Act of 1940 Release No. 2266 (July 20, 2004). The Commission
estimated that the hour burden under Rule 17g-1 would be greater,
given the substantially larger amount of information that will be
required in Form NRSRO.
    \527\ 300 hours x 30 entities = 9,000 hours.
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    The Commission did not receive any comments on these specific
estimates. The Commission notes that Form NRSRO has been changed to
ease the burden of completing the Form. For example, applicants will
not be required to provide information about each credit analyst,
credit analyst supervisor, and compliance employee that assists the
designated compliance officer. As discussed above, we developed these
estimates based on the rules as proposed. We continue to believe the
estimates are appropriate for the rules as now modified. Indeed,
because we have in a variety of respects narrowed the requirements of
the rules, we believe the estimates are likely to be conservative. We
also note that NRSROs with small staffs will be less impacted by these
modifications.
    The Commission also noted that an NRSRO likely would engage outside
counsel to assist it in the process of completing and submitting a Form
NRSRO. The Commission estimated that the amount of time an outside
attorney will spend on this work would depend on the size and
complexity of the NRSRO. Therefore, the Commission estimated that, on
average, an outside counsel would spend approximately 40 hours
assisting an NRSRO in preparing its application for registration for a
one-time aggregate burden to the industry of 1,200 hours.\528\ The
Commission further estimated that this work would be split between a
partner and associate, with an associate performing a majority of the
work. Therefore, the Commission estimated that the average hourly cost
for an outside counsel would be approximately $400 per hour. For these
reasons, the Commission estimated that the average one-time cost to an
NRSRO would be $16,000 \529\ and the one-time cost to the industry
would be $480,000.\530\ The Commission did not receive any comments on
these specific estimates and continues to believe that they are
appropriate. Therefore, the Commission is retaining these estimates
without revision.
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    \528\ 40 hours x 30 entities = 1,200 hours.
    \529\ $400 per hour x 40 hours = $16,000.
    \530\ $16,000 x 30 NRSROs = $480,000.
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    Rule 17g-1 requires that an NRSRO registered for fewer than the
five classes of credit ratings listed in Section 3(a)(62)(B) of the
Exchange Act apply to be registered for an additional class by
furnishing an amendment on a completed Form NRSRO.\531\ The Commission
estimated that it would take an NRSRO substantially less time to update
the Form NRSRO for this purpose than to prepare the initial
application. For example, much of the information on the Form and many
of the Exhibits would still be current and not have to be updated.
Based on the burden estimate to complete a Form ADV, the Commission
estimated that furnishing an application on Form NRSRO for this purpose
would take an average of approximately 25 hours per NRSRO.\532\
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    \531\ See paragraphs (c), (d), and (h) of Rule 17g-1.
    \532\ As noted above, the Commission's burden estimate for Form
ADV is approximately 22.25 hours to complete. See Investment Advisor
Act of 1940 Release No. 2266 (July 20, 2004).
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    The Commission further estimated based on staff experience that
approximately five of the 30 credit rating agencies expected to
register with the Commission would apply to register for additional
classes of credit ratings within the first year. The Commission
explained that almost all NRSROs would initially apply to register for
the first three classes of credit ratings identified in the definition
of NRSRO: (1) Financial institutions, brokers, or dealers; (2)
insurance companies; and (3) corporate issuers.\533\ These are the most
common types of credit ratings issued, particularly since some credit
rating agencies limit their credit ratings to domestic companies. The
Commission explained that, after these three classes, the next largest
class of credit ratings for which most NRSROs would be registered would
be for credit ratings with respect to issuers of government securities,
municipal securities, and foreign government securities.\534\ These
types of credit ratings take additional expertise. Finally, the
Commission explained that the class of credit ratings for which the
least number of NRSROs would be registered would be credit ratings of
issuers of asset-backed securities (as that term is defined in 17 CFR
229.1101(c)).\535\ This assumption was based on the fact that
determining a credit rating for an asset-backed security takes
specialized expertise beyond that for determining credit ratings of
corporate issuers and obligors. For example, it requires analysis of
complex legal structures.
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    \533\ Section 3(a)(62)(B) of the Exchange Act (15 U.S.C.
78c(a)(62)(B)).
    \534\ Section 3(a)(62)(B)(v) of the Exchange Act (15 U.S.C.
78c(a)(62)(B)(v)).
    \535\ Section 3(a)(62)(B)(iv) of the Exchange Act (15 U.S.C.
78c(a)(62)(B)(iv)).
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    For these reasons, the Commission anticipated that some NRSROs
might register for less than all five classes of credit ratings.
Moreover, these NRSROs, in time, may develop their businesses to
include issuing credit ratings in a class for which they are not
initially registered. Based on staff experience, the Commission
estimated that approximately five of the 30 NRSROs would apply to add
another class of credit ratings to their registration within the first
year. Therefore, given the 25 hour per NRSRO average burden estimate,
the total aggregate one-time burden to the industry for filing the
amended Form NRSRO to change the scope of registration was estimated be
approximately 125 hours.\536\ The Commission did not receive any
comments on these specific estimates and continues to believe that they
are appropriate. Therefore, the Commission is retaining these estimates
without revision.
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    \536\ 25 hours x 5 NRSROs = 125 hours.
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    Rule 17g-1 requires a credit rating agency to provide the
Commission with a written notice if it intends to withdraw its
application prior to final Commission action.\537\ Based on staff
experience, the Commission estimated that one credit rating agency per
year would withdraw a Form NRSRO prior to final Commission action on
the application and, consequently, would furnish a notice of its intent
to withdraw the application. Based on current estimates for a broker-
dealer to file a notice under Rule 17a-11, the Commission estimated the
average burden to an NRSRO to furnish the notice of withdrawal would be
one hour.\538\ Thus, the Commission estimated that the aggregate annual
burden to the industry of providing a

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