credit ratings.\1060\ In this case, this alternative could result in
costs for users of credit ratings as information would be updated in a
less timely fashion than will be the case under the new rule.
---------------------------------------------------------------------------

    \1057\ See Better Markets Letter; CFA/AFR Letter.
    \1058\ See Table 2 in section I.B. of this release.
    \1059\ See Table 1 in section I.B. of this release.
    \1060\ See Harrington Letter (raising this concern).
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G. Form and Certifications to Accompany Credit Ratings

    Section 932(a)(8) of the Dodd-Frank Act amended section 15E of the
Exchange Act to add paragraphs (q) and (s).\1061\ Section 15E(q)(2)(F)
of the Exchange Act provides that the Commission's rules must require
an NRSRO to include an attestation with any credit rating it issues
affirming that no part of the rating was influenced by any other
business activities, that the rating was based solely on the merits of
the instruments being rated, and that such rating was an independent
evaluation of the risks and merits of the instrument.\1062\ Sections
15E(s)(1) through (4), among other things, contain provisions requiring
Commission rulemaking with respect to disclosures an NRSRO must make
with the publication of a credit rating.\1063\ The

Commission proposed paragraph (a) to Rule 17g-7, in large part, to
implement sections 15E(q) and 15E(s) of the Exchange Act.\1064\
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    \1061\ See 15 U.S.C. 78o-7(q) and (s).
    \1062\ See 15 U.S.C. 78o-7(q)(2)(F).
    \1063\ See Public Law 111-203, 932(a)(8); 15 U.S.C. 78o-7(s)(1)
through (4). Section 15E(s)(4) of the Exchange Act also establishes
requirements and mandates rulemaking with respect to issuers and
underwriters of asset-backed securities, NRSROs, and providers of
third-party due diligence services with respect to third-party due
diligence services relating to asset-backed securities. See 15
U.S.C. 78o-7(s)(4)(A) through (D). As discussed in more detail below
in section II.H. of this release, the Commission also proposed to
implement section 15E(s)(4) of the Exchange Act through: (1) Rule
15Ga-2; (2) amendments to Form ABS-15G; (3) Rule 17g-10; and (4)
Form ABS Due Diligence-15E. Nationally Recognized Statistical Rating
Organizations, 76 FR at 33465-33476.
    \1064\ See paragraph (a) of Rule 17g-7, as proposed; Nationally
Recognized Statistical Rating Organizations, 76 FR at 33456-33465.
---------------------------------------------------------------------------

    Under the proposal, an NRSRO would be required to publish two items
when taking a rating action: (1) A form containing information about
the credit rating resulting from or subject to the rating action; and
(2) any certification of a provider of third-party due diligence
services received by the NRSRO that relates to the credit rating.\1065\
The proposal also included provisions prescribing the format of the
form; the content of the form; and an attestation requirement for the
form.\1066\ The Commission is adopting paragraph (a) to Rule 17g-7 with
modifications in response to comments.\1067\
---------------------------------------------------------------------------

    \1065\ See paragraph (a) of Rule 17g-7, as proposed; Nationally
Recognized Statistical Rating Organizations, 76 FR at 33456-33465.
    \1066\ See paragraph (a) of Rule 17g-7, as proposed; Nationally
Recognized Statistical Rating Organizations, 76 FR at 33456-33465.
    \1067\ See paragraph (a) of Rule 17g-7.
---------------------------------------------------------------------------

1. Paragraph (a) of Rule 17g-7--Prefatory Text
    Section 15E(s)(1) of the Exchange Act provides that the Commission
shall require, by rule, an NRSRO to prescribe a form to accompany the
publication of each credit rating that discloses: (1) Information
relating to the assumptions underlying the credit rating procedures and
methodologies; the data that was relied on to determine the credit
rating; and if applicable, how the NRSRO used servicer or remittance
reports, and with what frequency, to conduct surveillance of the credit
rating; and (2) information that can be used by investors and other
users of credit ratings to better understand credit ratings in each
class of credit rating issued by the NRSRO.\1068\ Section 15E(s)(2)(C)
of the Exchange Act provides that the form shall be made readily
available to users of credit ratings, in electronic or paper form, as
the Commission may, by rule, determine.\1069\ Section 15E(s)(4)(D) of
the Exchange Act provides that the Commission shall adopt rules
requiring an NRSRO at the time it produces a credit rating to disclose
any certifications from providers of third-party due diligence services
to the public in a manner that allows the public to determine the
adequacy and level of due diligence services provided by the third
party.\1070\
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    \1068\ See 15 U.S.C. 78o-7(s)(1)(A) and (B).
    \1069\ See 15 U.S.C. 78o-7(s)(2)(C).
    \1070\ See 15 U.S.C. 78o-7(s)(4)(D).
---------------------------------------------------------------------------

    The Commission proposed to implement sections 15E(s)(1),
15E(s)(2)(C), and 15E(s)(4)(D) of the Exchange Act, in large part,
through the prefatory text of proposed paragraph (a) of Rule 17g-
7.\1071\ As proposed, the prefatory text provided that an NRSRO must
publish two items when taking a rating action: (1) A form containing
information about the credit rating resulting from or subject to the
rating action;\1072\ and (2) any certification of a provider of third-
party due diligence services received by the NRSRO that relates to the
credit rating.\1073\ The first sentence of the prefatory text further
provided that an NRSRO must publish the form and certification, as
applicable, when taking a rating action with respect to a credit rating
assigned to an obligor, security, or money market instrument in a class
of credit ratings for which the NRSRO is registered.\1074\ The second
sentence of the prefatory text defined the term rating action for
purposes of the rule to mean any of the following: The publication of
an expected or preliminary credit rating assigned to an obligor,
security, or money market instrument before the publication of an
initial credit rating; an initial credit rating; an upgrade or
downgrade of an existing credit rating (including a downgrade to, or
assignment of, default); a placement of an existing credit rating on
credit watch or review; an affirmation of an existing credit rating;
and a withdrawal of an existing credit rating.\1075\ The third sentence
of the prefatory text provided that the form and any applicable
certifications must be published in the same medium and made available
to the same persons who can receive or access the credit rating that is
the result of the rating action or the subject of rating action.\1076\
---------------------------------------------------------------------------

    \1071\ See prefatory text of paragraph (a) of Rule 17g-7, as
proposed; Nationally Recognized Statistical Rating Organizations, 76
FR at 33456-33457. As discussed below, the Commission proposed to
implement section 15E(s)(1)(A)(iii) of the Exchange Act--which
relates to the use of servicer or remittance reports--in paragraph
(a)(1)(ii)(G) of Rule 17g-7, as proposed, because it specifies a
particular item of information that would need to be disclosed in
the form. See 15 U.S.C. 78o-7(a)(1)(i)(G); Nationally Recognized
Statistical Rating Organizations, 76 FR at 33461.
    \1072\ See paragraph (a)(1) of Rule 17g-7, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33540.
    \1073\ See paragraph (a)(2) of Rule 17g-7, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33541-33542.
    \1074\ See prefatory text to paragraph (a) of Rule 17g-7, as
proposed; Nationally Recognized Statistical Rating Organizations, 76
FR at 33540.
    \1075\ See prefatory text to paragraph (a) of Rule 17g-7, as
proposed; Nationally Recognized Statistical Rating Organizations, 76
FR at 33540.
    \1076\ See prefatory text to paragraph (a) of Rule 17g-7, as
proposed; Nationally Recognized Statistical Rating Organizations, 76
FR at 33540.
---------------------------------------------------------------------------

    The Commission is adopting the first sentence of the prefatory text
of paragraph (a) of Rule 17g-7 with a modification in response to
comment.\1077\ As adopted, this sentence provides that except as
provided in paragraph (a)(3), an NRSRO must publish the items described
in paragraphs (a)(1) (the form) and (a)(2) (third-party due diligence
certifications), as applicable, when taking a rating action with
respect to a credit rating assigned to an obligor, security, or money
market instrument in a class of credit ratings for which the NRSRO is
registered.\1078\
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    \1077\ See Fitch Letter; prefatory text of paragraph (a) of Rule
17g-7 (first sentence). The modification, as discussed below, refers
to an exemption the Commission is adopting from the publication
requirement for certain rating actions that relate to a non-U.S.
person and transactions that occur overseas. See paragraph (a)(3) of
Rule 17g-7.
    \1078\ See prefatory text of paragraph (a) of Rule 17g-7 (first
sentence).
---------------------------------------------------------------------------

    The Commission is adopting the second sentence of the prefatory
text of paragraph (a) of Rule 17g-7 with modifications to narrow the
definition of rating action in response to comments.\1079\ Several
commenters stated generally that the proposed definition is overly
broad.\1080\ One NRSRO stated that a broad definition of rating action
could limit disclosure by ``creating incentives for NRSROs to publish
commentary about their credit ratings less frequently.''\1081\
Commenters stated that the proposed definition of rating action would
make it difficult for NRSROs to release their credit ratings in a
timely fashion.\1082\ One commenter stated that rating actions
involving transaction documents that were finalized before the
effective date of the rules should not be subject to the disclosure
requirements.\1083\ An NRSRO stated that the amount of preparation time
needed to comply with the rule will likely delay the issuance of
ratings, ``particularly with respect to preliminary ratings.''\1084\ In
contrast,

another commenter stated that including preliminary ratings on asset-
backed securities ratings will ensure that investors receive the
information at a time when it is ``likely to be most useful to them in
making an investment decision.'' \1085\
---------------------------------------------------------------------------

    \1079\ See prefatory text of paragraph (a) of Rule 17g-7 (second
sentence).
    \1080\ See A.M. Best Letter; ASF Letter; DBRS Letter; Deloitte
Letter; FSR Letter; Moody's Letter; S&P Letter.
    \1081\ See Moody's Letter.
    \1082\ See DBRS Letter; FSR Letter.
    \1083\ See ABA Letter.
    \1084\ See S&P Letter.
    \1085\ See CFA/AFR Letter.
---------------------------------------------------------------------------

    As explained below, commenters urged the Commission to eliminate
from the definition of rating action: Preliminary credit ratings;
placements of credit ratings on watch or review; affirmations and
confirmations of credit ratings; and withdrawals of credit
ratings.\1086\
---------------------------------------------------------------------------

    \1086\ See, e.g., A.M. Best Letter; ASF Letter; DBRS Letter;
Deloitte Letter; FSR Letter; Moody's Letter; S&P Letter.
---------------------------------------------------------------------------

    One NRSRO commented that placing a credit rating on review should
not be considered a rating action because a review is simply an
indication of the potential for a future rating action, and is not
itself a rating action.\1087\ Several commenters stated that some or
all rating affirmations should not be included in the definition of a
rating action.\1088\ One NRSRO stated that including rating
affirmations would ``significantly'' increase the reporting burden on
NRSROs, and would produce only a record that there was no change to the
rating in question.\1089\ The NRSRO also suggested that if affirmations
are included, they should refer only to a published announcement or
written confirmation that the rating is being maintained at its current
level. Another commenter stated that affirmations should be excluded
unless they represent ``a comprehensive review of a transaction.''
\1090\ A different commenter stated that a ``confirmation,'' which is a
type of affirmation that simply indicates that a particular action will
not change a credit rating, should not constitute a rating action
because disclosures associated with confirmations would only cover very
minor document changes and add ``little value.''\1091\
---------------------------------------------------------------------------

    \1087\ See Moody's Letter.
    \1088\ See A.M. Best Letter; ASF Letter; DBRS Letter; Deloitte
Letter; FSR Letter; Moody's Letter; S&P Letter.
    \1089\ See S&P Letter.
    \1090\ See ASF Letter.
    \1091\ See FSR Letter.
---------------------------------------------------------------------------

    Two commenters stated that some or all withdrawals should not be
included in the definition of a rating action.\1092\ One NRSRO stated
that publishing the forms for withdrawals that are ``mechanical in
nature and not based on a credit assessment or analysis'' could make it
more difficult for market participants to locate significant
information.\1093\
---------------------------------------------------------------------------

    \1092\ See Deloitte Letter; Moody's Letter.
    \1093\ See Moody's Letter.
---------------------------------------------------------------------------

    The Commission is sensitive to the burdens imposed by its rules,
and in considering the comments discussed above has sought to balance
the need for timely and robust disclosure with concerns about the costs
that would result from the proposal. As discussed below, the Commission
believes it is appropriate to narrow the definition of rating action
from the proposed definition to include those actions that are made at
a time when there is limited information about the rated obligor,
security, or money market instrument and to other rating actions if
they are linked to the performance of credit analysis. This will reduce
the burden of complying with the rule. Nonetheless, the Commission
recognizes that preparing the form in response to those rating actions
that trigger the disclosure requirement will take time and that this
could impact how quickly an NRSRO is able to publish the credit rating
that results from or is the subject of the rating action. However, the
Commission has balanced this concern with the directive of the statute
(that the Commission adopt a rule requiring the form to be published
with a credit rating) and the benefits of the increased transparency
the disclosures in the form will provide to users of the NRSRO's credit
ratings.\1094\ Moreover, an NRSRO should be able to draft significant
portions of the form largely in tandem with the credit rating process
and, therefore, the form and the final decision on the rating action
generally should be completed simultaneously.
---------------------------------------------------------------------------

    \1094\ See, e.g., CFA/AFR Letter (``One reason rating agencies
were able to play fast and loose with their own rating methodologies
is that the ratings were a sort of `black box,' with little
information made available to the users of those ratings about the
assumptions that lay behind them or the data on which they were
based. Dodd-Frank includes provisions to address this problem by
requiring new disclosures to accompany the publication of a
rating.'').
---------------------------------------------------------------------------

    In response to the comment to eliminate preliminary credit ratings
from the definition of rating action, the Commission notes that this
type of rating action and certain initial credit ratings (that is,
those assigned to a newly formed obligor or newly issued security or
money market instrument) are made at a time when there is little
information available about the rated obligor, security, or money
market instrument. Given the timing of these rating actions, the
Commission agrees with comments that it is critical that investors and
other users of credit ratings have access to the information that is
required to be disclosed in the form and any applicable certifications
on Form ABS Due Diligence-15E.\1095\ Consequently, the Commission is
adopting the requirement that the form and certifications be published
when the NRSRO publishes a preliminary or expected credit rating or an
initial credit rating.\1096\
---------------------------------------------------------------------------

    \1095\ See CFA/AFR Letter (``Importantly, the Commission
proposes to include preliminary ratings among the actions that would
trigger the required disclosures. We strongly support this approach,
which is essential to ensure that investors in ABS get the
information at time [sic] when it is likely to be most useful to
them in making an investment decision.''). As the Commission
explained when adopting Rule 17g-7, the definition of credit rating
in the note to the rule was designed to address pre-sale reports,
which are typically issued by an NRSRO with respect to an asset-
backed security at the time the issuer commences the offering and
typically include an expected or preliminary rating and a summary of
the important features of a transaction. See Disclosure for Asset-
Backed Securities Required by Section 943 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, 76 FR at 4503-4505 (Jan.
26, 2011). Consequently, disclosure at the time of issuance of a
pre-sale report is particularly important to investors, since such
reports provide them with important information prior to the point
at which they make an investment decision. See id.
    \1096\ See prefatory text of paragraph (a) of Rule 17g-7 (second
sentence). The Commission requested comment in the proposing release
as to whether the disclosures required by the proposed rule in the
context of a new offering should be provided no later than at least
five business days in advance of the first sale of securities in the
offering. See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33457. In response, an NRSRO stated that
requiring disclosures in a fixed timeframe is ``unrealistic''
because NRSROs often receive their information after the prospectus
is filed and frequently assign ratings well after the actual closing
and first sale of a transaction. S&P Letter. Another NRSRO and a
commenter stated that the five business day requirement could
potentially delay many issuances. See DBRS Letter; FSR Letter. In
contrast, one commenter recommended that the Commission adopt the
five business day requirement. See CFA/AFR Letter. The Commission
believes at this time that the five business day requirement could
raise practical issues and, therefore, is not adopting such a
requirement. Consequently, the NRSRO must publish the form and any
certifications at the same time the NRSRO publishes the result of
the rating action.
---------------------------------------------------------------------------

    Some of the types of rating actions included in the proposed
definition are not necessarily linked to the performance of credit
analysis. In particular, placements of credit ratings on watch or
review, certain types of affirmations of credit ratings, and certain
types of withdrawals of credit ratings are not based on the NRSRO
applying its rating procedures or methodologies and making a credit
rating determination. In the case of a watch or review, the rating
action precedes the application of the rating procedure or methodology,
which, once completed, may result in an affirmation or an adjustment
(upgrade or downgrade) to the credit rating. However, not all credit
rating

affirmations are based on the NRSRO applying its rating procedures and
methodologies.\1097\ Similarly, NRSROs withdraw credit ratings for a
number of reasons that are unrelated to the performance of credit
analysis, including that the obligation was paid off or the obligor
stopped paying to be rated.\1098\
---------------------------------------------------------------------------

    \1097\ See ASF Letter (stating that a ``rating agency consent''
or ``rating agency confirmation'' simply confirms that a specific
contractual change will not result in adverse effect on an existing
rating and arguing that these ``statements do not reflect a
comprehensive review of a transaction, unlike the type of review
that would be undertaken in connection with an affirmation of a
rating following on the placement of a rating on watch or
review.'').
    \1098\ See Moody's Letter (stating that the requirement to
publish a form should not apply in connection with the withdrawals
of credit ratings that are mechanical in nature and not based on a
credit assessment or analysis).
---------------------------------------------------------------------------

    In balancing the concerns of commenters about the burden of the
rule against the need for timely and robust disclosure, the Commission,
as stated above, believes it is appropriate to focus the disclosure
requirement on rating actions that are based on the application of the
NRSRO's procedures and methodologies for determining credit ratings. In
this regard, much of the information required to be disclosed in the
form under section 15E(s)(3) of the Exchange Act relates to the
procedures, methodologies, and information used to determine the credit
rating.\1099\ For these reasons, placements of credit ratings on watch
or review have been removed from the definition of rating action.\1100\
In addition, the definition provides that an affirmation or withdrawal
is a rating action if the affirmation or withdrawal is the result of a
review of the credit rating assigned to the obligor, security, or money
market instrument by the NRSRO using its procedures and methodologies
for determining credit ratings.\1101\
---------------------------------------------------------------------------

    \1099\ See 15 U.S.C. 78o-7(s)(3). For example, the required
disclosures include: (1) The version of the methodology used to
determine the credit rating; and (2) the main assumptions and
principles used in constructing the applicable rating procedures and
methodologies.
    \1100\ See prefatory text of paragraph (a) of Rule 17g-7 (second
sentence).
    \1101\ See id. An affirmation that results from a look-back
review under paragraph (c) of Rule 17g-8 would be an affirmation
that is the result of a review of the credit rating assigned to the
obligor, security, or money market instrument by the NRSRO using its
procedures and methodologies for determining credit ratings. In
particular, the NRSRO would be applying the procedures required by
paragraph (c)(1) of Rule 17g-8 to promptly determine whether the
current credit rating assigned to the obligor, security, or money
market instrument must be revised so that it no longer is influenced
by a conflict of interest and is solely a product of the documented
procedures and methodologies the NRSRO uses to determine credit
ratings.
---------------------------------------------------------------------------

    For the foregoing reasons, the amendments have been modified from
the proposal to eliminate placements of credit ratings on watch or
review from the definition of rating action and to eliminate from the
definition affirmations and withdrawals that are not based on the NRSRO
applying its procedures and methodologies for determining credit
ratings. Consequently, the second sentence--as adopted--provides that
the term rating action ``means any of the following: The publication of
an expected or preliminary credit rating assigned to an obligor,
security, or money market instrument before the publication of an
initial credit rating; an initial credit rating; an upgrade or
downgrade of an existing credit rating (including a downgrade to, or
assignment of, default); and an affirmation or withdrawal of an
existing credit rating if the affirmation or withdrawal is the result
of a review of the credit rating assigned to the obligor, security, or
money market instrument by the NRSRO using applicable procedures and
methodologies for determining credit ratings.'' \1102\
---------------------------------------------------------------------------

    \1102\ See prefatory text of paragraph (a) of Rule 17g-7 (second
sentence).
---------------------------------------------------------------------------

    The Commission is making another modification to the proposed
amendments that will reduce the burden of the adopted rule.
Specifically, one NRSRO recommended that the temporary conditional
exemption for foreign transactions from the requirements in paragraph
(a)(3) of Rule 17g-5 be applied to the disclosure requirements in
paragraph (a) of Rule 17g-7, as proposed.\1103\ The commenter stated
that many foreign issuers lack the infrastructure to comply with the
level of disclosure required by paragraphs (a)(1) and (a)(2) of Rule
17g-7, as proposed.\1104\ The commenter stated further that, without an
exemption, ``NRSROs either might be unable to issue a credit rating on
non-U.S. securities or must withdraw as an NRSRO in order to continue
rating certain non-U.S. securities.'' \1105\
---------------------------------------------------------------------------

    \1103\ See Fitch Letter. See Order Granting Temporary
Conditional Exemption for Nationally Recognized Statistical Rating
Organizations from Requirements of Rule 17g-5 Under the Securities
Exchange Act of 1934 and Request for Comment, Exchange Act Release
No. 62120 (May 19, 2010). See also Order Extending Temporary
Conditional Exemption for Nationally Recognized Statistical Rating
Organizations from Requirements of Rule 17g-5 Under the Securities
Exchange Act of 1934 and Request for Comment, Exchange Act Release
No. 70919 (Nov. 22, 2013) (most recent extension of the exemption).
    \1104\ See Fitch Letter.
    \1105\ See id.
---------------------------------------------------------------------------

    The Commission is persuaded that at this time the disclosure
requirement should not apply to rating actions involving credit ratings
of obligors or issuers whose securities or money market instruments
will be offered or sold in transactions that occur exclusively outside
the United States. As noted above, one commenter suggested that local
laws could impede the ability of the NRSRO to obtain or disclose
information about the issuer in accordance with the requirements of the
proposed amendments. To address these types of concerns, the Commission
is adding paragraph (a)(3) to Rule 17g-7 to provide an exemption from
the requirements of paragraphs (a)(1) and (a)(2) for rating actions in
which: (1) The rated obligor or issuer of the rated security or money
market instrument is not a U.S. person (as defined under Securities Act
Rule 902(k)); \1106\ and (2) the NRSRO has a reasonable basis to
conclude that a security or money market instrument issued by the rated
obligor or the issuer will be offered and sold upon issuance, and that
any underwriter or arranger linked to the security or money market
instrument will effect transactions in the security or money market
instrument after issuance, only in transactions that occur outside the
United States.\1107\ The wording of the exemption is modeled closely on
the temporary conditional exemption from the requirements in paragraph
(a)(3) of Rule 17g-5 the Commission has granted by order.\1108\

As stated above, the Commission is making a corresponding modification
to the first sentence of the prefatory text of paragraph (a) of Rule
17g-7, to add that an NRSRO must publish the items described in
paragraphs (a)(1) and (a)(2) of Rule 17g-7 ``except as provided in
paragraph (a)(3)'' of Rule 17g-7.\1109\
---------------------------------------------------------------------------

    \1106\ 17 CFR 230.902(k).
    \1107\ See paragraph (a)(3) of Rule 17g-7. If the rating action
involves a credit rating of an obligor as an entity, the NRSRO must
have a reasonable basis to conclude that any security or money
market instrument of the obligor will be offered and sold upon
issuance, and that any underwriter or arranger linked to the
security or money market instrument will effect transactions of the
security or money market instrument after issuance, only in
transactions that occur outside the United States. For example, if
some securities or money market instruments issued by the obligor
are sold in transactions that occur in the United States, the
exemption does not apply to rating actions involving the credit
rating assigned to the obligor as an entity. In contrast, if the
rating action involves a security or money market instrument, the
NRSRO need only make the required conclusion with respect to the
specific issuance.
    \1108\ See Order Granting Temporary Conditional Exemption for
Nationally Recognized Statistical Rating Organizations from
Requirements of Rule 17g-5 Under the Securities Exchange Act of 1934
and Request for Comment, Exchange Act Release No. 62120 (May 19,
2010). See also Order Extending Temporary Conditional Exemption for
Nationally Recognized Statistical Rating Organizations from
Requirements of Rule 17g-5 Under the Securities Exchange Act of 1934
and Request for Comment, Exchange Act Release No. 70919 (Nov. 22,
2013) (most recent extension of the exemption). In the original
order, the Commission provided guidance on how an NRSRO may have a
``reasonable basis'' for the purpose of the second prong of the
conditional exemption. See Order Granting Temporary Conditional
Exemption for Nationally Recognized Statistical Rating Organizations
from Requirements of Rule 17g-5 Under the Securities Exchange Act of
1934 and Request for Comment, Exchange Act Release No. 62120 (May
19, 2010) (``The question of whether an NRSRO has a `reasonable
basis' to conclude that the structured finance product will be
offered and sold upon issuance, and [that] any arranger linked to
the structured finance product will effect transactions of the
structured finance product after issuance, in transactions that
occur outside the United States will depend on the facts and
circumstances of a given situation. In order to have a reasonable
basis to make these conclusions, the NRSRO should discuss with any
arranger linked to the structured finance product (i.e., the
sponsor, underwriter, and issuer) how they intend to market and sell
the structured finance product and how they intend to engage in any
secondary market activities (i.e., re-sales) of the structured
finance product. An NRSRO may choose to obtain from the arranger a
representation upon which the NRSRO can reasonably rely that sales
of the structured finance product will meet this condition. Factors
relevant to the analysis of whether such reliance would be
reasonable would include, but not be limited to: (1) Ongoing or
prior failures by the arranger to adhere to its representations; or
(2) a pattern of conduct by the arranger where it fails to promptly
correct breaches of its representations.'').
    \1109\ See prefatory text of paragraph (a) of Rule 17g-7 (first
sentence).
---------------------------------------------------------------------------

    The Commission is adopting the third sentence of the prefatory text
of paragraph (a) of Rule 17g-7 with technical modifications to improve
its clarity.\1110\ This sentence provides that the items described in
paragraphs (a)(1) and (a)(2) must be published in the same manner as
the credit rating that is the result or subject of the rating action
and made available to the same persons who can receive or access the
credit rating that is the result or subject of the rating action.\1111\
In response to comments, the Commission agrees that an NRSRO may
satisfy this requirement by publishing the form and any applicable
certifications on its public Internet Web site if the credit rating is
disseminated through the Web site as well.\1112\ In addition, if the
NRSRO publishes the credit rating in a press release announcing the
relevant rating action in addition to publishing the credit rating on
its corporate Internet Web site, the NRSRO may make the form available
through a clearly and prominently labeled hyperlink on the press
release to the page on its corporate Internet Web site that contains
the form and any applicable certifications.\1113\
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    \1110\ See prefatory text of paragraph (a) of Rule 17g-7 (third
sentence).
    \1111\ See id. As proposed, the sentence provided: ``[t]he items
described in paragraphs (a)(1) and (a)(2) of this section must be
published in the same medium and made available to the same persons
who can receive or access the credit rating that is the result of
the rating action or that is the subject of the rating action.'' See
Nationally Recognized Statistical Rating Organizations, 76 FR at
33540.
    \1112\ See S&P Letter.
    \1113\ See DBRS Letter (``DBRS supports this part of the
proposal, but asks the Commission to confirm that an NRSRO that
publishes its credit ratings via an electronically disseminated
press release can satisfy the disclosure requirement by hyperlinking
the disclosure form and any applicable due diligence certifications
to that press release.'').
---------------------------------------------------------------------------

    In addition, the final amendments, as proposed, require that the
form and any applicable certifications on Form ABS Due Diligence-15E
must be made available to the same persons who can receive or access
the credit rating that is the result of the rating action.\1114\
Consequently, if the NRSRO publishes credit ratings for free on its
corporate Internet Web site, it must make the form and certifications
similarly available.\1115\ Alternatively, if the NRSRO operates under
the subscriber-pay business model, it must make the form and
certifications available to its subscribers.\1116\
---------------------------------------------------------------------------

    \1114\ See prefatory text of paragraph (a) of Rule 17g-7 (third
sentence).
    \1115\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33457.
    \1116\ See id. at 33457.
---------------------------------------------------------------------------

    Finally, one commenter suggested the assessment of financial
penalties for each day that NRSROs do not post the form when taking a
rating action.\1117\ The Commission has authority to take appropriate
action against an NRSRO that fails to comply with the requirements of
paragraph (a) of Rule 17g-7. Further, as discussed above in section
II.D.1. of this release, the Exchange Act provides a wide range of
fines, penalties, and other sanctions applicable to NRSROs for
violations of any section of the Exchange Act (including section 15E)
and the rules under the Exchange Act (including the rules under section
15E).\1118\ The Commission therefore does not believe that providing
for additional penalties is necessary.
---------------------------------------------------------------------------

    \1117\ See Gardner Letter.
    \1118\ See 15 U.S.C. 78o-7(d); 15 U.S.C. 78u; 15 U.S.C. 78u; 15
U.S.C. 78u-2; 15 U.S.C. 78u-3; 15 U.S.C. 78ff.
---------------------------------------------------------------------------

2. Paragraph (a)(1)(i) of Rule 17g-7--Format of the Form
    To implement sections 15E(s)(2)(A) and (B) of the Exchange Act, the
Commission proposed paragraph (a)(1)(i) of Rule 17g-7, which would
describe the required format of the form to accompany the publication
of a rating action.\1119\ In particular, section 15E(s)(2)(A) of the
Exchange Act provides that the form developed by the NRSRO shall be
easy to use and helpful for users of credit ratings to understand the
information contained in the report.\1120\ The Commission proposed
paragraph (a)(1)(i)(A) of Rule 17g-7 to implement this section of the
statute.\1121\ This paragraph--as proposed--mirrored the statutory text
by providing that the form generated by the NRSRO would need to be easy
to use and helpful for users of credit ratings to understand the
information contained in the form.\1122\
---------------------------------------------------------------------------

    \1119\ See paragraph (a)(1) of Rule 17g-7, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33458.
    \1120\ See 15 U.S.C. 78o-7(s)(2)(A).
    \1121\ See paragraph (a)(1) of Rule 17g-7, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33458.
    \1122\ See paragraph (a)(1)(i)(A) of Rule 17g-7, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33540.
---------------------------------------------------------------------------

    Section 15E(s)(2)(B) of the Exchange Act provides that the
quantitative content required to be disclosed in the form and
identified in section 15E(s)(3)(B) must be directly comparable across
types of securities.\1123\ As discussed below, section 15E(s)(3) of the
Exchange Act identifies qualitative and quantitative information that
must be included in the form.\1124\ The Commission proposed that the
quantitative content specified in section 15E(s)(3)(B) of the Exchange
Act must be disclosed in the form pursuant to paragraphs (a)(1)(ii)(K),
(L), and (M) of Rule 17g-7, as proposed.\1125\ Consequently, paragraph
(a)(1)(i)(B) of Rule 17g-7, as proposed, required the form generated by
the NRSRO to be in a format that provides the content described in
paragraphs (a)(1)(ii)(K), (L), and (M) of Rule 17g-7 in a manner that
is directly comparable across types of obligors, securities, and money
market instruments.\1126\
---------------------------------------------------------------------------

    \1123\ See 15 U.S.C. 78o-7(s)(3)(B).
    \1124\ See 15 U.S.C. 78o-7(s)(3).
    \1125\ See paragraphs (a)(1)(ii)(K), (L), and (M) of Rule 17g-7,
as proposed; Nationally Recognized Statistical Rating Organizations,
76 FR at 33458-33646.
    \1126\ See paragraph (a)(1)(i)(B) of Rule 17g-7, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33540. While the statutory text refers only to ``securities,''
section 3(a)(60) 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.'' See 15 U.S.C. 78c(a)(60). Consequently, proposed
paragraph (a)(1)(i)(B) of Rule 17g-7 also referred to ``obligors''
and ``money market instruments'' to ensure that it applies to all
types of credit ratings and to be consistent with the Commission's
rules for NRSROs, which commonly apply to credit ratings of
``obligors, securities, and money market instruments.'' Nationally
Recognized Statistical Rating Organizations, 76 FR at 33458, n.411.
---------------------------------------------------------------------------

    The Commission is adopting the proposal with modifications in
response to comments.\1127\ The modifications are

designed to respond to comments recommending that the rule prescribe a
standard format for presenting the information in the form.\1128\
---------------------------------------------------------------------------

    \1127\ See paragraph (a)(1)(i) of Rule 17g-7.
    \1128\ See id.
---------------------------------------------------------------------------

    In particular, as proposed, the rule would require that the form,
among other things, must be in a format that is easy to use and helpful
for users of credit ratings to understand.\1129\ However, the proposal
did not prescribe a form into which NRSROs would input information or
provide more specificity as to how the information in the form must be
presented. Two commenters recommended that the format of the form
should be more standardized.\1130\ One commenter stated that
standardization would simplify oversight and make the information in
the form easier for investors to analyze.\1131\ The other commenter
suggested standard headings and prescribing an order for the
presentation of the information in the form.\1132\ The Commission
agrees with the commenters that requiring the NRSROs to adhere to a
more standardized format will assist users of the form in locating and
analyzing items of information disclosed in the form. It also will
facilitate the Commission's oversight of the disclosure requirements,
as noted by the commenter. Consequently, paragraph (a)(1)(i) of Rule
17g-7 provides that the form must be in a format that organizes the
information required to be disclosed into numbered items that are
identified by the type of information being disclosed and by a
reference to the paragraph in Rule 17g-7 that specifies the information
required to be disclosed, and are in the order that the paragraphs
specifying the information to be disclosed are codified in Rule 17g-
7.\1133\ In addition, as adopted, paragraph (a)(1)(i) of Rule 17g-7
contains a note providing details about this requirement--in
particular, stating that a given item in the form should be identified
by a title that identifies the type of information and references
paragraph (a)(1)(ii)(A), (B), (C), (D), (E), (F), (G), (H), (I), (J),
(K), (L), (M), (N), or (a)(2) of Rule 17g-7, based on the information
being disclosed in the item.\1134\ The note provides the example that
the item on the form containing the information specified in paragraph
(a)(1)(ii)(C) of Rule 17g-7 should be captioned: ``Main Assumptions and
Principles Used to Construct the Rating Methodology used to Determine
the Credit Rating as required by Paragraph (a)(1)(ii)(C) of Rule 17g-
7.'' \1135\ The note also explains that the form must organize the
items of information in the following order: Items 1 through 14 must
contain the information specified in paragraphs (a)(1)(ii)(A) through
(N) of Rule 17g-7, respectively, and item 15 must contain the
certifications specified in paragraph (a)(2) of Rule 17g-7.\1136\
---------------------------------------------------------------------------

    \1129\ See paragraph (a)(1)(i)(A) of Rule 17g-7, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33540.
    \1130\ See CFA/AFR Letter; Levin Letter.
    \1131\ See Levin Letter.
    \1132\ See CFA/AFR Letter.
    \1133\ See paragraph (a)(1)(i)(A) of Rule 17g-7, and the
accompanying note to the paragraph. This approach, specifying the
order in which the information must be presented, is consistent with
the amendments to the instructions for Exhibit 1 to Form NRSRO being
adopted today, which specify the order in which the Transition/
Default Matrices must presented in the Exhibit. See paragraph (2) of
the instructions for Exhibit 1 to Form NRSRO. See also section
II.E.1.c. of this release discussing the amendments to the
instructions for Exhibit 1 to Form NRSRO.
    \1134\ See note to paragraph (a)(1)(i)(A) of Rule 17g-7. See
also paragraphs (a)(1)(ii)(A) through (N) and (a)(2) of Rule 17g-7.
As discussed below in section II.G.3. of this release, paragraphs
(a)(1)(ii)(A) through (N) and (a)(2) of Rule 17g-7 specify the types
of information that must be disclosed in the form.
    \1135\ See note to paragraph (a)(1)(i)(A) of Rule 17g-7.
    \1136\ See id.
---------------------------------------------------------------------------

    Several NRSROs stated that a standardized form may discourage
NRSROs from providing more transparency.\1137\ Another NRSRO stated
that if formatted disclosure is ultimately required, ``the Commission
should provide sufficient flexibility to allow for disclosure that is
meaningful in the context provided.'' \1138\ The Commission believes
the approach it has taken in prescribing a standardized format for
presenting the information in the form without, for example, requiring
that a prescribed form be filled out, strikes an appropriate balance in
implementing section 15E(s)(2) of the Exchange Act between the
comparability of the information provided across NRSROs and the
flexibility to allow for meaningful disclosure. For example, the final
amendments--while prescribing certain formatting requirements--
generally permit an NRSRO to design the form that will be used to make
the disclosure. Thus, an NRSRO can tailor the form to specific classes
or subclasses of credit ratings to provide more targeted information.
---------------------------------------------------------------------------

    \1137\ See DBRS Letter; Morningstar Letter; S&P Letter.
    \1138\ See Kroll Letter.
---------------------------------------------------------------------------

    The proposed amendments required that the form must be in a format
that is easy to use and helpful for users of credit ratings to
understand the information contained in the form.\1139\ The proposed
rule text closely mirrored section 15E(s)(2)(A) of the Exchange
Act.\1140\ The modifications discussed above prescribing a standard for
presenting the information in the form are specifically designed to
achieve the objective set forth in section 15E(s)(2)(A) and the
proposed rule. However, the final amendments, as proposed, include the
more general requirement that the form must be in a format that is
``easy to use and helpful for users of credit ratings to understand the
information contained in the form.'' \1141\ Because the presentation of
the information has been prescribed, this format-related requirement
will be more relevant to the narrative disclosures that are made in the
items of the form. In particular, NRSROs must provide narrative
disclosures that help users of credit ratings to understand the
information. Several commenters stated that the form will result in
boilerplate disclosure rather than more transparency.\1142\ Pursuant to
the final amendments, NRSROs will need to make the disclosures as
specific to the particular rating action, and as relevant to investors,
as possible, and strike a reasonable balance between standardizing the
disclosures and tailoring them to specific rating actions. While the
Commission recognizes that some of the information to be disclosed in
the form may be standardized for classes or subclasses of credit
ratings, NRSROs must disclose information in the form in a manner that
promotes greater understanding of how a credit rating was determined.
Accordingly, the form must contain plainly worded and succinct
disclosures that are easy to understand and not lengthy boilerplate
disclaimers.
---------------------------------------------------------------------------

    \1139\ See paragraph (a)(1)(i)(A) of Rule 17g-7, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR 33540.
    \1140\ See 15 U.S.C. 78o-7(s)(2)(A).
    \1141\ See paragraph (a)(1)(i)(B) of Rule 17g-7.
    \1142\ See DBRS Letter; Morningstar Letter; S&P Letter.
---------------------------------------------------------------------------

    Finally, paragraph (a)(1)(i)(C) of Rule 17g-7, as proposed,
provides that the form must be in a format that provides the content
described in paragraphs (a)(1)(ii)(K), (L), and (M) of Rule 17g-7 in a
manner that is directly comparable across types of obligors,
securities, and money market instruments.\1143\ As discussed below in
section II.G.3. of this release, these paragraphs of Rule 17g-7 require
the disclosure of certain types of quantitative information as mandated
by section 15E(s)(3)(B) of the Exchange

Act.\1144\ One commenter stated that it would be difficult, if not
impossible, to make this information ``directly comparable'' across all
NRSROs.\1145\ In response, the Commission notes that the final
amendments require certain types of quantitative information to be
comparable across types of obligors, securities, and money market
instruments rated by the NRSRO (rather than across NRSROs).\1146\
---------------------------------------------------------------------------

    \1143\ See paragraph (a)(1)(i)(C) of Rule 17g-7.
    \1144\ See paragraphs (a)(1)(ii)(K) through (M) of Rule 17g-7;
15 U.S.C. 78o-7(s)(3)(B).
    \1145\ See S&P Letter.
    \1146\ See paragraph (a)(1)(i)(C) of Rule 17g-7.
---------------------------------------------------------------------------

3. Paragraph (a)(1)(ii) of Rule 17g-7--Content of the Form
    Section 15E(s)(3) of the Exchange Act provides that the Commission
shall require, by rule, that the form accompanying the publication of a
credit rating contain specifically identified items of
information.\1147\ In particular, section 15E(s)(3)(A) identifies eight
items of ``qualitative content'' \1148\ and section 15E(s)(3)(B)
identifies four items of ``quantitative content.'' \1149\ Because the
statute specified the type of information to be included in the form,
the Commission proposed rule text prescribing the required contents of
the form that largely mirrored the statutory text.\1150\ In particular,
the prefatory text of paragraph (a)(1)(ii) of Rule 17g-7, as proposed,
provided that the form generated by the NRSRO must contain the
information about the credit rating that is identified in paragraphs
(a)(1)(ii)(A) through (N) of the rule.\1151\ The order of, and
information required in, these paragraphs largely mirrored the
provisions of section 15E(s)(3) of the Exchange Act.\1152\
---------------------------------------------------------------------------

    \1147\ See 15 U.S.C. 78o-7(s)(3).
    \1148\ See 15 U.S.C. 78o-7(s)(3)(A)(i) through (vii). Section
(s)(3)(A)(ix) includes a ninth catchall item: Such additional
information as the Commission may require. 15 U.S.C. 78o-
7(s)(3)(A)(ix).
    \1149\ See 15 U.S.C. 78o-7(s)(3)(B)(i) through (iv).
    \1150\ See paragraph (a)(1)(ii) of Rule 17g-7, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33458-33463.
    \1151\ See paragraph (a)(1)(ii) of Rule 17g-7, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33540.
    \1152\ See paragraphs (a)(1)(ii)(A) through (M) of Rule 17g-7;
15 U.S.C. 78o-7(s)(3)(A)(i) through (vii) and (B)(i) through (iv).
---------------------------------------------------------------------------

    The Commission is adopting the prefatory text of paragraph
(a)(1)(ii) of Rule 17g-7 without modification.\1153\ The paragraph
provides that the form generated by the NRSRO must contain information
about the credit rating identified in paragraphs (a)(1)(ii)(A) through
(N).\1154\ Consequently, NRSROs are required to generate a form
containing the prescribed information and publish it when taking a
rating action (as defined in the prefatory text of paragraph (a) of
Rule 17g-7).
---------------------------------------------------------------------------

    \1153\ See paragraph (a)(1)(ii) of Rule 17g-7. One NRSRO
suggested that the prefatory text be modified to add the phrase ``to
the extent applicable''. See Moody's Letter. The Commission is not
making this modification because the specific disclosure provisions
contain such limiters when the information to be disclosed may not
be applicable in all cases. See, e.g., paragraphs (a)(1)(ii)(D),
(G), (J), (L), (M), (N) of Rule 17g-7.
    \1154\ See paragraph (a)(1)(ii) of Rule 17g-7.
---------------------------------------------------------------------------

    Several commenters raised concerns that the proposed rule could
require the disclosure of confidential or proprietary information
regarding the NRSRO or an issuer.\1155\ The Commission does not intend
that the rule require an NRSRO to disclose confidential or proprietary
information in the form. As discussed above, the format of the form
must be easy to use and helpful for users of credit ratings to
understand the information contained in the form about the rating
action.\1156\ NRSROs must provide narrative disclosures that are
helpful for users of credit ratings to understand the information and,
therefore, the form must contain plainly worded and succinct
disclosures that are not overly detailed. An NRSRO must meet this
standard through disclosures that are informative but at the same time
the Commission does not expect an NRSRO to disclose confidential or
proprietary information.
---------------------------------------------------------------------------

    \1155\ See, e.g., Barnard Letter; FSR Letter; Moody's Letter;
Siff Letter; S&P Letter.
    \1156\ See paragraph (a)(1)(i)(B) of Rule 17g-7.
---------------------------------------------------------------------------

    As noted above, commenters suggested expanding the information
required to be disclosed in the form. In particular, one commenter
stated that the Commission should encourage NRSROs to provide
additional information if they deem it appropriate,\1157\ another
stated that NRSROs should provide further information that would enable
investors to understand the significance of the disclosures,\1158\ and
a third stated that NRSROs should be required to indicate the
``projected time period during which the given rating was expected to
be valid.'' \1159\ One commenter stated that some disclosure
requirements should be expanded to provide in greater detail
information that can be used by investors and other users of credit
ratings.\1160\ Another commenter suggested further rulemaking to
require NRSROs to disclose and explain the rationale behind proposed
credit ratings to the rated entity prior to publication, provide a
rated entity with the right to appeal a proposed credit rating, and
give reasonable consideration to an appeal.\1161\
---------------------------------------------------------------------------

    \1157\ See ICI Letter.
    \1158\ See Better Markets Letter.
    \1159\ See Levin Letter.
    \1160\ See Better Markets Letter.
    \1161\ See Andrews Letter.
---------------------------------------------------------------------------

    In contrast, other commenters raised burden concerns with respect
to the breadth of the information that the proposed rule required to be
included in the form. One NRSRO urged the Commission not to extend the
rule beyond what the statute requires.\1162\ Another NRSRO stated that
although the form may be useful to investors, it must not be ``so
lengthy and overburdened with detail that it loses its utility,'' and
expressed a concern that the level of detail ``far surpasses what most
users of credit ratings would find of practical use, while imposing
unnecessary burdens on NRSROs.'' \1163\ A third NRSRO stated that
disclosure should be limited to asset-backed securities ratings,
indicating that expanding requirements to other ratings is ``extremely
overburdensome'' and provides little information that is not already
publicly available.\1164\
---------------------------------------------------------------------------

    \1162\ See DBRS Letter.
    \1163\ See S&P Letter.
    \1164\ See A.M. Best Letter.
---------------------------------------------------------------------------

    The Commission acknowledges that section 15E(s)(3) of the Exchange
Act identifies a significant amount of information that the
Commission's rule must require to be disclosed in the form.\1165\ This
information will be helpful in providing transparency as to how an
NRSRO determines credit ratings across all classes of credit ratings.
This transparency should benefit users of credit ratings and could
mitigate the risk of undue reliance on credit ratings by providing
information about the limits of credit ratings. Further, because the
statute was very specific regarding the information to be disclosed,
the Commission has sought to model its rule closely on the statutory
text. Accordingly, the Commission does not believe it would be
appropriate to limit the disclosure requirements to rating actions
involving asset-backed securities. Moreover, given the significant
amount of information required to be disclosed, the Commission also
does not believe it to be necessary at this time to expand the
disclosure requirements as suggested by some commenters.
---------------------------------------------------------------------------

    \1165\ See 15 U.S.C. 78o-7(s)(3).
---------------------------------------------------------------------------

    The Commission also wants to emphasize that the information that
must be disclosed in the form must relate to the rating action that is
being taken. The NRSRO need not include in the disclosure information
about the credit rating that is no longer up-to-date. For example,
consistent with the statutory text, the rule text sometimes

uses the phrase ``to determine the credit rating.'' The Commission
intended this to relate to the credit rating that is determined as a
consequence of the rating action that triggers the disclosure
requirement (a preliminary credit rating, an initial credit rating, an
upgrade or downgrade of the credit rating, or certain affirmations or
withdrawals of the credit rating). The objective is to provide
investors and other users of credit ratings with helpful information
about the rating action being taken with respect to the credit rating
of the obligor, security, or money market instrument.
    Paragraph (a)(1)(ii)(A). Section 15E(s)(3)(A)(i) of the Exchange
Act provides that, as required by Commission rule, an NRSRO shall
disclose on the form the credit ratings produced by the NRSRO.\1166\
The Commission proposed to implement this section in paragraph
(a)(1)(ii)(A) of Rule 17g-7.\1167\ This paragraph, as proposed, would
require the NRSRO to include in the form the symbol, number, or score
in the rating scale used by the NRSRO to denote the credit rating
categories and notches within categories assigned to the obligor,
security, or money market instrument that is the subject of the credit
rating and the identity of the obligor, security, or money market
instrument.\1168\
---------------------------------------------------------------------------

    \1166\ See 15 U.S.C. 78o-7(s)(3)(A)(i).
    \1167\ See paragraph (a)(1)(ii)(A) of Rule 17g-7, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33459.
    \1168\ See paragraph (a)(1)(ii)(A) of Rule 17g-7, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR 33540.
---------------------------------------------------------------------------

    The Commission is adopting paragraph (a)(1)(ii)(A) of Rule 17g-7
with one modification from the proposal.\1169\ The paragraph provides
that the form must contain the symbol, number, or score in the rating
scale used by the NRSRO to denote credit rating categories and notches
within categories assigned to the obligor, security, or money market
instrument that is the subject of the credit rating and, as applicable,
the identity of the obligor or the identity of the security or money
market instrument and, in a modification from the proposal, must also
contain, a description of the security or money market
instrument.\1170\
---------------------------------------------------------------------------

    \1169\ See paragraph (a)(1)(ii)(A) of Rule 17g-7.
    \1170\ Id.
---------------------------------------------------------------------------

    The Commission stated in the proposing release that the identity of
a security or money market instrument must be the name of the security
or money market instrument, if applicable, and a description of the
security or money market instrument.\1171\ In the proposing release,
the Commission provided an example of how an NRSRO could identify a
bond: ``senior unsecured debt issued by Company XYZ maturing in 2015.''
\1172\ Consistent with the discussion in the proposing release, the
Commission has modified the rule text from the proposal to add that, in
the case of a credit rating of a security or money market instrument,
the NRSRO must include in the form ``the identity and a description of
the security or money market instrument.'' \1173\
---------------------------------------------------------------------------

    \1171\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33459.
    \1172\ Id.
    \1173\ See paragraph (a)(1)(ii)(A) of Rule 17g-7.
---------------------------------------------------------------------------

    Two NRSROs commented on the requirement to identify the relevant
obligor.\1174\ In the proposing release, the Commission stated its
preliminary belief that the obligor's identity would be its legal name
and any other name used in its business.\1175\ One NRSRO stated that it
could be ``enormously burdensome'' for an NRSRO to learn and disclose
all the business names that an obligor may use, and the additional
information would add ``little benefit'' to those who use the form.''
\1176\ The other NRSRO stated that entry of legal names in its database
has been problematic due to the inconsistent use of
abbreviations.\1177\ Both NRSROs suggested that NRSROs should be
permitted to determine the clearest way to identify obligors.\1178\ The
Commission agrees with the commenters that an NRSRO should be permitted
to determine the clearest way to identify an obligor. An NRSRO must
disclose a name that clearly identifies the obligor.\1179\
---------------------------------------------------------------------------

    \1174\ See DBRS Letter; S&P Letter.
    \1175\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33459.
    \1176\ See DBRS Letter.
    \1177\ See S&P Letter.
    \1178\ See DBRS Letter; S&P Letter.
    \1179\ As discussed above in section II.G.2. of this release,
the format of the form must be easy to use and helpful for users of
credit ratings to understand the information contained in the form.
See paragraph (a)(1)(i) of Rule 17g-7.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(B). Section 15E(r)(3)(A) of the Exchange Act
provides that the Commission shall prescribe rules with respect to the
procedures and methodologies used by NRSROs that require NRSROs to
notify users of credit ratings of the version of a procedure or
methodology, including the qualitative methodology or quantitative
inputs, used with respect to a particular credit rating.\1180\ As
discussed above in section II.F.1. of this release, the Commission
proposed to implement this provision in Rules 17g-8 and 17g-7.\1181\
With respect to Rule 17g-7, proposed paragraph (a)(1)(ii)(B) would
require an NRSRO to disclose on the form the version of the procedure
or methodology used to determine the credit rating.\1182\
---------------------------------------------------------------------------

    \1180\ See 15 U.S.C. 78o-7(r)(3)(A).
    \1181\ See Nationally Recognized Statistical Rating
Organizations, 76 FR 33454-33455, 33459.
    \1182\ See paragraph (a)(1)(ii)(B) of Rule 17g-7, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33540.
---------------------------------------------------------------------------

    The Commission is adopting paragraph (a)(1)(ii)(B) of Rule 17g-7 as
proposed.\1183\ The paragraph provides that the NRSRO must include in
the form the version of the procedure or methodology used to determine
the credit rating.\1184\
---------------------------------------------------------------------------

    \1183\ See paragraph (a)(1)(ii)(B) of Rule 17g-7.
    \1184\ Id.
---------------------------------------------------------------------------

    Two NRSROs commented on paragraph (a)(1)(ii)(B) of Rule 17g-7, as
proposed. \1185\ One NRSRO stated that disclosing the version of the
procedure or methodology used to determine a credit rating could be
accomplished by identifying the name of the procedure or methodology,
the date the procedure was implemented, and a hyperlink to further
information about the procedure or methodology.\1186\ The Commission
agrees.\1187\
---------------------------------------------------------------------------

    \1185\ See DBRS Letter; S&P Letter.
    \1186\ See DBRS Letter.
    \1187\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33459 (``The Commission preliminarily
believes that this disclosure could be made by identifying the name
of the procedure or methodology (including any number used to denote
the version), the date the procedure was implemented, and an
Internet URL where further information about the procedure or
methodology can be obtained.''). In the proposing release, the
Commission provided an example of the disclosure. Id. at 33459
(``For example, a disclosure could resemble: `RMBS Rating
Methodology 3.0, implemented February 12, 2011. For further
information go to [insert Web site address].'''). The Commission
continues to believe this provides a useful example that NRSROs
could use in making the required disclosure.
---------------------------------------------------------------------------

    A second NRSRO stated that the actual benefit to investors is
slight because the required content can be accessed through the NRSRO's
public Internet Web site.\1188\ As the Commission stated in the
proposing release, section 15E(s)(1)(B) of the Exchange Act provides
that the Commission shall require, by rule, each NRSRO to prescribe a
form to accompany the publication of a credit rating that discloses
information that can be used by investors and other users of credit
ratings to better understand credit ratings in each class of credit
rating issued by the NRSRO.\1189\

Disclosing in the form the version of the procedure or methodology used
to determine the credit rating will promote this goal. For example,
credit rating methodologies that are predominantly quantitative may
rely on models to produce credit ratings. These models are periodically
updated and released as newer or different versions of the previous
model. Disclosing in the form the version of a model used to produce a
credit rating with the credit rating is expected to help investors and
other users of credit ratings better understand the credit rating and
how the determination of the credit rating may differ from the
determination of credit ratings of similar products using an earlier
version of the model.
---------------------------------------------------------------------------

    \1188\ See S&P Letter.
    \1189\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33459; 15 U.S.C. 78o-7(s)(1)(B).
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(C). Section 15E(s)(3)(A)(ii) of the Exchange
Act provides that, as required by Commission rule, an NRSRO shall
disclose on the form the main assumptions and principles used in
constructing procedures and methodologies, including qualitative
methodologies and quantitative inputs and assumptions about the
correlation of defaults across underlying assets used in rating
structured products.\1190\ The Commission proposed to implement this
section through paragraph (a)(1)(ii)(C) of Rule 17g-7, which mirrored
the statutory text.\1191\ The Commission is adopting paragraph
(a)(1)(ii)(C) of Rule 17g-7 as proposed.\1192\ The paragraph provides
that the NRSRO must include in the form the main assumptions and
principles used in constructing the procedures and methodologies used
to determine the credit rating, including qualitative methodologies and
quantitative inputs, and, if the credit rating is for a structured
finance product, assumptions about the correlation of defaults across
the underlying assets.\1193\
---------------------------------------------------------------------------

    \1190\ See 15 U.S.C. 78o-7(s)(3)(A)(ii).
    \1191\ See paragraph (a)(1)(ii)(C) of Rule 17g-7, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33460, 33540. This paragraph, as proposed, would require the NRSRO
to include in the form the main assumptions and principles used in
constructing the procedures and methodologies used to determine the
credit rating, including qualitative methodologies and quantitative
inputs, and, if the credit rating is for a structured finance
product, assumptions about the correlation of defaults across the
underlying assets.
    \1192\ See paragraph (a)(1)(ii)(C) of Rule 17g-7.
    \1193\ Id.
---------------------------------------------------------------------------

    Three commenters addressed paragraph (a)(1)(ii)(C) of Rule 17g-7,
as proposed.\1194\ One NRSRO stated that the Commission should
harmonize this requirement with those of similar disclosures required
in other jurisdictions, including the European Union.\1195\ The
commenter, however, did not provide explicit suggestions as to how the
rule text could be modified to provide for such harmonization.
Consequently, the Commission is not modifying the text on this basis.
Two commenters stated that the Commission should not require the
disclosure of confidential or proprietary information belonging to
either the NRSRO or the issuer, such as non-public financial
information of an issuer.\1196\ The Commission does not intend that
NRSROs will be required to disclose confidential or proprietary
information to meet the requirements of paragraph (a)(1)(ii)(C) of Rule
17g-7. As discussed earlier with respect to the format of the form,
NRSROs must provide narrative disclosures that are helpful for users of
credit ratings to understand the information. Accordingly, the form
must contain plainly worded and succinct disclosures. However, the
Commission does not expect the disclosures to include confidential or
proprietary information.
---------------------------------------------------------------------------

    \1194\ See Barnard Letter; S&P Letter; Siff Letter.
    \1195\ See S&P Letter.
    \1196\ See Barnard Letter; Siff Letter.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(D). Section 15E(s)(3)(A)(iii) of the Exchange
Act provides that, as required by Commission rule, an NRSRO shall
disclose on the form the potential limitations of the credit ratings
and the types of risks excluded from the credit ratings that the NRSRO
does not comment on, including liquidity, market, and other
risks.\1197\ The Commission proposed to implement this section through
paragraph (a)(1)(ii)(D) of Rule 17g-7, which mirrored the statutory
text.\1198\
---------------------------------------------------------------------------

    \1197\ See 15 U.S.C. 78o-7(s)(3)(A)(iii).
    \1198\ See paragraph (a)(1)(ii)(D) of Rule 17g-7, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33460, 33540. This paragraph, as proposed, would require the NRSRO
to include in the form the potential limitations of the credit
rating, including the types of risks excluded from the credit rating
that the NRSRO does not comment on, including, as applicable,
liquidity, market, and other risks.
---------------------------------------------------------------------------

    The Commission is adopting paragraph (a)(1)(ii)(D) of Rule 17g-7 as
proposed.\1199\ The paragraph provides that the NRSRO must include in
the form the potential limitations of the credit rating, including the
types of risks excluded from the credit rating that the NRSRO does not
comment on, including, as applicable, liquidity, market, and other
risks.\1200\
---------------------------------------------------------------------------

    \1199\ See paragraph (a)(1)(ii)(D) of Rule 17g-7.
    \1200\ Id.
---------------------------------------------------------------------------

    Two commenters addressed paragraph (a)(1)(ii)(D) of Rule 17g-7, as
proposed.\1201\ One NRSRO supported the rule text as proposed,\1202\
and another commenter stated that the disclosure should include more
than a listing of the risks that are not assessed as part of the
rating.\1203\ The Commission agrees with both commenters and notes that
the rule as proposed and adopted requires the NRSRO to disclose the
potential limitations of the credit rating, including the types of
risks excluded from the credit rating that the NRSRO does not comment
on, including, as applicable, liquidity, market, and other risks.
Consequently, the risks excluded from the credit rating are only a part
of the required disclosure. For example, the NRSRO also must disclose
the limitations of the credit rating with respect to the risks the
NRSRO does comment on, including credit risk.
---------------------------------------------------------------------------

    \1201\ See CFA/AFR Letter; S&P Letter.
    \1202\ See S&P Letter.
    \1203\ See CFA/AFR Letter.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(E). Section 15E(s)(3)(A)(iv) of the Exchange
provides that, as required by Commission rule, an NRSRO shall disclose
on the form information on the uncertainty of the credit rating,
including: (1) Information on the reliability, accuracy, and quality of
the data relied on in determining the credit rating; and (2) a
statement relating to the extent to which data essential to the
determination of the credit rating were reliable or limited, including
any limits on the scope of historical data and any limits in
accessibility to certain documents or other types of information that
would have better informed the credit rating.\1204\ The Commission
proposed to implement this section through paragraph (a)(1)(ii)(E) of
Rule 17g-7, which mirrored the statutory text.\1205\
---------------------------------------------------------------------------

    \1204\ See 15 U.S.C. 78o-7(s)(3)(A)(iv).
    \1205\ See paragraph (a)(1)(ii)(E) of Rule 17g-7, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33460, 33540.
---------------------------------------------------------------------------

    The Commission is adopting paragraph (a)(1)(ii)(E) of Rule 17g-7 as
proposed.\1206\ The paragraph provides that the form must contain
information on the uncertainty of the credit rating, including: (1)
Information on the reliability, accuracy, and quality of the data
relied on in determining the credit rating; and (2) a statement
relating to the extent to which data essential to the determination of
the credit rating were reliable or limited, including any limits on the
scope of historical data and any limits on accessibility to certain
documents or other types of information that would have better informed
the credit rating.\1207\
---------------------------------------------------------------------------

    \1206\ See paragraph (a)(1)(ii)(E) of Rule 17g-7.
    \1207\ Id.

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

    Two commenters addressed paragraph (a)(1)(ii)(E) of Rule 17g-7, as
proposed.\1208\ One commenter stated that the Commission should require
an NRSRO to address specifically the heightened uncertainty associated
with ratings of offerings that do not have an extensive track record,
complex or customized securities, or areas where the credit rating
agency has limited data on which to base a rating.\1209\ The Commission
agrees and believes the rule as proposed and adopted requires
disclosure on the matters identified by the commenter in that it
requires disclosures regarding limits on the scope of historical data
and limits on the accessibility to certain documents or other types of
information that would have better informed the credit rating.
---------------------------------------------------------------------------

    \1208\ See CFA/AFR Letter; S&P Letter.
    \1209\ See CFA/AFR Letter.
---------------------------------------------------------------------------

    One NRSRO stated that requiring NRSROs to provide overly detailed
information regarding ```reliability,' `accuracy' and `quality''' of
data, could result in extremely lengthy disclosures due to the number
of types of data.\1210\ The NRSRO further stated that the Commission
should harmonize this requirement with other jurisdictions'
requirements by requiring only a statement about ``(i) whether
essential data was available; (ii) whether such data was believed to be
reliable; and (iii) any limitations on access to data for that
transaction that differed from typical circumstances.'' \1211\ As
discussed above, NRSROs must provide narrative disclosures that are
helpful for users of credit ratings to understand the information and,
therefore, the form must contain plainly worded and succinct
disclosures that are not unnecessarily detailed. As for the suggestion
to harmonize the rule with other jurisdictions' requirements, the text
suggested by the commenter generally seems consistent with the proposed
rule. Consequently, the Commission is not persuaded that it is
necessary to modify the proposed rule in response to this
comment.\1212\
---------------------------------------------------------------------------

    \1210\ See S&P Letter.
    \1211\ See id.
    \1212\ See 15 U.S.C. 78o-7(s)(3)(A)(iv).
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(F). Section 15E(s)(3)(A)(v) of the Exchange
Act provides that, as required by Commission rule, an NRSRO shall
disclose on the form whether and to what extent third-party due
diligence services have been used by the NRSRO, a description of the
information that such third party reviewed in conducting due diligence
services, and a description of the findings or conclusions of such
third party.\1213\ The Commission proposed to implement this section
through paragraph (a)(1)(ii)(F), which largely mirrored the statutory
text.\1214\
---------------------------------------------------------------------------

    \1213\ See 15 U.S.C. 78o-7(s)(3)(A)(v).
    \1214\ See paragraph (a)(1)(ii)(F) of Rule 17g-7, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33460-33461, 33540. This paragraph, as proposed, would require the
NRSRO to include in the form whether and to what extent third-party
due diligence services were used by the nationally recognized
statistical rating organization, a description of the information
that such third party reviewed in conducting due diligence services,
and a description of the findings or conclusions of such third
party.
---------------------------------------------------------------------------

    Several commenters addressed paragraph (a)(1)(ii)(F) of Rule 17g-7,
as proposed.\1215\ The Commission is adopting paragraph (a)(1)(ii)(F)
of Rule 17g-7 with modifications in response to comments.\1216\
---------------------------------------------------------------------------

    \1215\ See ASF Letter; DBRS Letter; Deloitte Letter; Moody's
Letter; PWC Letter; S&P Letter.
    \1216\ See paragraph (a)(1)(ii)(F) of Rule 17g-7.
---------------------------------------------------------------------------

    Two commenters stated that the rule should be confined in scope to
credit ratings on asset-backed securities.\1217\ Two NRSROs stated that
unless the person providing third-party due diligence services was
engaged by the NRSRO, disclosure would be more appropriately made by
the party that hired the due diligence provider.\1218\ One NRSRO stated
that ``[i]ssuers and underwriters, not NRSROs, should pass through the
third party's description of the information reviewed and the third
party's findings and conclusions,'' but, if the NRSROs must disclose
the information, the Commission should clarify that the disclosure
requirement can be met by the NRSRO ``passing through the certification
that the third party provides to the NRSRO.'' \1219\ In addition, one
commenter stated that the final amendments should require that NRSROs
``expressly restate'' specific findings and conclusions from third-
party due diligence reports to prevent them from being
``mischaracterized or taken out of context.'' \1220\ Another commenter
suggested that the words ``a description of the findings or
conclusions'' should be revised to ``a summary of the findings and
conclusions,'' because a ``summary'' better aligns with the requirement
in proposed Form ABS Due Diligence-15E.\1221\ The commenter further
stated that what should be provided is a summary of the findings and
conclusions, not the findings and conclusions themselves, and ``there
is no reason why the summary would not be substantially similar in each
context.'' \1222\ One NRSRO stated that publishing the certification of
the third-party due diligence provider with the form as required by
paragraph (a)(2) of Rule 17g-7, as proposed, makes its use by the NRSRO
``self-evident.'' \1223\
---------------------------------------------------------------------------

    \1217\ See Moody's Letter; PWC Letter.
    \1218\ See Moody's Letter; S&P Letter.
    \1219\ See Moody's Letter.
    \1220\ See Deloitte Letter.
    \1221\ See ASF Letter.
    \1222\ See id.
    \1223\ See DBRS Letter.
---------------------------------------------------------------------------

    The Commission is adopting the requirement that the form must
contain information relating to due diligence services performed by a
third party to implement section 15E(s)(3)(A)(v) of the Exchange
Act.\1224\ This information will help investors and other users of
credit ratings to understand how the NRSRO determined the credit
rating. In response to the comments that paragraph (a)(1)(ii)(F) should
be limited to rating actions involving asset-backed securities, the
Commission interprets the text of the rule referring to ``due diligence
services of a third party'' as meaning the type of due diligence
services that are within the scope of Rule 17g-10, as adopted, and Form
ABS Due Diligence-15E (which apply to third-party due diligence
services only in connection with asset-backed securities).\1225\
Consequently, paragraph (a)(1)(ii)(F) is limited to rating actions
involving Exchange Act-ABS.\1226\
---------------------------------------------------------------------------

    \1224\ See 15 U.S.C. 78o-7(s)(3)(A)(v).
    \1225\ See paragraph (d)(1) of Rule 17g-10 defining the term due
diligence services to mean, in pertinent part, ``a review of the
assets underlying an asset-backed security, as defined in section
3(a)(79) of the [Exchange] Act . . .'' In addition, section
15E(s)(4) of the Exchange Act is titled ``Due Diligence Services for
Asset-Backed Securities.'' See 15 U.S.C. 78o-7(s)(4). Moreover,
section 15E(s)(4)(A) provides that ``[t]he issuer or underwriter of
any asset-backed security shall make publicly available the findings
and conclusions of any third-party due diligence report obtained by
the issuer or underwriter.'' See 15 U.S.C. 78o-7(s)(4)(A) (emphasis
added). Consequently, as proposed, paragraph (a)(1)(ii)(F)--which
refers to due diligence services--was intended to address due
diligence services in the context of an asset-backed security.
    \1226\ As stated above in section I.B.1. of this release, the
term Exchange Act-ABS as used throughout this release refers to an
asset-backed security as defined in section 3(a)(79) of the Exchange
Act. 15 U.S.C. 78c(a)(79).
---------------------------------------------------------------------------

    In response to comments, the Commission is modifying the rule from
the proposal to permit the NRSRO to provide a cross-reference to a Form
ABS Due Diligence-15E that is published with the form to meet part of
the disclosure requirement in paragraph (a)(1)(ii)(F).\1227\ The
Commission is persuaded by commenters that if an NRSRO used due
diligence services of a third party it would be redundant, and
potentially confusing, for the NRSRO to provide a description of the
information that the third party reviewed in

conducting the due diligence services and a description of the findings
or conclusions of the third party if that information is in a Form ABS
Due Diligence-15E published with the form.\1228\
---------------------------------------------------------------------------

    \1227\ See paragraph (a)(1)(ii)(F)(2) of Rule 17g-7.
    \1228\ As discussed below in section II.H.3.c. of this release,
Item 4 of Form ABS Due Diligence-15E requires the third party to
provide a description of the due diligence performed that addresses
the information that was reviewed and Item 5 requires the third
party to provide a summary of the findings and conclusions of the
review.
---------------------------------------------------------------------------

    In addition, as noted above, a commenter proposed modifying the
rule to replace the phrase ``a description of the findings or
conclusions'' to ``a summary of the findings and conclusions,'' because
the commenter believed that a ``summary'' better aligns with the
requirement in proposed Form ABS Due Diligence-15E and that, in each
case, the rules should require a summary of the findings and
conclusions (as opposed to the findings and conclusions
themselves).\1229\ Item 5 of Form ABS Due Diligence-15E requires the
third party to provide a ``summary of the findings and conclusions that
resulted from the due diligence services.'' \1230\ The Commission
agrees with the commenter and has therefore modified the proposal to
replace the words ``description of the findings or conclusions of such
third party'' with the words ``summary of the findings and conclusions
of the third party.'' \1231\ However, if an NRSRO chooses to provide a
summary of the findings and conclusions, the level of detail in the
summary should be comparable to the level of detail a provider of
third-party due diligence services provides in Form ABS Due Diligence-
15E, as the summary in the form can be a substitute for the NRSRO
providing a summary.\1232\
---------------------------------------------------------------------------

    \1229\ See ASF Letter.
    \1230\ See Item 5 of Form ABS Due Diligence-15E.
    \1231\ See paragraph (a)(1)(ii)(F)(1) of Rule 17g-7.
    \1232\ The Commission, however, does not believe the rule as
proposed (which required ``a description of the findings or
conclusions'') and the rule as adopted (which requires a ``summary
of the findings and conclusions'') contain standards that differ in
any significant way. Under either standard, the NRSRO need not
repeat the actual findings and conclusions but rather must provide a
higher level disclosure about them.
---------------------------------------------------------------------------

    For these reasons, the final amendments provide that the form must
contain whether and to what extent the NRSRO used due diligence
services of a third party in taking the rating action, and, if the
NRSRO used such services, either: (1) A description of the information
that the third party reviewed in conducting the due diligence services
and a summary of the findings and conclusions of the third party; or
(2) a cross-reference to a Form ABS Due Diligence-15E executed by the
third party that is published with the form, provided the cross-
referenced Form ABS Due Diligence-15E contains a description of the
information that the third party reviewed in conducting the due
diligence services and a summary of the findings and conclusions of the
third party.\1233\
---------------------------------------------------------------------------

    \1233\ See paragraph (a)(1)(ii)(F) of Rule 17g-7.
---------------------------------------------------------------------------

    The Commission is not persuaded by the comment that publishing the
certification of the third-party due diligence provider with the form
as required by paragraph (a)(2) of Rule 17g-7, as proposed, makes its
use by the NRSRO ``self-evident.'' \1234\ As discussed below in section
II.G.5. of this release, section 15E(s)(4)(B) of the Exchange Act
requires a third party providing due diligence services to an NRSRO,
issuer, or underwriter with respect to an asset-backed security to
provide a written certification to any NRSRO that produces a credit
rating to which the due diligence services relate.\1235\ Section
15E(s)(4)(D) of the Exchange Act provides that the Commission shall
adopt rules requiring an NRSRO that receives a certification to
disclose the certification to the public at the time at which the NRSRO
produces a rating.\1236\ Paragraph (a)(2) of Rule 17g-7, as amended,
implements section 15E(s)(4)(D) by requiring the NRSRO to publish with
the form any certifications it receives. However, the NRSRO's receipt
of the certification pursuant to section 15E(s)(4)(B) and publication
of the certification pursuant to paragraph (a)(2) of Rule 17g-7, as
amended, is not predicated on the NRSRO having used the due diligence
services in determining the credit rating. Consequently, the final
amendments retain the requirement for the NRSRO to include in the form
whether and to what extent the NRSRO used due diligence services of a
third party in taking the rating action.\1237\
---------------------------------------------------------------------------

    \1234\ See DBRS Letter.
    \1235\ See 15 U.S.C. 78o-7(s)(4)(B).
    \1236\ See 15 U.S.C. 78o-7(s)(4)(D).
    \1237\ See paragraph (a)(1)(ii)(F) of Rule 17g-7.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(G). Section 15E(s)(1)(A)(iii) of the Exchange
Act provides that the Commission shall require, by rule, that the NRSRO
disclose on the form information relating to, if applicable, how the
NRSRO used servicer or remittance reports, and with what frequency, to
conduct surveillance of the credit rating.\1238\ The Commission
proposed to implement this section through paragraph (a)(1)(ii)(G) of
Rule 17g-7, which mirrored the statutory text.\1239\
---------------------------------------------------------------------------

    \1238\ See 15 U.S.C. 78o-7(s)(1)(A)(iii).
    \1239\ See paragraph (a)(1)(ii)(G) of Rule 17g-7, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33461, 33540. This paragraph, as proposed, would require the NRSRO
to include in the form, if applicable, how servicer or remittance
reports were used, and with what frequency, to conduct surveillance
of the credit rating.
---------------------------------------------------------------------------

    One commenter addressed paragraph (a)(1)(ii)(G) of Rule 17g-7, as
proposed, by noting its support of the rule text as proposed.\1240\ The
Commission is adopting paragraph (a)(1)(ii)(E) of Rule 17g-7 as
proposed.\1241\ The paragraph provides that the NRSRO must include in
the form, if applicable, how servicer or remittance reports were used,
and with what frequency, to conduct surveillance of the credit
rating.\1242\
---------------------------------------------------------------------------

    \1240\ See S&P Letter.
    \1241\ See paragraph (a)(1)(ii)(G) of Rule 17g-7. One commenter
addressed this proposal and supported it. See S&P Letter.
    \1242\ See paragraph (a)(1)(ii)(G) of Rule 17g-7.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(H). Section 15E(s)(3)(A)(vi) of the Exchange
Act provides that the Commission shall require, by rule, that the NRSRO
disclose on the form a description of the data about any obligor,
issuer, security, or money market instrument that were relied upon for
the purpose of determining the credit rating.\1243\ The Commission
proposed to implement this section through paragraph (a)(1)(ii)(H) of
Rule 17g-7, which mirrored the statutory text.\1244\ The Commission is
adopting paragraph (a)(1)(ii)(H) of Rule 17g-7 with a modification in
response to comments.\1245\
---------------------------------------------------------------------------

    \1243\ See 15 U.S.C. 78o-7(s)(3)(A)(vi).
    \1244\ See paragraph (a)(1)(ii)(H) of Rule 17g-7, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33461, 33540-33541. This paragraph, as proposed, would require the
NRSRO to include in the form a description of the data about any
obligor, issuer, security, or money market instrument that were
relied upon for the purpose of determining the credit rating.
    \1245\ See paragraph (a)(1)(ii)(H) of Rule 17g-7.
---------------------------------------------------------------------------

    One NRSRO stated that the requirement may result in ``effectively
overloading'' investors with information and essentially ``reducing
rather than enhancing'' the disclosure's value.\1246\ This commenter
and another commenter expressed concerns that some data may be
confidential or provided to the NRSRO under terms restricting public
disclosure.\1247\ One commenter suggested that the Commission clarify
that the requirement for a ``description of the data relied upon''
requires only a description of the general type of data and not of
specific data, since specific data can be obtained

from the relevant offering documents.\1248\
---------------------------------------------------------------------------

    \1246\ See S&P Letter.
    \1247\ See FSR Letter; S&P Letter.
    \1248\ See FSR Letter.
---------------------------------------------------------------------------

    In response to these comments, the Commission notes, as stated
above, that section 15E(s)(3)(A)(vi) of the Exchange Act provides that
the Commission shall require, by rule, that the NRSRO disclose on the
form a description of the data about any obligor, issuer, security, or
money market instrument that were relied upon for the purpose of
determining the credit rating.\1249\ Paragraph (a)(1)(ii)(H) of Rule
17g-7, as proposed, was designed to implement the statute. Moreover, as
discussed above, the form must disclose information that can be used by
investors and other users of credit ratings to better understand credit
ratings \1250\ and, therefore, the form must contain plainly worded and
succinct disclosures that are not overly detailed. In this regard, the
Commission did not intend to require that the form repeat verbatim all
the data that were relied upon to determine the credit rating. Instead,
it intended the form to include a ``description'' to help users of the
credit rating to understand the types of data the NRSRO relied on. To
make this more clear and address the commenter's concern, the
Commission has modified the final amendments to require the NRSRO to
include in the form a description of the types of data about any
obligor, issuer, security, or money market instrument that were relied
upon for the purpose of determining the credit rating.\1251\
---------------------------------------------------------------------------

    \1249\ See 15 U.S.C. 78o-7(s)(3)(A)(vi).
    \1250\ See 15 U.S.C. 78o-7(s)(1)(B).
    \1251\ See paragraph (a)(1)(ii)(H) of Rule 17g-7 (emphasis added
to highlight the modification).
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(I). Section 15E(s)(3)(A)(vii) of the Exchange
Act provides that the Commission shall require, by rule, that the NRSRO
disclose on the form a statement containing an overall assessment of
the quality of information available and considered in producing a
rating for the obligor, security, or money market instrument, in
relation to the quality of information available to the NRSRO in rating
similar issuances.\1252\ The Commission proposed to implement this
section through paragraph (a)(1)(ii)(I) of Rule 17g-7, which largely
mirrored the statutory text.\1253\
---------------------------------------------------------------------------

    \1252\ See 15 U.S.C. 78o-7(s)(3)(A)(vii).
    \1253\ See paragraph (a)(1)(ii)(I) of Rule 17g-7, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33461, 33541. This paragraph, as proposed, would require the NRSRO
to include in the form a statement containing an overall assessment
of the quality of information available and considered in
determining the credit rating for the obligor, security, or money
market instrument, in relation to the quality of information
available to the NRSRO in rating similar obligors, securities, or
money market instruments. The statute refers to ratings of ``similar
issuances.'' However, a credit rating of an obligor commonly means
the rating of the obligor as an entity rather than a rating of
securities or money market instruments issued by the obligor.
Consequently, the rating of an obligor may not relate to an
``issuance'' of a particular security or money market instrument.
Therefore, paragraph (a)(1)(ii)(I) of Rule 17g-7, as proposed,
substituted the phrase ``similar obligors, securities, or money
market instruments'' for the phrase ``similar issuances'' in the
statutory text.
---------------------------------------------------------------------------

    The Commission is adopting paragraph (a)(1)(ii)(I) of Rule 17g-7 as
proposed.\1254\ The paragraph provides that the NRSRO must include in
the form a statement containing an overall assessment of the quality of
information available and considered in determining the credit rating
for the obligor, security, or money market instrument, in relation to
the quality of information available to the NRSRO in rating similar
obligors, securities, or money market instruments.\1255\
---------------------------------------------------------------------------

    \1254\ See paragraph (a)(1)(ii)(I) of Rule 17g-7.
    \1255\ Id.
---------------------------------------------------------------------------

    One NRSRO stated that the requirement to disclose an overall
assessment of the quality of information used in its rating ``would
present practical, and possibly contractual difficulties,'' and that
the Commission should harmonize this requirement with other
jurisdictions' requirements by requiring a statement about ``(i)
whether essential data was available; (ii) whether such data was
believed to be reliable; and (iii) any limitations on access to data
for that transaction that differed from typical circumstances.'' \1256\
The commenter did not explain how the proposed requirement would
present contractual difficulties but, as discussed above, the
Commission does not intend the disclosure provisions in the rule to
require NRSROs to disclose confidential or proprietary information. In
terms of practical issues, as discussed above, the NRSROs must provide
narrative disclosures in the form that are helpful for users of credit
ratings to understand the information and, therefore, the form must
contain plainly worded and succinct disclosures that are not overly
detailed. Thus, the practical issue of having to make highly detailed
disclosures is not implicated by the rule as proposed and adopted. As
for the suggestion to harmonize the rule with other jurisdictions, the
text suggested by the commenter generally seems aimed at requiring
relatively similar disclosures though it does not explicitly require an
assessment of the overall quality of information available to the NRSRO
in rating similar obligors, securities, or money market instruments.
Consequently, the Commission is not persuaded that it is necessary to
implement the statute in a manner that deviates from the proposed
rule.\1257\
---------------------------------------------------------------------------

    \1256\ See S&P Letter.
    \1257\ See 15 U.S.C. 78o-7(s)(3)(A)(vii).
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(J). Proposed paragraph (a)(1)(ii)(J) of Rule
17g-7 \1258\ would implement, in part, section 15E(s)(3)(A)(viii) of
the Exchange Act, which provides that the Commission shall require, by
rule, that the NRSRO disclose on the form information relating to
conflicts of interest of the NRSRO.\1259\ The Commission proposed to
identify three specific items of information that, at a minimum, an
NRSRO would need to disclose in the form relating to conflicts of
interest.\1260\
---------------------------------------------------------------------------

    \1258\ See paragraph (a)(1)(ii)(J) of Rule 17g-7, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33541.
    \1259\ See 15 U.S.C. 78o-7(s)(3)(A)(viii).
    \1260\ See paragraph (a)(1)(ii)(J) of Rule 17g-7, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33461-33462, 33541.
---------------------------------------------------------------------------

    First, proposed paragraph (a)(1)(ii)(J)(1) would require the NRSRO
to include a classification of the credit rating as either solicited
sell-side, solicited buy-side, or unsolicited.\1261\ The proposal
defined solicited sell-side to mean that the credit rating was paid for
by the obligor being rated or the issuer, underwriter, depositor, or
sponsor of the security or money market instrument being rated.\1262\
The proposal defined solicited buy-side to mean that the credit rating
was paid for by a person other than the obligor being rated or the
issuer, underwriter, depositor, or sponsor of the security or money
market instrument being rated.\1263\ The proposal defined an
unsolicited credit rating to mean the NRSRO was not paid to determine
the credit rating.\1264\ The Commission is

adopting paragraph (a)(1)(ii)(J)(1) of Rule 17g-7 with modifications in
response to comments about these definitions.\1265\
---------------------------------------------------------------------------

    \1261\ See paragraph (a)(1)(ii)(J)(1) of Rule 17g-7, as
proposed; Nationally Recognized Statistical Rating Organizations, 76
FR at 33541.
    \1262\ See paragraph (a)(1)(ii)(J)(1)(i) of Rule 17g-7, as
proposed; Nationally Recognized Statistical Rating Organizations, 76
FR at 33541.
    \1263\ See paragraph (a)(1)(ii)(J)(1)(ii) of Rule 17g-7, as
proposed; Nationally Recognized Statistical Rating Organizations, 76
FR at 33541.
    \1264\ See paragraph (a)(1)(ii)(J)(1)(iii) of Rule 17g-7, as
proposed; Nationally Recognized Statistical Rating Organizations, 76
FR at 33541. The Commission further explained in the proposing
release that the intent was to include credit ratings funded by
selling subscriptions to access the credit ratings (so-called
``subscriber-paid credit ratings''). See Nationally Recognized
Statistical Rating Organizations, 76 FR at 33461-33462. However, if
a subscriber paid the NRSRO to determine a credit rating for a
specific obligor, security, or money market instrument, the credit
rating would need to be classified as either solicited sell-side, if
the subscriber also was the obligor, issuer, underwriter, depositor,
or sponsor of the security or money market instrument being rated,
or solicited buy-side if the subscriber was not the obligor, issuer,
underwriter, depositor, or sponsor of the security or money market
instrument being rated. Id.
    \1265\ See paragraph (a)(1)(ii)(J)(1) of Rule 17g-7.
---------------------------------------------------------------------------

    One NRSRO stated that equating the concept of solicitation with
payment would result in confusion in the market, and that the
definition should be harmonized with that of other jurisdictions, where
an unsolicited credit rating is defined as one that is initiated by the
credit rating agency and not requested by the issuer.\1266\ The
Commission is persuaded that requiring the NRSRO to classify the credit
rating using one of these terms could be confusing given other views as
to what constitutes a solicited or unsolicited credit rating. Further,
disclosing the conflict through a classification may not be as helpful
as simply having the NRSRO include a statement in the form as to
whether another person paid for the credit rating. For these reasons,
the final amendments have been modified to exclude the specific terms
proposed and instead require the NRSRO to include in the form, as
applicable, a statement that the NRSRO was: (1) Paid to determine the
credit rating by the obligor being rated or the issuer, underwriter,
depositor, or sponsor of the security or money market instrument being
rated; (2) paid to determine the credit rating by a person other than
the obligor being rated or the issuer, underwriter, depositor, or
sponsor of the security or money market instrument being rated; or (3)
not paid to determine the credit rating.\1267\
---------------------------------------------------------------------------

    \1266\ See Moody's Letter.
    \1267\ See paragraph (a)(1)(ii)(J)(1) of Rule 17g-7. For the
purpose of these disclosures, the Commission does not consider a
subscriber to an NRSRO's credit ratings to be a person who paid for
the credit rating simply because the subscriber paid a fee to access
the credit ratings of the NRSRO. However, the NRSRO would need to
state that it was paid to determine the credit rating if, for
example, the subscriber paid for the credit rating because it was
the obligor being rated or the issuer, underwriter, depositor, or
sponsor of the security or money market instrument being rated, or
the subscriber paid for determination of the credit rating because
the subscriber was an investor or potential investor in the security
or money market instrument and hired the NRSRO to rate the security
or money market instrument.
---------------------------------------------------------------------------

    The second type of conflict disclosure was specified in proposed
paragraph (a)(1)(ii)(J)(2) of Rule 17g-7.\1268\ Pursuant to this
paragraph, if the credit rating was classified as either solicited
sell-side or solicited buy-side, the NRSRO would be required to
disclose whether the NRSRO provided services other than determining
credit ratings to the person that paid for the credit rating during the
most recently ended fiscal year.\1269\ The Commission is adopting
paragraph (a)(1)(ii)(J)(2) of Rule 17g-7 with modifications in response
to comments.\1270\
---------------------------------------------------------------------------

    \1268\ See paragraph (a)(1)(ii)(J)(2) of Rule 17g-7, as
proposed; Nationally Recognized Statistical Rating Organizations, 76
FR at 33541.
    \1269\ See paragraph (a)(1)(ii)(J)(2) of Rule 17g-7, as
proposed.
    \1270\ See paragraph (a)(1)(ii)(J)(2) of Rule 17g-7.
---------------------------------------------------------------------------

    A commenter stated that the disclosure about other services
provided by an NRSRO does not provide any basis to conclude that a
rating may be compromised.\1271\ Another commenter strongly opposed the
requirement due to the difficulty of shielding analysts from such
information so as to promote independence in the credit rating
process.\1272\ A third commenter supported the proposed requirement and
added that the Commission should also require NRSROs to disclose the
revenue they received from a particular issuer.\1273\
---------------------------------------------------------------------------

    \1271\ See S&P Letter.
    \1272\ See Moody's Letter.
    \1273\ See CFR/AFR Letter.
---------------------------------------------------------------------------

    The Commission does not agree with the commenter that being paid
for other services does not present a potential conflict. As the
Commission stated in the proposing release, clients paying an NRSRO for
services in addition to determining credit ratings may pose an
increased risk of exerting undue influence on the NRSRO with respect to
its determination of credit ratings.\1274\ The Commission has adopted
rules that address this conflict.\1275\ The proposed disclosure
requirement about paying for other services was intended to complement
these requirements.\1276\
---------------------------------------------------------------------------

    \1274\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33461-33462. In this regard, the Commission
notes that section 939H of the Dodd-Frank Act contains a sense of
Congress that the Commission should exercise rulemaking authority
under section 15E(h)(2)(B) of the Exchange Act to prevent improper
conflicts of interest arising from employees of NRSROs providing
services to issuers of securities that are unrelated to the issuance
of credit ratings, including consulting, advisory, and other
services. See Public Law 111-203, 939H. See also 2013 Staff Report
on Credit Rating Agency Independence (a report on the potential
conflict of interest that arises from a credit rating agency
providing other services).
    \1275\ See 2013 Staff Report on Credit Rating Agency
Independence, pp. 9-13 (summarizing and describing the relevant
rules).
    \1276\ See Nationally Recognized Statistical Rating
Organizations, 76 FR at 33461-33462.
---------------------------------------------------------------------------

    The Commission acknowledges the concern raised by the commenter
about the objective of shielding analysts from information that could
compromise their independence.\1277\ Nonetheless, the Commission
believes that the proposed disclosure that the NRSRO was paid for other
services is appropriate because it will provide users of credit ratings
with relevant information about this conflict even when balanced
against the concern that an analyst reading the report will learn that
the NRSRO was paid for other services. If the NRSRO was required to
disclose the amount of revenue received (as suggested by the third
commenter), this concern that the analyst might be influenced by the
disclosure would be increased.\1278\
---------------------------------------------------------------------------

    \1277\ See Moody's Letter.
    \1278\ See CFR/AFR Letter.
---------------------------------------------------------------------------

    For all of these reasons, the Commission is adopting the
requirement that the NRSRO must include a disclosure in the form if it
was paid for other services.\1279\ The Commission modified the final
amendments to correspond to the modifications discussed above with
respect to eliminating the proposed classification of the credit rating
as either solicited or unsolicited. Specifically, the final amendments
require the NRSRO, if applicable, to include in the form a statement
that the NRSRO also was paid for services other than determining credit
ratings during the most recently ended fiscal year by the person that
paid the NRSRO to determine the credit rating.\1280\
---------------------------------------------------------------------------

    \1279\ See paragraph (a)(1)(ii)(J)(2) of Rule 17g-7.
    \1280\ Id.
---------------------------------------------------------------------------

    The third type of conflict disclosure was specified in
(a)(1)(ii)(J)(3) and related to rating actions resulting from look-back
reviews.\1281\ As discussed above in section II.C.1. of this release,
the proposal would require the disclosure of information about a
conflict of interest influencing a credit rating action discovered as a
result of a look-back review conducted pursuant to section 15E(h)(4)(A)
of the Exchange Act and proposed paragraph (c) of Rule 17g-8. Also, as
discussed above in section II.C.1. of this release, the Commission is
adopting paragraph (a)(1)(ii)(J)(3) of Rule 17g-7 with modifications in
response to comments that eliminate the required disclosure that would
have accompanied the placement of the credit rating on credit watch,
modify the required disclosure with respect to estimating the impact of
the conflict, and make certain related and technical
modifications.\1282\
---------------------------------------------------------------------------

    \1281\ See paragraph (a)(1)(ii)(J)(3) of Rule 17g-7, as
proposed; Nationally Recognized Statistical Rating Organizations, 76
FR at 33541.
    \1282\ See paragraph (a)(1)(ii)(J)(3) of Rule 17g-7.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(K). Section 15E(s)(3)(B)(i) of the Exchange
Act provides that the Commission shall require, by rule, that the NRSRO
disclose on the form an explanation or measure of the potential
volatility of the credit rating, including: (1) Any factors that might
lead to a change in the credit rating; and (2) the magnitude of the

change that a user can expect under different market conditions.\1283\
The Commission proposed to implement this section through paragraph
(a)(1)(ii)(K) of Rule 17g-7, which largely mirrored the statutory
text.\1284\ The Commission is adopting paragraph (a)(1)(ii)(K) of Rule
17g-7 with modifications in response to comment.\1285\
---------------------------------------------------------------------------

    \1283\ See 15 U.S.C. 78o-7(s)(3)(B)(i).
    \1284\ See paragraph (a)(1)(ii)(K) of Rule 17g-7, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33462, 33541. This paragraph, as proposed, would require the NRSRO
to include in the form an explanation or measure of the potential
volatility of the credit rating, including: (1) Any factors that
might lead to a change in the credit rating; and (2) the magnitude
of the change that could occur under different market conditions.
    \1285\ See paragraph (a)(1)(ii)(K) of Rule 17g-7.
---------------------------------------------------------------------------

    Three commenters addressed paragraph (a)(1)(ii)(K) of Rule 17g-7,
as proposed.\1286\ An NRSRO suggested that the Commission modify the
rule to require the disclosure of any factors that are ``reasonably
likely to'' (rather than ``might'') lead to a change in the credit
rating.\1287\ A second NRSRO stated that ``each NRSRO should decide for
itself what conditions merit discussion in light of the characteristics
of the rated instrument and whatever other information the NRSRO
believes it is appropriate to take into account.'' \1288\ A third
commenter stated that the Commission should require the NRSROs to be
very specific about the events and the magnitude of those events that
would cause ratings to be in ``error'' and provided a five percent drop
in housing prices as an example.\1289\
---------------------------------------------------------------------------

    \1286\ See CFR/AFR Letter; DBRS Letter; S&P Letter.
    \1287\ See DBRS Letter.
    \1288\ See S&P Letter.
    \1289\ CFR/AFR Letter.
---------------------------------------------------------------------------

    The Commission agrees with the modifications suggested by the first
commenter. The word ``might'' as used in the proposed rule text is
imprecise and could lead to disclosures that seek to identify any
conceivable factor that could lead to the change in the credit rating
no matter how remote the possibility. This could diminish the
usefulness of the disclosure by including information that is not
highly relevant to understanding the credit rating and generally making
the disclosure too long.
    Regarding the second comment, the magnitude of the change that
could occur under different market conditions will depend on an NRSRO's
procedures and methodologies for determining credit ratings that apply
to the credit rating that is subject to the rating action.\1290\
Consequently, the required disclosure--as proposed and adopted--will be
based on those procedures and methodologies and how they account for
different market conditions. In other words, the NRSRO will need to
``decide for itself'' the potential market conditions that could cause
a change in the credit rating given its rating procedures and
methodologies. However, to make this clear, the Commission is modifying
the rule to specify that the different market conditions are those that
are determined by the NRSRO to be relevant to the rating.\1291\
---------------------------------------------------------------------------

    \1290\ See, e.g., 2012 Staff Report on Credit Rating
Standardization, pp. 25-29 (discussing the feasibility and
desirability of standardizing the market stress conditions under
which ratings are evaluated).
    \1291\ See paragraph (a)(1)(ii)(K)(2) of Rule 17g-7.
---------------------------------------------------------------------------

    Finally, the Commission generally agrees with the third commenter
that the disclosure by the NRSRO must specify the factors (for example,
market conditions) that would lead to a change in the credit rating. As
discussed above, the NRSRO must disclose factors that might lead to a
change in the credit rating. In doing so, the NRSRO must explain the
factors.
    For these reasons, the final amendments require the NRSRO to
include in the form an explanation or measure of the potential
volatility of the credit rating, including: (1) Any factors that are
reasonably likely to lead to a change in the credit rating; and (2) the
magnitude of the change that could occur under different market
conditions determined by the NRSRO to be relevant to the rating.\1292\
---------------------------------------------------------------------------

    \1292\ Id.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(L). Section 15E(s)(3)(B)(ii) of the Exchange
Act provides that the Commission shall require, by rule, that the NRSRO
disclose on the form information on the content of the credit rating,
including: (1) The historical performance of the credit rating; and (2)
the expected probability of default and the expected loss in the event
of default.\1293\ The Commission proposed to implement this section
through paragraph (a)(1)(ii)(L) of Rule 17g-7, which mirrored the
statutory text.\1294\
---------------------------------------------------------------------------

    \1293\ See 15 U.S.C. 78o-7(s)(3)(B)(ii).
    \1294\ See paragraph (a)(1)(ii)(L) of Rule 17g-7, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33462, 33541. This paragraph, as proposed, would require the NRSRO
to include in the form information on the content of the credit
rating, including: (1) If applicable, the historical performance of
the credit rating; and (2) the expected probability of default and
the expected loss in the event of default.
---------------------------------------------------------------------------

    The Commission is adopting paragraph (a)(1)(ii)(L) of Rule 17g-7 as
proposed.\1295\ The paragraph provides that the NRSRO must include in
the form information on the content of the credit rating, including:
(1) If applicable, the historical performance of the credit rating; and
(2) the expected probability of default and the expected loss in the
event of default.\1296\
---------------------------------------------------------------------------

    \1295\ See paragraph (a)(1)(ii)(L) of Rule 17g-7.
    \1296\ Id.
---------------------------------------------------------------------------

    Two NRSROs addressed paragraph (a)(1)(ii)(L) of Rule 17g-7, as
proposed.\1297\ One stated that it supports the disclosure elements
specified in this paragraph.\1298\ The other commenter stated that the
proposal is sufficiently explicit, but indicated that its credit
ratings do not connote a ``particular'' expectation of the probability
of default.\1299\ The Commission recognizes that credit ratings
generally are intended to indicate the relative degree of credit risk
of an obligor or debt instrument rather than reflect a measure of a
specific default probability or loss expectation.\1300\ The Commission
does not expect NRSROs to alter the meanings of their credit ratings or
rating procedures and methodologies to conform to the disclosure
requirement. Rather, the Commission expects NRSROs to provide
``information'' to the extent it is consistent with their procedures
and methodologies for determining credit ratings, on the expected
probability of default and expected loss in the event of default. This
information could consist of, for example, historical default and loss
statistics, respectively, for the class or subclass of the credit
rating.
---------------------------------------------------------------------------

    \1297\ See Kroll Letter; S&P Letter.
    \1298\ See Kroll Letter.
    \1299\ See S&P Letter.
    \1300\ See 2012 Staff Report on Credit Rating Standardization,
pp. 29-34 (discussing the feasibility and desirability of requiring
a quantitative correspondence between credit ratings and a range of
default probabilities and loss expectations under standardized
conditions of economic stress).
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(M). Section 15E(s)(3)(B)(iii) of the Exchange
Act provides that the Commission shall require, by rule, that the NRSRO
disclose on the form information on the sensitivity of the credit
rating to assumptions made by the NRSRO, including: (1) Five
assumptions made in the ratings process that, without accounting for
any other factor, would have the greatest impact on a rating if the
assumptions were proven false or inaccurate; and (2) an analysis, using
specific examples, of how each of the five assumptions identified
impacts a credit rating.\1301\ The Commission proposed to implement
this section through paragraph (a)(1)(ii)(M) of Rule 17g-7, which
mirrored the statutory

text.\1302\ The Commission is adopting paragraph (a)(1)(ii)(M) of Rule
17g-7 with modifications in response to comments.\1303\
---------------------------------------------------------------------------

    \1301\ See 15 U.S.C. 78o-7(s)(3)(B)(iii).
    \1302\ See paragraph (a)(1)(ii)(M) of Rule 17g-7, as proposed;
Nationally Recognized Statistical Rating Organizations, 76 FR at
33541. This paragraph, as proposed, would require the NRSRO to
include in the form information on the sensitivity of the credit
rating to assumptions made by the NRSRO, including: (1) Five
assumptions made in the ratings process that, without accounting for
any other factor, would have the greatest impact on a credit rating
if the assumptions were proven false or inaccurate; and (2) an
analysis, using specific examples, of how each of the five
assumptions impacts a rating.
    \1303\ See paragraph (a)(1)(ii)(M) of Rule 17g-7.
---------------------------------------------------------------------------

    Several commenters addressed paragraph (a)(1)(ii)(M) of Rule 17g-7,
as proposed.\1304\ An NRSRO stated that the disclosure of assumptions
will tend to become a ``mechanical exercise'' where disclosure is
``sufficiently vague so as to be unimpeachable,'' but will not be
useful.\1305\ Another NRSRO stated that it should be permissible to
disclose fewer than five assumptions if fewer than five significant
assumptions exist.\1306\ Two other NRSROs stated that it may be
difficult to identify five single assumptions\1307\ because, according
to one NRSRO, many assumptions are ``cross-dependent,'' and different
assumptions may ``play out differently in various economic scenarios.''
\1308\ Another commenter stated that the Commission should also require
NRSROs to disclose the sensitivity of the credit rating to several
assumptions changing at the same time and the dependencies assumed
between the assumptions.\1309\
---------------------------------------------------------------------------

    \1304\ See Barnard Letter; CFA/AFR Letter; DBRS Letter; Kroll
Letter; Moody's Letter; Morningstar Letter; S&P Letter.
    \1305\ See Kroll Letter.
    \1306\ See Moody's Letter.
    \1307\ See Morningstar Letter; S&P Letter.
    \1308\ See S&P Letter.
    \1309\ See Barnard Letter.
---------------------------------------------------------------------------

    The Commission agrees with the commenter that an NRSRO should not
disclose five assumptions if there are fewer than five assumptions that
would have an impact on the credit rating if proven false or
inaccurate. Otherwise, the disclosure could contain information that is
potentially misleading by, for example, creating the impression the
assumption is important when it is not. Consequently, the final
amendments are modified to include a provision that the NRSRO need only
disclose information on the assumptions that would have an impact on
the credit rating if there are fewer than five such assumptions.\1310\
Specifically, the final amendments require the NRSRO to include in the
form information on the sensitivity of the credit rating to assumptions
made by the NRSRO, including: (1) Five assumptions made in the ratings
process that, without accounting for any other factor, would have the
greatest impact on the credit rating if the assumptions were proven
false or inaccurate, provided that, if the NRSRO has made fewer than
five such assumptions, it need only disclose information on the
assumptions that would have an impact on the credit rating; and (2) an
analysis, using specific examples, of how each of the assumptions
impacts the credit rating.\1311\
---------------------------------------------------------------------------

    \1310\ See paragraph (a)(1)(ii)(M)(1) of Rule 17g-7. For the
reasons stated above, the Commission believes this modification is
necessary or appropriate in the public interest, and is consistent
with the protection of investors. See 15 U.S.C. 78mm (providing the
Commission with general exemptive authority).
    \1311\ See paragraph (a)(1)(ii)(M) of Rule 17g-7.
---------------------------------------------------------------------------

    In response to the comment that this disclosure will become
``mechanical'' and not useful, the Commission--as stated above--expects
NRSROs to make the disclosures as specific to the particular rating
action, and as relevant to investors, as possible, and to strike a