[Federal Register Volume 76, Number 110 (Wednesday, June 8, 2011)]
[Proposed Rules]
[Pages 33420-33563]
[FR Doc No: 2011-12659]

Vol. 76

Wednesday,

No. 110

June 8, 2011

Part II

Securities and Exchange Commission

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17 CFR Parts 232, 240, 249, et al.

Nationally Recognized Statistical Rating Organizations; Proposed Rule

Federal Register / Vol. 76, No. 110 / Wednesday, June 8, 2011 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 232, 240, 249, and 249b

[Release No. 34-64514; File No. S7-18-11]
RIN 3235-AL15

Nationally Recognized Statistical Rating Organizations

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rules.

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SUMMARY: In accordance with the Dodd-Frank Wall Street Reform and
Consumer Protection Act (the ``Dodd-Frank Act'') and to enhance
oversight, the Securities and Exchange Commission (``Commission'') is
proposing amendments to existing rules and new rules that would apply
to credit rating agencies registered with the Commission as nationally
recognized statistical rating organizations (``NRSROs''). In addition,
in accordance with the Dodd-Frank Act, the Commission is proposing a
new rule and form that would apply to providers of third-party due
diligence services for asset-backed securities. Finally, the Commission
is proposing amendments to existing rules and a new rule that would
implement a requirement added by the Dodd-Frank Act that issuers and
underwriters of asset-backed securities make publicly available the
findings and conclusions of any third-party due diligence report
obtained by the issuer or underwriter. The Commission is requesting
comment on the proposed rule amendments and new rules.

DATES: Comments should be received on or before August 8, 2011.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules.shtml); or
     Send an e-mail to<EMAIL_ADDRESS>Please include
File Number S7-18-11 on the subject line; or
     Use the Federal eRulemaking Portal (http://www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number S7-18-11. This file number
should be included on the subject line if e-mail is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's Internet Web site (http://www.sec.gov/rules.shtml).
Comments are also available for public inspection and copying in the
Commission's Public Reference Room, 100 F Street NE., Washington, DC
20549. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
publicly available.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate
Director, at<PHONE_NUMBER>; Thomas K. McGowan, Deputy Associate
Director, at<PHONE_NUMBER>; Randall W. Roy, Assistant Director, at
(202) 551-5522; Raymond A. Lombardo, Branch Chief, at<PHONE_NUMBER>;
Rose Russo Wells, Senior Counsel, at<PHONE_NUMBER>; Joseph I.
Levinson, Special Counsel, at<PHONE_NUMBER>; or Timothy C. Fox,
Special Counsel, at<PHONE_NUMBER>; Division of Trading and Markets;
or, with respect to the proposals for issuers and underwriters of
asset-backed securities, Eduardo A. Aleman, Special Counsel, Division
of Corporation Finance at<PHONE_NUMBER>; Securities and Exchange
Commission, 100 F Street NE., Washington, DC 20549-7010.

SUPPLEMENTARY INFORMATION: The Commission, with respect to NRSROs, is
proposing amendments to rules 17 CFR 232.101 (``Rule 101 of Regulation
S-T''), 17 CFR 232.201 (``Rule 201 of Regulation S-T''), 17 CFR
240.17g-1 (``Rule 17g-1''), 17 CFR 240.17g-2 (``Rule 17g-2''), 17 CFR
240.17g-3 (``Rule 17g-3''), 17 CFR 240.17g-5 (``Rule 17g-5''), 17 CFR
240.17g-6 (``Rule 17g-6''), 17 CFR 240.17g-7 (``Rule 17g-7''), 17 CFR
249b.300 (``Form NRSRO''), and proposing new rules 17 CFR 240.17g-8
(``Rule 17g-8'') and 17 CFR 240.17g-9 (``Rule 17g-9'').
    In addition, the Commission, with respect to providers of third-
party due diligence services for asset-backed securities, is proposing
new rules 17 CFR 240.17g-10 (``Rule 17g-10'') and 17 CFR 249b.400
(``Form ABS Due Diligence-15E'').
    Finally, the Commission, with respect to issuers and underwriters
of asset-backed securities, is proposing amendments to 17 CFR 232.314
(``Rule 314 of Regulation S-T'') and 17 CFR 249.1400 (``Form ABS
15G''), and proposing new rule 17 CFR 240.15Ga-2 (``Rule 15Ga-2'').

I. Background

    Title IX, Subtitle C of the Dodd-Frank Act,\1\ ``Improvements to
the Regulation of Credit Rating Agencies,'' among other things,
establishes new self-executing requirements applicable to NRSROs,
requires certain studies,\2\ and requires that the Commission adopt
rules applicable to NRSROs in a number of areas.\3\ The NRSRO
provisions in the

Dodd-Frank Act augment the Credit Rating Agency Reform Act of 2006 (the
``Rating Agency Act of 2006''), which established a registration and
oversight program for NRSROs through self-executing provisions added to
the Exchange Act and implementing rules adopted by the Commission under
the Exchange Act as amended by the Rating Agency Act of 2006.\4\ Title
IX, Subtitle C of the Dodd-Frank Act also provides that the Commission
shall prescribe the format of a certification that providers of third-
party due diligence services would need to provide to each NRSRO
producing a credit rating for an asset-backed security to which the due
diligence services relate.\5\ Finally, Title IX, Subtitle C of the
Dodd-Frank Act establishes a new requirement for issuers and
underwriters of asset-backed securities to make publicly available the
findings and conclusions of any third-party due diligence report
obtained by the issuer or underwriter.\6\
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    \1\ Public Law 111-203, 124 Stat. 1376, H.R. 4173 (July 21,
2010).
    \2\ See Public Law 111-203 Sec. Sec.  939, 939D-939F. On
December 17, 2010, the Commission issued a request for comments to
inform a required study on standardizing credit ratings terminology.
See Credit Rating Standardization Study, Securities Exchange Act of
1934 (``Exchange Act'') Release No. 34-63573 (December 17, 2010). On
May 10, 2011, the Commission issued a request for comments to assist
it in carrying out a required study on, among other matters, the
feasibility of establishing a system in which a public or private
utility or a self-regulatory organization assigns NRSROs to
determine credit ratings for structured finance products. See
Solicitation of Comment to Assist in Study on Assigned Credit
Ratings, Exchange Act Release No. 64456 (May 10, 2011). The
Commission also is required to conduct a study of the independence
of NRSROs and how that independence affects the ratings issued by
NRSROs. The Comptroller General of the United States is required to
conduct a study on alternative means for compensating NRSROs in
order to create incentives to provide more accurate credit ratings
as well as a study on the feasibility and merits of creating an
independent professional organization for rating analysts employed
by NRSROs.
    \3\ See Public Law 111-203 Sec. Sec.  931-939H. In addition,
Title IX, Subtitle D, ``Improvements to the Asset-Backed
Securitization Process,'' contains Section 943, which provides that
the Commission shall adopt rules, within 180 days, requiring an
NRSRO to include in any report accompanying a credit rating of an
asset-backed security a description of the representations,
warranties, and enforcement mechanisms available to investors and
how they differ from the representations, warranties, and
enforcement mechanisms in issuances of similar securities. See
Public Law 111-203 Sec.  943. On January 20, 2011, the Commission
adopted Rule 17g- 7 to implement Section 943. See Disclosure for
Asset-Backed Securities Required by Section 943 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act, Securities Act of
1933 (``Securities Act'') Release No. 9175 (Jan. 20, 2011), 76 FR
4489 (Jan. 26, 2011) and 17 CFR 240.17g-7. Prior to enactment of the
Dodd-Frank Act and the adoption of Rule 17g-7, the Commission
proposed a different rule to be codified at 17 CFR 240.17g-7. See
Proposed Rules for Nationally Recognized Statistical Rating
Organizations, Exchange Act Release No. 57967 (June 16, 2008), 73 FR
36212 (June 25, 2008). This proposed rule would have required an
NRSRO to publish a report containing certain information with the
publication of a credit rating for a structured finance product or,
as an alternative, use ratings symbols for structured finance
products that differentiate them from the credit ratings for other
types of debt securities. Id. In November 2009, the Commission
announced it was deferring consideration of action on the proposal
and separately proposed a different rule to be codified at 17 CFR
240.17g-7 that would have required an NRSRO to annually disclose
certain information. See Proposed Rules for Nationally Recognized
Statistical Rating Organizations Exchange Act Release No. 61051
(Nov. 23, 2009), 74 FR 63866 (Dec. 4, 2009). Although the Commission
adopted Rule 17g-7 on January 20, 2011 to implement Section 943 of
the Dodd-Frank Act, the November 23, 2009 proposal remains
outstanding.
    \4\ See Public Law 109-291 (2006). The Rating Agency Act of
2006, among other things, amended Section 3 of the Exchange Act to
add definitions, added Section 15E to the Exchange Act to establish
self-executing requirements on NRSROs and provide the Commission
with the authority to implement a registration and oversight program
for NRSROs, amended Section 17 of the Exchange Act to provide the
Commission with recordkeeping, reporting, and examination authority
over NRSROs, and amended Section 21B(a) of the Exchange Act to
provide the Commission with the authority to assess penalties in
administrative proceedings instituted under Section 15E of the
Exchange Act. See Public Law 109-291 Sec. Sec.  3 and 4 and 15
U.S.C. 78c, 78o-7, 78q, and 78u-2. The Commission adopted rules to
implement a registration and oversight program for NRSROs in June
2007. See Oversight of Credit Rating Agencies Registered as
Nationally Recognized Statistical Rating Organizations, Exchange Act
Release No. 55857 (June 5, 2007), 72 FR 33564 (June 18, 2007). The
implementing rules were Form NRSRO, Rule 17g-1, Rule 17g-2, Rule
17g-3, Rule 17g-4, Rule 17g-5, and Rule 17g-6. The Commission has
twice adopted amendments to some of these rules. See Amendments to
Rules for Nationally Recognized Statistical Rating Organizations,
Exchange Act Release No. 59342 (Feb. 2, 2009), 74 FR 6456 (Feb. 9,
2009) and Amendments to Rules for Nationally Recognized Statistical
Rating Organizations, Exchange Act Release No. 61050 (Nov. 23,
2009), 74 FR 63832 (Dec. 4, 2009). The Commission also has proposed
further amendments to these rules, which remain pending. See
Proposed Rules for Nationally Recognized Statistical Rating
Organizations, 74 FR 63866 (Dec. 4, 2009). In addition, as noted
above, the Commission adopted Rule 17g-7 on January 20, 2011.
    \5\ See Public Law 111-203 Sec.  932(a)(8) adding new paragraph
(s)(4)(C) to Section 15E of the Exchange Act. 15 U.S.C. 78o-
7(s)(4)(C).
    \6\ See Public Law 111-203 Sec.  932(a)(8) adding new paragraph
(s)(4)(A) to Section 15E of the Exchange Act. 15 U.S.C. 78o-
7(s)(4)(A).
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II. The Proposed New Rules and Rule Amendments

    The Commission's proposed rule amendments and proposed new rules to
implement Title IX, Subtitle C of the Dodd-Frank Act are described
below.\7\
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    \7\ As used throughout this release, the term ``category'' of
credit rating refers to a distinct level in a rating scale
represented by a unique symbol, number, or score. For example, if a
rating scale consists of symbols (e.g., AAA, AA, A, BBB, BB, B, CCC,
CC, and C), each unique symbol would represent a category in the
rating scale. Similarly, if a rating scale consists of numbers
(e.g., 1, 2, 3, 4, 5, 6, 7, 8, and 9), each number would represent a
category in the rating scale. Each category also represents a
``notch'' in the rating scale. In addition, some NRSRO rating scales
attach additional symbols or numbers to the symbols representing
categories in order to denote gradations within a category. For
example, a rating scale may indicate gradations within a category by
attaching a plus or a minus or a number to a rating symbol. For
example, AA+, AA, and AA- or AA1, AA2, and AA3 would be three
gradations within the AA category. If a rating scale has gradations
within a category, each category and gradation within a category
would constitute a ``notch'' in the rating scale. For example, the
following symbols would each represent a notch in the rating scale
in descending order: AAA, AA+, AA, AA-, A+, A, A-, BBB+, BBB, BBB-,
BB+, BB, BB-, CCC+, CCC, CCC-, CC, C and D. Furthermore, for the
purposes of this release, changing a credit rating (e.g., upgrading
or downgrading the credit rating) means assigning a credit rating at
a different notch in the rating scale (e.g., downgrading an obligor
assigned an AA rating to an AA- rating or an A+ rating). A ``rating
action'' for the purposes of this release does not necessarily mean
changing a credit rating. A rating action is taken when an NRSRO
issues an expected or preliminary credit rating before it issues an
initial credit rating, issues an initial credit rating, upgrades an
existing credit rating, downgrades an existing credit rating
(including to a default category), places an existing credit rating
on credit watch or review (meaning the NRSRO is actively evaluating
whether to change the credit rating), affirms (or confirms) an
existing credit rating (meaning the NRSRO announces that it will not
change the credit rating), or withdraws a credit rating.
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A. Internal Control Structure

1. Self-Executing Requirement
    Section 932(a)(2)(B) of the Dodd-Frank Act added paragraph (3) to
Section 15E(c) of the Exchange Act.\8\ Section 15E(c)(3)(A) requires an
NRSRO to ``establish, maintain, enforce, and document an effective
internal control structure governing the implementation of and
adherence to policies, procedures, and methodologies for determining
credit ratings, taking into consideration such factors as the
Commission may prescribe, by rule.'' \9\ While Section 15E(c)(3)(A)
provides that the Commission ``may'' prescribe factors an NRSRO would
need to take into consideration with respect to an internal control
structure governing the implementation of and adherence to policies,
procedures, and methodologies for determining credit ratings (an
``internal control structure''), the requirement that an NRSRO
``establish, maintain, enforce, and document an effective internal
control structure'' is self-executing.\10\ Consequently, an NRSRO must
adhere to this self-executing provision irrespective of whether the
Commission prescribes factors the NRSRO must take into
consideration.\11\
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    \8\ See Public Law 111-203 Sec.  932(a)(2)(B) and 15 U.S.C. 78o-
7(c)(3)(A).
    \9\ Id.
    \10\ Id.
    \11\ Id.
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    The Commission preliminarily believes it would be appropriate at
this time to defer prescribing factors an NRSRO must take into
consideration with respect to its internal control structure. Deferring
rulemaking would provide the Commission with the opportunity, through
the NRSRO examination process and, as discussed below, the submission
of annual reports by the NRSROs, to review how the NRSROs have complied
with this self-executing requirement.\12\ This review could inform any
future rulemaking the Commission may initiate. Nonetheless, the
Commission is requesting extensive comment below on whether it would be
appropriate as part of this rulemaking to prescribe factors. Based on
the comments received, the Commission may decide to prescribe by rule
or identify through guidance the factors an NRSRO would need to
consider with respect to its internal control structure.
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    \12\ Section 923(a)(8) of the Dodd-Frank Act struck existing
Section 15E(p) of the Exchange Act, which related to the date of
applicability of the Rating Agency Act of 2006 and added new Section
15E(p). See Public Law 111-203 Sec.  932(a)(8). New Section
15E(p)(3) of the Exchange Act requires, among other things, the
Commission staff to conduct an examination of each NRSRO at least
annually. See 15 U.S.C. 78o-7(p)(3). The Commission staff intends to
conduct such annual statutory examinations on a cycle based on the
Commission's fiscal year. The staff intends to conduct the first
annual statutory examination of a newly registered NRSRO in the
annual cycle following its registration.
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Request for Comment
    The Commission generally requests comment on all aspects of Section
15E(c)(3)(A) of the Exchange Act. The Commission also seeks comment on
the following:
    1. Should the Commission, as part of this rulemaking initiative,
prescribe factors that an NRSRO would need to take into consideration
when establishing, maintaining, enforcing, and documenting an effective
internal control structure governing the implementation of and
adherence to policies, procedures, and methodologies for determining
credit ratings? For example, can the objectives of the self-executing
requirement in Section 15E(c)(3)(A) of the Exchange Act be adequately
achieved by NRSROs if the Commission does not prescribe factors?

    2. Alternatively, should the Commission defer rulemaking in order
to review through examination and monitoring the effectiveness of the
internal control structures each NRSRO establishes, maintains,
enforces, and documents pursuant to Section 15E(c)(3)(A) of the
Exchange Act? For example, would it be more appropriate for the
Commission to evaluate through examination and the annual reports
discussed below in Section II.A.3 of this release whether there is a
need to prescribe factors and, if such a need is identified,
incorporate in rulemaking or guidance best practices identified through
examination and NRSRO reporting?
    3. If appropriate to prescribe factors now, should the factors
address all elements of the self-executing requirement in Section
15E(c)(3)(A) of the Exchange Act (i.e., the establishment, maintenance,
enforcement, and documentation of the internal control structure) or
should the factors focus on the design (i.e., establishment) of the
internal control structure or one of the other elements or a
combination of some of the elements?
    4. If appropriate to prescribe factors now for the establishment of
an internal control structure, what should those factors be? For
example, should the Commission prescribe any of the factors identified
in the sub-paragraphs below? In analyzing these potential factors,
commenters should address the potential advantages, disadvantages,
benefits, and costs that could result if the Commission prescribed any
of the factors, as well as the potential effectiveness of the controls
and any practical issues related to implementing them.
    a. Controls reasonably designed to ensure that a newly developed
methodology or proposed update to an in-use methodology for determining
credit ratings is subject to an appropriate review process (e.g., by
persons who are independent from the persons that developed the
methodology or methodology update) and to management approval prior to
the new or updated methodology being employed by the NRSRO to determine
credit ratings; \13\
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    \13\ Section 15E(t)(3)(A) of the Exchange Act contains a self-
executing provision requiring that the board of directors of the
NRSRO shall ``oversee'' the ``establishment, maintenance, and
enforcement of policies and procedures for determining credit
ratings.'' See 15 U.S.C. 78o-7(t)(3)(A). At the same time, Section
15E(r) of the Exchange Act requires the Commission to adopt rules
``to ensure that credit ratings are determined using procedures and
methodologies, including qualitative and quantitative data and
models'' that are approved by the board of the NRSRO. See 15 U.S.C.
78o-7(r)(1)(A).
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    b. Controls reasonably designed to ensure that a newly developed
methodology or update to an in-use methodology for determining credit
ratings is disclosed to the public for consultation prior to the new or
updated methodology being employed by the NRSRO to determine credit
ratings, that the NRSRO makes comments received as part of the
consultation publicly available, and that the NRSRO considers the
comments before implementing the methodology;
    c. Controls reasonably designed to ensure that in-use methodologies
for determining credit ratings are periodically reviewed (e.g., by
persons who are independent from the persons who developed and/or use
the methodology) in order to analyze whether the methodology should be
updated;
    d. Controls reasonably designed to ensure that market participants
have an opportunity to provide comment on whether in-use methodologies
for determining credit ratings should be updated, that the NRSRO makes
any such comments received publicly available, and that the NRSRO
considers the comments;
    e. Controls reasonably designed to ensure that newly developed or
updated quantitative models proposed to be incorporated into a credit
rating methodology are evaluated and validated prior to being put into
use;
    f. Controls reasonably designed to ensure that quantitative models
incorporated into in-use credit rating methodologies are periodically
reviewed and back-tested;
    g. Controls reasonably designed to ensure that an NRSRO engages in
analysis before commencing the rating of a class of obligors,
securities, or money market instruments the NRSRO has not previously
rated to determine whether the NRSRO has sufficient competency, access
to necessary information, and resources to rate the type of obligor,
security, or money market instrument;
    h. Controls reasonably designed to ensure that an NRSRO engages in
analysis before commencing the rating of an ``exotic'' or ``bespoke''
type of obligor, security, or money market instrument to review the
feasibility of determining a credit rating;
    i. Controls reasonably designed to ensure that measures (e.g.,
statistics) are used to evaluate the performance of credit ratings as
part of the review of in-use methodologies for determining credit
ratings to analyze whether the methodologies should be updated or the
work of the analysts employing the methodologies should be reviewed;
    j. Controls reasonably designed to ensure that, with respect to
determining credit ratings, the work and conclusions of the lead credit
analyst developing an initial credit rating or conducting surveillance
on an existing credit rating is reviewed by other analysts,
supervisors, or senior managers before a rating action is formally
taken (e.g., having the work reviewed through a rating committee
process);
    k. Controls reasonably designed to ensure that a credit analyst
documents the steps taken in developing an initial credit rating or
conducting surveillance on an existing credit rating with sufficient
detail to permit an after-the-fact review or internal audit of the
rating file to analyze whether the analyst adhered to the NRSRO's
procedures and methodologies for determining credit ratings;
    l. Controls reasonably designed to ensure that the NRSRO conducts
periodic reviews or internal audits of rating files to analyze whether
analysts adhere to the NRSRO's procedures and methodologies for
determining credit ratings; or
    m. Any other factors that commenters identify and explain.
    5. If appropriate to prescribe factors now for the maintenance of
an internal control structure, what should those factors be? For
example, should the Commission prescribe any of the factors identified
in the sub-paragraphs below? In analyzing these potential factors,
commenters should address the potential advantages, disadvantages,
benefits, and costs that could result if the Commission prescribed any
of the factors, as well as the potential effectiveness of the controls
and any practical issues related to implementing them.
    a. Controls reasonably designed to ensure that the NRSRO conducts
periodic reviews of whether it has devoted sufficient resources to
implement and operate the documented internal control structure as
designed;
    b. Controls reasonably designed to ensure that the NRSRO conducts
periodic reviews or ongoing monitoring to evaluate the effectiveness of
the internal control structure and whether it should be updated;
    c. Controls designed to ensure that any identified deficiencies in
the internal control structure are assessed and addressed on a timely
basis;
    d. Any other factors that commenters identify and explain.
    6. If appropriate to prescribe factors now for the enforcement of
an internal

control structure, what should those factors be? For example, should
the Commission prescribe any of the factors identified in the sub-
paragraphs below? In analyzing these potential factors, commenters
should address the potential advantages, disadvantages, benefits, and
costs that could result if the Commission prescribed any of the
factors, as well as the potential effectiveness of the controls and any
practical issues related to implementing them.
    a. Controls designed to ensure that additional training is provided
or discipline taken with respect to employees who fail to adhere to
requirements imposed by the internal control structure;
    b. Controls designed to ensure that a process is in place for
employees to report failures to adhere to the internal control
structure; or
    c. Any other factors that commenters identify and explain?
    7. If appropriate to prescribe factors now for the documentation of
an internal control structure, what should those factors be? For
example, should there be a factor relating to the level of written
detail about the internal control structure that should be documented?
Are there other factors that should be considered? What potential
advantages, disadvantages, benefits, and costs would result if the
Commission prescribed any such factors?
    8. Identify any other factors that an NRSRO should consider when
establishing, maintaining, enforcing, and documenting an internal
control structure. Explain the utility of any factors identified as
well as the potential advantages, disadvantages, benefits, and costs
that could result if the Commission prescribed any such factors.
2. Proposed Amendment to Rule 17g-2
    As noted above, Section 15E(c)(3)(A) of the Exchange Act requires
an NRSRO, among other things, to document its internal control
structure.\14\ Thus, the statute itself requires the NRSRO to make this
record.\15\ However, the statute does not prescribe how an NRSRO would
need to maintain this record.\16\ The Commission preliminarily believes
this record should be subject to the same recordkeeping requirements
applicable to other records an NRSRO is required to retain pursuant to
the NRSRO recordkeeping rule--Rule 17g-2.\17\ Consequently, the
Commission proposes adding new paragraph (b)(12) to Rule 17g-2 to
identify the internal control structure an NRSRO, among other things,
must document pursuant to Section 15E(c)(3)(A) of the Exchange Act as a
record that must be retained.\18\ As a result, the various retention
and production requirements of paragraphs (c), (d), (e), and (f) of
Rule 17g-2 would apply to the documented internal control
structure.\19\
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    \14\ See 15 U.S.C. 78o-7(c)(3)(A).
    \15\ Id.
    \16\ Id. For example, it does not prescribe how long the
document must be retained.
    \17\ 17 CFR 240.17g-2(c), (d), (e), and (f). Section 17(a)(1) of
the Exchange Act requires an NRSRO to make and keep such records,
and make and disseminate such reports, as the Commission prescribes
by rule as necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the Exchange
Act. 15 U.S.C. 78q(a)(1). The Commission preliminarily believes it
would be necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the Exchange
Act to apply the record retention requirements of Rule 17g-2 to the
internal control structure required pursuant to Section 15E(c)(3)(A)
of the Exchange Act (15 U.S.C. 78o-7(c)(3)(A)). See Oversight of
Credit Rating Agencies Registered as Nationally Recognized
Statistical Rating Organizations, 72 FR at 33582 (June 18, 2007)
(``The Commission designed [Rule 17g-2] based on its experience with
recordkeeping rules for other regulated entities. These other books
and records rules have proven integral to the Commission's investor
protection function because the preserved records are the primary
means of monitoring compliance with applicable securities laws. Rule
17g-2 is designed to ensure that an NRSRO makes and retains records
that will assist the Commission in monitoring, through its
examination authority, whether an NRSRO is complying with the
provisions of Section 15E of the Exchange Act and the rules
thereunder.'') (footnotes omitted).
    \18\ See proposed new paragraph (b)(12) of Rule 17g-2.
    \19\ See 17 CFR 240.17g-2(c), (d), (e) and (f). Paragraph (c) of
Rule 17g-2 requires an NRSRO to retain the records identified in
paragraphs (a) and (b) for three years after the date the record is
made or received. 17 CFR 240.17g-2(c). Paragraph (d) requires, among
other things, that an NRSRO maintain each record identified in
paragraphs (a) and (b) in a manner that makes the original record or
copy easily accessible to the principal office of the NRSRO. 17 CFR
240.17g-2(d). Paragraph (e) sets forth the requirements that apply
when an NRSRO uses a third-party custodian to maintain its records.
17 CFR 240.17g-2(e). Paragraph (f) requires an NRSRO to promptly
furnish the Commission with legible, complete, and current copies,
and, if specifically requested, English translations, of the records
identified in paragraphs (a) and (b), or any other records of the
NRSRO subject to examination under Section 17(b) of the Exchange
Act. See 17 CFR 240.17g-2(f); see also 15 U.S.C. 78q(b).
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Request for Comment
    The Commission generally requests comment on all aspects of
proposed new paragraph (b)(12) of Rule 17g-2.
3. Proposed Amendments to Rule 17g-3
    Section 15E(c)(3)(B) of the Exchange Act provides that the
Commission shall prescribe rules requiring an NRSRO to ``submit'' an
annual internal controls report to the Commission, which shall contain:
(1) A description of the responsibility of management in establishing
and maintaining an effective internal control structure; (2) an
assessment of the effectiveness of the internal control structure; and
(3) the attestation of the chief executive officer (``CEO'') or
equivalent individual.\20\ Rule 17g-3 requires an NRSRO to furnish
annual reports to the Commission.\21\ In particular, paragraph (a) of
Rule 17g-3 requires an NRSRO to furnish five or, in some cases, six
separate reports within 90 days after the end of the NRSRO's fiscal
year and identifies the reports that must be furnished.\22\ The first
report--the NRSRO's financial statements--must be audited; the
remaining reports may be unaudited.\23\ Paragraph (b) of Rule 17g-3
provides that the NRSRO must attach to the reports a signed statement
by a duly authorized person that the person has responsibility for the
reports and, to the best knowledge of the person, the reports fairly
present, in all material respects, the information contained in the
reports.\24\
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    \20\ See 15 U.S.C. 78o-7(c)(3)(B)(i)-(iii).
    \21\ See 17 CFR 240.17g-3.
    \22\ See 17 CFR 240.17g-3(a)(1)-(6).
    \23\ Id.
    \24\ See 17 CFR 240.17g-3(b).
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    The Commission proposes amending paragraphs (a) and (b) of Rule
17g-3 to implement the rulemaking mandated by Section 15E(c)(3)(B) of
the Exchange Act.\25\ The proposed amendment would add a new paragraph
(a)(7) to require an NRSRO to file an additional report--the report on
the NRSRO's internal control structure--with its annual submission of
reports pursuant to Rule 17g-3.\26\ As discussed above in Section
II.A.1 of this release, the Commission preliminarily believes it would
be appropriate at this time to defer prescribing factors an NRSRO must
take into consideration with respect to its internal control

structure. For similar reasons, the Commission preliminarily believes
it would be appropriate at this time to implement Sections
15E(c)(3)(B)(i) and (ii) of the Exchange Act through rule text that
closely mirrors the statute.\27\ Consequently, proposed new paragraph
(a)(7) would require that the internal control report contain: (1) a
description of the responsibility of management in establishing and
maintaining an effective internal control structure; and (2) an
assessment by management of the effectiveness of the internal control
structure.\28\ As is the case with the reports currently identified in
paragraphs (a)(2) through (a)(6) of Rule 17g-3, the report identified
in new paragraph (a)(7) would be unaudited.\29\ While the proposed rule
text closely mirrors the statutory text, the Commission is requesting
extensive comment below on whether it would be appropriate as part of
this rulemaking to provide more explanation in terms of the standards
to use in preparing the internal controls report and providing
information in the report. Based on the comments received, the
Commission may decide to prescribe by rule or identify through guidance
such standards.
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    \25\ See 15 U.S.C. 78o-7(c)(3)(B)(i)-(iii). In addition, as a
technical amendment, the Commission proposes to amend the title of
Rule 17g-3 to replace the words ``financial reports'' with the words
``financial and other reports.'' The Commission notes that the
report identified in paragraph (a)(6) of Rule 17g-3, the proposed
internal control report, and the compliance report discussed below
in Section II.K of this release are not financial in nature. The
Commission also proposes to add the word ``filed'' in the title of
Rule 17g-3. As discussed below in Section II.M.1 of this release,
the Commission is proposing amendments to Rules 17g-1 and 17g-3 to
treat certain submissions of Form NRSRO and the Rule 17g-3 annual
reports as being ``filed'' as opposed to being ``furnished'' to
conform to amendments the Dodd-Frank Act made to Section 15E of the
Exchange Act. See Public Law 111-203 Sec.  932(a). Specifically, the
reports identified in paragraphs (a)(1), (2), (3), (4), (5), (7) and
(8) of Rule 17g-3 would be ``filed'' and the report identified in
paragraph (a)(6) would be ``furnished.''
    \26\ See proposed new paragraph (a)(7) of Rule 17g-3.
    \27\ See 15 U.S.C. 78o-7(c)(3)(B)(i) and (ii).
    \28\ Compare 15 U.S.C. 78o-7(c)(3)(B)(i) and (ii) with proposed
new paragraphs (a)(7)(i) and (ii) of Rule 17g-3.
    \29\ See proposed new paragraph (a)(7) of Rule 17g-3.
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    Section 15E(c)(3)(B)(iii) of the Exchange Act provides that the
annual internal controls report must contain an attestation of the
NRSRO's CEO, or equivalent individual.\30\ Accordingly, the Commission
proposes amending paragraph (b) of Rule 17g-3 to require that the
NRSRO's chief executive officer, or, if the firm does not have a CEO,
an individual performing similar functions, provide a signed statement
that would need to be attached to the report.\31\
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    \30\ 15 U.S.C. 78o-7(c)(3)(B)(iii).
    \31\ See proposed amendments to paragraph (b) of Rule 17g-3. In
particular, the Commission proposes re-organizing existing paragraph
(b) of Rule 17g-3 into paragraphs (b)(1) and (b)(2). Paragraph
(b)(1) would contain the current requirement that the NRSRO must
attach to each of the annual reports required pursuant to paragraphs
(a)(1)-(6) a signed statement by a duly authorized person associated
with the NRSRO stating that the person has responsibility for the
financial reports and, to the best knowledge of the person, the
reports fairly present, in all material respects, the information
required to be contained in the report. Paragraph (b)(2) of Rule
17g-3 would require that the report on the NRSRO's internal control
structure be attested to by the NRSRO's CEO or an individual
performing similar functions. See proposed paragraph (b)(2) of Rule
17g-3.
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Request for Comment
    The Commission generally requests comment on all aspects of these
proposed amendments to paragraphs (a) and (b) of Rule 17g-3. The
Commission also seeks comment on the following:
    1. Is the requirement to provide a description of the
responsibility of management in establishing and maintaining an
effective internal control structure sufficiently explicit? If not, how
should the Commission modify proposed paragraph (a)(7) of Rule 17g-3 to
make the requirement more understandable? For example, should the
Commission provide guidance on how an NRSRO must describe the
responsibility of management in establishing and maintaining an
effective internal control structure? If so, what should that guidance
be? For example, are there existing frameworks that such guidance could
be modeled on?
    2. In terms of establishing an effective internal control
structure, what level of NRSRO management should have primary
responsibility for the design of the internal control structure and
what level of management should supervise the design of the internal
control structure? For example, should managers with direct
responsibility for supervising the personnel who use the policies,
procedures, and methodologies for determining credit ratings and the
personnel who conduct compliance reviews for adherence to those
policies, procedures, and methodologies design the internal control
structure and a committee of the NRSRO's most senior managers supervise
the design of the internal control structure? Should other management
or non-management levels of the NRSRO have responsibility for either of
these functions? In addition, Section 15E(t)(3)(C) of the Exchange Act
provides that the board of directors of the NRSRO shall ``oversee'' the
``effectiveness of the internal control system with respect to the
policies and procedures for determining credit ratings.'' \32\ How
should this statutorily mandated board responsibility be integrated
with the responsibility of the NRSRO's management to establish an
effective internal control structure?
---------------------------------------------------------------------------

    \32\ See 15 U.S.C. 78o-7(t)(3)(A).
---------------------------------------------------------------------------

    3. In terms of establishing an effective internal control
structure, should the Commission define the term ``internal control
structure governing the implementation of and adherence to policies,
procedures, and methodologies for determining credit ratings''? In
terms of establishing an effective internal control structure, should
the Commission further define the term ``internal control structure
governing the implementation of and adherence to policies, procedures,
and methodologies for determining credit ratings''? If so, how should
that term be further defined? \33\ Provide suggested rule text and
supporting analysis.
---------------------------------------------------------------------------

    \33\ The term ``internal control'' has been defined in other
contexts. For example, the Commission has defined internal control
over financial reporting. See 17 CFR 240.13a-15(f).
---------------------------------------------------------------------------

    4. In terms of establishing an effective internal control
structure, should the Commission prescribe a standard in terms of the
design? If so, what standard would be appropriate? For example, should
the internal control structure be ``reasonably designed'' to achieve
its objectives (a standard required by Sections 15E(g) and (h) of the
Exchange Act with respect to policies and procedures of an NRSRO to
address, respectively, the misuse of material nonpublic information and
conflicts of interest)? \34\ Conversely, is the proposed requirement
that the internal control structure be ``effective'' a sufficient
standard?
---------------------------------------------------------------------------

    \34\ See 15 U.S.C. 78o-7(g) and (h).
---------------------------------------------------------------------------

    5. In terms of maintaining an effective internal control structure,
what level of NRSRO management should have primary responsibility for
monitoring the operation of the internal control structure and the
NRSRO's adherence to the internal control structure? For example,
should managers with direct responsibility for supervising the
personnel who use the policies, procedures, and methodologies for
determining credit ratings and the personnel who conduct compliance
reviews for adherence to those policies, procedures, and methodologies
have day-to-day responsibility for monitoring the operation of the
internal control structure and the NRSRO's adherence to the internal
control structure? Should other management or non-management levels of
the NRSRO have responsibility for either of these functions? For
example, should the personnel responsible for monitoring the operation
of the internal control structure and the NRSRO's adherence to the
internal control structure generate periodic (weekly, monthly,
quarterly, and/or annual) reports that are provided to the NRSRO's most
senior managers and the board about the internal control structure? If
so, what information should be contained in those reports? In addition,
Section 15E(t)(3)(C) of the Exchange Act provides that the board of
directors of the NRSRO shall ``oversee'' the ``effectiveness of the
internal control system with respect to the policies and

procedures for determining credit ratings.'' \35\ How should this
statutorily mandated board responsibility be integrated with the
responsibility of the NRSRO's management to maintain an effective
internal control structure?
---------------------------------------------------------------------------

    \35\ See 15 U.S.C. 78o-7(t)(3)(A).
---------------------------------------------------------------------------

    6. Is the requirement to provide an assessment by management of the
effectiveness of the internal control structure sufficiently explicit?
If not, how should the Commission modify proposed paragraph (a)(7) of
Rule 17g-3 to make the requirement more understandable? For example,
given that the NRSRO needs to maintain the internal control structure
(i.e., keep it in operation), should the Commission clarify that the
assessment should address the effectiveness of the internal control
structure during the entire fiscal year covered by the report?
    7. In terms of reporting management's assessment of the
effectiveness of the internal control structure, should the Commission
provide guidance on how an NRSRO must assess the effectiveness of the
internal control structure, such as evaluative criteria or standards?
If so, what should those criteria or standards be? For example, should
the Commission require that management's assessment of the
effectiveness of the internal control structure be based on procedures
sufficient to evaluate the design of the internal control structure and
test its operating effectiveness?
    8. In terms of management's assessment of the effectiveness of the
internal control structure, should the Commission define the conditions
that preclude management from concluding that the internal control
structure is effective? If so, how should an ineffective internal
control structure be defined? For example, should management be
precluded from concluding that the internal control structure is
effective if there are one or more instances of ``material weaknesses''
in the internal control structure? If one or more instances of
``material weaknesses'' should preclude management from concluding that
its internal control structure is effective, then should the Commission
define ``material weakness''? If so, how should the term ``material
weakness'' be defined? If management cannot conclude that the internal
control structure is effective, what corrective action or sanctions
should be imposed on the NRSRO?
    9. In terms of reporting management's assessment of the
effectiveness of the internal control structure, should the Commission
provide guidance regarding the topics to be addressed in the report? If
so, what should that guidance be? For example, if the Commission
prescribes factors that an NRSRO should take into consideration in
establishing, maintaining, enforcing, and documenting its internal
control structure, should the report specifically reference those
factors? In addition, should the report identify or describe the
framework management used to conduct the evaluation of the
effectiveness of the internal control structure? Moreover, should the
report identify deficiencies found during the assessment process? If
so, should all deficiencies be identified or only those which preclude
management from concluding that the internal control structure is
effective? Furthermore, should the Commission require that the report
disclose whether there were any significant changes in the internal
control structure or other factors that could significantly affect the
internal control structure subsequent to the date of the evaluation,
including any corrective actions in response to any material weaknesses
found during the evaluation?
    10. In terms of reporting management's assessment of the
effectiveness of the internal control structure, should the report
identify any fraud, significant errors, or previously undisclosed
conflicts of interest identified during the assessment of the
effectiveness of the internal control structure that could have a
material effect on the integrity of the NRSRO's procedures and
methodologies for determining credit ratings? What other disclosures
should the report contain?
    11. Should an NRSRO be required to maintain evidential matter,
including documentation, to provide reasonable support for management's
assessment of the effectiveness of the internal control structure that
could be used by Commission examination staff to review the adequacy of
the assessment? In this regard, should the Commission identify specific
objectives of an internal control structure that the evidential matter
would need to support? For example, should the evidential matter
provide reasonable support for an assessment that the internal control
structure is designed to effectively prevent or detect failures of the
NRSRO to adhere to its policies, procedures, and methodologies for
determining credit ratings? If such specific objectives should be
identified, describe them and identify the evidential matter that could
be retained to allow the Commission examination staff to review the
adequacy of the NRSRO's assessment of the effectiveness of the internal
control structure in achieving the objective.
    12. With respect to proposed paragraph (b)(2) of Rule 17g-3, should
the Commission provide more guidance on the type of management
responsibilities that would qualify an individual as one who performs
functions similar to a CEO? If so, what are those types of
responsibilities?
    13. Should the Commission require the internal control report to be
filed separately from the Rule 17g-3 annual reports (which are kept
confidential to the extent permitted by law) and, instead, require the
internal control report to be disclosed to the public on, for example,
the Commission's Electronic Data Gathering, Analysis, and Retrieval
(``EDGAR'') system? What would be the benefits and costs of requiring
the public disclosure of the report?
    14. If it would be appropriate to make the report public, should
the Commission prescribe a form for the report? If so, what information
should the form require the NRSRO to provide in the disclosure? What
would the form look like? Could any of the Commission's current forms
serve as a model? If so, identify the forms and explain how they could
be tailored to require an NRSRO to provide information about its
internal control structure.

B. Conflicts of Interest Relating to Sales and Marketing

    Section 932(a)(4) of the Dodd-Frank Act added new paragraph (3) to
Section 15E(h) of the Exchange Act.\36\ Section 15E(h)(3)(A) of the
Exchange Act provides that the Commission shall issue rules to prevent
the sales and marketing considerations of an NRSRO from influencing the
production of credit ratings by the NRSRO.\37\ Section 15E(h)(3)(B) of
the Exchange Act provides that the Commission's rules must contain two
additional provisions.\38\ First, Section 15E(h)(3)(B)(i) requires that
the Commission's rules shall provide for exceptions for small NRSROs
with respect to which the Commission determines that the separation of
the production of ratings and sales and marketing activities is not
appropriate.\39\ Second, Section 15E(h)(3)(B)(ii) requires that the
Commission's rules shall provide for the suspension or revocation of
the registration of an NRSRO if the Commission finds, on the record,
after notice and opportunity for a hearing,

that: (1) The NRSRO has committed a violation of a rule issued under
Section 15E(h) of the Exchange Act; and (2) the violation affected a
rating.\40\
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    \36\ Public Law 111-203 Sec.  932(a)(4) and 15 U.S.C. 78o-
7(h)(3).
    \37\ 15 U.S.C. 78o-7(h)(3)(A).
    \38\ 15 U.S.C. 78o-7(h)(3)(B)(i) and (ii).
    \39\ 15 U.S.C. 78o-7(h)(3)(B)(i).
    \40\ 15 U.S.C. 78o-7(h)(3)(B)(ii).
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    The Commission proposes to implement Sections 15E(h)(3)(A), (B)(i),
and (B)(ii) of the Exchange Act by amending the NRSRO conflict of
interest rule--Rule 17g-5.\41\ The proposals would amend the rule by:
(1) identifying a new prohibited conflict in paragraph (c) of the rule;
(2) adding a new paragraph (f) setting forth the finding the Commission
would need to make in order to grant a small NRSRO an exemption from
the prohibition; and (3) adding a new paragraph (g) setting forth the
standard for suspending or revoking an NRSRO's registration for
violating a rule adopted under Section 15E(h) of the Exchange Act.
---------------------------------------------------------------------------

    \41\ 17 CFR 240.17g-5. The Commission adopted and subsequently
amended Rule 17g-5 pursuant, in part, to authority in Section
15E(h)(2) of the Exchange Act (15 U.S.C. 78o-7(h)(2)). See Oversight
of Credit Rating Agencies Registered as Nationally Recognized
Statistical Rating Organizations, 72 FR at 33595-33599 (June 18,
2007); Amendments to Rules for Nationally Recognized Statistical
Rating Organizations, 74 FR at 6465-6469 (Feb. 9, 2009); Amendments
to Rules for Nationally Recognized Statistical Rating Organizations,
74 FR at 63842-63850 (Dec. 4, 2009).
---------------------------------------------------------------------------

1. Proposed New Prohibited Conflict
    As noted above, Section 15E(h)(3)(A) of the Exchange Act provides
that the Commission shall issue rules to prevent the sales and
marketing considerations of an NRSRO from influencing the production of
ratings by the NRSRO.\42\ The Commission is proposing to implement this
provision by identifying a new conflict of interest in paragraph (c) of
Rule 17g-5.\43\ Paragraph (c) prohibits a person within an NRSRO (as
well as the NRSRO itself) \44\ from having any of the conflicts of
interest relating to the issuance or maintenance of a credit rating or
credit rating agency identified in the paragraph under all
circumstances (hereinafter the ``absolute prohibitions'').\45\ Proposed
new paragraph (c)(8) of Rule 17g-5 would identify a new absolute
prohibition; namely, one in which the NRSRO issues or maintains a
credit rating where a person within the NRSRO who participates in the
sales or marketing of a product or service of the NRSRO or a product or
service of a person associated with the NRSRO also participates in
determining or monitoring the credit rating, or developing or approving
procedures or methodologies used for determining the credit rating,
including qualitative or quantitative models.\46\
---------------------------------------------------------------------------

    \42\ 15 U.S.C. 78o-7(h)(3)(A).
    \43\ See proposed new paragraph (c)(8) of Rule 17g-5.
    \44\ See paragraph (d) of Rule 17g-5 defining ``person within an
NRSRO'' for purposes of the rule. 17 CFR 240.17g-5(d).
    \45\ See 17 CFR 240.17g-5(c)(1)-(7). These absolute prohibitions
are distinguished from the types of conflicts identified in
paragraph (b) of Rule 17g-5, which are prohibited unless the NRSRO
has taken the steps to address them set forth in paragraph (a) of
Rule 17g-5. See 17 CFR 240.17g-5(a) and (b).
    \46\ See proposed new paragraph (c)(8) of Rule 17g-5.
---------------------------------------------------------------------------

    The proposed new absolute prohibition would be designed to address
situations in which, for example, individuals within the NRSRO
responsible for selling its products and services could seek to
influence a specific credit rating to favor an existing or prospective
client or the development of a credit rating methodology to favor a
class of existing or prospective clients. With regard to methodologies,
the Commission notes that its staff found as part of the examination of
the activities of the three largest NRSROs in rating residential
mortgage-backed securities (``RMBS'') and collateralized debt
obligations (``CDOs'') linked to subprime mortgages that it appeared
``employees responsible for obtaining ratings business would notify
other employees, including those responsible for criteria development,
about business concerns they had related to the criteria.'' \47\ The
absolute prohibition in proposed paragraph (c)(8) of Rule 17g-5 would
be designed to insulate individuals within the NRSRO responsible for
the analytic function from such sales and marketing concerns and
pressures.
---------------------------------------------------------------------------

    \47\ See Summary Report of Issues Identified in the Commission
Staff's Examination of Select Credit Rating Agencies, Commission
(July 2008), pp. 25-26.
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of
proposed new paragraph (c)(8) of Rule 17g-5. The Commission also seeks
comment on the following:
    1. Would the proposed amendment impact existing governance
structures, reporting lines and internal organizations of NRSROs,
particularly smaller NRSROs? If so, provide specific information about
the nature and consequences of such impacts.
    2. Are there sales and marketing activities persons that
participate in determining credit ratings or developing or approving
procedures or methodologies used for determining credit ratings,
including qualitative or quantitative models, could participate in
without undermining the goal of proposed paragraph (a)(8) of Rule 17g-
5? If so, what types of activities? How could proposed new paragraph
(a)(8) of Rule 17g-5 be modified to retain an absolute prohibition and
at the same time not prohibit persons who participate in determining
credit ratings or developing or approving procedures or methodologies
used for determining credit ratings, including qualitative or
quantitative models, to participate in sales and marketing activities
that do not expose them to business concerns that could compromise
their analytical integrity?
    3. Should the Commission provide guidance on what constitutes a
sales and marketing activity? If so, how should the Commission define
``sales and marketing activities''? In addition, should the Commission
define what it means to ``participate in sales and marketing
activities''? Similarly, should the Commission define what it means to
``participate in developing or approving procedures and methodologies
used for determining credit ratings''? If so, how should the Commission
define these terms?
    4. Identify other requirements applicable to NRSROs that are
designed to address this conflict of interest.
2. Proposed Exemption for ``Small'' NRSROs
    Section 15E(h)(3)(B)(i) of the Exchange Act requires that the
Commission's rules under Section 15E(h)(3)(A) shall provide for
exceptions for small NRSROs with respect to which the Commission
determines that the separation of the production of ratings and sales
and marketing activities is not appropriate.\48\ To implement this
provision, the Commission is proposing to amend Rule 17g-5 by adding a
new paragraph (f).\49\ Proposed paragraph (f) would provide a mechanism
for a small NRSRO to apply in writing for an exemption from the
absolute prohibition proposed in new paragraph (c)(8).\50\ In
particular,

proposed new paragraph (f) of Rule 17g-5 would provide that upon
written application by an NRSRO, the Commission may exempt, either
conditionally or unconditionally or on specified terms and conditions,
such NRSRO from the provisions of paragraph (c)(8) of Rule 17g-5 if the
Commission finds that due to the small size of the NRSRO it is not
appropriate to require the separation within the NRSRO of the
production of credit ratings from sales and marketing activities and
such exemption is in the public interest.\51\
---------------------------------------------------------------------------

    \48\ See 15 U.S.C. 78o-7(h)(3)(B)(i).
    \49\ See proposed new paragraph (f) of Rule 17g-5.
    \50\ Section 36 of the Exchange Act provides that the
Commission, by rule, regulation, or order, may conditionally or
unconditionally exempt any person, security, or transaction, or any
class or classes of persons, securities or transactions from any
provision or provisions of the Exchange Act or any rule or
regulation thereunder, to the extent that such exemption is
necessary or appropriate in the public interest and is consistent
with the protection of investors. 17 U.S.C. 78mm. Consequently, an
NRSRO could request to be exempt from the proposed sales and
marketing prohibition pursuant to this more general authority in
Section 36. See id. Nonetheless, the Commission has adopted rules
providing mechanisms for registrants--such as broker-dealers--to
request an exemption from specific rule requirements. See, e.g., 17
CFR 240.15c3-1(b)(3); 17 CFR 240.15c3-3(k)(3); and 17 CFR 240.17a-
5(m)(3). The Commission preliminarily believes proposed paragraph
(f) of Rule 17g-5 should parallel such provisions.
    \51\ See proposed new paragraph (f) of Rule 17g-5.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the absolute prohibition
should apply to all NRSROs. However, the Commission notes that in some
cases the small size of an NRSRO could make a complete separation of
the sales and marketing function from the credit rating analytical
function inappropriate. For example, the NRSRO may not have enough
staff (or the resources to hire additional staff) to establish separate
functions. In such a case, the Commission would entertain requests for
relief. In granting such relief, the Commission may impose conditions
designed to preserve as much of the separation between these two
functions as possible.
Request for Comment
    The Commission generally requests comment on all aspects of
proposed new paragraph (f) of Rule 17g-5. The Commission also seeks
comment on the following:
    1. The Commission notes that Section 15E(h)(3)(A) of the Exchange
Act provides that the Commission shall issue rules to prevent the sales
and marketing considerations of an NRSRO from influencing the
production of credit ratings by the NRSRO. Section 15E(h)(3)(B)(i)
requires that the Commission's rules shall provide for exceptions for
small NRSROs with respect to which the Commission determines that the
separation of the production of ratings and sales and marketing
activities is not appropriate (emphasis added). Why would the
separation of the production of ratings from sales and marketing
activities be appropriate for NRSROs that are not small but might not
be appropriate for NRSROs that are small? For example, does the small
size of an NRSRO make the conflict less likely to influence ratings? If
so, why? Alternatively, could the small size of an NRSRO make the
application of the absolute prohibition impractical, thus preventing a
small credit rating agency from seeking registration or a small NRSRO
from maintaining its registration? If so, would the adverse impact on
competition outweigh the benefit of applying the absolute prohibition
to a small NRSRO? If so, explain how.
    2. Would the case-by-case approach proposed by the Commission
appropriately implement Section 15E(h)(3)(B)(i) of the Exchange Act? If
not, how should the proposal be modified? For example, should the
Commission prescribe an objective self-executing exemption from the
absolute prohibition in proposed paragraph (c)(8) of Rule 17g-5? For
example, should the exemption be automatic for ``small'' NRSROs? If so,
how should the Commission define a small NRSRO? For example, should the
definition be based on the total assets of the NRSRO? In this regard,
should the Commission adopt a rule that exempts any NRSRO that has
total assets of $5 million or less from the absolute prohibition given
that is how the Commission currently defines a small NRSRO for purposes
of the Regulatory Flexibility Act? \52\ How would such an exemption
work in practice? For example, would such a rule need to provide for a
transition period for an NRSRO that crosses the total asset threshold
to provide time to establish the separate sales and marketing function?
How long should such a transition period be? For example, should it be
90, 120, 180 or some other number of days after the required filing
date of the NRSRO's audited financial statements indicating the
threshold was crossed are required to be filed with the Commission?
---------------------------------------------------------------------------

    \52\ See Section VII.C of this release; see also 5 U.S.C.
603(a), Oversight of Credit Rating Agencies Registered as Nationally
Recognized Statistical Rating Organizations, 72 FR 33618 (June 18,
2007); Amendments to Rules for Nationally Recognized Statistical
Rating Organizations, 74 FR at 6481 (Feb. 9, 2009); and Amendments
to Rules for Nationally Recognized Statistical Rating Organizations,
74 FR at 63863 (Dec. 4, 2009).
---------------------------------------------------------------------------

    3. What other factors should the Commission consider in analyzing
whether the small size of an NRSRO makes it not appropriate to require
the separation of the production of credit ratings from sales and
marketing activities? Should the Commission consider the annual
revenues of the NRSRO? Should the Commission consider the number of
employees of the NRSRO? Would consideration of the number of employees
create a disincentive to devote resources to adequately staff the
NRSRO? Are there factors in addition to an NRSRO's size the Commission
should consider in analyzing whether to grant an exemption under this
proposal? If so, please describe any such factors.
    4. If the Commission granted relief to an NRSRO, should the
Commission specify conditions for obtaining the relief? If so, what
should those conditions be? For example, should the conditions limit
the number of credit analysts that can participate in sales and
marketing activities, limit the manner in which they can participate in
such activities, require additional procedures to address the conflict,
and require additional procedures to document how credit analysts
participate in sales and marketing activities? If any of these
conditions would be appropriate, describe how they could be implemented
in practice.
3. Suspending or Revoking a Registration
    Section 15E(h)(3)(B)(ii) of the Exchange Act specifies that the
Commission's rules under Section 15E(h) of the Exchange Act shall
provide for suspension or revocation of the registration of an NRSRO if
the Commission finds, on the record, after notice and opportunity for a
hearing, that the NRSRO has committed a violation of ``a rule issued
under this subsection'' and the violation of the rule affected a credit
rating.\53\ While Section 15E(h)(3)(A) relates only to the conflict
arising from sales and marketing activities, Section 15E(h)(3)(B)(ii)--
by using the term ``subsection''--has a broader scope in that it refers
to all rules issued under Section 15E(h) of the Exchange Act.\54\
Consequently, the rule implementing Section 15E(h)(3)(B)(ii) must
provide for the suspension or revocation of an NRSRO's registration for
violations of any rule adopted under Section 15E(h).\55\ Moreover, the
Commission notes that Section 15E(h)(3)(B)(ii) does not require that
the violation of the rule be ``willful.'' \56\
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    \53\ 15 U.S.C. 78o-7(h)(3)(B)(ii).
    \54\ See id.
    \55\ Id.
    \56\ Id.
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    Currently, the Commission can seek to suspend or revoke the
registration of an NRSRO, in addition to other potential sanctions,
under Section 15E(d) of the Exchange Act.\57\ In particular, Section
15E(d) provides that the Commission shall, by order, censure, place
limitations on the activities, functions, or operations of, suspend for
a period not exceeding 12 months, or revoke the registration of an
NRSRO if the Commission finds, ``on the record after notice and
opportunity for a hearing,'' that such sanction is

``necessary for the protection of investors and in the public
interest'' and the NRSRO, or a person associated with the NRSRO, has
engaged in one or more of six categories of conduct.\58\ The first
category is that the NRSRO or an associated person has: committed or
omitted any act, or has been subject to an order or finding, enumerated
in subparagraphs (A), (D), (E), (G), or (H) of Section 15(b)(4) of the
Exchange Act; has been convicted of any offense identified in Section
15(b)(4)(B) of the Exchange Act; or has been enjoined from any action,
conduct, or practice identified in Section 15(b)(4)(C) of the Exchange
Act.\59\ The acts enumerated in Section 15(b)(4)(D) of the Exchange Act
include that the person has willfully violated any provision of the
Exchange Act or the rules or regulations under the Exchange Act.\60\
Therefore, the Commission has the ability, under Section 15E(d), to
suspend or revoke the registration of an NRSRO for a willful violation
of Rule 17g-5, but does not have the power to do so under Section
15E(d) for violations of Rule 17g-5 that are not willful.\61\
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    \57\ See 15 U.S.C. 78o-7(d).
    \58\ 15 U.S.C. 78o-7(d).
    \59\ See 15 U.S.C. 78o-7(d)(1)(A); see also 15 U.S.C.
78o(b)(4)(A), (B), (C), (D), (E), (G), and (H).
    \60\ 15 U.S.C. 78o(b)(4)(D).
    \61\ See 15 U.S.C. 78o-7(d)(1)(A) and 15 U.S.C. 78o(b)(4)(D).
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    The Commission preliminarily believes a rule implementing Section
15E(h)(3)(B)(ii) of the Exchange Act should work in conjunction with
Sections 15E(d) and 21C of the Exchange Act.\62\ Specifically, proposed
new paragraph (g) of Rule 17g-5 would provide that in a proceeding
pursuant to Section 15E(d) or Section 21C of the Exchange Act, the
Commission shall suspend or revoke the registration of an NRSRO if the
Commission finds in such proceeding that the NRSRO has violated a rule
issued under Section 15E(h) of the Exchange Act, the violation affected
a rating, and that suspension or revocation is necessary for the
protection of investors and in the public interest.\63\ The Commission
preliminarily believes this provision is appropriately placed in Rule
17g-5 given that it is the predominant rule issued under Section 15E(h)
of the Exchange Act.\64\
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    \62\ 15 U.S.C. 78o-7(d) and 15 U.S.C. 78u-3.
    \63\ See proposed new paragraph (g) of Rule 17g-5; see also 15
U.S.C. 78o-7(d) and (h), and 78u-3. Section 21C of the Exchange Act
provides the Commission with authority, among other things, to enter
an order requiring, among other things, that a person cease-and-
desist from continuing to violate, or future violations of, a
provision of the Exchange Act or any rule or regulation thereunder.
Proposed paragraph (g) of Rule 17g-5 would provide that the
Commission can issue an order in a cease-and-desist proceeding
suspending or revoking the registration of an NRSRO. Id.
    \64\ See, e.g., Oversight of Credit Rating Agencies Registered
as Nationally Recognized Statistical Rating Organizations, 72 FR at
33595-33599 (June 18, 2007), Amendments to Rules for Nationally
Recognized Statistical Rating Organizations, 74 FR at 6465-6469
(Feb. 9, 2009), and Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR 63842-63850 (Dec. 4, 2009).
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    The first two proposed findings in proposed paragraph (g) of Rule
17g-5 would mirror the text of Section 15E(h)(3)(B)(ii) of the Exchange
Act.\65\ The final finding--that the suspension or revocation is
necessary for the protection of investors and in the public interest--
is a common finding that the Commission must make to take disciplinary
action against a registered person or entity.\66\ It is not, however, a
finding that the Commission must make in a proceeding under Section
21C.\67\ Further, unlike Section 15E(d) of the Exchange Act, the
Commission can take action under Section 21C for violations of the
securities laws even if such violations are not willful.\68\ Moreover,
Section 15E(h)(3)(B)(ii) of the Exchange Act does not prescribe the
maximum amount of time for which an NRSRO could be suspended, whereas
Section 15E(d) provides that a suspension shall not exceed 12
months.\69\ Consequently, a proceeding pursuant to paragraph (g) of
Rule 17g-5 brought under Section 21C could result in a suspension that
exceeds 12 months. Given that Section 21C of the Exchange Act has a
lower threshold for the intent to establish a violation, and given the
substantial consequences of suspending or revoking a registration, the
Commission preliminarily believes that the public interest finding
would be an appropriate predicate to a suspension or revocation of an
NRSRO's registration under Section 21C of the Exchange Act.
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    \65\ Compare the first two findings in proposed new paragraph
(g) of Rule17g-5 (that the NRSRO has violated a rule issued under
Section 15E(h) of the Act; and the violation affected a rating) with
Sections 15E(h)(3)(B)(ii)(I) and (II) of the Exchange Act,
respectively. 15 U.S.C. 78o-7(h)(3)(B)(ii)(I) and (II).
    \66\ For example, the Commission must make this finding to take
action under Section 15E(d) of the Exchange Act. See 15 U.S.C. 78o-
7(d).
    \67\ See 15 U.S.C. 78u-3.
    \68\ Compare 15 U.S.C. 78o-7(d) and 15 U.S.C. 78u-3.
    \69\ Compare 15 U.S.C. 78o-7(h)(3)(B)(ii) and 15 U.S.C. 78o-
7(d).
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Request for Comment
    The Commission generally requests comment on all aspects of
proposed new paragraph (g) of Rule 17g-5. The Commission also seeks
comment on the following:
    1. Should the Commission propose, pursuant to Section
15E(h)(3)(B)(ii) of the Exchange Act, an independent and alternative
process for suspending or revoking an NRSRO's registration for a
violation of a rule issued under Section 15E(h) (i.e., a proceeding
that is not pursuant to Sections 15E(d) and 21C of the Exchange Act)?
If so, how should such a separate proceeding operate? For example,
should it require the same findings proposed above or alternative or
additional findings?
    2. In terms of the finding that ``the violation affected a
rating,'' what type of factual predicate should support such a finding?
For example, would it be appropriate to make such a finding if the
Commission determined that the violation caused the NRSRO to issue a
credit rating that was not based solely on its documented procedures
and methodologies for determining credit ratings (e.g., the Commission
finds that undue influence impacted the credit rating assigned to the
rated obligor, security, or money market instrument because strictly
adhering to the procedures and methodologies would have resulted in the
NRSRO issuing a credit rating at a lower or higher notch in the
applicable rating scale)?
    3. With respect to proposed new paragraph (g) of Rule 17g-5, should
the proposed rule include additional or alternative findings that the
Commission would need to make to revoke or suspend the registration of
an NRSRO in a proceeding under Sections 15E(d) or 21C? If so, what
should those findings be? For example, should the Commission need to
find that the violation harmed investors or other users of credit
ratings?
    4. Should the Commission, as proposed, require a public interest
finding in order to suspend or revoke an NRSRO's registration in a
proceeding under paragraph (g) of Rule 17g-5 pursuant to Section 21C,
or should the rule provide for the suspension or revocation of an
NRSRO's registration solely based on a finding that a violation of a
rule affected a rating?
    5. With respect to proposed new paragraph (g) of Rule 17g-5, should
the rule incorporate only Section 15E(d) of the Exchange Act? If so,
why? Alternatively, should it incorporate only Section 21C of the
Exchange Act? If so, why?
    6. As noted above, there would be no limit on the amount of time
for which the Commission could suspend the registration of an NRSRO in
a proceeding under Section 21C of the Exchange Act and proposed
paragraph (g) of Rule 17g-5. Should the Commission add such a time
limit to be consistent with Section 15E(d) of the Exchange Act?
Alternatively, does the

different standard provide the Commission with appropriate flexibility
to seek longer suspensions?

C. ``Look-Back'' Review

    Section 932(a)(4) of the Dodd-Frank Act amended Section 15E(h) of
the Exchange Act to add a new paragraph (4).\70\ The Commission is
proposing to implement rulemaking required in Section 15E(h)(4)(A)(ii)
of the Exchange Act through proposed paragraph (c) of new Rule 17g-
8.\71\ In addition, the Commission is proposing to amend Rule 17g-2 to
apply that rule's record retention and production requirements to the
policies and procedures required pursuant to the self-executing
provisions in Section 15E(h)(4)(A) of the Exchange Act and pursuant to
proposed paragraph (c) of new Rule 17g-8.\72\
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    \70\ See Public Law 111-203 Sec.  932(a)(4) and 15 U.S.C. 78o-
7(h)(4).
    \71\ New Rule 17g-8 would be codified at 17 CFR 240.17g-8, if
adopted. In addition, new Rule 17g-8, as proposed, would consolidate
requirements that NRSROs have policies and procedures in a number of
areas. As discussed below in Section II.F.1 of this release,
proposed paragraph (a) of new Rule 17g-8 would require an NRSRO to
establish policies and procedures with respect to credit rating
methodologies. In addition, as discussed below in Section II.J.1 of
this release, proposed paragraph (b) of new Rule 17g-8 would require
an NRSRO to establish policies and procedures with respect to the
use of credit rating symbols, numbers, and scores. And, as discussed
in this section of the release, the Commission is proposing to
implement rulemaking specified in Section 15E(h)(4)(A)(ii) of the
Exchange Act (15 U.S.C. 78o-7(h)(4)(A)(ii)), in part, by proposing
paragraph (c) of new Rule 17g-8.
    \72\ See 15 U.S.C. 78o-7(h)(4)(A), proposed paragraph (c) of new
Rule 17g-8, and proposed new paragraph (a)(9) of Rule 17g-2.
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1. Proposed Paragraph (c) of New Rule 17g-8
    Sections 15E(h)(4)(A)(i) and (ii) of the Exchange Act require an
NRSRO to establish, maintain, and enforce policies and procedures
reasonably designed to ensure that, in any case in which an employee of
a person subject to a credit rating of the NRSRO or the issuer,
underwriter, or sponsor of a security or money market instrument
subject to a credit rating of the NRSRO, was employed by the NRSRO and
participated in any capacity in determining credit ratings for the
person or the securities or money market instruments during the 1-year
period preceding the date an action was taken with respect to the
credit rating, the NRSRO shall: (1) Conduct a review to determine
whether any conflicts of interest of the employee influenced the credit
rating (a ``look-back review''); and (2) take action to revise the
rating if appropriate, in accordance with such rules as the Commission
shall prescribe.\73\ Consequently, Section 15E(h)(4)(A)(i) of the
Exchange Act contains a self-executing provision requiring an NRSRO to
establish, maintain, and enforce policies and procedures as described
above to conduct look-back reviews, and Section 15E(h)(4)(ii) contains
a provision mandating Commission rulemaking with respect to
requirements for an NRSRO to revise a credit rating in certain
circumstances.\74\
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    \73\ See 15 U.S.C. 78o-7(h)(4)(A)(i) and (ii) (emphasis added).
    \74\ Id.
---------------------------------------------------------------------------

    The Commission proposes to implement the rulemaking required in
Section 15E(h)(4)(A)(ii) of the Exchange Act by proposing paragraph (c)
of new Rule 17g-8.\75\ Proposed paragraph (c) would require that the
policies and procedures the NRSRO establishes, maintains, and enforces
pursuant to Section 15E(h)(4)(A) of the Exchange Act must address
instances in which a review conducted pursuant to those policies and
procedures determines that a conflict of interest influenced a credit
rating assigned to an obligor, security, or money market instrument by
including, at a minimum, procedures that are reasonably designed to
ensure the NRSRO will: (1) Immediately place the credit rating on
credit watch; (2) promptly determine whether the credit rating must be
revised so it no longer is influenced by a conflict of interest and is
solely the product of the NRSRO's documented procedures and
methodologies for determining credit ratings; and (3) promptly publish
a revised credit rating, if appropriate, or affirm the credit rating if
appropriate.\76\
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    \75\ See proposed paragraph (c) of new Rule 17g-8 and 15 U.S.C.
78o-7(h)(4)(A)(ii).
    \76\ See proposed paragraphs (c)(1), (2) and (3) of new Rule
17g-8.
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    The Commission acknowledges that Section 15E(c)(2) of the Exchange
Act provides, in pertinent part, that the Commission may not regulate
the substance of credit ratings or the procedures and methodologies by
which an NRSRO determines credit ratings.\77\ The Commission
preliminarily believes that the steps described above would not
regulate the procedures and methodologies by which an NRSRO determines
credit ratings because the NRSRO would apply its own procedures and
methodologies to determine whether the credit rating should be revised.
Moreover, the placement of a credit rating on credit watch is not a
determination of a credit rating (i.e., it does not change the credit
rating) but rather is a means of providing notice to users of the
NRSRO's credit ratings that an active evaluation of the credit rating
is underway. For these reasons, the Commission preliminarily believes
that the approach in proposed paragraph (c) of new Rule 17g-8
appropriately avoids regulating the substance of credit ratings or the
procedures and methodologies an NRSRO uses to determine credit ratings
but, at the same time, requires an NRSRO to have procedures reasonably
designed to ensure that it immediately provides notification and
promptly address a credit rating that is influenced by a conflict of
interest.\78\ The Commission also preliminarily believes that the
actions prescribed in proposed paragraph (c) of new Rule 17g-8 are
steps a prudent NRSRO would take in the normal course when discovering
a conflict of interest influenced the determination of a credit rating.
Nonetheless, the Commission is soliciting comment on these issues
below.
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    \77\ 15 U.S.C. 78o-7(c)(2).
    \78\ The Commission also notes an NRSRO would, among other
things, violate Section 15E(h)(1) of the Exchange Act and Rule 17g-
5, among other rules, if it continued to assign an obligor,
security, or money, market instrument a credit rating that, absent
the undue influence of the conflict of interest, would be different
because the NRSRO could not be deemed to have policies and
procedures reasonably designed to address and manage conflicts of
interest that can arise from its business under such a circumstance.
See 15 U.S.C. 78o-7(h) and 17 CFR 17g-5.
---------------------------------------------------------------------------

    Proposed paragraph (c)(1) of new Rule 17g-8 would require the NRSRO
to have procedures reasonably designed to ensure that, upon the NRSRO's
discovery of the conflict, it immediately publishes a rating action
placing the applicable credit ratings of the obligor, security, or
money market instrument on credit watch or review.\79\ When an NRSRO
publishes a rating action indicating the current credit rating assigned
to an obligor, security, or money market instrument (or a class of
obligors, securities, or money market instruments) is on credit watch
or under review, the purpose is to notify users of the NRSRO's credit
ratings that the credit rating is undergoing a process of evaluation
that may result in it being upgraded or downgraded.\80\ The Commission
preliminarily believes an NRSRO should have policies and procedures
reasonably designed to ensure that the users of its credit ratings are
provided immediate notice of the discovery that a conflict influenced a
credit rating assigned to an obligor, security, or money market
instrument.

The Commission also preliminarily believes an effective means of
providing such notice would be to place the obligor, security, or money
market instrument on credit watch.
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    \79\ See proposed paragraph (c)(1) of new Rule 17g-8.
    \80\ For example, an NRSRO may place a credit rating on negative
credit watch, which means it is evaluating whether to downgrade the
credit rating, or on positive credit watch, which means it is
evaluating whether to upgrade the credit rating.
---------------------------------------------------------------------------

    Proposed paragraph (c)(1) of new Rule 17g-8 also would provide that
the policies and procedures must be reasonably designed to ensure the
NRSRO includes the information required by paragraph
(a)(1)(ii)(J)(3)(i) of Rule 17g-7 with the publication of the rating
action placing the credit rating of the obligor, security, or money
market instrument on credit watch.\81\ As discussed below in Section
II.G of this release, the Commission is proposing to implement Section
15E(s) of the Exchange Act, in part, by requiring, in proposed new
paragraph (a) of Rule 17g-7, that an NRSRO generate a form to be
included with the publication of a credit rating.\82\ Proposed
paragraph (a) of Rule 17g-7, among other things, would prescribe
certain qualitative and quantitative information that must be disclosed
in the form.\83\ The Commission is proposing that the qualitative
information in the form include certain disclosures that would need to
be made if the rating action results from a look-back review conducted
pursuant to Section 15E(h)(4)(A)(i) of the Exchange Act and proposed
paragraph (c) of new Rule 17g-8.\84\ Specifically, when a credit rating
is placed on credit watch, proposed new paragraph (a)(1)(ii)(J)(3)(i)
of Rule 17g-7 would require the NRSRO to provide in the form published
with the rating action an explanation that the reason for the action is
the discovery that a credit rating assigned to the obligor, security,
or money market instrument in one or more prior rating actions was
influenced by a conflict of interest and the date and associated credit
rating of each prior rating action the NRSRO currently has determined
was influenced by the conflict.\85\ This would alert users of the
NRSRO's credit ratings that the credit rating assigned to the obligor,
security, or money market instrument might be revised to address a
conflict of interest and would identify the prior rating action or
actions the NRSRO has determined were influenced by the conflict. With
respect to identifying the prior rating actions, the Commission is
proposing that the rule require the NRSRO to provide the date and
associated credit rating of such actions the NRSRO ``currently has
determined'' were influenced by the conflict.\86\ The Commission's
proposed use of the term ``currently'' is designed to conform to the
requirement of proposed paragraph (c)(1) of Rule 17g-8 that the NRSRO
have procedures designed to place the credit rating of the obligor,
security, or money market instrument on credit watch immediately upon
the discovery that a conflict influenced a prior credit rating action
(i.e., not wait until the NRSRO has determined whether additional
credit ratings previously assigned to the obligor, security, or money
market instrument also were influenced by the conflict). The Commission
preliminarily believes that the best approach would be to alert users
of the NRSRO's credit ratings as soon as possible after a conflict is
discovered.
---------------------------------------------------------------------------

    \81\ Id.; see also proposed new paragraph (a)(1)(ii)(J)(3)(i) of
Rule 17g-7.
    \82\ See 15 U.S.C. 78o-7(s) and proposed new paragraph (a) of
Rule 17g-7.
    \83\ See proposed new paragraphs (a)(1)(ii)(A)-(N) of Rule 17g-
7.
    \84\ See proposed new paragraphs (a)(1)(ii)(J)(3)(i)-(iii) of
Rule 17g-7 and related discussion below in Section II.G.3 of the
release.
    \85\ See proposed new paragraph (a)(1)(ii)(J)(3)(i) of Rule 17g-
7.
    \86\ Id.
---------------------------------------------------------------------------

    Proposed paragraph (c)(2) of new Rule 17g-8 would require the NRSRO
to have procedures reasonably designed to ensure it promptly determines
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.\87\ The goal would be to ensure as quickly as possible
that the credit rating assigned to the obligor, security, or money
market instrument is solely a product of the NRSRO's procedures and
methodologies for determining credit ratings (i.e., is in no way
influenced by the conflict). With respect to making this determination,
the Commission preliminarily believes one approach would be to apply de
novo the NRSRO's procedures and methodologies for determining credit
ratings to the rated obligor, security, or money market instrument and
revise the current credit rating if the de novo application produces a
credit rating at a different notch on the rating scale.
---------------------------------------------------------------------------

    \87\ See proposed paragraph (c)(2) of new Rule 17g-8.
---------------------------------------------------------------------------

    The Commission does not expect an NRSRO would revise a credit
rating in every circumstance in which an earlier rating action was
influenced by a conflict of interest. The Commission preliminarily
notes that Section 15E(h)(4)(A)(ii) of the Exchange Act provides that
the NRSRO's policies and procedures shall be reasonably designed to,
among other things, ensure that the NRSRO takes action to revise the
credit rating ``if appropriate.''\88\ It is possible, for example, that
in the period since the NRSRO published the conflicted credit rating
events unrelated to the conflict occurred that when factored into a de
novo application of the NRSRO's procedures and methodologies for
determining credit ratings would produce a credit rating at the same
notch in the rating scale as the credit rating that was influenced by
the conflict.\89\ The Commission preliminarily believes a requirement
that the NRSRO nonetheless revise the credit rating could interfere
with the NRSRO's procedures and methodologies for determining credit
ratings in that it would force the NRSRO to change the credit rating
assigned to the obligor, security, or money market instrument to a
different notch in the rating scale than would be the case if the
credit rating were solely a product of the NRSRO's procedures and
methodologies. Consequently, a mandatory revision requirement could, in
effect, require the NRSRO to publish a credit rating that was
inaccurate from the perspective of those procedures and methodologies.
---------------------------------------------------------------------------

    \88\ 15 U.S.C. 78o-7(h)(4)(A)(ii).
    \89\ For example, assume that nine months ago an analyst
upgraded the credit rating assigned to an issuer's securities from
BBB to AA. The analyst leaves the NRSRO to work for the issuer. The
analyst's new employment triggers a look-back review of the rating
action upgrading the credit rating from BBB to AA pursuant to
Section 15E(h)(4)(A)(i) of the Exchange Act. The look-back review
determines the credit rating should not have been upgraded from BBB
to AA at that point in time and the analyst's action in upgrading
the credit rating was influenced by the prospect of employment with
the issuer. The NRSRO performs a de novo review of the credit rating
assigned to the issuer by applying its procedures and methodologies
for determining credit ratings. This review--as required by the
procedures and methodologies--takes into consideration favorable
financial results the issuer reported three months ago.
Consequently, the process of re-rating the issuer's securities
determines the current credit rating should be AA.
---------------------------------------------------------------------------

    Proposed paragraph (c)(3) of new Rule 17g-8 would require that the
NRSRO have procedures reasonably designed to ensure it promptly
publishes a revised credit rating, if appropriate, or an affirmation of
the credit rating, if appropriate, based on the determination of
whether the current credit rating assigned to the obligor, security, or
money market instrument must be revised.\90\ The Commission's intent is
for the NRSRO to have procedures that are reasonably designed to notify
users of the NRSRO's credit ratings as quickly as possible, whether the
credit rating assigned to the obligor, security, or money market
instrument will be

changed or remain the same.\91\ The goal would be to promptly remove
the uncertainty surrounding the credit rating to limit the potential
that investors and other users of credit ratings might make investment
or other credit based decisions based on incomplete information.
---------------------------------------------------------------------------

    \90\ See proposed paragraphs (c)(3)(i) and (ii) of new Rule 17g-
8; see also proposed new paragraphs (a)(1)(ii)(J)(3)(ii) and (iii)
of Rule 17g-7.
    \91\ The Commission notes that, in the case of an NRSRO that
makes its rating actions available only to subscribers, former
subscribers who made an investment or other credit based decision
using the credit rating likely would not receive notice that the
credit rating was influenced by a conflict of interest as well as
any changes made to the credit rating as a result of the ``look-
back'' review.
---------------------------------------------------------------------------

    As with the placement of the credit rating on credit watch,
proposed paragraph (c)(3) of new Rule 17g-8 would require that the
NRSRO's procedures would need to be reasonably designed to ensure that
information required pursuant to proposed new paragraph
(a)(1)(ii)(J)(3)(ii) and (iii) of Rule 17g-7, respectively, is included
with the publication of a revised or affirmed credit rating.\92\ In the
case of a revised rating, proposed new paragraph (a)(1)(ii)(J)(3)(ii)
of Rule 17g-7 would require the NRSRO to provide in the form published
with the rating action an explanation that the reason for the action is
the discovery that a credit rating assigned to the obligor, security,
or money market instrument in one or more prior rating actions was
influenced by a conflict of interest, the date and associated credit
rating of each prior rating action the NRSRO has determined was
influenced by the conflict, and an estimate of the impact the conflict
had on each such prior rating action.\93\ Similarly, in the case of an
affirmed rating, proposed new paragraph (a)(1)(ii)(J)(3)(iii) of Rule
17g-7 would require the NRSRO to provide an explanation of why no
rating action was taken to revise the credit rating notwithstanding the
conflict, the date and associated credit rating of each prior rating
action the NRSRO has determined was influenced by the conflict, and an
estimate of the impact the conflict had on each such prior rating
action.\94\
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    \92\ See proposed paragraphs (c)(3)(i) and (ii) of new Rule 17g-
8.
    \93\ See proposed new paragraph (a)(1)(ii)(J)(3)(ii) of Rule
17g-7.
    \94\ See proposed new paragraph (a)(1)(ii)(J)(3)(iii) of Rule
17g-7.
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    As indicated in the proposed disclosures, the NRSRO would need to
include an estimate of the impact the conflict had on each prior rating
action influenced by the conflict.\95\ The Commission preliminarily
believes one approach an NRSRO could take to making such an estimate
would be to apply de novo its procedures and methodologies for
determining credit ratings to the rated obligor, security, or money
market instrument using information and inputs as of the time period
for which it was determined that the credit rating was influenced. In
other words, under this approach the NRSRO would reconstruct the past
rating action through a ``conflict-free'' application of its procedures
and methodologies for determining credit ratings. The NRSRO then could
compare the credit ratings and disclose the difference between the
rating action that was influenced by a conflict and the reconstructed
rating action.
---------------------------------------------------------------------------

    \95\ See proposed paragraph (c)(2)(i) of new Rule 17g-8; see
also proposed paragraph (c)(2)(ii) of Rule 17g-8.
---------------------------------------------------------------------------

    The disclosures required by proposed new paragraphs
(a)(1)(ii)(J)(3)(i), (ii) and (iii) of Rule 17g-7 would alert users of
the NRSRO's credit ratings that the rating action was taken because a
conflict of interest had influenced one or more credit ratings assigned
to the obligor, security, or money market instrument.\96\ In addition,
the estimate of the impact of the conflict would provide users of the
NRSRO's credit ratings with a sense of the magnitude of the variation
between the credit rating influenced by the conflict and the credit
rating that would have been determined had the conflict not existed.
The users of the NRSRO's credit ratings could consider this information
in evaluating the ability of the NRSRO to manage conflicts of interest
in the production of credit ratings. Moreover, if the variation between
the credit rating influenced by the conflict and the ``un-conflicted''
credit rating was large (e.g., 2 or 3 notches in the applicable rating
scale), users of the NRSRO's credit ratings could consider the
potential risk of using the NRSRO's credit ratings to make investment
or other credit-based decisions (particularly if the revision
downgraded the credit rating to a low category in the rating scale).
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    \96\ See proposed paragraphs (a)(1)(ii)(J)(3)(i), (ii) and (iii)
of Rule 17g-7.
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of
proposed paragraph (c) of new Rule 17g-8. The Commission also seeks
comment on the following:
    1. Would the requirements to have procedures reasonably designed to
ensure the NRSRO takes the steps set forth in proposed paragraphs
(c)(1), (2), and (3) of new Rule 17g-8 alter the procedures and
methodologies an NRSRO uses to determine credit ratings? For example,
would an NRSRO take materially different steps if a look-back review
conducted pursuant to Section 15E(h)(4)(A) of the Exchange Act
determined that a credit rating was influenced by a conflict of
interest? If so, describe in detail how those steps would differ.
    2. Under Section 15E(h)(4)(A)(i) of the Exchange Act, an NRSRO
must, in certain circumstances, conduct a review to determine whether
any conflicts of interest of an employee influenced the credit rating.
Should the Commission define what it means to have a conflict of
interest ``influence'' a credit rating? If so, how should this term be
defined? For example, should a credit rating be deemed ``influenced''
if the NRSRO would have taken a different rating action with respect to
the credit rating in the absence of the conflict?
    3. How would an NRSRO determine whether this conflict influenced a
credit rating? Describe the types of evidence that would support such a
determination. What steps could an NRSRO take to analyze whether this
conflict influenced a credit rating? Are there any practical issues
with respect to making such a determination? If so, describe them.
    4. Is there any reason an NRSRO should not have procedures
reasonably designed to ensure it immediately publishes a rating action
placing the obligor, security, or money market instrument on credit
watch based on the discovery of the conflict and include with the
publication of the rating action the information required by proposed
new paragraph (a)(1)(ii)(J)(3)(i) of Rule 17g-7 as would be required by
proposed paragraph (c)(1) of Rule 17g-8? If so, please explain in
detail the rationale for not disclosing this information immediately in
this manner. In addition, if a commenter agrees with the objective of
the requirement but not the manner of disclosure, describe any
alternative means of disclosure that would achieve the objective.
    5. What practical issues should the Commission consider in
implementing proposed paragraph (c)(1) of new Rule 17g-8? How could the
proposal be modified to address any practical issues identified without
undermining the objectives of the proposal?
    6. Would the information required by proposed new paragraph
(a)(1)(ii)(J)(3)(i) of Rule 17g-7 to be included in the form published
with a rating action placing the obligor, security, or money market
instrument on credit watch be useful to the users of the NRSRO's credit
ratings? Is there additional or alternative information that should be
provided? If so, please describe such additional or alternative
information.

    7. Is there any reason an NRSRO would not have procedures
reasonably designed to ensure it promptly determines whether the
current credit rating assigned to the obligor, security, or money
market instrument must be revised so 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
as would be required pursuant to proposed paragraph (c)(2) of new Rule
17g-8? If so, please explain in detail the rationale for not promptly
making such a determination. In addition, are there alternative
approaches to addressing conflicts of interest influencing credit
ratings that the Commission should consider? If so, please identify and
describe them.
    8. What practical issues should the Commission consider in
implementing proposed paragraph (c)(2) of new Rule 17g-8? How could the
proposal be modified to address any practical issues identified without
undermining the objectives of the proposal?
    9. Should the Commission be more prescriptive in terms of how an
NRSRO would be required to determine whether the current credit rating
assigned to the obligor, security, or money market instrument must be
revised so 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? If so, what actions should the
Commission require be included in the NRSRO's policies and procedures?
For example, should the Commission specifically require the NRSRO to
apply de novo its policies and procedures for determining credit
ratings in the ways described above?
    10. Would a de novo application of the NRSRO's policies and
procedures for determining credit ratings be sufficient to address the
conflict of interest? Are there alternative or additional approaches to
determining whether a credit rating influenced by a conflict of
interest should be revised?
    11. Is there any reason an NRSRO should not have procedures
reasonably designed to ensure that it promptly publishes, as
applicable, a revised credit rating or an affirmation of the current
credit rating based on the determination of whether the current credit
rating assigned to the obligor, security, or money market instrument
must be revised and include with the rating action the information
required by proposed new paragraphs (a)(1)(ii)(J)(3)(ii) or (iii) of
Rule 17g-7, as applicable, as would be required pursuant to paragraph
(c)(3) of new Rule 17g-8? If so, please explain in detail the rationale
for not promptly revising or affirming the current credit rating.
    12. What practical issues should the Commission consider in
implementing proposed paragraph (c)(3) of new Rule 17g-8 that would
require an NRSRO to have procedures reasonably designed to ensure that
it promptly publishes, as appropriate, a revised credit rating or an
affirmation of the current credit rating and includes with the rating
action the information required by proposed new paragraphs
(a)(1)(ii)(J)(3)(ii) and (iii) of Rule 17g-7? For example, would the
requirement to estimate the impact the conflict had on the prior rating
actions substantially prolong the time between placing the credit
rating on credit watch and either publishing a revised credit rating or
affirming the current credit rating? How could the proposal be modified
to address any practical issues identified without undermining the
objective of promptly addressing a credit rating influenced by a
conflict of interest and at the same time providing investors and other
users of credit ratings with the information about the conflict?
    13. In terms of estimating the impact of a conflict on a past
rating action, would a feasible approach be to apply de novo the
procedures and methodologies for determining credit ratings to the
relevant obligor, security, or money market instrument using
information and inputs as of the time period in which the conflicted
credit rating was determined? Would this approach result in a
meaningful estimate? Are there alternative or additional steps that
could be taken to estimate the impact?
    14. Would the information required by proposed new paragraphs
(a)(1)(ii)(J)(3)(ii) and (iii) of Rule 17g-7 to be included in the form
published with a revised or affirmed credit rating, respectively, be
useful to the users of the NRSRO's credit ratings? Is there additional
or alternative information that should be provided? If so, please
describe such additional or alternative information.
    15. How would the proposals impact obligors and issuers subject to
a credit rating determined through the ``look-back'' review to be
influenced by the conflict of interest?
    16. In the case of an NRSRO that only makes its rating actions
available to subscribers, former subscribers likely would not receive
the proposed notices. Does this raise a significant issue that the
Commission should address? If so, describe alternatives that could be
used to address this issue.
2. Proposed Amendment to Rule 17g-2
    Section 15E(h)(4)(A) of the Exchange Act requires an NRSRO ``to
establish, maintain, and enforce policies and procedures'' but does not
explicitly require an NRSRO to ``document'' such policies and
procedures.\97\ Nonetheless, the Commission preliminarily believes that
documenting these policies and procedures is necessary in order to
carry out the statute's mandate. The Commission also preliminarily
believes they should be documented because, among other reasons, it is
a sound practice for any organization to document its policies and
procedures to promote better understanding of them among the
individuals within the organization and thereby to promote compliance
with such policies and procedures. In addition, for the reasons
discussed in Section II.A.2 of this release, the Commission
preliminarily believes that the policies and procedures should be
subject to the same recordkeeping requirements that apply to other
records an NRSRO is required to retain pursuant to Rule 17g-2.\98\ For
these reasons, the Commission proposes adding paragraph (a)(9) to Rule
17g-2 to identify the policies and procedures an NRSRO is required to
establish, maintain, and enforce pursuant to Section 15E(h)(4)(A) of
the Exchange Act and paragraph (c) of Rule 17g-8 as a record an NRSRO
must make and retain.\99\ As a result, the policies and procedures
would need to be documented in writing and be subject to the record
retention and production requirements in paragraphs (c) through (f) of
Rule 17g-2.\100\
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    \97\ See 15 U.S.C. 78o-7(h)(4)(A).
    \98\ 17 CFR 240.17g-2.
    \99\ See proposed new paragraph (a)(9) to Rule 17g-2; see also
Section 17(a)(1) of the Exchange Act, which requires an NRSRO to
make and keep such records, and make and disseminate such reports,
as the Commission prescribes by rule as necessary or appropriate in
the public interest, for the protection of investors, or otherwise
in furtherance of the Exchange Act. 15 U.S.C. 78q(a)(1).
    \100\ See 17 CFR 240.17g-2(c)-(f).
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Request for Comment
    The Commission generally requests comment on all aspects of
proposed new paragraph (a)(9) of Rule 17g-2.

D. Fines and Other Penalties

    Section 932(a)(8) of the Dodd-Frank Act amended Section 15E of the
Exchange Act to add new subsection (p), which contains four paragraphs:
(1), (2), (3), and (4).\101\ Section 15E(p)(4)(A) provides that the
Commission shall establish, by rule, fines and other penalties
applicable to any NRSRO that

violates the requirements of Section 15E of the Exchange Act and the
rules under the Exchange Act.\102\
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    \101\ See Public Law 111-203 Sec.  932(a)(8) and 15 U.S.C. 78o-
7(p)(1)-(4).
    \102\ See 15 U.S.C. 78o-7(p)(4)(A).
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    The Exchange Act already 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).\103\ For example,
Section 15E(d)(1) of the Exchange Act provides that the Commission
shall censure an NRSRO, place limitations on the activities, functions,
or operations of an NRSRO, suspend an NRSRO for a period not exceeding
12 months, or revoke the registration of an NRSRO if, among other
reasons, the NRSRO violates Section 15E of the Exchange Act or the
Commission's rules thereunder.\104\ In addition, Section 932(a)(3) of
the Dodd-Frank Act amended Section 15E(d) to explicitly provide
additional potential sanctions.\105\ First, it provided the Commission
with the authority to seek sanctions against persons associated with,
or seeking to become associated with, an NRSRO.\106\ Under these
amendments, the Commission can censure such persons, place limitations
on the activities or functions of such persons, suspend such persons
for a period not exceeding 1 year, or bar such persons from being
associated with an NRSRO.\107\ Second, Section 932(a)(3) of Dodd-Frank
Act amended Section 15E(d) to provide the Commission with explicit
authority to temporarily suspend or permanently revoke the registration
of an NRSRO in a particular class or subclass of credit ratings if the
NRSRO does not have adequate financial and managerial resources to
consistently produce credit ratings with integrity.\108\
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    \103\ See 15 U.S.C. 78o-7(d), 15 U.S.C. 78u, 15 U.S.C. 78u-1, 15
U.S.C. 78u-2, 15 U.S.C. 78u-3 and 15 U.S.C. 78ff.
    \104\ See Section 15E(d)(1)(A)-(F) of the Exchange Act (15
U.S.C. 78o-7(d)(1)(A)-(F)), as amended by the Dodd-Frank Act.
    \105\ See Public Law 111-203 Sec.  932(a)(3) and 15 U.S.C. 78o-
7(d).
    \106\ 15 U.S.C. 78o-7(d)(1).
    \107\ Id.
    \108\ See Public Law 111-203 Sec.  932(a)(3) and 15 U.S.C. 78o-
7(d)(2). Prior to this amendment, the Commission already had
authority to suspend or revoke the registration of an NRSRO if it
failed to maintain adequate financial and managerial resources to
consistently produce credit ratings with integrity. See Section
15E(d)(5) of the Exchange Act (15 U.S.C. 78o-7(d)(5)) before being
amended by the Dodd-Frank Act, which re-designated paragraph (d)(5)
of Section 15E as paragraph (d)(1)(E) (15 U.S.C. 78o-7(d)(1)(E)).
Section 15E(d)(2) of the Exchange Act, however, provides explicit
authority to target a suspension or registration revocation to a
specific class or subclass of security. See 15 U.S.C. 78o-7(d)(2).
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    Furthermore, Sections 21, 21A, 21B, 21C, and 32 of the Exchange Act
provide additional means to sanction an NRSRO for violations of the
provisions of the Exchange Act such as the self-executing provisions in
Section 15E of the Exchange Act and the rules under the Exchange
Act.\109\
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    \109\ See 15 U.S.C. 78o-7, 15 U.S.C. 78u, 15 U.S.C. 78u-1, 15
U.S.C. 78u-2, 15 U.S.C. 78u-3 and 15 U.S.C. 78ff, respectively. In
fact, the Dodd-Frank Act amended Section 21B of the Exchange Act (15
U.S.C. 78u-2) to provide the Commission with the authority to assess
money penalties in cease and desist proceedings under Section 21C
(15 U.S.C. 78u-3). See Section 929P(a)(2) of the Dodd-Frank Act.
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    The Commission preliminarily believes these provisions of the
Exchange Act, as amended by the Dodd-Frank Act, provide a sufficiently
broad range of means to impose fines, penalties, and other sanctions on
an NRSRO for violations of Section 15E of the Exchange Act and the
rules thereunder. For example, the fines, penalties, and sanctions
applicable to NRSROs are similar in scope to the fines, penalties, and
sanctions applicable to other registrants under the Exchange Act, such
as broker-dealers. Moreover, since enactment of the Rating Agency Act
of 2006, the Commission has not identified a specific need for a fine
or penalty applicable to NRSROs not otherwise provided for in the
Exchange Act. Consequently, the Commission preliminarily believes it
would be appropriate at this time to defer establishing new fines or
penalties in addition to those provided for in the Exchange Act.
However, in the future, the Commission may use the authority in Section
15E(p)(4)(A) of the Exchange Act if a specific need is identified. For
the foregoing reasons, to implement Section 15E(p)(4)(A) of the
Exchange Act at this time, the Commission proposes to amend the
instructions to Form NRSRO by adding new Instruction A.10.\110\ This
new instruction would provide notice to credit rating agencies applying
for registration and NRSROs that an NRSRO is subject to applicable
fines, penalties, and other available sanctions set forth in Sections
15E, 21, 21A, 21B, 21C, and 32 of the Exchange Act (15 U.S.C. 78o-7,
78u, 78u-1, 78u-2, 78u-3, and 78ff, respectively) for violations of the
securities laws.
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    \110\ See proposed new Instruction A.10 to Form NRSRO.
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Request for Comment
    The Commission generally requests comment on all aspects of
proposed new Instruction A.10 to Form NRSRO. The Commission also seeks
comment on the following:
    1. Are the fines, penalties and other sanctions applicable to
NRSROs in Sections 15E, 21, 21A, 21B, 21C, and 32 of the Exchange Act
sufficient? If not, what additional fines and penalties should the
Commission establish by rule?

E. Public Disclosure of Information About the Performance of Credit
Ratings

    Section 932(a)(8) of the Dodd-Frank Act amended Section 15E of the
Exchange Act to add new subsection (q), which contains paragraphs (1)
and (2).\111\ Section 15E(q)(1) provides that the Commission shall, by
rule, require each NRSRO to publicly disclose information on the
initial credit ratings determined by the NRSRO for each type of
obligor, security, and money market instrument, and any subsequent
changes to such credit ratings, for the purpose of allowing users of
credit ratings to evaluate the accuracy of ratings and compare the
performance of ratings by different NRSROs.\112\ Section 15E(q)(2)
provides that the Commission's rules shall require, at a minimum,
disclosures that:
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    \111\ See Public Law 111-203 Sec.  932(a)(8) and 15 U.S.C. 78o-
7(q)(1) and (2).
    \112\ See 15 U.S.C. 78o-7(q)(1).
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     Are comparable among NRSROs, to allow users of credit
ratings to compare the performance of credit ratings across NRSROs;
\113\
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    \113\ See 15 U.S.C. 78o-7(q)(2)(A).
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     Are clear and informative for investors having a wide
range of sophistication who use or might use credit ratings; \114\
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    \114\ See 15 U.S.C. 78o-7(q)(2)(B).
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     Include performance information over a range of years and
for a variety of types of credit ratings, including for credit ratings
withdrawn by the NRSRO; \115\
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    \115\ See 15 U.S.C. 78o-7(q)(2)(C).
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     Are published and made freely available by the NRSRO, on
an easily accessible portion of its Web site, and in writing, when
requested; \116\
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    \116\ See 15 U.S.C. 78o-7(q)(2)(D).
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     Are appropriate to the business model of an NRSRO; \117\
and
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    \117\ See 15 U.S.C. 78o-7(q)(2)(E).
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     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.\118\
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    \118\ See 15 U.S.C. 78o-7(q)(2)(F). As discussed below in
Section II.G.4 of this release, the Commission preliminarily
believes that the attestation requirement specified in Section
15E(q)(2)(F) should be incorporated into the rule the Commission is
proposing to implement Section 15E(s) of the Exchange Act, which
specifies, among other things, that the Commission adopt rules
requiring an NRSRO to generate a form to be included with the
publication of a credit rating. See 15 U.S.C. 78o-7(s) and proposed
new paragraph (a)(1)(iii) of Rule 17g-7.

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    Currently, the Commission's rules require NRSROs to publish two
types of information about the performance of their credit ratings: (1)
Performance statistics\119\ and (2) ratings histories.\120\ As
discussed in detail below, the Commission proposes to implement the
rulemaking mandated in Section 15E(q) of the Exchange Act, in
substantial part, by significantly enhancing the requirements for
generating and disclosing this information by amending the instructions
to Form NRSRO as they relate to Exhibit 1 and amending Rule 17g-1, Rule
17g-2, and Rule 17g-7.\121\
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    \119\ See Exhibit 1 to Form NRSRO and Instruction H to Form
NRSRO (as it relates to Exhibit 1). This type of disclosure shows
the performance of an NRSRO's credit ratings in the aggregate
through statistics. Specifically, it provides the percent of rated
obligors, securities, and money market instruments in each category
of credit rating in a rating scale (e.g., AAA, AA, A, BBB, BB, B,
CCC, CC, and C) that over a given time period were downgraded or
upgraded to another credit rating category (``transition rates'')
and went into default (``default rates''). The goal is to provide a
mechanism for users of credit ratings to compare the statistical
performance of credit ratings across NRSROs.
    \120\ See 17 CFR 240.17g-2(d). This type of disclosure shows the
credit rating history of a given rated obligor, security, or money
market instrument. Specifically, it shows the initial credit rating
and all subsequent modifications to the credit rating (such as
upgrades, downgrades, and placements on watch) and the dates of such
actions. The goal is to allow users of credit ratings to compare how
different NRSROs rated an individual obligor, security, or money
market instrument and how and when those ratings were changed over
time. The disclosure of ratings histories also is designed to
provide ``raw data'' that can be used by third parties to generate
independent performance statistics such as transition and default
rates.
    \121\ See proposed amendments to Instruction H to Form NRSRO (as
it relates to Exhibit 1), paragraph (i) of Rule 17g-1, paragraph (d)
of Rule 17g-2, and proposed new paragraph (b) of Rule 17g-7.
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1. Proposed Enhancements to Disclosures of Performance Statistics
    The Commission proposes to implement the rulemaking mandated in
Section 15E(q) of the Exchange Act, in part, by amending Instruction H
to Form NRSRO (the ``instructions for Exhibit 1'') and Rule 17g-1.\122\
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    \122\ See proposed amendments to the instructions for Exhibit 1
and paragraph (i) of Rule 17g-1.
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a. Proposed Amendments to Instructions for Exhibit 1
    Exhibit 1 is part of the registration application a credit rating
agency seeking to be registered as an NRSRO (an ``applicant'') must
submit to the Commission and an NRSRO must file with the Commission,
keep up-to-date, and publicly disclose.\123\ Section 15E(a)(1)(B)(i) of
the Exchange Act requires that the registration application include
performance measurement statistics over short-term, mid-term, and long-
term periods (as applicable).\124\ The Commission implemented this
requirement, in large part, through Exhibit 1 to Form NRSRO and the
instructions for Exhibit 1.\125\ Section 15E(b)(1)(A) of the Exchange
Act provides that the performance measurement statistics must be
updated annually in an annual submission of the registration
application required by Section 15E(b)(2) (the ``annual
certification'').\126\
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    \123\ In particular, Section 15E(a)(1)(A) of the Exchange Act
requires an applicant to furnish an application for registration to
the Commission, in such form as the Commission shall require, by
rule or regulation. See 15 U.S.C. 78o-7(a)(1)(A). Section
15E(a)(1)(B) of the Exchange Act identifies information that must be
included in the application for registration. See 15 U.S.C. 78o-
7(a)(1)(B)(i)-(x). The Commission implemented Sections 15E(a)(1)(A)
and (B) of the Exchange Act by adopting Form NRSRO. See Form NRSRO;
see also Oversight of Credit Rating Agencies Registered as
Nationally Recognized Statistical Rating Organizations, 72 FR at
33569-33582 (June 18, 2007). Section 15E(a)(3) of the Exchange Act
provides that the Commission, by rule, shall require an NRSRO, upon
being granted registration, to make the information and documents in
its completed application for registration, or in any amendment to
its application, publicly available on its Web site, or through
another comparable, readily accessible means, except for certain
information that is submitted on a confidential basis. See 15 U.S.C.
78o-7(a)(3). The Commission implemented this provision by adopting
paragraph (i) of Rule 17g-1. See 17 CFR 240.17g-1(i); see also
Oversight of Credit Rating Agencies Registered as Nationally
Recognized Statistical Rating Organizations, 72 FR at 33569 (June
18, 2007). Section 15E(b)(1) requires an NRSRO to promptly amend its
application for registration if any information or document provided
therein becomes materially inaccurate; however, (as discussed below)
certain information does not have to be updated and other
information must be updated only on an annual basis. See 15 U.S.C.
78o-7(b)(1); see also 15 U.S.C. 78o-7(b)(1) and 15 U.S.C. 78o-
7(a)(1)(B)(ix). The Commission implemented this provision by
adopting Form NRSRO and paragraph (e) of Rule 17g-1. See Form NRSRO
and 17 CFR 240.17g-1(e); see also Oversight of Credit Rating
Agencies Registered as Nationally Recognized Statistical Rating
Organizations, 72 FR at 33567, 33569-33582 (June 18, 2007).
    \124\ See 15 U.S.C. 78o-7(a)(1)(B)(i).
    \125\ See instructions for Exhibit 1.
    \126\ See 15 U.S.C. 78o-7(b)(1) and (2). In particular, Section
15E(b)(2) of the Exchange Act provides that not later than 90 days
after the end of each calendar year, an NRSRO shall file with the
Commission an amendment to its registration application, in such
form as the Commission, by rule, may prescribe: (1) Certifying that
the information and documents in the application for registration
continue to be accurate; and (2) listing any material change that
occurred to such information and documents during the previous
calendar year. See 15 U.S.C. 78o-7(b)(2). The Commission implemented
these provisions by adopting Form NRSRO and paragraph (f) of Rule