rating on the Internet or through another readily accessible
means.\1027\
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    \1025\ See 15 U.S.C. 78o-7(r) and proposed new paragraph (a) of
Rule 17g-8; see also Section II.F.1 of this release for a more
detailed discussion of this proposal.
    \1026\ See 15 U.S.C. 78o-7(g).
    \1027\ See 17 CFR 240.17g-4; see also Oversight of Credit Rating
Agencies Registered as Nationally Recognized Statistical Rating
Organizations, 72 FR at 33593-33595 (June 18, 2007).
---------------------------------------------------------------------------

    When adopting Rule 17g-4, the Commission assumed NRSROs already had
procedures in place to address the specific misuses of material
nonpublic information identified in Rule 17g-4.\1028\ Nonetheless, the
Commission expected that some NRSROs might need to modify their
procedures to comply with the rule.\1029\ Based on staff experience,
the Commission estimated that it would take approximately 50 hours for
an NRSRO to establish procedures in conformance with the rule.\1030\
Given the specificity of paragraph (a) proposed Rule 17g-8 as well as
the fact that unlike the policies and procedures required under Rule
17g-4, the policies and procedures that would be required under
paragraph (a) of proposed Rule 17g-8 would not be supplementing
policies and procedures that are required under a separate self-
executing statutory provision (i.e., the requirement would be based
solely on the Commission's rule), the Commission preliminarily believes
that paragraph (a) of proposed Rule 17g-8 would result in a greater
hour burden for an NRSRO. For these reasons, the Commission
preliminarily estimates that an NRSRO would spend an average of
approximately 200 hours establishing the policies and procedures,
resulting in an industry-wide one-time hour burden of approximately
2,000 hours.\1031\ In addition, the Commission preliminarily estimates
an NRSRO would spend an average of approximately 50 hours per year
reviewing the policies and procedures and updating them (if necessary),
resulting in an industry-wide annual hour burden of approximately 500
hours.\1032\
---------------------------------------------------------------------------

    \1028\ See Oversight of Credit Rating Agencies Registered as
Nationally Recognized Statistical Rating Organizations, 72 FR at
33610-33611 (June 18, 2007).
    \1029\ Id.
    \1030\ Id.
    \1031\ 10 NRSROs x 200 hours = 2,000 hours.
    \1032\ 10 NRSROs x 50 hours = 500 hours.
---------------------------------------------------------------------------

    Proposed paragraph (b) of new Rule 17g-8 would implement Section
938(a) of the Dodd-Frank Act by requiring an NRSRO to have policies and
procedures with respect to the symbols, numbers, or scores it uses to
denote credit ratings.\1033\ These policies and procedures would be
used by the NRSRO to achieve the objectives specified in Sections
938(a)(1) through (3) of the Dodd-Frank Act.\1034\ For the reasons
stated above with respect to proposed paragraph (a) of new Rule 17g-8,
the Commission estimates that an NRSRO would spend an average of
approximately 200 hours establishing the policies and procedures,
resulting in an industry-wide one-time hour burden of approximately
2,000 hours.\1035\ In addition, the Commission preliminarily estimates
an NRSRO would spend an average of approximately 50 hours per year
reviewing the policies and procedures and updating them (if necessary),
resulting in an industry-wide annual hour burden of approximately 500
hours.\1036\
---------------------------------------------------------------------------

    \1033\ See Public Law 111-203 Sec.  938(a) and proposed
paragraph (b) of new Rule 17g-8; see also Section II.J.1 of this
release for a more detailed discussion of this proposal.
    \1034\ See Public Law 111-203 Sec. Sec.  938(a)(1)-(3).
    \1035\ 10 NRSROs x 200 hours = 2,000 hours.
    \1036\ 10 NRSROs x 50 hours = 500 hours.
---------------------------------------------------------------------------

    Proposed paragraph (c) of new Rule 17g-8 would implement Section
15E(h)(4)(A)(ii) of the Exchange Act by requiring the NRSRO to
establish, maintain, and enforce certain policies and procedures
pursuant to Section 15E(h)(4)(A) of the Exchange Act.\1037\ The
Commission preliminarily believes that the hour burdens resulting from
this proposal would be closer to the one-time hour burden estimate for
Rule 17g-4 because these policies and procedures would supplement
policies and procedures that are required under a separate self-
executing statutory provision. However, the Commission also believes
there would be new policies and procedures and, therefore, as with the
proposed requirements in paragraphs (a) and (b) of new Rule 17g-8, the
NRSRO would need to establish new policies and procedures. For these
reasons, the Commission preliminarily estimates an NRSRO would spend an
average of approximately 100 hours establishing the policies and
procedures, resulting in an industry-wide one-time hour burden of
approximately 1,000 hours.\1038\ In addition, the Commission
preliminarily estimates an NRSRO would spend an average of
approximately 25 hours per year reviewing the policies and procedures
and updating them (if necessary), resulting in an average industry-wide
annual hour burden of approximately 250 hours.\1039\
---------------------------------------------------------------------------

    \1037\ See 15 U.S.C. 78o-7(h)(4)(A)(ii) and proposed new
paragraph (c) of Rule 17g-8; see also Section II.C.1 of this release
for a more detailed discussion of this proposal.
    \1038\ 10 NRSROs x 100 hours = 1,000 hours.
    \1039\ 10 NRSROs x 25 hours = 250 hours.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission estimates that the total
industry-wide one-time hour burden to the NRSROs resulting from the
proposed amendments to Rule 17g-8

would be approximately 5,000 hours\1040\ and the total industry-wide
annual hour burden would be approximately 1,250 hours.\1041\
---------------------------------------------------------------------------

    \1040\ 2,000 hours + 2,000 + 1,000 hours = 5,000 hours.
    \1041\ 500 hours + 500 hours + 250 hours = 1,250 hours.
---------------------------------------------------------------------------

7. Proposed New Rule 17g-9
    The Commission is proposing new Rule 17g-9.\1042\ This rule would
implement Section 936 of the Dodd-Frank Act by requiring an NRSRO to
establish, maintain, enforce, and document standards of training,
experience, and competence for the individuals it employs to determine
credit ratings.\1043\ As discussed below, the Commission preliminarily
estimates that these proposals would result in additional one-time and
annual hour burdens for NRSROs.
---------------------------------------------------------------------------

    \1042\ Proposed new Rule 17g-9 would be codified at 17 CFR
240.17g-9, if adopted.
    \1043\ See Public Law 111-203 Sec.  936 and proposed new Rule
17g-9; see also Section II.I.1 of this release for a more detailed
discussion of this proposal.
---------------------------------------------------------------------------

    In this regard, the Commission preliminarily believes that several
of the NRSROs already have implemented standards of training,
experience, and competence for the individuals they employ to determine
credit ratings. For example, Section 1.4 of the Code of Conduct
Fundamentals for Credit Rating Agencies of the International
Organization of Securities Commissions (``IOSCO Code'') provides that
credit rating agencies ``should use people who, individually or
collectively (particularly where rating committees are used) have
appropriate knowledge and experience in developing a rating opinion for
the type of credit being applied.''\1044\ A number of NRSROs disclose
that they have implemented the IOSCO Code.\1045\ In addition, some
NRSROs disclose in the Exhibits to their Form NRSROs that they have
standards of training, experience, competence, continuing education,
and testing programs for their credit analysts.\1046\
---------------------------------------------------------------------------

    \1044\ Code of Conduct Fundamentals for Credit Rating Agencies,
Technical Committee of IOSCO (May 2008).
    \1045\ The following NRSROs, for example, reported in Exhibit 5
to Form NRSRO that they comply with the IOSCO Code: A.M. Best
Company, Inc., DBRS Ltd., Kroll Bond Rating Agency, Inc., Moody's
Investors Service, Inc., Rating and Investment Information, Inc.,
Realpoint LLC, and Standard & Poor's Ratings Services.
    \1046\ For example, Fitch, Inc., Moody's Investors Service,
Inc., and Standard & Poor's Ratings Services reported in Exhibit 8
to Form NRSRO that they had standards of experience and competence
for their credit analysts, and Moody's Investors Service, Inc.
reported in Exhibit 5 to Form NRSRO that its analysts were required
to complete 20 hours of coursework annually.
---------------------------------------------------------------------------

    As noted above, the size and complexity of the NRSROs varies
greatly. The magnitude of this variance is reflected in the number of
credit analysts and credit analyst supervisors each NRSRO employs
(hereinafter collectively referred to as ``credit analysts'') as shown
in Figure 3 above.\1047\ For example, three NRSROs employed over 1,000
credit analysts as of calendar year-end 2009 and three NRSROs employed
fewer than 30 credit analysts.
---------------------------------------------------------------------------

    \1047\ These figures are based on the annual certifications on
Form NRSRO submitted to the Commission and publicly disclosed by the
NRSROs for the calendar year-end 2009. See Annual Report on
Nationally Recognized Statistical Rating Organizations, Commission
(Jan. 2011), p. 5.
---------------------------------------------------------------------------

    The Commission preliminarily estimates that the degree of the one-
time and annual hour burdens resulting from proposed new Rule 17g-9
would depend on the number of credit analysts an NRSRO employs as well
as the range and complexity of the obligors, securities, and money
market instruments it rates. Consequently, the one-time and annual hour
burdens per NRSRO would vary widely.
    In order to account for this variance, the Commission preliminarily
believes that the one-time and annual hour burden estimates should be
based on the number of credit rating analysts employed by the NRSROs.
Based on the 2009 annual certifications, the Commission estimates that
the NRSROs currently employ approximately 3,520 credit analysts.\1048\
In addition, as noted above, the Commission preliminarily believes some
of the NRSROs have established standards of training, experience, and
competence for their credit analysts. Consequently, for purposes of
this estimate, the Commission preliminarily believes these firms would
be required to augment or modify existing standards to comply with the
proposed rule as opposed to developing a set of completely new
standards. For these reasons, the Commission preliminarily estimates
that the one-time burden to establish the standards required pursuant
to proposed new Rule 17g-9 would be approximately 5 hours per credit
analyst, resulting in an industry-wide one-time hour burden of
approximately 17,600 hours.\1049\ In addition, the Commission
preliminarily allocates 75% of these burden hours (13,200 hours) to
internal burden and the remaining 25% (4,400 hours) to external burden
to hire outside professionals to assist in setting up training
programs.\1050\ The Commission preliminarily estimates $400 per hour
for external costs for retaining outside consultants, resulting in an
industry-wide cost of approximately $1,760,000.\1051\ Although larger
NRSROs may realize economies of scale, the Commission preliminarily
estimates that the industry-wide annual hour burden of 17,600 hours,
including the external burden costs, would be allocated to each NRSRO
based on the number of credit analysts the firm employs.\1052\
---------------------------------------------------------------------------

    \1048\ NRSROs reported that they have a total of 3,520 credit
analysts and 820 credit analyst supervisors. See Figure 3. As
discussed above in Section II.M.4.b of this release, some NRSROs
included credit analyst supervisors in the number of credit analysts
they reported; whereas others may not have included the supervisors.
Based on staff experience, the Commission preliminarily believes
that the majority of NRSROs included credit analyst supervisors in
the number of reported credit analysts. Consequently, for the
purposes of the PRA, the Commission is using a total of 3,520 credit
analysts across the 10 NRSROs.
    \1049\ 3,520 credit analysts x 5 hours = 17,600 hours.
    \1050\ 17,600 hours x 0.75 = 13,200 hours; 17,600 hours x 0.25 =
4,400 hours.
    \1051\ 4,400 hours x $400 = $1,760,000. See Disclosure for
Asset-Backed Securities Required by Section 943 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act, 76 FR at 4507-4506
(Jan. 26, 2011) (providing an estimate of $400 an hour to engage
outside professionals) and Proposed Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR 63889 (Dec. 4, 2009)
(providing an estimate of $400 per hour to engage an outside
attorney).
    \1052\ See Figure 3.
---------------------------------------------------------------------------

    The Commission believes that the annual hour burden to comply with
proposed new Rule 17g-9 would be less than the one-time hour burden
since NRSROs would have established the standards of training,
experience, and competence for the individuals they employ to determine
credit ratings. The annual hour burden would arise from reviewing and
updating the standards. Consequently, the Commission preliminarily
estimates that the annual industry-wide hour burden to update the
standards would be approximately 1 hour per credit analyst employed,
resulting in an industry-wide annual hour burden of approximately 3,520
hours across all NRSROs.\1053\ In addition, the Commission
preliminarily allocates 75% of these burden hours (2,640 hours) to
internal burden and the remaining 25% (880 hours) to external burden to
hire outside professionals to assist in reviewing and updating training
programs.\1054\ The Commission preliminarily estimates $400 per hour
for external costs for retaining outside consultants, resulting in an
industry-wide cost of $352,000.\1055\ Finally,

although larger NRSROs may realize economies of scale, the Commission
estimates that the industry-wide annual hour burden of 3,520 hours,
including the external costs, would be allocated to each NRSRO based on
the number of credit analysts the firm employs.\1056\
---------------------------------------------------------------------------

    \1053\ 3,520 credit analysts x 1 hour = 3,520 hours.
    \1054\ 3,520 hours x 0.75 = 2,640 hours; 3,520 hours x 0.25 =
880 hours.
    \1055\ 880 hours x $400 = $352,000. See Disclosure for Asset-
Backed Securities Required by Section 943 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, 76 FR at 4507-4506 (Jan.
26, 2011) (providing an estimate of $400 an hour to engage outside
professionals) and Proposed Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR 63889 (Dec. 4, 2009)
(providing an estimate of $400 per hour to engage an outside
attorney).
    \1056\ See Figure 3.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission estimates that proposed
new Rule 17g-9 would result in a total industry-wide one-time hour
burden of approximately 17,600 hours,\1057\ a total industry-wide one-
time cost of approximately $1,760,000, a total industry-wide annual
hour burden of approximately 3,520 hours, and a total industry-wide
annual external cost of approximately $352,000.
---------------------------------------------------------------------------

    \1057\ 2,000 hours + 2,000 + 1,000 hours = 5,000 hours.
---------------------------------------------------------------------------

8. Proposed New Rule 17g-10 and Form ABS Due Diligence-15E
    The Commission is proposing new Rule 17g-10 and new Form ABS Due
Diligence-15E.\1058\ Proposed new Rule 17g-10 would implement
rulemaking mandated in Sections 15E(s)(4)(B) and (C) of the Exchange
Act by requiring that the written certification a provider of third-
party due diligence services must provide to an NRSRO be made on Form
ABS Due Diligence-15E.\1059\ As discussed below, the Commission
preliminarily estimates that these proposals would result in additional
one-time and annual hour burdens for providers of third-party due
diligence services.
---------------------------------------------------------------------------

    \1058\ Proposed new Rule 17g-10 would be codified at 17 CFR
240.17g-10 and proposed new Form ABS Due Diligence-15E would be
identified at 17 CFR 249b.400.
    \1059\ See 15 U.S.C. 78o-7(s)(4)(B) and (C), proposed new Rule
17g-10, and proposed new Form ABS Due Diligence-15E; see also
Sections II.H of this release for a more detailed discussion of this
proposal.
---------------------------------------------------------------------------

    In terms of one-time hour burdens, the Commission preliminarily
estimates that providers of third-party due diligence services would
need to develop processes and protocols to provide the required
information in new Form ABS Due Diligence-15E and submit the
certifications to NRSROs. The Commission preliminarily estimates that
providers of third-party due diligence services would spend an average
of approximately 300 hours per firm developing these processes and
protocols, resulting in a one-time industry-wide hour burden of 3,000
hours.\1060\ In addition, the Commission preliminarily allocates 75% of
these burden hours (2,250 hours) to internal burden and the remaining
25% (750 hours) to external burden to hire outside attorneys to provide
legal advice on the requirements of new Rule 17g-10 and Form ABS Due
Diligence-15E.\1061\ The Commission preliminarily estimates $400 per
hour for external costs for retaining outside consultants, resulting in
an industry-wide one-time cost of $300,000.\1062\
---------------------------------------------------------------------------

    \1060\ 10 Providers of third-party due diligence services x 300
hours = 3,000 hours. This estimate is based on the Commission's
estimate for the amount of time it would take a securitizer to set
up a system to make the disclosures required by Form ABS-15G. See
Disclosure for Asset-Backed Securities Required by Section 943 of
the Dodd-Frank Wall Street Reform and Consumer Protection Act, 76 FR
at 4507-4506 (Jan. 26, 2011). The Commission, however, has reduced
the hour estimate of 850 hours used for Form ABS-15G by
approximately two-thirds because information required to be provided
in proposed new Form ABS Due Diligence-15E is substantially less
detailed and complex than the information required in Form ABS-15G.
    \1061\ 3,000 hours x 0.75 = 2,250 hours; 3,000 hours x 0.25 =
750 hours.
    \1062\ 750 hours x $400 = $300,000. See Disclosure for Asset-
Backed Securities Required by Section 943 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act, 76 FR at 4507-4506 (Jan.
26, 2011) (providing an estimate of $400 an hour to engage outside
professionals) and Proposed Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR 63889 (Dec. 4, 2009)
(providing an estimate of $400 per hour to engage an outside
attorney).
---------------------------------------------------------------------------

    With respect to the annual burden, the Commission preliminarily
believes that the estimate should be based on the number of issuances
per year of Exchange Act-ABS because the requirement to produce the
certification and provide it to NRSROs would be triggered when an
issuer, underwriter, or NRSRO hires a provider of third-party due
diligence services for transactions.\1063\ In the PRA for the adoption
of Rule 17g-7, the Commission estimated, on average, there would be
approximately 2,067 Exchange Act-ABS offerings per year.\1064\ In
addition, the Commission preliminarily estimates that a provider of
third-party due diligence services would spend approximately 30 minutes
completing and submitting Form ABS Due Diligence-15E. The Commission
bases this preliminary estimate on the fact that the first three Items
in the form require basic information and the fourth Item (the due
diligence performed) and the fifth Item (the findings and conclusions
of the review) could be drawn directly from the due diligence reports
the Commission expects that providers of third-party due diligence
services generate with respect to their performance of due diligence
services. Therefore, the Commission preliminarily estimates that the
industry-wide annual hour burden resulting from proposed new Rule 17g-
10 and Form ABS Due Diligence-15E would be approximately 1,034
hours.\1065\
---------------------------------------------------------------------------

    \1063\ See 15 U.S.C. 78o-7(s)(4)(B) and (C), and proposed new
Rule 17g-10.
    \1064\ See Disclosure for Asset-Backed Securities Required by
Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR at 4507-4508 (Jan. 26, 2011). The Commission
notes that issuers, underwriters, and NRSROs may not use providers
of third-party due diligence services with respect to every issuance
of Exchange Act-ABS. For example, as discussed in Section II.H of
this release, the Commission preliminarily believes that providers
of third-party due diligence services are used primarily for RMBS
transactions. However, the Commission's estimate uses the total
number of estimated Exchange Act-ABS offerings (as opposed to a
lesser amount based on an estimate of RMBS offerings) because the
use of providers of third-party due diligence services may migrate
to other types of Exchange Act-ABS. This also makes the Commission's
estimates more conservative.
    \1065\ 2,067 Exchange Act-ABS offerings x 30 minutes = 1,034
hours.
---------------------------------------------------------------------------

    For the foregoing reasons, the Commission estimates proposed new
Rule 17g-8 would result in a total industry-wide one-time burden of
approximately 3,000 hours, a total industry-wide one-time cost of
approximately $300,000, and a total industry-wide annual hour burden of
approximately 1,034 hours.
9. Rule 15Ga-2 and Form ABS-15G
    The Commission is proposing new Rule 15Ga-2 and amendments to Form
ABS-15G.\1066\ The new rule and amended form would implement Section
15E(s)(4)(A) of the Exchange Act.\1067\ As discussed below, the
Commission preliminarily estimates that these proposals would result in
additional one-time and annual hour burdens for issuers and
underwriters of the Exchange Act-ABS.
---------------------------------------------------------------------------

    \1066\ See proposed new Rule 15Ga-2 and proposed amendments to
Form ABS-15G.
    \1067\ See 15 U.S.C. 78o-7(s)(4)(A); see also Section II.H.1 of
this release for a more detailed discussion of this proposal.
---------------------------------------------------------------------------

    Proposed new Rule 15Ga-2 would require an issuer or underwriter of
any Exchange Act-ABS that is to be rated by an NRSRO to furnish a Form
ABS-15G on the EDGAR system containing the findings and conclusions of
any third-party ``due diligence report'' obtained by the issuer or
underwriter. Under the proposal, the disclosure would be furnished
using Form ABS-15G for both registered and unregistered offerings of
Exchange Act-ABS. In addition, under the Commission's proposal, an
issuer or underwriter would not need to furnish Form ABS-15G if the
issuer or underwriter obtains a representation

from each NRSRO engaged to produce a credit rating for the Exchange
Act-ABS that can be reasonably relied on that the NRSRO will publicly
disclose the findings and conclusions of any third-party due diligence
report obtained by the issuer or underwriter with the publication of
the credit rating five business days prior to the first sale in the
offering in an information disclosure form generated pursuant to
proposed new paragraph (a)(1) of Rule 17g-7.
    The Commission preliminarily believes that this proposal would
result in a one-time hour burden to issuers and underwriters in
offerings of registered and unregistered Exchange Act-ABS in connection
with developing processes and protocols to provide the required
information to comply with new Rule 15Ga-2, including modifying their
existing Form ABS-15G processes and protocols to accommodate the
requirements of Rule 15Ga-2. In the adopting release for Form ABS-15G,
the Commission estimated that 270 unique securitizers would be required
to file the form.\1068\ The Commission preliminarily estimates that
each securitizer would require approximately 100 hours to develop
processes and protocols to comply with new Rule 15Ga-2 and to modify
their existing Form ABS-15G processes and protocols to provide for the
disclosure of the information required pursuant to Rule 15Ga-2,
resulting in an industry-wide total of 27,000 hours.\1069\ The
Commission believes that this work would be done internally by issuers
and underwriters.
---------------------------------------------------------------------------

    \1068\ See Disclosure for Asset-Backed Securities Required by
Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR at 4506 (Jan. 26, 2011).
    \1069\ 270 unique securitizers x 100 hours = 27,000 hours. This
estimate is based on the Commission's estimate for the amount of
time it would take a securitizer to set up a system to make the
disclosures required by Form ABS-15G as originally adopted by the
Commission. See Disclosure for Asset-Backed Securities Required by
Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR at 4507-4506 (Jan. 26, 2011). The Commission,
however, believes that the hour burden for amending existing Form
ABS-15G processes and protocols will be significantly lower than the
estimate of 850 hours used to initially develop those processes and
protocols.
---------------------------------------------------------------------------

    The PRA burden assigned to Form ABS-15G reflects the cost of
preparing and furnishing the form on EDGAR. As noted above, the
proposed amendment to Form ABS-15G would require that it be furnished
by issuers and underwriters in offerings of registered and unregistered
Exchange Act-ABS. Consequently, the Commission preliminarily believes
that the estimate of the annual hour burden for furnishing Form ABS-15G
should be based on an estimate of the number of Exchange Act-ABS
offerings per year. As noted above, in the PRA for the adoption of Rule
17g-7, the Commission estimated, on average, there would be
approximately 2,067 Exchange Act-ABS offerings per year.\1070\ In
addition, the Commission preliminarily estimates that an issuer or
underwriter would spend approximately one hour completing and
submitting Form ABS-15G for purposes of meeting the requirement in Rule
15Ga-2. The Commission bases this preliminary estimate on the fact that
Form ABS-15G would elicit much less information when used solely for
the purpose of complying with proposed new Rule 15Ga-2. In addition,
the information required in the form could be drawn directly from the
due diligence reports the Commission expects providers of third-party
due diligence services generate with respect to their performance of
due diligence services. Therefore, the Commission preliminarily
estimates that the industry-wide annual hour burden resulting from
proposed new Rule 15Ga-2 and the amendments to Form ABS-15G would be
approximately 2,067 hours.\1071\ In addition, the Commission
preliminarily believes that this work would be done internally by
issuers and underwriters of Exchange Act-ABS.
---------------------------------------------------------------------------

    \1070\ See Disclosure for Asset-Backed Securities Required by
Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR at 4507-4508 (Jan. 26, 2011). As noted above,
issuers, underwriters, and NRSROs may not use providers of third-
party due diligence services with respect to every issuance of
Exchange Act-ABS. For example, as discussed in Section II.H of this
release, the Commission preliminarily believes that providers of
third-party due diligence services are used primarily for RMBS
transactions. However, the Commission's estimate uses the total
number of estimated Exchange Act-ABS offerings (as opposed to a
lesser amount based on an estimate of RMBS offerings) because the
use of providers of third-party due diligence services may migrate
to other types of Exchange Act-ABS. This also makes the Commission's
estimates more conservative.
    \1071\ 2,067 Exchange Act-ABS transactions x 1 hour = 2,067
hours.
---------------------------------------------------------------------------

    To avoid duplicative disclosure, however, the Commission notes that
an issuer or underwriter would not need to furnish Form ABS-15G if the
issuer or underwriter obtains a representation from each NRSRO engaged
to produce a credit rating for the Exchange Act-ABS that can be
reasonably relied on that the NRSRO will publicly disclose the findings
and conclusions of any third-party due diligence report obtained by the
issuer or underwriter with the publication of the credit rating five
business days prior to the first sale in the offering in an information
disclosure form generated pursuant to proposed new paragraph (a)(1) of
Rule 17g-7. The Commission anticipates that issuers and underwriters
subject to this proposed requirement likely will seek to obtain such
representations from the NRSROs engaged to produce credit ratings for
Exchange Act-ABS. Consequently, the PRA burden for issuers and
underwriters may be reduced substantially. However, to be conservative,
the Commission preliminarily allocates the PRA burden for complying
with proposed new Rule 15Ga-2 and the proposed amendments to Form ABS-
15G to the issuers and underwriters.
    In addition, the Commission also is proposing to permit issuers of
municipal Exchange Act-ABS, or underwriters in such offerings, to
provide the information required by Form ABS-15G on EMMA. The
Commission believes this would limit the PRA burden on issuers and
underwriters of municipal Exchange Act-ABS subject to the proposed
rule, as well as provide the disclosure for investors in the same
location as other disclosures regarding municipal Exchange Act-ABS.
    For the foregoing reasons, the Commission preliminarily estimates
that proposed new Rule 15Ga-2 and the proposed amendments to Form ABS-
15G would result in a total industry-wide one-time hour burden of
approximately 27,000 hours and a total industry-wide annual hour burden
of approximately 2,067 hours.
10. Proposed Amendments to Regulation S-T
    The Commission is proposing that certain Form NRSRO submissions and
all Rule 17g-3 annual report submissions be submitted to the Commission
using the EDGAR system. In order to implement this requirement, the
Commission is proposing amendments to Rule 101 of Regulation S-T to
require the electronic submission using the EDGAR system of Form NRSRO
pursuant to paragraphs (e), (f), and (g) of Rule 17g-1 and the annual
reports pursuant to Rule 17g-3.\1072\ The Commission also is proposing
to amend Rule 201 of Regulation S-T, which governs temporary hardship
exemptions from electronic filing, to make this exemption unavailable
for NRSRO submissions.\1073\
---------------------------------------------------------------------------

    \1072\ See proposed amendment of Rule 101 of Regulation S-T (17
CFR 231.101); see also Section II.L of this release for a more
detailed discussion of this proposal.
    \1073\ See proposed amendment of Rule 201 of Regulation S-T (17
CFR 231.201); see also Section II.L of this release for a more
detailed discussion of this proposal.

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

    The Commission is proposing new Rule 15Ga-2, which would require an
issuer or underwriter of any Exchange Act-ABS that is to be rated by an
NRSRO to furnish a Form ABS-15G on the EDGAR system containing the
findings and conclusions of any third-party ``due diligence report''
obtained by the issuer or underwriter.\1074\
---------------------------------------------------------------------------

    \1074\ See proposed new Rule 15Ga-2 and proposed amendments to
Form ABS-15G; see also Section II.H.1 of this release for a more
detailed discussion of this proposal.
---------------------------------------------------------------------------

    OMB requires the Commission to assign a burden of one hour to
Regulation S-T and to indicate that the Regulation has one respondent
so that the automated OMB system will be able to handle approval of the
Regulation. OMB has already approved a burden of one hour for one
respondent to the Regulation.
11. Form ID
    The Commission expects that NRSROs would need to file a Form ID
with the Commission in order to gain access to the EDGAR system. Form
ID is used to request the assignment of access codes to make
submissions on EDGAR. The current OMB approved hour burden for Form ID
is 15 minutes per respondent.\1075\ Thus, the Commission estimates that
the total one-time hour burden resulting from filing Form ID would be
approximately 2.5 hours.\1076\
---------------------------------------------------------------------------

    \1075\ See Form ID (OMB Number 3235-0328).
    \1076\ 10 NRSROs x 15 minutes = 150 minutes; 150 minutes/60
minutes = 2.5 hours.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the issuers and
underwriters of Exchange Act-ABS that would need to furnish Form ABS-
15G to the Commission through the EDGAR system pursuant to proposed new
Rule 15Ga-2 already have access to the EDGAR system because, for
example, they need such access for the purpose of Rule 15Ga-1.
12. Total Paperwork Burdens
    Based on the foregoing, the Commission estimates that the total
recordkeeping burden for NRSRO respondents resulting from the proposed
rule amendments and proposed new rules would be approximately 77,150
industry-wide one-time hours, $7,160,000 industry-wide external one-
time costs, 741,140 industry-wide annual hours, and $552,000 industry-
wide external annual costs.
    Based on the foregoing, the Commission estimates that the total
recordkeeping burden for respondents that are providers of third-party
due diligence services resulting from the rule amendments and proposed
new rules would be approximately 3,000 industry-wide one-time hours,
$300,000 industry-wide external one-time costs, and 1,034 industry-wide
annual hours.
    Based on the foregoing, the Commission estimates that the total
recordkeeping burden for issuer and underwriter respondents resulting
from the rule amendments and proposed new rules would be approximately
27,000 industry-wide one-time hours and 2,067 industry-wide annual
hours.

E. Collection of Information Is Mandatory

    The collections of information pursuant to the proposed amendments
and new rules are mandatory, as applicable, for NRSROs, providers of
third-party due diligence services, and issuers and underwriters.

F. Confidentiality

    Other than information for which an NRSRO, provider of third-party
due diligence services, or issuer or underwriter requests confidential
treatment, or as may otherwise be kept confidential by the Commission,
and which may be withheld from the public in accordance with the
provisions of FOIA, the collection of information requirements
resulting from the proposed amendments and new rules would not be
confidential and would be publicly available.\1077\
---------------------------------------------------------------------------

    \1077\ See 15 U.S.C. 552 et seq.
---------------------------------------------------------------------------

G. Retention Period of Recordkeeping Requirements

    All records an NRSRO is required to retain under Rule 17g-3
(including records that would need to be made or received by an NRSRO
under the proposed amendments and new rules) must be retained for three
years after the record is made or retained.\1078\
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    \1078\ See 17 CFR 240.17g-2(a), (b), and (c).
---------------------------------------------------------------------------

    The Dodd-Frank Act did not establish record retention requirements
for providers of third-party due diligence services.
    The records issuers and underwriters are required to make and
furnish to the Commission pursuant to the requirements in proposed new
Rule 15Ga-2 and the proposed amendments to Form ABS-15G would be
mandatory. Responses to the information collections will not be kept
confidential and there is no mandatory retention period for the
collections of information.

H. Request for Comment

    Pursuant to 44 U.S.C. 3505(c)(2)(B), the Commission solicits
comment to:
    1. Evaluate whether the proposed collection of information
requirements are necessary for the performance of the functions of the
Commission, including whether the information shall have practical
utility;
    2. Evaluate the accuracy of the Commission's estimates of the
burden of the proposed collection of information requirements;
    3. Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected; and
    4. Minimize the burden of the collection of information
requirements on those who are to respond, including through the use of
automated collection techniques or other forms of information
technology.
    Persons wishing to submit comments on the collection of information
requirements should direct them to the following persons: (1) Desk
Officer for the Securities and Exchange Commission, Office of
Information and Regulatory Affairs, OMB, Room 3208, New Executive
Office Building, Washington, DC 20503; and (2) Secretary, Securities
and Exchange Commission, Station Place, 100 F Street, NE., Washington,
DC 20549-1090 with reference to File No. S7-18-11. OMB is required to
make a decision concerning the collection of information between 30 and
60 days after publication, so a comment to OMB is best assured of
having its full effect if OMB receives it within 30 days of
publication. The Commission has submitted the proposed collection of
information to OMB for approval. Requests for the materials submitted
to OMB by the Commission with regard to this collection of information
should be in writing, refer to File No. S7-18-11, and be submitted to
the Securities and Exchange Commission, Office of Investor Education
and Advocacy, Station Place, 100 F Street, NE., Washington, DC 20549-
0213.

V. Economic Analysis

    The Commission is sensitive to the costs imposed by its rules. To
the extent possible, the discussion below focuses on the benefits and
costs of the decisions made by the Commission to fulfill the mandates
of the Dodd-Frank Act within its permitted discretion, rather than the
benefits and costs of the mandates of the Dodd-Frank Act itself.
However, as discussed below, to the extent that the Commission
exercises discretion in implementing the provisions of the Dodd-Frank
Act, the benefits and costs arising from the Commission's exercise of
its discretion and the benefits and costs arising directly from the
requirements of the Dodd-Frank Act are not entirely separable.
Accordingly, where the

Commission believes that it has exercised some discretion in
implementing the Dodd-Frank Act, hour burden estimates and dollar cost
estimates in the above PRA analysis are included in full below, even
where a portion--in most cases, the significantly greater portion--of
the anticipated costs are attributable to the rulemaking mandates of
the Dodd-Frank Act and not the exercise of the Commission's discretion
in how to implement those requirements.\1079\ Where the Commission
believes, however, that it has not exercised discretion in implementing
the rulemaking mandates of the Dodd-Frank Act and that any anticipated
benefits and costs are entirely attributable to those mandates, those
anticipated benefits and costs are not addressed in the discussion
below. Finally, as used below, the term ``incremental costs'' refers to
costs attributable to the exercise of the Commission's rulemaking
discretion that are in addition to costs attributable to the rulemaking
mandates of the Dodd-Frank Act.
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    \1079\ For purposes of this economic analysis, the Commission's
salary figures are from SIFMA's Management & Professional Earnings
in the Securities Industry 2010, modified by Commission staff to
account for an 1800-hour work year and multiplied by 5.35 to account
for bonuses, firm size, employee benefits, and overhead.
---------------------------------------------------------------------------

    In addition, the Commission notes that Section 3(f) of the Exchange
Act requires the Commission, whenever it engages in rulemaking and is
required to consider or determine whether an action is necessary or
appropriate in the public interest, to consider, in addition to the
protection of investors, whether the action would promote efficiency,
competition, and capital formation.\1080\ Furthermore, Section 23(a)(2)
of the Exchange Act requires the Commission, when issuing rules under
the Exchange Act, to consider the impact such rules would have on
competition.\1081\ Section 23(a)(2) prohibits the Commission from
adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act.\1082\ The Commission's analysis under these requirements as
applied to the proposed amendments to existing rules and proposed new
rules is included below in the discussions of the benefits and the
costs of the proposals where appropriate. In this regard, the
Commission's analysis focuses on the discretionary component of the
Commission's proposals and the incremental costs resulting from that
discretion.
---------------------------------------------------------------------------

    \1080\ See 15 U.S.C. 78c(f).
    \1081\ See 15 U.S.C. 78w(a)(2).
    \1082\ See id.
---------------------------------------------------------------------------

    Unless otherwise noted, the total one-time and annual cost
estimates per NRSRO for PRA purposes as used in this section are
averages across all types of NRSROs that would be subject to the
proposed amendments and new rules. The NRSROs vary, in terms of size
and complexity, from small entities that employ less than 20 credit
analysts to complex global organizations that employ over a thousand
credit analysts.\1083\ Given the variance in size between the largest
NRSROs and the smallest NRSROs, the cost estimates, as averages across
all NRSROs, are skewed higher because the largest firms currently
dominate in terms of size and the volume of credit rating
activities.\1084\
---------------------------------------------------------------------------

    \1083\ See, e.g., Annual Report on Nationally Recognized
Statistical Rating Organizations. Commission (January 2011), pp. 4-
9.
    \1084\ As discussed above in Section IV.D of this release, based
on data collected from the NRSROs in their Form NRSROs and Rule 17g-
3 annual reports, the Commission has calculated an HHI number using
the number credit ratings outstanding per NRSRO and that number is
3,495, which is equivalent to there being approximately 2.86 equally
sized firms. The HHI using earnings reported by NRSROs in the Rule
17g-3 annual reports is 3,926, which the equivalent of 2.55 equally
sized firms.
---------------------------------------------------------------------------

    The Commission's estimates of the benefits and costs of the
proposals, as well as the anticipated effects on efficiency,
competition and capital formation, are described below. The Commission
recognizes that there may be benefits and costs resulting from the
proposals that are not required to be described or otherwise identified
below. The Commission generally requests that commenters identify and
describe any such benefits and costs.

A. Internal Control Structure

    Section 932(a)(2)(B) of the Dodd-Frank Act added paragraph (3) to
Section 15E(c) of the Exchange Act.\1085\ 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.'' \1086\ 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 CEO or equivalent individual.\1087\ The Commission
proposes to implement this rulemaking by: (1) Adding a new paragraph
(b)(12) to Rule 17g-2; \1088\ and (2) amending paragraphs (a) and (b)
of Rule 17g-3.\1089\
---------------------------------------------------------------------------

    \1085\ See Public Law 111-203 Sec.  932(a)(2)(B) and 15 U.S.C.
78o-7(c)(3)(A); see also Section II.A.1 of this release for a more
detailed discussion of this provision.
    \1086\ Id.
    \1087\ See 15 U.S.C. 78o-7(c)(3)(B)(i)-(iii).
    \1088\ See proposed new paragraph (b)(12) to Rule 17g-2; see
also Section II.A.2 of this release for a more detailed discussion
of this proposal.
    \1089\ See proposed new paragraphs (a)(7) and of Rule 17g-3; see
also Section II.A.3 of this release for a for a more detailed
discussion of these proposals.
---------------------------------------------------------------------------

    Proposed new paragraph (b)(12) of Rule 17g-2 would 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.\1090\ As a result, the various retention and
production requirements of paragraphs (c), (d), (e), and (f) of Rule
17g-2 in its current form would apply to the documented internal
control structure.\1091\
---------------------------------------------------------------------------

    \1090\ See proposed new paragraph (b)(12) of Rule 17g-2.
    \1091\ See 17 CFR 240.17g-2(c), (d), (e) and (f).
---------------------------------------------------------------------------

    Proposed new paragraph (a)(7) of Rule 17g-3 would require an NRSRO
to include with the other reports required under that rule a report
regarding the NRSRO's internal control structure established pursuant
to Section 15E(c)(3)(A) of the Exchange Act.\1092\ The proposed
amendment would mirror the text of Section 15E(c)(3)(B) of the Exchange
Act by requiring that the 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.\1093\ The Commission's proposed amendment to paragraph (b)
of Rule 17g-3 would require that the NRSRO's CEO, 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.\1094\
The CEO or other individual would need to state, among other things,
that the report fairly presents, in all material respects, a
description of the responsibility of management in establishing and

maintaining an effective internal control structure and an assessment
of the effectiveness of the internal control structure.
---------------------------------------------------------------------------

    \1092\ See proposed new paragraph (a)(7) of Rule 17g-3.
    \1093\ Compare 15 U.S.C. 78o-7(c)(3)(B)(i) and (ii) and proposed
new paragraphs (a)(7)(i) and (ii) of Rule 17g-3.
    \1094\ See proposed amendments to paragraph (b) of Rule 17g-3.
---------------------------------------------------------------------------

1. Benefits
    Section 15E(c)(3)(A) of the Exchange Act 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.\1095\ The Commission proposes to further implement this
provision by applying the record retention and production requirements
of Rule 17g-2 to the documented internal control structure by adding
new paragraph (b)(12).\1096\ Recordkeeping rules such as Rule 17g-2
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.\1097\ 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 applicable securities laws,
including the provisions of Section 15E of the Exchange Act and the
rules thereunder.\1098\ The proposed amendment to Rule 17g-2 is
designed to assist the Commission in monitoring an NRSRO's compliance
with the requirement in Section 15E(c)(3)(A) of the Exchange Act 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.
---------------------------------------------------------------------------

    \1095\ See 15 U.S.C. 78o-7(c)(3)(A).
    \1096\ See 17 CFR 240.17g-2(c), (d), (e) and (f).
    \1097\ See Oversight of Credit Rating Agencies Registered as
Nationally Recognized Statistical Rating Organizations, 72 FR at
33582 (June 18, 2007).
    \1098\ Id.
---------------------------------------------------------------------------

    The Commission preliminarily believes that implementing the
internal control structure reporting requirement through an amendment
to Rule 17g-3 would facilitate the Commission's oversight of NRSROs.
First, it would assist the Commission in monitoring an NRSRO's
compliance with the requirement in Section 15E(c)(3)(A) of the Exchange
Act 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.
Second, it would specify the format, manner, and timeframe in which the
report must be submitted to the Commission, thereby facilitating the
Commission's processing of the report. Furthermore, the Commission
preliminarily believes that proposed amendments to Rules 17g-2 and 17g-
3 would provide an efficient process for NRSROs by allowing them to
file the internal control report with the other annual reports required
under Rule 17g-3.
2. Costs
    The Commission preliminarily estimates that, although the costs
resulting from the proposed amendment to Rule 17g-2, discussed below,
would largely be attributable to the Commission's discretionary
rulemaking, those incremental costs would be minimal. An NRSRO already
should have recordkeeping and control systems in place to comply with
the existing requirements in Rule 17g-2 to make and retain or to retain
documents listed in the rule.
    The Commission preliminarily estimates that the Commission's
exercise of rulemaking discretion with respect to the amendments to
Rule 17g-3 would also impose minimal incremental costs. The Commission
preliminarily estimates that the costs resulting from the proposed
amendments to Rule 17g-3 would largely be attributable to the
rulemaking mandated by the Dodd-Frank Act.\1099\
---------------------------------------------------------------------------

    \1099\ Compare 15 U.S.C. 78o-7(c)(3)(B)(i) and (ii) with
proposed new paragraphs (a)(7)(i), (a)(7)(ii), and (b)(2) of Rule
17g-3.
---------------------------------------------------------------------------

    An NRSRO already should have control systems in place to comply
with the existing requirements of Rule 17g-3. Consequently, the
Commission preliminarily estimates that the internal hour burden
associated with the first filing of the internal control report would
not be materially different than the hour burden associated with filing
subsequent reports (though the time spent on subsequent reports may
decrease incrementally over time as the NRSRO gains experience with the
requirement). The Commission, however, preliminarily believes that an
NRSRO likely would engage outside counsel to analyze the requirements
for the report and assist in drafting and reviewing the first report,
given that it must be signed by the NRSRO's CEO or an individual
performing a similar function. The time an outside attorney would spend
on this work would depend on the size and complexity of the NRSRO.
    In addition, as discussed above in Section IV.D.4 of this release
with respect to the PRA, the Commission preliminarily believes an NRSRO
likely would continue to engage outside counsel to assist in the
process of preparing the report on an annual basis and that the time an
outside attorney would spend on this work would depend on the size and
complexity of the NRSRO but in all cases be less than time spent on the
first report.
    In sum, limiting the analysis to the elements of the proposals over
which the Commission exercised discretion, the Commission acknowledges
that the proposals would entail some compliance burdens for NRSROs.
Some of the compliance effects are estimated for the industry in
Sections Section IV.D.3 and Section IV.D.4 as $600,000 for the use of
outside counsel and 1,550 internal burden hours for creating and
retaining documents and complying with management's assessment of the
internal control structure. However, the Commission preliminarily
believes these compliance effects would result largely from the
rulemaking mandated by the Dodd-Frank Act rather than the Commission's
exercise of discretion.
    The Commission preliminarily believes that the incremental cost
resulting from the proposed amendments would not impact competition or
impose a burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act.
Request for Comment
    The Commission requests comment on all aspects of the costs and
benefits associated with proposed new paragraph (b)(12) of Rule 17g-2
and proposed new paragraphs (a)(7) and (b)(2) of Rule 17g-3.

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.\1100\ 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.\1101\ The Commission is
proposing to implement this provision by identifying a new conflict of
interest in paragraph (c) of Rule 17g-5.\1102\ The existing
requirements in paragraph (c) prohibit a person within an NRSRO (which

includes the NRSRO) \1103\ from having any of the conflicts of interest
identified in the paragraph under all circumstances.\1104\ Proposed new
paragraph (c)(8) of Rule 17g-5 would identify a new absolute
prohibition: an NRSRO issuing or maintaining 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.\1105\
---------------------------------------------------------------------------

    \1100\ Public Law 111-203 Sec.  932(a)(4) and 15 U.S.C. 78o-
7(h)(3).
    \1101\ 15 U.S.C. 78o-7(h)(3)(A).
    \1102\ See proposed new paragraph (c)(8) of Rule 17g-5; see also
Section II.B.1 of this release for a more detailed discussion of
this proposal.
    \1103\ See paragraph (d) of Rule 17g-5 defining ``person within
an NRSRO'' for purposes of the rule. 17 CFR 240.17g-5(d).
    \1104\ See 17 CFR 240.17g-5(c)(1)-(7).
    \1105\ See proposed new paragraph (c)(8) of Rule 17g-5.
---------------------------------------------------------------------------

    Section 15E(h)(3)(B) of the Exchange Act provides that the
Commission's rules must contain two additional provisions.\1106\ 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.\1107\ To
implement this provision, the Commission is proposing to amend Rule
17g-5 by adding a new paragraph (f).\1108\ 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). 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.\1109\
---------------------------------------------------------------------------

    \1106\ 15 U.S.C. 78o-7(h)(3)(B)(i) and (ii).
    \1107\ 15 U.S.C. 78o-7(h)(3)(B)(i).
    \1108\ See proposed new paragraph (f) of Rule 17g-5; see also
Section II.B.2 of this release for a more detailed discussion of
this proposal.
    \1109\ See proposed new paragraph (f) of Rule 17g-5.
---------------------------------------------------------------------------

    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 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.\1110\ The Commission proposes
to implement this provision by adding new paragraph (g) of Rule 17g-
5.\1111\ This paragraph 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.
---------------------------------------------------------------------------

    \1110\ 15 U.S.C. 78o-7(h)(3)(B)(ii).
    \1111\ See proposed new paragraph (g) of Rule 17g-5; see also
Section II.B.3 of this release for a more detailed discussion of
this proposal.
---------------------------------------------------------------------------

1. Benefits
    The Commission preliminarily believes that the proposed new
absolute prohibition in proposed paragraph (c)(8) of Rule 17g-5 would
provide benefits to investors by mitigating the potential that undue
influences based on sales and marketing considerations could impact the
objectivity of the NRSRO's credit rating process.\1112\ As discussed
above in Section II.B.1 of this release, Commission staff found as part
of its 2007-2008 examination of the activities of the three largest
NRSROs in rating asset-backed securities linked to subprime mortgages
that it appeared that marketing personnel discussed with other
employees, including those responsible for credit rating criteria
development, business concerns they had related to those
criteria.\1113\ The rule proposal would be designed to insulate
individuals within the NRSRO responsible for determining credit ratings
from such pressures. In addition, the bright line on prohibited
behavior is likely to allow the company to effectively comply with the
proposed rules. The Commission believes that this could benefit
investors by increasing the integrity of credit ratings and the
procedures and methodologies used to determine credit ratings.
---------------------------------------------------------------------------

    \1112\ See Oversight of Credit Rating Agencies Registered as
Nationally Recognized Statistical Rating Organizations, 72 FR at
33598-33599, 33613 (June 18, 2007) (discussing objectives and
benefits of paragraph (c) of Rule 17g-5 when it was adopted); see
also Amendments to Rules for Nationally Recognized Statistical
Rating Organizations, 74 FR at 6465-6469, 6474-6475 (February 9,
2009) (discussing objectives and benefits of paragraph (c) of Rule
17g-5 when it was amended).
    \1113\ See Summary Report of Issues Identified in the Commission
Staff's Examination of Select Credit Rating Agencies, Commission
(July 2008), pp. 25-26.
---------------------------------------------------------------------------

    With respect to the proposal for the suspension or revocation of
the registration of an NRSRO after a violation of a rule, the
Commission preliminarily believes that it would provide the Commission
with more flexibility in determining appropriate sanctions for
violations of the securities laws. This could act as a deterrent
against violations by NRSROs and could motivate them to strengthen
their internal controls to manage conflicts of interest.
    The Commission preliminarily believes that codifying these
requirements mandated by the Dodd-Frank Act in Rule 17g-5 may promote
efficiency. NRSROs should already have developed a system of controls
to comply with the existing requirements relating to conflicts of
interest that are codified in Rule 17g-5. In addition, the Commission
believes proposed paragraph (g) may promote efficiency by incorporating
existing processes for sanctioning NRSROs (i.e., those provided for
Sections 15E(d) or Section 21C of the Exchange Act).
2. Costs
    The Commission preliminarily estimates that the Commission's
exercise of rulemaking discretion with respect to the proposed
amendments to Rule 17g-5 would impose minimal incremental costs.
However, the Commission preliminarily estimates that the costs
discussed below resulting from the proposed amendments to Rule 17g-5
would be attributable largely to the rulemaking mandated by Dodd-Frank
Act.\1114\
---------------------------------------------------------------------------

    \1114\ Compare 15 U.S.C. 78o-7(h)(3)(A), (B)(i), and (B)(ii)
with proposed new paragraphs (c)(8), (f), and (g) of Rule 17g-5.
---------------------------------------------------------------------------

    The Commission notes that, when it adopted three new absolutely
prohibited conflicts by amending paragraph (c) of Rule 17g-5 in 2009,
the Commission provided estimates of one-time and annual compliance
costs for NRSROs resulting from the amendments.\1115\ Moreover, one of
those amendments resulted in an absolute prohibition that is similar to
the Commission's proposed new absolute prohibition in that it prohibits
an NRSRO from issuing or maintaining a credit rating where the fee paid
for the rating was negotiated, discussed, or arranged by a person
within the NRSRO who has responsibility for participating in
determining credit ratings or for

developing or approving procedures or methodologies used for
determining credit ratings, including qualitative and quantitative
models.\1116\ With respect to the 2009 amendments, the Commission
estimated that the costs to the three largest NRSROs as a result of the
three new prohibited conflicts would be approximately $5,442,100 per
firm in one-time costs and $1,563,800 per firm in annual costs.\1117\
In addition, the Commission estimated that the costs to the seven
smaller NRSROs would be approximately $47,600 per firm in one-time
costs and $13,760 per firm in annual costs.\1118\ The Commission
preliminarily believes that the compliance cost for the new absolute
prohibition proposed in this release would be proportionally less than
the estimates provided above for the three 2009 prohibitions. The
Commission also preliminarily believes that granting an exemption from
the proposed new absolute prohibition for a small NRSRO that applied in
writing for such exemption could reduce potential costs for a smaller
NRSRO for which the complete separation of sales and marketing
activities from the analytical function would not be appropriate.
---------------------------------------------------------------------------

    \1115\ See Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR at 6479 (February 9, 2009).
    \1116\ See Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR at 6479 (February 9, 2009)
and 17 CFR 240.17g-5(c)(6).
    \1117\ See Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR at 6479 (February 9, 2009).
    \1118\ Id.
---------------------------------------------------------------------------

    The Commission therefore preliminarily believes any incremental
cost resulting from the amendments would not impact competition or
impose a burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act.
Request for Comment
    The Commission requests comment on all aspects of the costs and
benefits associated with proposed new paragraphs (c)(8), (f), and (g)
of Rule 17g-5.

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).\1119\ The Commission is
proposing to implement the rulemaking required in Section
15E(h)(4)(A)(ii) of the Exchange Act through proposed paragraph (c) of
new Rule 17g-8.\1120\ 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.\1121\
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    \1119\ See Public Law 111-203 Sec.  932(a)(4) and 15 U.S.C. 78o-
7(h)(4).
    \1120\ See proposed paragraph (c) of new Rule 17g-8; see also
Section II.C.1 of this release for a more detailed discussion of
this proposal. 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; and (2) take action to revise the
rating if appropriate, in accordance with such rules as the
Commission shall prescribe. See 15 U.S.C. 78o-7(h)(4)(A)(i) and
(ii).
    \1121\ See proposed paragraphs (c)(1), (2) and (3) of new Rule
17g-8.
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    In addition, 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 proposed paragraph (c) of new Rule 17g-8 as a
record an NRSRO must make and retain.\1122\ As a result, the policies
and procedures would need to be documented in writing and subject to
the record retention and production requirements in paragraphs (c)
through (f) of Rule 17g-2.\1123\
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    \1122\ See proposed new paragraph (a)(9) to Rule 17g-2; see also
Section II.C.2 of this release for a more detailed discussion of
this proposal.
    \1123\ See 17 CFR 240.17g-2(c)-(f).
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1. Benefits
    The Commission preliminarily believes that the proposed look-back
review provisions would provide three primary benefits. First, they
would implement the rulemaking mandate in a way that would require an
NRSRO to notify users of its credit ratings that a prior rating action
was subject to a conflict and to review whether the credit rating
should be revised. This would help 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. In addition, by
prescribing the steps an NRSRO must take to remove the uncertainty
surrounding the credit rating, the rule proposal could limit the
potential that investors and other users of credit ratings might make
investment or other credit based decisions based on incomplete, biased
or inaccurate information.
    Second, the Commission preliminarily believes that the proposal
could operate within the existing framework of an NRSRO's policies and
procedures for taking rating actions and procedures and methodologies
for determining credit ratings. Placing a rated obligor, security, or
money market instrument on credit watch and subsequently affirming or
revising (i.e., upgrading or downgrading the rating) are among the
rating actions NRSRO's commonly take with respect to their credit
ratings. In addition, in terms of revising the conflicted credit
rating, the proposal would rely on an NRSRO's policies and procedures
for determining credit ratings and not require revisions that are
contrary to those policies and procedures. 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 promptly addresses a credit rating that is
subject to a conflict of interest.\1124\
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    \1124\ The Commission also notes an NRSRO would violate Section
15E(h) of the Exchange Act (15 U.S.C. 78o-7(h)) 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.
---------------------------------------------------------------------------

    Third, the Commission preliminarily believes that having these
policies and procedures in writing would promote better understanding
of them among the individuals within the NRSRO and, therefore, promote
compliance with the policies and procedures. In addition, the record
retention requirements would facilitate Commission oversight of NRSROs.
In this regard, recordkeeping rules such as Rule 17g-2 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.\1125\
---------------------------------------------------------------------------

    \1125\ See Oversight of Credit Rating Agencies Registered as
Nationally Recognized Statistical Rating Organizations, 72 FR at
33582 (June 18, 2007).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the proposed
implementation of Section 15E(h)(4)(A)(ii) of the Exchange Act as
mandated by the Dodd-Frank Act may promote efficiency. As noted above,
the proposal would be designed to work within the existing processes
NRSROs have for taking rating actions and would not interfere with
their procedures and methodologies for determining credit ratings.
2. Costs
    The Commission preliminarily estimates that the Commission's
exercise of rulemaking discretion with respect to proposed paragraph
(c) of new Rule 17g-8 would impose minimal incremental costs. The
Commission preliminarily estimates that the costs resulting from
proposed paragraph (c) of new Rule 17g-8 would be attributable largely
to the rulemaking mandated by Dodd-Frank Act.\1126\ As discussed above
in Section IV.D.6, the Commission preliminarily estimates that for PRA
purposes, the average annual cost to each NRSRO would be approximately
$7,000, resulting in an industry-wide annual cost of approximately
$70,000.\1127\
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    \1126\ Compare 15 U.S.C. 78o-7(h)(4)(A) with proposed paragraph
(c) of new Rule 17g-8.
---------------------------------------------------------------------------

    The Commission preliminarily estimates that the costs resulting
from the proposed amendment to Rule 17g-2 discussed below largely would
be attributable to the Commission's discretionary rulemaking. As
discussed above in Section IV.D.3 of this release with respect to the
PRA, the Commission preliminary believes applying the recordkeeping
requirements of Rule 17g-2 to five new types of records would result in
one-time and annual hour burdens for NRSROs in connection with updating
their record retention policies and procedures to account for and
retain these new records. Also, as discussed above in Section IV.D.3 of
this release with respect to the PRA, based on staff experience, the
Commission preliminarily estimates that the additional one-time hour
burden for each NRSRO to update its record retention policies and
procedures to account for the new records that would need to be
retained under proposed new paragraphs (a)(9), (b)(12), (b)(13),
(b)(14), and (b)(15) of Rule 17g-2 would be 20 hours. Based on that
estimate, the Commission preliminary believes that the one-time hour
burden resulting from proposed new paragraph (a)(9) of Rule 17g-2 would
be approximately 4 hours per NRSRO, resulting in an industry-wide hour
burden of approximately 40 hours.\1128\ As discussed above in Section
IV.D.3 of this release with respect to the PRA, the Commission
preliminarily estimates it would take an average of approximately one
hour each year for an NRSRO to retain updated versions of the internal
control structure, resulting in an annual industry-wide hour burden of
10 hours.\1129\
---------------------------------------------------------------------------

    \1128\ 20 hours/5 new required records = 4 hours; 10 NRSROs x 4
hours = 40 hours.
    \1129\ 10 NRSROs x 1 hour = 10 hours.
---------------------------------------------------------------------------

    The Commission believes that in addition to the compliance costs
calculated above for PRA purposes, there could be other potential
economic effects resulting from the proposed release that are hard to
quantify. For example, former subscribers, who bought on the basis of
the original rating but who no longer subscribe to the rating service,
would not be notified when a rating has been revised.
    For the foregoing reasons, the Commission preliminarily believes
any incremental cost resulting from the amendments would not impact
competition or impose a burden on competition not necessary or
appropriate in furtherance of the purposes of the Exchange Act.
Request for Comment
    The Commission requests comment on all aspects of the costs and
benefits associated with proposed paragraph (c) of new Rule 17g-8 and
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).\1130\ 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.\1131\ The
Commission proposes to amend the instructions to Form NRSRO by adding
new Instruction A.10.\1132\ This new instruction would provide notice
to credit rating agencies applying for registration and NRSROs that an
NRSRO is subject to the fine and penalty provisions, and other
available sanctions contained in Sections 15E, 21, 21A, 21B, 21C, and
32 of the Exchange Act for violations of the securities laws.\1133\
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    \1130\ See Public Law 111-203 Sec.  932(a)(8) and 15 U.S.C. 78o-
7(p)(1)-(4).
    \1131\ See 15 U.S.C. 78o-7(p)(4)(A).
    \1132\ See proposed new Instruction A.10 to Form NRSRO; see also
Section II.D of this release for a more detailed discussion of this
proposal.
    \1133\ 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.
---------------------------------------------------------------------------

1. Benefits
    The Commission preliminarily believes this amendment to Form NRSRO
would benefit credit rating agencies applying for registration as
NRSROs and NRSROs because it would notify them of the potential
consequences of violating provisions of the Exchange Act and Commission
rules. The Commission also believes that this notification could
potentially cause the NRSROs to enhance their compliance and compliance
procedures, which would benefit investors and other users of credit
ratings. In addition, the Commission believes implementing the rule in
this manner would create efficiencies by relying on existing authority
to seek fines, penalties, and other available sanctions contained in
Sections 15E, 21, 21A, 21B, 21C, and 32 of the Exchange Act for
violations of the securities laws.\1134\
---------------------------------------------------------------------------

    \1134\ Id.
---------------------------------------------------------------------------

2. Costs
    The Commission preliminarily estimates that the proposed amendment
to the instructions to Form NRSRO would not result in additional
regulatory obligations for NRSROs. Consequently, the Commission
preliminarily believes it would not impact competition or impose a
burden on competition not necessary or appropriate in furtherance of
the purposes of the Exchange Act.
Request for Comment
    The Commission requests comment on all aspects of the benefits and
costs associated with the proposal to amend the instructions to Form
NRSRO by adding new Instruction A.10.

E. Proposed Enhancements to Disclosures of Performance Statistics

    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).\1135\ 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.\1136\ Section 15E(q)(2)
provides that the Commission's rules shall require, at a minimum,
disclosures that, among other things: (1) Are comparable among NRSROs,
to allow users of credit ratings to compare the performance of credit
ratings across NRSROs;\1137\ (2) are clear and informative for
investors having a wide range of sophistication who use or might use
credit ratings;\1138\ (3) 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;\1139\ and (4) are appropriate to
the business model of an NRSRO.\1140\
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    \1135\ See Public Law 111-203 Sec.  932(a)(8) and 15 U.S.C. 78o-
7(q)(1) and (2).
    \1136\ See 15 U.S.C. 78o-7(q)(1).
    \1137\ See 15 U.S.C. 78o-7(q)(2)(A).
    \1138\ See 15 U.S.C. 78o-7(q)(2)(B).
    \1139\ See 15 U.S.C. 78o-7(q)(2)(C).
    \1140\ See 15 U.S.C. 78o-7(q)(2)(E).
---------------------------------------------------------------------------

    The Commission proposes to implement the rulemaking mandated in
Section 15E(q) of the Exchange Act, in part, by significantly enhancing
the requirements applicable to NRSROs with respect to generating and
disclosing performance statistics in Exhibit 1 of Form NRSRO.\1141\
Among other things, the amendments would confine the disclosures in the
Exhibit to transition and default rates and certain limited
supplemental information.\1142\ Moreover, the amendments would
standardize the production and presentation of the transition and
default rates.\1143\ Specifically, the amendments would require the
transition and default rates in Exhibit 1 to be produced using a
``single cohort approach.'' \1144\ Under this approach, an applicant
and NRSRO, on an annual basis, would be required to compute how the
credit ratings assigned to obligors, securities, and money market
instruments in a particular class or subclass of credit rating
outstanding on the date 1, 3, and 10 years prior to the most recent
calendar year-end performed during those respective 1, 3, and 10-year
time periods.\1145\
---------------------------------------------------------------------------

    \1141\ See proposed amendments to Instruction H to Form NRSRO
(as it relates to Exhibit 1); see also Section II.E.1.a of this
release for a more detailed discussion of this proposal.
    \1142\ See proposed amendments to the instructions for Exhibit
1.
    \1143\ Id.
    \1144\ Id.
    \1145\ Id.
---------------------------------------------------------------------------

    Under the amendments, the proposed new instructions would be
divided into paragraphs (1), (2), (3), and (4), some of which would
have subparagraphs.\1146\ The proposed new paragraphs would contain
specific instructions with respect to, among other things, how required
information should be presented in the Exhibit (including the order of
presentation) and how transition and default rates should be produced
using a single cohort approach.\1147\ As with all information that must
be submitted in Form NRSRO and its Exhibits, applicants and NRSROs
would be subject to these new requirements.\1148\
---------------------------------------------------------------------------

    \1146\ See proposed paragraphs (1)-(4) of the instructions for
Exhibit 1.
    \1147\ Id.
    \1148\ See, e.g., 17 CFR 240.17g-1; see also Instructions A.1,
B, C, D, E, and F to Form NRSRO.
---------------------------------------------------------------------------

    The Commission also is proposing implementing Section 15E(q)(2)(D)
of the Exchange Act, which requires that the Commission's rules must
require NRSROs to make its performance statistics freely available and
disclose them on an easily accessible portion of its Web site, and in
writing when requested, by amending paragraph (i) of Rule 17g-1.\1149\
The amendment would require an NRSRO to make Form NRSRO and Exhibits 1
through 9 ``freely available on an easily accessible portion of its Web
site.'' The proposed amendment to paragraph (i) also would remove the
option for an NRSRO to make its Form NRSRO publicly available ``through
another comparable, readily accessible means'' as an alternative to Web
site disclosure.
---------------------------------------------------------------------------

    \1149\ A detailed discussion of this proposal is at Section
II.E.1.b of this release.
---------------------------------------------------------------------------

1. Benefits
    Section 15E(q)(1) of the Exchange Act 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.\1150\ The Commission is
proposing to implement this rulemaking mandate, in part, through
amendments to the instructions for Exhibit 1 to Form NRSRO. The
amendments would be designed to meet the goal in Section 15E(q)(1) that
the information disclosed by NRSROs allows users of credit ratings to
evaluate the accuracy of credit ratings and compare the performance of
credit ratings by different NRSROs. In this regard, the amendments are
designed to make disclosures simply presented, easy to understand,
uniform in appearance, and comparable across NRSROs.\1151\
---------------------------------------------------------------------------

    \1150\ 15 U.S.C. 78o-7(q)(1).
    \1151\ See Section 15E(q)(2)(A) of the Exchange Act, which
provides that the disclosure of information about the performance of
credit ratings should be comparable among NRSROs, to allow users of
credit ratings to compare the performance of credit ratings across
NRSROs. 15 U.S.C. 78o-7(q)(2)(A). See also Section 15E(q)(2)(B) of
the Exchange Act, which provides that the disclosure of information
about the performance of credit ratings should be clear and
informative for investors having a wide range of sophistication who
use or might use credit ratings. 15 U.S.C. 78o-7(q)(2)(B).
---------------------------------------------------------------------------

    As the Commission stated when originally adopting Form NRSRO, the
information provided in Exhibit 1 is an important indicator of the
performance of an NRSRO in terms of its ability to assess the
creditworthiness of issuers and obligors and, consequently, will be
useful to users of credit ratings in evaluating an NRSRO.\1152\ The
performance statistics required to be disclosed in Exhibit 1 of Form
NRSRO were designed to allow users of the credit ratings to compare the
credit ratings quality of different NRSROs and, thereby, make it easier
for users of credit ratings to compare the ratings performance of the
NRSROs. The performance statistics also were designed to allow an NRSRO
to demonstrate that it has a superior ratings methodology or competence
and, thereby, attract clients. In doing so, the Commission believed,
the performance statistics would therefore enhance competition in the
credit ratings industry.\1153\ The proposed amendments to the
instructions to Exhibit 1 of Form NRSRO are designed to improve the
utility of the required performance statistics disclosure to investors
and other users of credit ratings and facilitate comparisons between

NRSROs, thereby amplifying this positive effect on competition.
---------------------------------------------------------------------------

    \1152\ See Oversight of Credit Rating Agencies Registered as
Nationally Recognized Statistical Rating Organizations, 72 FR at
33574 (June 18, 2007); see also Amendments to Rules for Nationally
Recognized Statistical Rating Organizations, 74 FR at 6474 (Feb. 9,
2009) (``The amendments to the instructions to Exhibit 1 to Form
NRSRO will require NRSROs to provide more detailed performance
statistics and, thereby, make it easier for users of credit ratings
to compare the performance of the NRSROs. In addition, these
amendments will make it easier for an NRSRO to demonstrate that it
has a superior ratings methodology or competence and, thereby,
attract clients.'').
    \1153\ See Oversight of Credit Rating Agencies Registered as
Nationally Recognized Statistical Rating Organizations, 72 FR at
33612 (June 18, 2007); Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR at 6474 (Feb. 9, 2009).
---------------------------------------------------------------------------

    In addition, the proposed amendments could improve the Commission's
ability to carry out its oversight function for NRSRO which, in turn,
would benefit investors. For example, the enhanced utility of the
performance statistics provided in an applicant's initial application
for registration and in an NRSRO's Form NRSRO could aid the Commission
in, among other things, assessing whether the applicant or NRSRO has
adequate financial and managerial resources to consistently produce
credit ratings with integrity.\1154\ Furthermore, the disclosure of the
enhanced performance statistics in an applicant's initial application
would allow the Commission staff to verify that the applicant, if
granted registration, would publicly disclose the information in
accordance with the proposed amendments to the Instructions for Exhibit
1.\1155\
---------------------------------------------------------------------------

    \1154\ See, e.g., 15 U.S.C. 78o-7(a)(2)(C) (setting forth
grounds to deny an initial application) and 15 U.S.C. 78o-7(d)(1)(E)
and (d)(2) (setting forth grounds to sanction an NRSRO, including
revoking the NRSRO's registration); see also Oversight of Credit
Rating Agencies Registered as Nationally Recognized Statistical
Rating Organizations, 72 FR at 33612 (June 18, 2007) (``Form NRSRO
requires that a credit rating agency provide information required
under Section 15E(a)(1)(B) of the Exchange Act and certain
additional information. The additional information will assist the
Commission in making the assessment regarding financial and
managerial resources required under Section 15E(a)(2)(C)(2)(ii)(I)
of the Exchange Act.'').
    \1155\ As indicated above, paragraph (i) requires an NRSRO to
make Form NRSRO and Exhibits 1 through 9 publicly available within
10 business days of being granted an initial registration. See 17
CFR 240.17g-1(i). In addition, the public disclosure of Form NRSRO
and Exhibits 1 through 9 could be accelerated if the Commission
adopts the proposal that this information be filed through the EDGAR
system upon registration.
---------------------------------------------------------------------------

    In addition, the Commission preliminarily believes that applying
the requirement to disclose Form NRSRO and Exhibits 1 through 9 on an
``easily accessible'' portion of the NRSRO's Web site would assist
investors and other users of credit ratings by making it easier to
locate a Form NRSRO. The Commission also believes that amending
paragraph (i) to provide that Exhibit 1 be made freely available in
writing when requested \1156\ would benefit those investors who do not
have access to the Internet.
---------------------------------------------------------------------------

    \1156\ See proposed amendments to paragraph (i) of Rule 17g-1.
---------------------------------------------------------------------------

    The Commission preliminarily believes that enhancing the existing
requirements in Exhibit 1 to Form NRSRO is an efficient means of
implementing the rulemaking mandated through Section 15E(q) of the
Exchange Act. An NRSRO already should have in place information
technology systems to meet the existing requirements of the
instructions for Exhibit 1 to Form NRSRO, which it could adjust to
comply with the proposed new disclosure requirements.
2. Costs
    The Commission preliminarily estimates that the Commission's
exercise of rulemaking discretion in proposing amendments to the
instructions for Exhibit 1 of Form NRSRO would impose incremental
costs. The Commission preliminarily estimates, however, that the costs
discussed below would be attributable largely to the rulemaking
mandated by the Dodd-Frank Act \1157\ and that the incremental costs
would be minimal.
---------------------------------------------------------------------------

    \1157\ Compare 15 U.S.C. 78o-7(q) with the proposed amendments
to the instructions for Exhibit 1 to Form NRSRO; see also GAO Report
10-782, pp. 27-40 (indicating the current requirements for
disclosing performance statistics in Exhibit 1 to Form NRSRO may not
achieve the objectives of 15 U.S.C. 78o-7(q)).
---------------------------------------------------------------------------

    An NRSRO should already have in place information technology
systems to meet the existing requirements of the instructions to
Exhibit 1 of Form NRSRO, which it could adjust to comply with the
proposed new disclosure requirements. NRSROs are already subject to
substantial performance statistic disclosure requirements, including
the requirement to provide transition and default rates in Exhibit 1
for each class of credit rating for which they are registered and for
1, 3, and 10-year periods. The Commission preliminarily believes that
NRSROs could use the internal information technology systems and
expertise and other resources they currently devote to processing the
information necessary to monitor credit ratings and calculate
transitions and default statistics in order to program a system to
comply with the proposed amendments to the Instructions for Exhibit 1.
    At the same time, the Commission notes that under the proposed
amendments, NRSROs would be required to adhere to specific requirements
that may not follow their traditional practices for calculating and
presenting transitions and default rates. Consequently, the Commission
preliminarily estimates that the proposed amendments requiring
standardized Transition/Default Matrices would result in one-time costs
to program existing systems to create the Transition/Default Matrices
that would be required under the proposed amendments and annual costs
to comply with the requirement to update the transition and default
rates in Exhibit 1.
    As discussed above in Section IV.D.2, the Commission preliminarily
believes that the one-time and annual hour burden estimates for
implementing these changes should be based on the number of credit
ratings outstanding. Based on the annual certifications submitted by
the NRSROs for the 2009 calendar year-end, there were approximately
2,905,824 credit ratings outstanding across all 10 NRSROs.\1158\ The
Commission preliminarily estimates that the one-time industry-wide
burden to establish systems to process the relevant information
necessary to calculate the Transition/Default Matrices and make the
necessary calculations would be an average of approximately 3 seconds
per outstanding credit rating, resulting in a one-time industry-wide
hour burden of approximately 2,420 hours.\1159\
---------------------------------------------------------------------------

    \1158\ Id.
    \1159\ 2,905,824 credit ratings x 3 seconds = 2,421.52 hours
(rounded to 2,420 hours).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the annual hours burden
to comply with the proposed amendments to the Instructions for Exhibit
1 would be less than the one-time burden since the NRSROs would have
established systems to process the necessary information to produce the
required Transition/Default Matrices. As discussed above in Section
IV.D.2 of this release with respect to the PRA, the Commission
preliminarily estimates that the annual industry-wide hour burden to
calculate the Transition/Default Matrices would be an average of
approximately 1.5 seconds per outstanding credit rating, resulting in
an industry-wide annual hour burden of approximately 1,210 hours.\1160\
---------------------------------------------------------------------------

    \1160\ 2,905,824 credit ratings x 1.5 seconds = 1,210.76 hours
(rounded to 1,210 hours).
---------------------------------------------------------------------------

    As discussed above in Section IV.D.1 of this release with respect
to the PRA, the Commission preliminarily estimates that there would be
a minimal one-time hour burden attributable to requiring that an NRSRO
make Form NRSRO and Exhibits 1 through 9 freely available on an easily
accessible portion of its corporate Internet Web site and removing the
option for an NRSRO to make its Form NRSRO and Exhibits 1 through 9
available through another comparable, readily accessible means.
Currently, all NRSROs make Form NRSRO and Exhibits 1 through 9
available on their corporate Internet Web sites.\1161\ However, the
Commission preliminarily believes that

a Form NRSRO and Exhibits 1 through 9 would be ``easily accessible'' if
they could be accessed through a clearly and prominently labeled
hyperlink on the home page of the NRSRO's corporate Internet Web site.
Consequently, NRSROs may need to make changes to their corporate
Internet Web sites to disclose the information on an ``easily
accessible'' portion of the Web site. The Commission preliminarily
estimates re-configuring a corporate Internet Web site for this purpose
would take an NRSRO an average of approximately 5 hours. For these
reasons, the Commission preliminarily estimates that the proposed
requirement would result in an average one-time hour burden of 5 hours
per NRSRO, resulting in a one-time industry-wide hour burden of 50
hours.\1162\
---------------------------------------------------------------------------

    \1161\ See, e.g., Annual Report on Nationally Recognized
Statistical Rating Organizations. Commission (Jan. 2011), pp. 18-19.
    \1162\ 10 NRSROs x 5 hours = 50 hours.
---------------------------------------------------------------------------

    Also as discussed in Section IV.D.1 with respect to the PRA, the
Commission expects that the proposed requirement that an NRSRO provide
a written copy of Exhibit 1 on request would result in a one-time hour
burden for each NRSRO to establish procedures and protocols for
receiving and processing these requests. The Commission preliminarily
estimates that each NRSRO would spend an average of approximately 48
hours establishing such procedures and protocols, resulting in an
industry-wide one-time hour burden of approximately 480 hours.\1163\
---------------------------------------------------------------------------

    \1163\ 10 NRSROs x 48 hours = 480 hours.
---------------------------------------------------------------------------

    Also as discussed in Section IV.D.1 with respect to the PRA, the
Commission preliminarily estimates that an NRSRO would receive an
average of 200 requests per year to provide Exhibit 1 in writing and
that it would take an average of 20 minutes to respond to each request.
Therefore, the Commission preliminarily estimates that the average
annual hour burden to each NRSRO would be approximately 67 hours,
resulting in an annual industry-wide burden of approximately 670 hours.
\1164\
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    \1164\ 200 requests x \1/3\ hours = 67 hours per NRSRO; 10
NRSROs x 67 hours = 670 hours.
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    In addition, the Commission preliminarily estimates that the
incremental cost resulting from implementing the rulemaking mandated by
Section 15E(q) of the Exchange Act in this manner would be minimal and,
as noted above, the proposal would have substantial benefits.
Consequently, the Commission preliminarily believes any incremental
cost resulting from the amendments would not impact competition or
impose a burden on competition not necessary or appropriate in
furtherance of the purposes of the Exchange Act.
Request for Comment
    The Commission requests comment on all aspects of the benefits and
costs associated with the proposals to amend the Instructions to
Exhibit 1 of Form NRSRO and paragraph (i) of Rule 17g-1.

F. Proposed Enhancements to Rating Histories Disclosures

    As discussed above, 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).\1165\ In addition to the proposed
amendments to the Instructions for Exhibit 1 discussed in the preceding
section, the Commission proposes to further implement the rulemaking
mandated in Section 15E(q) of the Exchange Act, in part, by adding new
paragraph (b) to Rule 17g-7.\1166\ This proposed amendment would
implement rulemaking mandated in Section 15E(q) of the Exchange Act by:
(1) Re-codifying in paragraph (b) of Rule 17g-7 requirements currently
contained in paragraph (d)(3) of Rule 17g-2; and (2) substantially
enhancing those requirements.\1167\ More specifically, paragraph (d)(3)
of Rule 17g-2 requires an NRSRO to, among other things, make publicly
available on its corporate Internet Web site in an XBRL format the
information required to be documented pursuant to paragraph (a)(8) of
the rule with respect to any credit rating initially determined by the
NRSRO on or after June 26, 2007, the effective date of the Rating
Agency Act of 2006.\1168\
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    \1165\ See Public Law 111-203 Sec.  932(a)(8) and 15 U.S.C. 78o-
7(q)(1) and (2). See Section
    \1166\ See proposed new paragraph (b) of Rule 17g-7; see also
Section II.E.2 of this release for a more detailed discussion of
this proposal.
    \1167\ See 15 U.S.C. 78o-7(q) and proposed new paragraph (b) of
Rule 17g-7; see also Section II.E.2 of this release for a more
detailed discussion of this proposal.
    \1168\ 17 CFR 240.17-2(d)(3)(i)(A). Paragraph (a)(8) of Rule
17g-2 requires an NRSRO to make and retain a record that, ``for each
outstanding credit rating, shows all rating actions and the date of
such actions from the initial credit rating to the current credit
rating identified by the name of the rated security or obligor and,
if applicable, the CUSIP of the rated security or the Central Index
Key (``CIK'') number of the rated obligor.'' 17 CFR 240.17-2(a)(8).
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    These requirements would be enhanced in four ways. The first
enhancement would make the disclosure easier for investors and other
users of credit ratings to locate. Specifically, new proposed paragraph
(b)(1) of Rule 17g-7 would require the NRSRO, among other things, to
publicly disclose the ratings history information for free on an easily
accessible portion of its corporate Internet Web site.\1169\
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    \1169\ See proposed new paragraph (b)(1) of Rule 17g-7.
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    The second enhancement would broaden the scope of credit ratings
subject to the disclosure requirements. Specifically, proposed new
paragraph (b)(1)(i) of Rule 17g-7 would require an NRSRO to disclose
each credit rating assigned to an obligor, security, and money market
instrument in every class of credit ratings for which the NRSRO is
registered that was outstanding as of June 26, 2007 and any subsequent
upgrades or downgrades of a credit rating assigned to the obligor,
security, or money market instrument (including a downgrade to, or
assignment of, default), any placements of a credit rating assigned to
the obligor, security, or money market instrument on watch or review,
any affirmation of a credit rating assigned to the obligor, security,
or money market instrument, and a withdrawal of a credit rating
assigned to the obligor, security, or money market instrument.\1170\
With respect to credit ratings initially determined on or after June
26, 2007, the amendments would clarify that the disclosure of the
rating history information would be triggered when an NRSRO publishes
an initial credit rating, and any subsequent upgrades or downgrades of
a credit rating assigned to the obligor, security, or money market
instrument (including a downgrade to, or assignment of, default), any
placements of a credit rating assigned to the obligor, security, or
money market instrument on watch or review, any affirmation of a credit
rating assigned to the obligor, security, or money market instrument,
and a withdrawal of a credit rating assigned to the obligor, security,
or money market instrument.\1171\
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    \1170\ See proposed new paragraph (b)(1)(i) of Rule 17g-7.
    \1171\ See proposed new paragraph (b)(1)(ii) of Rule 17g-7.
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    The third enhancement would increase the scope of information that
must be disclosed about a rating action. Specifically, proposed
paragraph (b)(2) of Rule 17g-7 would identify 7 categories of data that
would need to be disclosed when a credit rating action is published
pursuant to proposed new paragraph (b)(1) of Rule 17g-7.\1172\ The
fourth enhancement, contained in proposed new paragraph (b)(5) to Rule
17g-7, would be to require that a rating history not be removed from
the disclosure until 20 years after the NRSRO withdraws the credit
rating

assigned to the obligor, security, or money market instrument.\1173\
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    \1172\ See proposed new paragraph (b)(2) of Rule 17g-7.
    \1173\ See proposed new paragraph (b)(5) of Rule 17g-7.
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1. Benefits
    Section 15E(q)(1) of the Exchange Act 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.\1174\ The Commission is
proposing to implement this rulemaking mandate, in part, through
proposed new paragraph (b) of Rule 17g-7. The amendments would be
designed to meet the goal in Section 15E(q)(1) that the information
disclosed by NRSROs allows users of credit ratings to evaluate the
accuracy of credit ratings and compare the performance of credit
ratings by different NRSROs.
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    \1174\ 15 U.S.C. 78o-7(q)(1).
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    As the Commission stated when adopting the current ratings history
disclosure requirement, the ``intent of the rule is to facilitate
comparisons of credit rating accuracy across all NRSROs--including
direct comparisons of different NRSROs' treatment of the same obligor
or instrument--in order to enhance NRSRO accountability, transparency,
and competition.'' \1175\ The proposals also are designed to provide
persons with the ``raw data'' necessary to generate statistical
information about the performance of each NRSRO's credit ratings.\1176\
Finally, the proposals also are designed to implement provisions of
Section 15E(q)(2) of the Exchange Act, which provides, among other
things, that the Commission's rules shall require NRSROs to disclose
information about the performance of credit ratings that is comparable
among NRSROs, to allow users of credit ratings to compare the
performance of credit ratings across NRSROs.\1177\
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    \1175\ See Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR at 63838 (Dec. 4, 2009)
(``Ratings history information for outstanding credit ratings is the
most direct means of comparing the performance of two or more
NRSROs. It allows an investor or other user of credit ratings to
compare how all NRSROs that maintain a credit rating for a
particular obligor or instrument initially rated that obligor or
instrument and, thereafter, how and when they adjusted their credit
rating over time.''). The Commission notes that under the proposals
the disclosures would not contain complete histories for many credit
ratings because the NRSRO would not need to include information
about rating actions taken before June 26, 2007. However, the
Commission believes that the disclosures would still be used to
compare how different NRSROs rated a particular obligor, security,
or money market instrument beginning as of June 26, 2007 and from
that date forward.
    \1176\ See Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR at 63837-63838 (Dec. 4,
2009) (``The raw data to be provided by NRSROs pursuant to the new
ratings history disclosure requirements * * * will enable market
participants to develop performance measurement statistics that
would supplement those required to be published by NRSROs themselves
in Exhibit 1, tapping into the expertise of credit market observers
and participants in order to create better and more useful means to
compare the credit ratings performance of NRSROs.'').
    \1177\ See 15 U.S.C. 78o-7(q)(2).
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    The Commission preliminarily believes that implementing the
rulemaking mandated through Section 15E(q) of the Exchange Act through
proposed new paragraph (b) of Rule 17g-7 would promote an efficient
process for NRSROs. An NRSRO already should have in place information
technology systems to meet the existing requirements of paragraph
(d)(3) of Rule 17g-2, which it could adjust to comply with the proposed
new disclosure requirements.
2. Costs
    The Commission preliminarily estimates that the Commission's
exercise of rulemaking discretion in proposing new paragraph (b) of
Rule 17g-7 would impose incremental costs. However, the Commission
preliminarily estimates that the costs discussed below resulting from
the proposed new paragraph would be attributable largely to the
rulemaking mandated by Dodd-Frank Act \1178\ and that the incremental
costs would be minimal.
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    \1178\ Compare 15 U.S.C. 78o-7(q) with proposed new paragraph
(b) of Rule 17g-7; see also GAO Report 10-782, pp. 40-46 (indicating
the current requirements of paragraph (d)(3) of Rule 17g-2 may not
achieve the objectives of 15 U.S.C. 78o-7(q)).
---------------------------------------------------------------------------

    The Commission preliminarily believes that requiring an NRSRO to
make ratings histories available on an ``easily accessible'' portion of
its Web site would result in the same burden as re-configuring a
corporate Internet Web site for the purpose of making Form NRSRO and
Exhibits 1 through 9 ``easily accessible.'' The Commission, therefore,
preliminarily believes that the hour burden estimates discussed above
in Section V.F.2 of this release with respect to the PRA would be
appropriate for estimating the costs resulting from this requirement.
Consequently, the Commission preliminarily estimates that requiring an
NRSRO to make ratings histories available on an ``easily accessible''
portion of its corporate Internet Web site would take each NRSRO an
average of approximately 5 hours, resulting in a one-time industry-wide
hour burden of 50 hours.\1179\
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    \1179\ 10 NRSROs x 5 hours = 50 hours.
---------------------------------------------------------------------------

    Pursuant to paragraph (d)(3) of Rule 17g-2, NRSROs currently are
required to provide ratings history information for each credit rating
initially determined on or after June 26, 2007. Proposed new paragraph
(b) of Rule 17g-7 would incorporate the requirements currently
contained in paragraph (d)(3) of Rule 17g-2 with substantial
enhancements that would require NRSROs to add more ratings histories to
their disclosures and provide more information about each rating action
in the ratings history for each given obligor, security, or money
market instrument.\1180\ The Commission preliminarily estimates that
NRSROs would meet the requirements of new paragraph (b) of Rule 17g-7
by adapting the internal information technology systems and expertise
and other resources they currently devote to complying with paragraph
(d)(3) of Rule 17g-2, which would result in one-time costs to NRSROs.
Consequently, the Commission preliminarily estimates that the proposed
amendments would result in one-time costs to reprogram existing systems
as well as to add the required information for all credit ratings
outstanding as of (as opposed to initially determined on or after) June
26, 2007. As discussed in section IV.D.5 of this release with respect
to the PRA, the Commission preliminarily estimates that the proposed
enhancements to the current disclosure requirements would result in an
average one-time hour burden to each NRSRO of approximately 135 hours,
resulting in an industry-wide one-time hour burden of approximately
1,350 hours.\1181\ The Commission preliminarily believes that NRSROs
would implement the required changes internally.
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    \1180\ See proposed new paragraph (b) of Rule 17g-7; see also
Section II.E.2 of this release for a more detailed discussion of
this proposal.
    \1181\ 10 NRSRO x 135 hours = 1,350 hours.
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    In addition, as discussed in section IV.D.5 of this release with
respect to the PRA, the Commission preliminarily estimates that the
proposed enhanced disclosure requirements would result in an average
annual hour burden per NRSRO of approximately 45 hours, resulting in an
industry-wide annual hour burden of approximately 450 hours.\1182\
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    \1182\ 10 NRSRO x 45 hours = 450 hours.
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    Finally, the Commission preliminarily believes any incremental cost
resulting from the amendments would not impact competition or impose a
burden on

competition not necessary or appropriate in furtherance of the purposes
of the Exchange Act.
Request for Comment
    The Commission requests comment on all aspects of the benefits and
costs associated with proposed new paragraph (b) of Rule 17g-7.

G. Credit Rating Methodologies

    Section 932(a)(8) of the Dodd-Frank Act amends Section 15E of the
Exchange Act to add new subsection (r).\1183\ Section 15E(r) of the
Exchange Act provides that the Commission shall prescribe rules, for
the protection of investors and in the public interest, with respect to
the procedures and methodologies, including qualitative and
quantitative data and models, used by NRSROs that require each NRSRO to
ensure a number of objectives.\1184\ The Commission is proposing to
implement Section 15E(r) of the Exchange Act through paragraph (a) of
proposed new Rule 17g-8.\1185\
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    \1183\ See Public Law 111-203 Sec.  932(a)(8) and 15 U.S.C. 78o-
7(r).
    \1184\ See 15 U.S.C. 78o-7(r)(1)-(3).
    \1185\ See proposed paragraph (a) of new Rule 17g-8; see also
Section II.F.1 of this release for a more detailed discussion of
this proposal.
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    In particular, proposed paragraph (a)(1) would require the NRSRO to
have policies and procedures that are reasonably designed to ensure
that the procedures and methodologies, including qualitative and
quantitative data and models, the NRSRO uses to determine credit
ratings are approved by its board of directors or, if the NRSRO does
not have a board of directors, another body performing a function
similar to that of a board of directors.\1186\ Proposed paragraph
(a)(2) would require an NRSRO to have policies and procedures that are
reasonably designed to ensure that the procedures and methodologies,
including qualitative and quantitative data and models, the NRSRO uses
to determine credit ratings are developed and modified in accordance
with the policies and procedures of the NRSRO.\1187\ Proposed paragraph
(a)(3)(i) would require an NRSRO to have policies and procedures that
are reasonably designed to ensure that material changes to the
procedures and methodologies, including changes to qualitative and
quantitative data and models, the NRSRO uses to determine credit
ratings are applied consistently to all credit ratings to which the
changed procedures or methodologies apply.\1188\ Proposed paragraph
(a)(3)(ii) would require the NRSRO to have policies and procedures that
are reasonably designed to ensure that material changes to the
procedures and methodologies, including changes to qualitative and
quantitative data and models, the NRSRO uses to determine credit
ratings, to the extent that the changes are to surveillance or
monitoring procedures and methodologies, are applied to then-current
credit ratings within a reasonable period of time taking into
consideration the number of ratings impacted, the complexity of the
procedures and methodologies used to determine the credit ratings, and
the type of obligor, security, or money market instrument being
rated.\1189\ Proposed paragraph (a)(4)(i) would require the NRSRO to
have policies and procedures that are reasonably designed to ensure
that the NRSRO promptly publishes on an easily accessible portion of
its corporate Internet Web site material changes to the procedures and
methodologies, including to qualitative models or quantitative inputs,
the NRSRO uses to determine credit ratings, the reason for the changes,
and the likelihood the changes will result in changes to any current
ratings.\1190\ Proposed paragraph (a)(4)(ii) would require the NRSRO to
have policies and procedures that are reasonably designed to ensure the
NRSRO promptly publishes on its corporate Internet Web site significant
errors identified in a procedure or methodology, including a
qualitative or quantitative model, the NRSRO uses to determine credit
ratings that may result in a change in current credit ratings.\1191\
Finally, proposed paragraph (a)(5) would require the NRSRO to have
policies and procedures that are reasonably designed to ensure that it
discloses the version of a credit rating procedure or methodology,
including the qualitative methodology or quantitative inputs, used with
respect to a particular credit rating.\1192\
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    \1186\ See proposed paragraph (a)(1) of new Rule 17g-8.
    \1187\ See proposed paragraph (a)(2) of new Rule 17g-8.
    \1188\ See proposed paragraph (a)(3)(i) of new Rule 17g-8.
    \1189\ See proposed paragraph (a)(3)(ii) of new Rule 17g-8.
    \1190\ See proposed paragraph (a)(4)(i) of new Rule 17g-8.
    \1191\ See proposed paragraph (a)(4)(ii) of new Rule 17g-8.
    \1192\ See proposed paragraph (a)(5) of new Rule 17g-8.
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    The Commission also is proposing that the policies and procedures
required pursuant to proposed paragraph (a) of new Rule 17g-8 be
subject to the record retention and production requirements of Rule
17g-2.\1193\ Consequently, the Commission proposes adding new paragraph
(b)(13) to Rule 17g-2 to identify the policies and procedures an NRSRO
is required to establish, maintain, enforce, and document pursuant to
proposed paragraph (a) of new Rule 17g-8 as a record that must be
retained.\1194\
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    \1193\ 17 CFR 240.17g-2.
    \1194\ See proposed new paragraph (b)(13) to Rule 17g-2; see
also Section II.F.2 of this release for a more detailed discussion
of this proposal.
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1. Benefits
    The Commission is proposing to implement Sections 15E(r) of the
Exchange Act through paragraph (a) of proposed new Rule 17g-8. The
Commission preliminarily believes that the proposals would provide
several primary benefits for investors and other users of credit
ratings. First, having the NRSRO's board of directors or a body
performing a function similar to a board approve the NRSRO's procedures
and methodologies for determining credit ratings could promote the
quality and consistency of the procedures and methodologies.\1195\ In
addition, taking steps to ensure that such procedures and methodologies
are developed and modified pursuant to the NRSRO's policies and
procedures also could promote the quality and consistency of the
procedures and methodologies.\1196\
---------------------------------------------------------------------------

    \1195\ See proposed paragraph (a)(1) of new Rule 17g-8.
    \1196\ See proposed paragraph (a)(2) of new Rule 17g-8.
---------------------------------------------------------------------------

    Furthermore, taking steps to ensure that material changes to the
procedures and methodologies, including changes to qualitative and
quantitative data and models, the NRSRO uses to determine credit
ratings are applied consistently to all credit ratings to which the
changed procedures or methodologies apply could promote consistent and
timely application of such changes, which could benefit investors and
other users of credit ratings.\1197\ Similarly, the consistent and
timely application of changes to procedures and methodologies for
determining credit ratings could be promoted by an NRSRO taking steps
to ensure that material changes to the procedures and methodologies,
including changes to qualitative and quantitative data and models, the
NRSRO uses to determine credit ratings are, to the extent that the
changes are to surveillance or monitoring procedures and methodologies,
applied to then-current credit ratings within a reasonable period of
time taking into consideration the number of ratings impacted, the

complexity of the procedures and methodologies used to determine the
credit ratings, and the type of obligor, security, or money market
instrument being rated.\1198\
---------------------------------------------------------------------------

    \1197\ See proposed paragraph (a)(3)(i) of new Rule 17g-8.
    \1198\ See proposed paragraph (a)(3)(ii) of new Rule 17g-8.
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    In addition, the Commission preliminarily believes the proposal
would benefit investors and other users of credit ratings by improving
the transparency of an NRSRO's procedures and methodologies for
determining credit ratings. Specifically, investors and other users of
credit ratings would benefit from the transparency arising from
requiring that an NRSRO promptly publishes on an easily accessible
portion of its corporate Internet Web site material changes to the
procedures and methodologies, including to qualitative models or
quantitative inputs, the reason for the changes, and the likelihood the
changes will result in changes to any current ratings as well as
significant errors identified in a procedure or methodology, including
a qualitative or quantitative model.\1199\ Finally, transparency also
would be promoted by requiring that an NRSRO disclose the version of a
credit rating procedure or methodology, including the qualitative
methodology or quantitative inputs, used with respect to a particular
credit rating.\1200\
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    \1199\ See proposed paragraph (a)(4) of new Rule 17g-8.
    \1200\ See proposed paragraph (a)(5) of new Rule 17g-8.
---------------------------------------------------------------------------

    The Commission preliminarily believes that an additional benefit of
the proposal is that implementing Section 15E(r) of the Exchange Act by
requiring the NRSRO to have policies and procedures designed to achieve
the objectives set forth in that section would provide the NRSRO with
flexibility to integrate the required policies and procedure with its