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    \270\ See proposed new paragraph (b)(1)(i) of Rule 17g-7.
    \271\ The Commission notes, however, that an NRSRO could
voluntarily disclose more rating history information than required
by the current rule or the proposed amendment to the rule.
    \272\ Id.
    \273\ For example, assume an obligor was initially rated in AA
on June 26, 2000. Thereafter, the rating was downgraded to AA- on
June 26 2003, to A on June 26, 2005, and to BBB on June 26, 2008.
Under the proposed rule, the ratings history disclosure would cross
the June 26, 2007 threshold with an A rating. The history for this
obligor would omit the initial AA rating on June 26, 2000 and the
downgrades to AA- and A on June 26, 2003 and June 26, 2005,
respectively. Therefore, the first event in the rating history would
be that the obligor was assigned an A rating as of June 26, 2007.
The next event in the rating history would be the downgrade of the
credit rating to BBB on June 26, 2008.
    \274\ For example, a user of the credit rating histories would
be able to generate transition and default rates for a period having
a start date as far back as June 26, 2007. In doing so, the user
would be able to compile a start-date cohort consisting of all the
obligors, securities, and money market instruments assigned an
outstanding credit rating in a given class as of June 26, 2007. The
user could compute transition and default rates over short-term
periods (i.e., 1 or 2 years) in the near term and for longer periods
as time progresses and more ratings actions over a longer time
horizon are added to the disclosure. In addition, the user could
calculate transition or default rates using a different process than
the single cohort approach proposed for the Exhibit 1 disclosures.
For example, the user could begin calculating short-term transition
and default rates using a rolling average in which start-date
cohorts are identified each month (e.g., June 26, 2007, July 26,
2007, August 26, 2007, and so on).
---------------------------------------------------------------------------

    Proposed paragraph (b)(1)(ii) of Rule 17g-7 would contain the
existing requirement in the 100% Rule that an NRSRO disclose rating
histories for each credit rating in every class of credit ratings for
which the NRSRO is registered that was initially determined on or after
June 26, 2007 and any subsequent rating action taken with respect to
such credit ratings.\275\ Specifically, proposed paragraph (b)(1)(ii)
would require the 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 initially determined
on or after 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. Consequently, the disclosure mandated under
proposed paragraph (b)(1) of Rule 17g-7 would capture all credit
ratings outstanding as of June 26, 2007 (regardless of when the
obligor, security, or money market instrument was initially assigned a
credit rating) and the subsequent rating actions taken with respect to
those credit ratings as well as all credit ratings initially determined
on or after that date and the subsequent rating actions taken with
respect to those credit ratings.\276\
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    \275\ See proposed new paragraph (b)(1)(ii) of Rule 17g-7.
    \276\ See proposed new paragraph (b)(1) of Rule 17g-7.
---------------------------------------------------------------------------

    The next enhancement to the 100% Rule proposed by the Commission is
to increase the number and scope of the data fields that must be
disclosed about a rating action.\277\ 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. In addition, some of
the categories would have sub-categories.\278\ The goal would be to
make the data more useful in terms of the amount of information
provided, the ability to search and sort the information, and the
ability to compare historical rating information across NRSROs.\279\
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    \277\ See proposed new paragraph (b)(2) of Rule 17g-7.
    \278\ If adopted, the Commission would need to update the List
of XBRL Tags to include some of the new data fields; whereas other
of the fields are covered by existing Tags, including by some of the
voluntary Tags.
    \279\ See, e.g., GAO Report 10-782, p. 41 (``First, SEC [sic]
did not specify the data fields the NRSROs were to disclose in the
rule, and the data fields provided by the NRSROs were not always
sufficient to identify a complete rating history for ratings in each
of the seven samples. If users cannot identify the rating history
for each rating in the sample, they cannot develop performance
measures that track how an issuer's credit rating evolves.'').
---------------------------------------------------------------------------

    Proposed new paragraph (b)(2)(i) of Rule 17g-7 would identify the
first category of data: namely, the identity of the NRSRO disclosing
the rating action.\280\ This may seem unnecessary as the identity of
the NRSRO making the disclosure should be obvious. However, as noted
above, the NRSRO would need to assign an XBRL Tag to each item of
information, including the identity of the NRSRO. Including and tagging
the identity of the NRSRO would assist users who download and combine
data files of multiple NRSROs to sort credit ratings by a given NRSRO.
---------------------------------------------------------------------------

    \280\ See proposed new paragraph (b)(2)(i) of Rule 17g-7.
---------------------------------------------------------------------------

    Proposed new paragraph (b)(2)(ii) of Rule 17g-7 would identify the
second category of data: namely, the date of the rating action.\281\
This proposed

requirement is in the 100% Rule as it exists today.\282\ The inclusion
of the date of a rating action is designed to allow investors and other
users of credit ratings to review the timing of a rating action.\283\
This would allow the person reviewing the credit rating histories of
the NRSROs to reach conclusions about which NRSROs did the best job in
determining an initial rating and, thereafter, making appropriate and
timely adjustments to the credit rating.\284\
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    \281\ See proposed new paragraph (b)(2)(ii) of Rule 17g-7. The
Commission notes that many of the rating actions in an NRSRO's
disclosure would share the date of June 26, 2007, which would be the
first action disclosed for rating histories of credit ratings
initially determined before June 26, 2007. This would result from
the proposed requirement to add all credit ratings outstanding as of
June 26, 2007 to the disclosure. See proposed new paragraph
(b)(1)(i) of Rule 17g-7. As discussed below, the Commission is
proposing that this action (the adding of an outstanding credit
rating) have a unique XBRL tag so that persons using these
disclosures do not confuse the action as an initial credit rating or
change to an existing credit rating (e.g., an upgrade or a down
grade). See proposed new paragraph (b)(2)(v)(A) of Rule 17g-7.
    \282\ See 17 CFR 240.17g-2(a)(8).
    \283\ See Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR at 63837-63838 (Dec. 4,
2009).
    \284\ Id.
---------------------------------------------------------------------------

    Proposed new paragraph (b)(2)(iii) of Rule 17g-7 would identify the
third category of data.\285\ The information in this category would
need to be disclosed if the rating action is taken with respect to an
obligor (i.e., as opposed to a credit rating of a security or money
market instrument). In this case, the NRSRO would need to disclose (if
applicable): (1) the CIK number of the rated obligor; and (2) the legal
name of the obligor. This proposed requirement is in the 100% Rule as
it exists today.\286\
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    \285\ See proposed new paragraph (b)(2)(iii) of Rule 17g-7.
    \286\ See 17 CFR 240.17g-2(a)(8).
---------------------------------------------------------------------------

    Proposed new paragraph (b)(2)(iv) of Rule 17g-7 would identify the
fourth category of data.\287\ The information in this category would
need to be disclosed when the rating action is taken with respect to a
security or money market instrument. In this case, the NRSRO would need
to disclose (if applicable): (1) The CIK number of the issuer of the
security or money market instrument; (2) the legal name of the issuer
of the security or money market instrument; and (3) the CUSIP of the
security or money market instrument.\288\ The proposed requirement to
include the CUSIP of security or money market instrument is in the 100%
Rule as it exists today.\289\ The requirements to include the name and
CIK number of the issuer would be new. The Commission preliminarily
believes including this information would be useful because it would
allow users of the XBRL data file to sort credit ratings of securities
and money market instruments by issuer.
---------------------------------------------------------------------------

    \287\ See proposed new paragraph (b)(2)(iv) of Rule 17g-7.
    \288\ CUSIP stands for the Committee on Uniform Securities and
Identification. A CUSIP number consists of nine characters that
uniquely identify a company or issuer and the type of security.
    \289\ See 17 CFR 240.17g-2(a)(8).
---------------------------------------------------------------------------

    Proposed paragraph (b)(2)(v) of Rule 17g-7 would identify the fifth
category of data: namely, a classification of the type of rating
action.\290\ The NRSRO would be required to select 1 of 7
classifications to identify the reason for the rating action.\291\
Aside from the first classification discussed below, the Commission
preliminarily believes that the classifications identify all types of
actions an NRSRO might take with respect to a credit rating.
---------------------------------------------------------------------------

    \290\ See proposed paragraph (b)(2)(v) of Rule 17g-7.
    \291\ The actual disclosure would need to be the type of rating
action and not the credit rating resulting from the rating action.
For example, if the rating action was a downgrade, the NRSRO would
need to classify it as a ``downgrade'' and not, for example, a
change of the current credit rating from the AA notch to AA- notch.
This would allow users of the disclosures to sort the information
by, for example, initial credit ratings, upgrades, and downgrades.
---------------------------------------------------------------------------

    The first classification would be that the rating action
constitutes a disclosure of a credit rating that was outstanding as of
June 26, 2007 for the purposes of proposed paragraph (b)(1)(i) of Rule
17g-7.\292\ As discussed above, the Commission is proposing that the
100% rule capture all credit ratings outstanding as of June 26, 2007 by
disclosing the credit rating and associated information as of that
date.\293\ If adopted, this would mean that thousands, if not hundreds
of thousands, of ratings histories each beginning on June 26, 2007
would be disclosed. The proposed classification is designed to alert
users of the disclosures that the proposed rule caused the June 26,
2007 entry in the rating history of the obligor, security, or money
market instrument and not because, for example, a credit rating was
initially determined for the obligor, security, or money market
instrument on that date.
---------------------------------------------------------------------------

    \292\ See proposed paragraph (b)(2)(v)(A) of Rule 17g-7.
    \293\ See proposed paragraph (b)(1)(i) of Rule 17g-7.
---------------------------------------------------------------------------

    The second classification would be that the rating action was an
initial credit rating.\294\ For example, an NRSRO would select this
classification if the rating action was the first credit rating
determined by the NRSRO with respect to the obligor, security, or money
market instrument. The third classification would be an upgrade to an
existing credit rating.\295\ The fourth classification would be a
downgrade to an existing credit rating, which would include assigning a
credit rating of default.\296\ The fifth classification would be
placing an existing credit rating on credit watch or review.\297\ This
means the NRSRO has disclosed that it is actively evaluating whether
the credit rating should be changed. The sixth classification would be
affirming the current credit rating assigned to the obligor, security,
or money market instrument.\298\ For example, an NRSRO may publish an
announcement that it is affirming the current credit rating of an
obligor, security, or money market instrument and, consequently,
determine not to upgrade or downgrade the credit rating to a different
notch in the rating scale.
---------------------------------------------------------------------------

    \294\ See proposed paragraph (b)(2)(v)(B) of Rule 17g-7. The
Commission is not proposing that a rating action that results in an
``expected'' or ``preliminary'' credit rating be included in the
rating history for a given obligor, security, or money market
instrument. As noted above, expected or preliminary ratings most
commonly are issued by an NRSRO with respect to a structured finance
product at the time the issuer commences the offering and typically
are included in pre-sale reports. These ratings may include a range
of ratings, or any other indications of a credit rating used prior
to the assignment of an initial credit rating for a new issuance. As
such, the Commission preliminarily believes they should be excluded
from the ratings histories since the issuance of the ``initial''
credit rating is the first formal expression of the NRSRO's view of
the relative creditworthiness of the obligor, security, or money
market instrument.
    \295\ See proposed paragraph (b)(2)(v)(C) of Rule 17g-7.
    \296\ See proposed paragraph (b)(2)(v)(D) of Rule 17g-7.
    \297\ See proposed paragraph (b)(2)(v)(E) of Rule 17g-7.
    \298\ See proposed paragraph (b)(2)(v)(F) of Rule 17g-7. Some
NRSRO's also may ``confirm'' an existing credit rating. For the
purposes of this proposed disclosure requirement, the Commission
intends the term ``affirmation of an existing credit rating'' to
include a ``confirmation'' of an existing credit rating.
---------------------------------------------------------------------------

    The seventh classification would be the withdrawal of an existing
credit rating.\299\ In the case of a withdrawal, the NRSRO would be
required to provide a sub-classification identifying reason for the
withdrawal.\300\ There would be three sub-classifications: (1) The
obligor defaulted, or the security or money, market instrument went
into default; \301\ (2) the obligation subject to the credit rating was
extinguished by payment in full of all outstanding principal and
interest due on the obligation according to the terms of the
obligation; \302\ or (3) the credit rating was withdrawn for reasons
other than those set forth in (1) and (2) above.\303\

These sub-classifications would parallel, in many respects, the
outcomes identified in paragraphs (4)(B)(iii), (iv), and (v) of the
proposed amendments to the instructions for Exhibit 1 to Form NRSRO
discussed above in Section II.E.1.a of this release. However, the
Commission preliminarily believes that it would not be appropriate to
prescribe standard definitions of ``default'' and ``paid-off'' for the
purposes of making these classifications.\304\ The reason is the
ratings history disclosure requirement is designed to allow investors
and other users of credit ratings to compare how each NRSRO treats a
commonly rated obligor, security, or money market instrument. In other
words, unlike the production of performance statistics where standard
definitions are necessary to promote comparability of aggregate
statistics, the historical rating information should indicate on the
granular level any differences between the NRSROs with respect to the
rating actions they take for a commonly rated obligor, security or
money, market instrument, including their differing definitions of
default. This would allow investors and other users of credit ratings
to review, for example, the timing of when one NRSRO downgraded an
obligor to the default category as opposed to another NRSRO or group of
NRSROs. Among other things, investors and other users of credit ratings
could review the data to identify outliers that are either quick or
slow to downgrade obligors, securities, or money market instruments to
default. In addition, an NRSRO with a very narrow definition of
``default'' might continue to maintain a security at a notch in its
rating scale above the default category; whereas other NRSROs, using
broader definitions, had classified the security as having gone into
default. Creating a mechanism to identify these types of variances is a
goal of the enhancements to the 100% Rule. Moreover, users of the
ratings history information could use the standard definition of
Default in the proposed enhancements to the instructions for Exhibit 1
as a benchmark to compare when an NRSRO classified obligors,
securities, or money markets as having gone into default.
---------------------------------------------------------------------------

    \299\ See proposed paragraph (b)(2)(v)(G) of Rule 17g-7.
    \300\ See proposed paragraphs (b)(2)(v)(G)(1), (2) and (3) of
Rule 17g-7.
    \301\ See proposed paragraph (b)(2)(v)(G)(1) of Rule 17g-7.
    \302\ See proposed paragraphs (b)(2)(v)(G)(2) of Rule 17g-7.
    \303\ See proposed paragraphs (b)(2)(v)(G)(3) of Rule 17g-7.
    \304\ For the reasons discussed herein, the Commission also
preliminarily believes that the NRSRO should use its definition of
``default'' in taking a rating action that results in a downgrade to
the default category, which would need to be classified as a
downgrade in the information disclosed with the rating action
pursuant to proposed paragraph (b)(2)(v)(D) of Rule 17g-7.
---------------------------------------------------------------------------

    The Commission preliminarily believes a default and the
extinguishment of an obligation because it was paid in full are the
most frequently occurring reasons why an NRSRO withdraws a credit
rating. However, as discussed above, in Section II.E.1.a of this
release, there are other reasons an NRSRO might withdraw a credit
rating, including that the rated obligor or issuer of the rated
security or money market instrument stopped paying for the surveillance
of rating or the NRSRO decided not to devote resources to continue to
perform surveillance on the rating of an obligor, security, or money
market instrument on an unsolicited basis. However, as also discussed
above, the withdrawal of credit ratings could be used to make
performance statistics appear more favorable. Consequently, as with the
Transition/Default Matrices in Exhibit 1, an NRSRO would be required to
identify when a credit rating was withdrawn for reasons other than
default or the extinguishment of the obligation upon which the credit
rating is based. Similar to the Transition/Default Matrices, persons
using the ratings history information could analyze how often an NRSRO
withdraws a credit rating for ``other'' reasons in a class or subclass
of credit ratings.
    Proposed paragraph (b)(2)(vi) of Rule 17g-7 would identify the
sixth category of data: Namely, a classification of the class or
subclass of credit rating.\305\ The classes of credit ratings would be
based on the definition of ``nationally recognized statistical rating
organization'' in Section 3(a)(62) of the Exchange Act.\306\
Consequently, the first classification would be financial institutions,
brokers or dealers.\307\ The second classification would be insurance
companies.\308\ The third classification would be corporate
issuers.\309\
---------------------------------------------------------------------------

    \305\ See proposed paragraph (b)(2)(vi) of Rule 17g-7.
    \306\ See 15 U.S.C. 78o-7(a)(62). Because some obligors,
securities, and money market instruments have characteristics that
could cause them to be assigned more than one class of credit
rating, the Commission is seeking comment below in Section II.M.4.a
of this release on which class would be the most appropriate for
certain types of obligors, securities, and money market instruments.
Based on the comments received in response to those requests, the
Commission may decide to prescribe by rule or identify through
guidance how certain types of obligors, securities, and money market
instruments should be classified for the purposes proposed in new
paragraph (b)(vi) of Rule 17g-7.
    \307\ See 15 U.S.C. 78o-7(a)(62)(B)(i) and proposed paragraph
(b)(2)(vi)(A) of Rule 17g-7.
    \308\ See 15 U.S.C. 78o-7(a)(62)(B)(ii) and proposed paragraph
(b)(2)(vi)(B) of Rule 17g-7.
    \309\ See 15 U.S.C. 78o-7(a)(62)(B)(iii) and proposed paragraph
(b)(2)(vi)(C) of Rule 17g-7.
---------------------------------------------------------------------------

    The fourth classification would be issuers of structured finance
products.\310\ If the credit rating falls into this class, the proposed
rule would require the NRSRO to identify a sub-classification as
well.\311\ The sub-classifications would be the same subclasses for
structured finance credit ratings the Commission is proposing an
applicant and NRSRO use for the purposes of the Transition/Default
Matrices to be disclosed in Exhibit 1 to Form NRSRO:\312\ RMBS;\313\
CMBS;\314\ CLOs;\315\ CDOs;\316\ ABCP;\317\ other asset-backed
securities;\318\ and other structured finance products.\319\
---------------------------------------------------------------------------

    \310\ See 15 U.S.C. 78o-7(a)(62)(B)(iv) and proposed paragraph
(b)(2)(vi)(D) of Rule 17g-7. Consistent with the existing
Instructions to Exhibit 1 to Form NRSRO (and the proposed amendments
to those instructions) this class of credit rating would be broader
than the class identified in Section 15E(a)(62)(B)(iv) of the
Exchange Act.
    \311\ See proposed paragraphs (b)(2)(vi)(D)(1)-(7) of Rule 17g-
7.
    \312\ See discussion in Section II.E.1.a of this release and
proposed new paragraphs (1)(D)(i)-(vii) of the instructions for
Exhibit 1.
    \313\ See proposed paragraph (b)(2)(vi)(D)(1) of Rule 17g-7. As
with the proposal for Exhibit 1 to Form NRSRO, the Commission
preliminarily intends that ``RMBS'' for the purposes of this rule
means a securitization primarily of residential mortgages.
    \314\ See proposed paragraph (b)(2)(vi)(D)(2) of Rule 17g-7. As
with the proposal for Exhibit 1 to Form NRSRO, the Commission
preliminarily intends that ``CMBS'' for the purposes of this rule
means a securitization primarily of commercial mortgages.
    \315\ See proposed paragraph (b)(2)(vi)(D)(3) of Rule 17g-7. As
with the proposal for Exhibit 1 to Form NRSRO, the Commission
preliminarily intends ``CLO'' for the purposes of this rule means a
securitization primarily of commercial loans.
    \316\ See proposed paragraph (b)(2)(vi)(D)(4) of Rule 17g-7. As
with the proposal for Exhibit 1 to Form NRSRO, the Commission
preliminary intends ``CDO'' for the purposes of this rule to mean a
securitization primarily of other debt instruments such as RMBS,
CMBS, CLOs, CDOs, other asset backed securities, and corporate
bonds.
    \317\ See proposed paragraph (b)(2)(vi)(D)(5) of Rule 17g-7. As
with the proposal for Exhibit 1 to Form NRSRO, the Commission
preliminarily intends ``ABCP'' for the purposes of this rule to mean
short term notes issued by a structure that securitizes a variety of
financial assets (e.g., trade receivables or credit card
receivables), which secure the notes.
    \318\ See proposed paragraph (b)(2)(vi)(D)(6) of Rule 17g-7. As
with the proposal for Exhibit 1 to Form NRSRO, the Commission
preliminarily intends that ``other asset backed security'' for the
purposes of this rule to mean a securitization primarily of auto
loans, auto leases, floor plan financings, credit card receivables,
student loans, consumer loans, equipment loans or equipment leases.
    \319\ See proposed paragraph (b)(2)(vi)(D)(7) of Rule 17g-7. As
with the proposal for Exhibit 1 to Form NRSRO, the Commission
preliminarily intends that ``other structured finance product'' for
the purposes of this rule to mean a structured finance product not
identified in the other sub-classifications of structured finance
products.
---------------------------------------------------------------------------

    The fifth classification would be issuers of government securities,
municipal securities or securities issued by a foreign government.\320\
If the credit rating falls into this class, the proposed rule would
require the NRSRO to

identify a sub-classification as well.\321\ The sub-classifications
would be the same for this class as are currently identified in the
Instructions for Exhibit 1 to Form NRSRO: (1) Sovereign issuers;\322\
(2) United States public finance;\323\ or (3) International public
finance.\324\
---------------------------------------------------------------------------

    \320\ See 15 U.S.C. 78o-7(a)(62)(B)(v) and proposed paragraph
(b)(2)(vi)(E) of Rule 17g-7.
    \321\ See proposed paragraphs (b)(2)(vi)(E)(1)-(3) of Rule 17g-
7.
    \322\ See Instructions for Exhibit 1 to Form NRSRO and proposed
paragraph (b)(2)(vi)(E)(1) of Rule 17g-7.
    \323\ See Instructions for Exhibit 1 to Form NRSRO and proposed
paragraph (b)(2)(vi)(E)(2) of Rule 17g-7.
    \324\ See Instructions for Exhibit 1 to Form NRSRO and proposed
paragraph (b)(2)(vi)(E)(3) of Rule 17g-7.
---------------------------------------------------------------------------

    Proposed paragraph (b)(2)(vii) of Rule 17g-7 would identify the
seventh category of data: Namely, the credit rating symbol, number, or
score in the applicable rating scale of the NRSRO assigned to the
obligor, security, or money market instrument as a result of the rating
action or, if the credit rating remained unchanged as a result of the
action, the credit rating symbol, number, or score in the applicable
rating scale of the NRSRO assigned to the obligor, security, or money
market instrument as of the date of the rating action.\325\ The rating
symbol, number, or score is a key component of the information that
would need to be disclosed as it reflects the NRSRO's view of the
relative creditworthiness of the obligor, security, or money market
instrument subject to the rating as of the date the action is taken.
The proposal would specify that the NRSRO, in either case, would need
to include a credit rating in a default category, if applicable.
Otherwise an NRSRO might exclude a default on the theory that it is not
a credit rating per se (i.e., an opinion of creditworthiness) but
rather a statement of fact.
---------------------------------------------------------------------------

    \325\ See proposed new paragraph (b)(2)(vii) of Rule 17g-7.
---------------------------------------------------------------------------

    Proposed paragraph (b)(3) of Rule 17g-7 would provide that the
information identified in paragraph (b)(2) of the rule (discussed
above) must be disclosed in an interactive data file that uses an XBRL
format and the List of XBRL Tags for NRSROs as published on the
Internet Web site of the Commission.\326\ This would be consistent with
the current requirement of the 100% Rule.\327\ As discussed above,
however, the data fields that would need to have an XBRL tag would be
expanded.\328\
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    \326\ See proposed new paragraph (b)(3) of Rule 17g-7.
    \327\ See 17 CFR 240.17g-2(d)(3)(ii).
    \328\ See proposed new paragraph (b)(2)(i)-(vii).
---------------------------------------------------------------------------

    Proposed paragraph (b)(4) of Rule 17g-7 would specify when a rating
action would need to be disclosed by establishing two distinct grace
periods: 12 months and 24 months.\329\ In particular, a rating action
would need to be disclosed: (1) Within 12 months from the date the
action is taken, if the credit rating subject to the action is issuer-
paid; \330\ (2) or within 24 months from the date the action is taken,
if the credit rating subject to the action is not issuer-paid.\331\
These separate grace periods for issuer-paid and non-issuer-paid credit
ratings are consistent with the current requirement of the 100%
Rule.\332\
---------------------------------------------------------------------------

    \329\ See proposed new paragraph (b)(4) of Rule 17g-7.
    \330\ See proposed paragraph (b)(4)(i) of Rule 17g-7.
    \331\ See proposed paragraph (b)(4)(ii) of Rule 17g-7.
    \332\ See 17 CFR 240.17g-2(d)(3)(i)(B) and (C). See Amendments
to Rules for Nationally Recognized Statistical Rating Organizations,
74 FR at 63837-63842 (Dec. 4, 2009) (discussing the 100% Rule and
the reasons why the Commission adopted distinct 12 and 24 month
grace periods).
---------------------------------------------------------------------------

    Finally, paragraph (b)(5) of Rule 17g-7 would provide that an NRSRO
may cease disclosing a rating history of an obligor, security, or money
market instrument no earlier than 20 years after the date a rating
action with respect to the obligor, security, or money market
instrument is classified as a withdrawal of the credit rating pursuant
to paragraph (b)(2)(v)(G) of Rule 17g-7, provided no subsequent credit
ratings are assigned to the obligor, security, or money market
instrument after the withdrawal classification.\333\ This proposed
requirement is designed to ensure that information about credit ratings
that are withdrawn for any reason would remain a part of the disclosure
for a significant period of time. The Commission preliminarily believes
this would address concerns that an NRSRO might withdraw a credit
rating to remove its history from the disclosure requirement to, for
example, make the performance of its credit ratings appear better than,
in fact, is the case.
---------------------------------------------------------------------------

    \333\ See proposed paragraph (b)(5) of Rule 17g-7.
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of
proposed new paragraph (b) of Rule 17g-7. The Commission also seeks
comment on the following:
    1. Should the 10% Rule be retained? For example, could it be
enhanced to meet the requirement of Section 15E(q)(A) of the Exchange
Act that disclosures be comparable among NRSROs, to allow users of
credit ratings to compare the performance of credit ratings across
NRSROs? If so, how could the 10% Rule be modified to better meet this
requirement? Moreover, even with such modifications, would an enhanced
10% Rule provide information to investors and other users of credit
ratings that would be useful to assess the performance of credit
ratings across NRSROs?
    2. Should the proposed rule require that the disclosure of the
ratings history information under the proposed enhancements to the 100%
Rule be made freely available in writing, when requested? If so, how
should an NRSRO meet such a request? For example, would an NRSRO be
required to mail a written copy of information in the XBRL data file to
a party requesting the information? If so, would it be appropriate to
permit the NRSRO to charge reasonable handling and postage fees? Would
such a requirement to provide a written copy of the information in the
XBRL data file be feasible? Are there other ways an NRSRO could make
this disclosure freely available in writing?
    3. If the rule required an NRSRO to provide a written copy of the
information in the XBRL data file, when requested, under what
circumstances would a party request this information in writing, given
that it would be freely available on an easily accessible portion of
the NRSRO's corporate Internet Web site? Moreover, why would a party
request the information in written form when downloading an electronic
file in an XBRL format would make accessing and analyzing the
information much easier?
    4. Should the rule require that an NRSRO publish quarterly, bi-
annual, or annual copies of the rating histories and that these be made
available when requested to implement the ``in writing'' provision in
the statute?
    5. What practical issues should the Commission consider in
implementing the proposed enhancements to the 100% Rule? For example,
would the variances in the procedures and methodologies NRSROs use to
determine credit ratings raise practical issues in terms of classifying
and disclosing the proposed required information about a credit rating
action? In addition, would the variances in the meanings and
definitions that NRSROs ascribe to the categories of credit ratings in
their rating scales raise practical issues in terms of classifying and
disclosing the proposed required information about a credit rating
action? How could the proposal be modified to address any practical
issues identified without undermining the goal of making the data more
useful in terms of the

amount of information provided, the ability to search and sort the
information, and the ability to compare historical rating information
across NRSROs?
    6. How long would it take an NRSRO to implement the proposed
requirements and begin making the proposed disclosures? What steps
would an NRSRO need to take to implement the proposed requirements?
    7. What practical issues should the Commission consider with
respect to the proposed requirement to add histories for all credit
ratings outstanding as of June 26, 2007 to the disclosure? How could
the proposal be modified to address any practical issues identified
without undermining the rule's goal of making the data more useful in
terms of the amount of information provided, the ability to search and
sort the information, and the ability to compare historical rating
information across NRSROs?
    8. What practical issues should the Commission consider with
respect to the proposed new requirement to disclose the name and CIK
number of the issuer of a rated security or money market instrument?
How could the proposal be modified to address any practical issues
identified without undermining the goal of making the data more useful
in terms of the amount of information provided, the ability to search
and sort the information, and the ability to compare historical rating
information across NRSROs?
    9. What practical issues should the Commission consider with
respect to the proposed new requirement to disclose the type of rating
action? For example, are the proposed classifications a comprehensive
list of the types of rating actions taken by NRSROs? If not, identify
and describe any other types of rating actions. Would the disclosure of
this data be useful to investors and other users of credit ratings? How
could the proposal be modified to address any practical issues
identified without undermining the goal of making the data more useful
in terms of the amount of information provided, the ability to search
and sort the information, and the ability to compare historical rating
information across NRSROs?
    10. With respect to the proposal to disclose the types of rating
actions, are the three sub-classifications proposed for the withdrawal
classification sufficient? For example, should the rule further refine
the ``withdrawal for other reasons'' sub-classification to require
disclosure of certain other reasons that a credit rating might be
withdrawn such as the obligor or issuer ceased paying for the credit
rating?
    11. What practical issues should the Commission consider with
respect to the proposed new requirement to disclose the class or
subclass of the credit rating? For example, are the descriptions of the
subclasses of credit ratings for structured finance products
sufficiently clear to provide an NRSRO with guidance as to how such
credit ratings should be classified? How could the descriptions be
modified to make them clearer and provide better guidance?
    12. Are the subclasses of credit ratings for structured finance
products the most appropriate way to divide this class of credit
ratings? For example, should the ``other-ABS'' subclass be separated
into subclasses based on the assets underlying the ABS (i.e., auto
loans, auto leases, floor plan financings, credit card receivables,
student loans, consumer loans, equipment loans, or equipment leases)?
In addition, are there other classes of structured finance products
that should be identified?
    13. Commenters are referred to the questions in Section II.M.4.a of
this release with respect to Items 6 and 7 of Form NRSRO and how
certain types of obligors, securities, and money market instruments
should be classified for purposes of providing approximate amounts of
credit ratings outstanding in each class of credit rating for which an
applicant is seeking registration (Item 6) or an NRSRO is registered
(Item 7)? In responding to those questions, commenters should consider
how proposed classifications could be applied for the purposes of
proposed new paragraph (b)(2)(vi) of Rule 17g-7.
    14. Is 20 years the appropriate amount of time to require that the
ratings history for a withdrawn credit rating remain part of the
disclosure? Should the rule require these histories be retained for a
lesser period of time, such as 10 or 15 years or a greater period of
time, such as 25 or 30 years? If a different time period would be more
appropriate, explain the rationale for such different time period.
    15. Are the existing 12 and 24 month grace periods appropriate?
Should the Commission consider adopting a single grace period, rather
than the existing bifurcated approach?

F. Credit Rating Methodologies

    Section 932(a)(8) of the Dodd-Frank Act amends Section 15E of the
Exchange Act to add new subsection (r).\334\ 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.\335\ The Commission preliminarily
believes it would be appropriate to implement Section 15E(r) by
proposing rules requiring an NRSRO to establish, maintain, enforce, and
document policies and procedures that are reasonably designed to ensure
the objectives identified in that section of the statute.\336\ This
approach would allow an NRSRO to establish policies and procedures that
can be integrated with its procedures and methodologies for determining
credit ratings, which vary across NRSROs. At the same time, the
proposed rule would set forth specific objectives that the policies and
procedures would need to be reasonably designed to achieve both in
design and operation. The Commission preliminarily believes this
approach would be appropriate, particularly given that the objectives
set forth in Section 15E(r) of the Exchange Act relate to the
procedures and methodologies an NRSRO uses to determine credit
ratings.\337\
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    \334\ See Public Law 111-203 Sec.  932(a)(8) and 15 U.S.C. 78o-
7(r).
    \335\ See 15 U.S.C. 78o-7(r)(1)-(3).
    \336\ See id.
    \337\ See Section 15E(r) of the Exchange Act (15 U.S.C. 78o-
7(r)); see also Section 15E(c)(2) of the Exchange Act (providing, in
pertinent part, that the Commission may not regulate the substance
of credit ratings or the procedures and methodologies by which any
NRSRO determines credit ratings). 15 U.S.C. 78o-7(c)(2).
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    For these reasons, the Commission is proposing to implement Section
15E(r) of the Exchange Act, in large part, through paragraph (a) of new
Rule 17g-8.\338\ The Commission also is proposing an amendment to Rule
17g-2 to apply the record retention and production requirements of that
rule to the policies and procedures.\339\
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    \338\ See proposed paragraph (a) of new Rule 17g-8. As discussed
above in Section II.C of this release, the Commission is proposing
to implement several provisions of the Dodd-Frank Act through rules
that would prescribe policies and procedures an NRSRO would need to
establish, maintain, enforce, and document. The Commission is
proposing that all such rule requirements be consolidated in new
Rule 17g-8. See proposed paragraphs (a), (b), and (c) of new Rule
17g-8 and Section II.C.1 of this release discussing proposed
paragraph (c) and Section II.J.1 discussing proposed paragraph (b).
    \339\ See proposed new paragraph (b)(13) of Rule 17g-2.
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1. Proposed Paragraph (a) of New Rule 17g-8
    As noted above, proposed paragraph (a) of new Rule 17g-8 would
require an NRSRO to have policies and procedures

that are reasonably designed to achieve objectives identified in
Section 15E(r) of the Exchange Act.\340\ In particular, the prefatory
text would require an NRSRO to establish, maintain, enforce, and
document policies and procedures that are reasonably designed to ensure
the objectives identified in paragraphs (a)(1), (2), (3), (4), and (5).
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    \340\ See prefatory text of proposed paragraph (a) of new Rule
17g-8.
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    Proposed paragraph (a)(1) of new Rule 17g-8 would implement Section
15E(r)(1)(A) of the Exchange Act.\341\ This section provides that the
Commission's rules shall require an NRSRO to ensure that credit ratings
are determined using procedures and methodologies, including
qualitative and quantitative data and models, that are approved by the
board of the NRSRO, or a body performing a function similar to that of
a board.\342\ The Commission preliminarily believes that the mandate
set forth in the statute is explicit and, consequently, proposes rule
text that would mirror the statutory text.\343\ Therefore, proposed
paragraph (a)(1) of new Rule 17g-8 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
approved by its board of directors or another body performing a
function similar to that of a board of directors.\344\ In this regard,
the Commission notes that Section 15E(t)(3)(A) of the Exchange Act
contains a self-executing provision that the board of the NRSRO shall
oversee the ``establishment, maintenance, and enforcement of the
policies and procedures for determining credit ratings.'' \345\
Consequently, the Commission preliminarily believes that the policies
and procedures proposed to be required pursuant to paragraph (a)(1) of
Rule 17g-8 would need to be designed to assist the NRSRO's board in
carrying out this responsibility. In addition, Section 15E(t)(5) of the
Exchange Act provides that the Commission may permit an NRSRO to
delegate responsibilities required in Section 15E(t) to a committee if
the Commission finds that compliance with the provisions of that
section present an unreasonable burden on a small NRSRO.\346\
Consequently, the Commission preliminarily believes that the policies
and procedures proposed to be required pursuant to paragraph (a)(1) of
Rule 1717g-8 would need to be designed to assist the NRSRO's committee
in carrying out the responsibility to oversee the ``establishment,
maintenance, and enforcement of the policies and procedures for
determining credit ratings mandated by Section 15E(t)(3)(A) of the
Exchange Act'' if the committee (rather than the board) carries out
this responsibility.\347\
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    \341\ See proposed paragraph (a)(1) of new Rule 1717g-8 and 15
U.S.C. 78o-7(r)(1)(A).
    \342\ See 15 U.S.C. 78o-7(r)(1)(A).
    \343\ See proposed paragraph (a)(1) of new Rule 17g-8.
    \344\ Compare proposed paragraph (a)(1) of new Rule 17g-8, with
15 U.S.C. 78og-7(r)(1)(A).
    \345\ See 15 U.S.C. 78og-7(t)(3)(A).
    \346\ See 15 U.S.C. 78og-7(t)(5).
    \347\ See 15 U.S.C. 78og-7(t)(3)(A).
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    Proposed paragraph (a)(2) of new Rule 17g-8 would implement Section
15E(r)(1)(B) of the Exchange Act.\348\ This section provides that the
Commission's rules shall require an NRSRO to ensure that credit ratings
are determined using procedures and methodologies, including
qualitative and quantitative data and models, that are in accordance
with the policies and procedures of the NRSRO for the development and
modification of credit rating procedures and methodologies.\349\ The
Commission preliminarily believes that the mandate set forth in the
statute is explicit and, consequently, proposes rule text that would
mirror the statutory text.\350\ Therefore, proposed paragraph (a)(2) of
new Rule 17g-8 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.\351\
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    \348\ See proposed paragraph (a)(2) of new Rule 17g-8 and 15
U.S.C. 78og-7(r)(1)(B).
    \349\ See 15 U.S.C. 78o-7(r)(1)(B).
    \350\ See proposed paragraph (a)(2) of new Rule 17g-8.
    \351\ Compare proposed paragraph (a)(2) of new Rule 17g-8, with
15 U.S.C. 78o-7(r)(1)(B).
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    Proposed paragraph (a)(3)(i) of new Rule 17g-8 would implement
Section 15E(r)(2)(A) of the Exchange Act.\352\ This section provides
that the Commission's rules shall require an NRSRO to ensure that when
material changes are made to credit rating procedures and methodologies
(including changes to qualitative and quantitative data and models),
the changes are applied consistently to all credit ratings to which the
changed procedures and methodologies apply.\353\ The Commission
preliminarily believes that the mandate set forth in the statute is
explicit and, consequently, proposes rule text that would mirror the
statutory text.\354\ Therefore, proposed paragraph (a)(3)(i) of new
Rule 17g-8 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.\355\
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    \352\ See proposed paragraph (a)(3)(i) of new Rule 17g-8 and 15
U.S.C. 78o-7(r)(2)(A).
    \353\ See 15 U.S.C. 78o-7(r)(2)(A).
    \354\ See proposed paragraph (a)(3)(i) of new Rule 17g-8.
    \355\ Compare proposed paragraph (a)(3)(i) of new Rule 17g-8,
with 15 U.S.C. 78o-7(r)(2)(A).
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    Proposed paragraph (a)(3)(ii) of new Rule 17g-8 would implement
Section 15E(r)(2)(B) of the Exchange Act.\356\ This section provides
that the Commission's rules shall require an NRSRO to ensure that when
material changes are made to credit rating procedures and methodologies
(including changes to qualitative and quantitative data and models), to
the extent that changes are made to credit rating surveillance
procedures and methodologies, the changes are applied to then-current
credit ratings by the NRSRO within a reasonable time period determined
by the Commission, by rule.\357\ The Commission proposes that paragraph
(a)(3)(ii) of new Rule 17g-8 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 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.\358\ This
proposed rule would mirror the text of Section 15E(r)(2)(B) of the
Exchange Act but add additional language to implement the rulemaking
provision that the changes are applied to then-current credit ratings
by the NRSRO within a ``reasonable time

period determined by the Commission, by rule.'' \359\
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    \356\ See proposed paragraph (a)(3)(i) of new Rule 17g-8 and 15
U.S.C. 78o-7(r)(2)(B).
    \357\ 15 U.S.C. 78o-7(r)(2)(B).
    \358\ See proposed paragraph (a)(3)(ii) of new Rule 17g-8.
    \359\ Compare proposed paragraph (a)(3)(ii) of new Rule 17g-8,
with 15 U.S.C. 78o-7(r)(2)(B).
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    In determining what time period would be reasonable, the Commission
preliminarily believes that the NRSRO should be required to have
policies and procedures designed to ensure that the changes are applied
to existing credit ratings within a reasonable time period taking into
consideration certain relevant factors; namely, 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. The Commission preliminarily
believes that a prescribed time frame (e.g., 1, 2, 3, 4 or more months)
would not be appropriate because the reasonableness of the timeframe in
which existing credit ratings are modified would depend on the facts
and circumstances. If the rule mandated a time-frame that is too short,
under the circumstances, the NRSRO would need to rush to meet the
deadline. This could negatively impact the quality of the credit
ratings determined using the changed surveillance procedures and
methodologies. Moreover, prescribing a timeframe that is too long could
create an inadvertent ``safe harbor'' allowing the NRSRO to act more
slowly to apply the changed surveillance procedures and methodologies
to the impacted obligors, securities, and money market instruments.
Consequently, the Commission preliminarily believes that the best
approach is to require the NRSRO to apply the changed surveillance
procedures and methodologies to the impacted obligors, securities, and
money market instruments within a reasonable amount of time given the
circumstances.
    Proposed paragraph (a)(4)(i) of new Rule 17g-8 would implement
Sections 15E(r)(2)(C), 15E(r)(3)(B), and 15E(r)(3)(D) of the Exchange
Act as they all relate to disclosing information about material changes
to procedures and methodologies (including changes to qualitative and
quantitative data and models) an NRSRO uses to determine credit
ratings.\360\ Specifically, Section 15E(r)(2)(C) provides that the
Commission's rules shall require an NRSRO to ensure that when material
changes are made to credit rating procedures and methodologies
(including changes to qualitative and quantitative data and models),
the NRSRO publicly discloses the reason for the change.\361\ Section
15E(r)(3)(B) provides that the Commission's rules shall require an
NRSRO to notify users of credit ratings when a material change is made
to a procedure or methodology, including to a qualitative model or
quantitative input.\362\ Finally, Section 15E(r)(3)(D) provides that
that the Commission's rules shall require an NRSRO to notify users of
credit ratings when a material change is made to a procedure or
methodology, including to a qualitative model or quantitative input, of
the likelihood the change will result in a change in current credit
ratings.\363\
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    \360\ See proposed paragraph (a)(4)(i) of new Rule 17g-8, 15
U.S.C. 78o-7(r)(2)(B), 15 U.S.C. 78o-7(r)(3)(B), and 15 U.S.C. 78o-
7(r)(3)(D).
    \361\ See 15 U.S.C. 78o-7(r)(2)(C).
    \362\ See 15 U.S.C. 78o-7(r)(3)(B).
    \363\ See 15 U.S.C. 78o-7(r)(3)(D).
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    Consequently, Section 15E(r)(3)(B) requires the NRSRO to notify
users of a change, Section 15E(r)(2)(C) requires the NRSRO to publish
the reason for a change, and Section 15E(r)(3)(D) requires the NRSRO to
disclose the potential impact of the change on existing credit
ratings.\364\ The Commission preliminarily believes that the mandates
set forth in these sections are explicit and, consequently, proposes
rule text that would mirror the statutory text.\365\ Moreover, because
the objective of the provision is to provide disclosure to investors
and users of credit ratings, the Commission preliminarily believes
proposed paragraph (a)(4)(i) of Rule 17g-8 should specify that these
disclosures be published on an easily accessible portion of the NRSRO's
corporate Internet Web site.\366\ This would be consistent with the
Commission's proposed Internet disclosure requirements for Form NRSRO
under paragraph (i) of Rule 17g-1 and the ratings history information
under proposed new paragraph (b)(1) of Rule 17g-1. For these reasons,
proposed paragraph (a)(4)(i) of new Rule 17g-8 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.\367\
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    \364\ 15 U.S.C. 78o-7(r)(3)(B), 15 U.S.C. 78o-7(r)(2)(C), and 15
U.S. C. 78o-7(r)(3)(D).
    \365\ Compare proposed paragraph (a)(4)(ii) of new Rule 17g-8,
with 15 U.S.C. 78o-7(r)(3)(B), 15 U.S.C. 78o-7(r)(2)(C), and 15 U.S.
C. 78o-7(r)(3)(D).
    \366\ As discussed above in Section II.E.1.b of this release,
the Commission preliminarily believes there is no alternative means
of disclosure that makes information as ``readily accessible'' as an
Internet Web site. In addition, as discussed in that section of this
release, the Commission preliminarily believes that information
would be disclosed on an ``easily accessible'' portion of a
corporate Internet Web site if it could be accessed through a
clearly and prominently labeled hyperlink on the homepage of the
NRSRO's corporate Internet Web site.
    \367\ See proposed paragraph (a)(4)(i) of new Rule 17g-8.
---------------------------------------------------------------------------

    Proposed paragraph (a)(4)(ii) of new Rule 17g-8 would implement
Sections 15E(r)(3)(C) of the Exchange Act.\368\ This section provides
that the Commission's rules shall require an NRSRO to notify users of
credit ratings when a significant error is identified in a procedure or
methodology, including a qualitative or quantitative model, that may
result in credit rating actions.\369\ The Commission preliminarily
believes that the mandate set forth in the statute is explicit and,
consequently, proposes rule text that would mirror the statutory
text.\370\ Moreover, as with the proposed paragraph (a)(4)(i)
disclosures, the Commission preliminarily believes proposed paragraph
(a)(4)(ii) of Rule 17g-8 should specify that these disclosures be
published on the NRSRO's corporate Internet Web site. Therefore,
proposed paragraph (a)(4)(ii) of new Rule 17g-8 would require the NRSRO
to have policies and procedures that are reasonably designed to ensure
the NRSRO promptly publishes on an easily accessible portion of 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.\371\
---------------------------------------------------------------------------

    \368\ See proposed paragraph (a)(4)(ii) of new Rule 17g-8 and 15
U.S.C. 78o-7(r)(3)(C).
    \369\ See 15 U.S.C. 78o-7(r)(3)(C).
    \370\ Compare proposed paragraph (a)(4)(ii) of new Rule 17g-8,
with 15 U.S.C. 78o-7(r)(3)(C).
    \371\ See proposed paragraph (a)(4)(ii) of new Rule 17g-8.
---------------------------------------------------------------------------

    Proposed paragraph (a)(5) of new Rule 17g-8 would implement
Section15E(r)(3)(A) of the Exchange Act.\372\ This section provides
that the Commission's rules shall require an NRSRO to notify users of
credit ratings of the version of a procedure or methodology, including
the qualitative methodology or quantitative inputs, used with respect
to a particular credit rating.\373\ The Commission preliminarily
believes that the mandate set forth in the statute is explicit and,
consequently, proposes rule text that would mirror the statutory
text.\374\ Therefore, proposed

paragraph (a)(5) of new Rule 17g-8 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.\375\
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    \372\ See proposed paragraph (a)(5) of new Rule 17g-8 and 15
U.S. C. 78o-7(r)(3)(A).
    \373\ 15 U.S.C. 78o-7(r)(3)(A).
    \374\ Compare proposed paragraph (a)(5) of new Rule 17g-8, with
15 U.S.C. 78o-7(r)(3)(A).
    \375\ See proposed paragraph (a)(5) of new Rule 17g-8. In
addition, because this would be a rating-by-rating disclosure, the
Commission is proposing, as discussed in Section II.G.3 of this
release, that disclosure of the version of a credit rating procedure
or methodology be part of the rule implementing Section 15E(s) of
the Exchange Act, which specifies, among other things, that the
Commission adopt rules requiring an NRSRO to generate a form to be
included with the publication of a credit rating. See 15 U.S.C. 78o-
7(s) and proposed new paragraph (a)(1)(ii)(B) of Rule 17g-7.
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Request for Comment
    The Commission generally requests comment on all aspects of
proposed paragraph (a) of new Rule 17g-8. The Commission also seeks
comment on the following:
    1. Are there alternatives to implementing Section 15E(r) of the
Exchange Act (i.e., other than requiring policies and procedures
reasonably designed to achieve the objectives identified in the
statute) that the Commission should consider? If so, please identify
those alternatives and explain how they would better achieve the goals
of Section 15E(r)?
    2. Would proposed paragraph (a)(1) of new Rule 17g-8 requiring an
NRSRO to have policies and procedures that are reasonably designed to
achieve the objective 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
another body performing a function similar to that of a board of
directors appropriately meet the mandate identified in Section
15E(r)(1)(A) of the Exchange Act? If not, how could the proposal be
modified to provide more guidance to NRSROs about how to design their
policies and procedures?
    3. Would proposed paragraph (a)(2) of new Rule 17g-8 requiring 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 appropriately meet the mandate identified in
Section 15E(r)(1)(B) of the Exchange Act? If not, how should the
proposal be modified to provide more guidance to NRSROs about how to
design their policies and procedures? In addition, how would this
proposed requirement relate to the requirement in Section 15E(c)(3)(A)
of the Exchange Act requiring 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. For example, would
procedures established under proposed paragraph (a)(2) of Rule 17g-8 be
part of the internal control structure or would they be designed to
achieve different goals?
    4. Would proposed paragraph (a)(3)(i) of new Rule 17g-8 requiring
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
appropriately meet the mandate identified in Section 15E(r)(2)(A) of
the Exchange Act? If not, how should the proposal be modified to
provide more guidance to NRSROs about how to design their policies and
procedures?
    5. Would proposed paragraph (a)(3)(ii) of new Rule 17g-8 requiring
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, 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 appropriately meet the mandate identified in
Section 15E(r)(2)(B) of the Exchange Act? If not, how should the
proposal be modified to provide more guidance to NRSROs about how to
design their policies and procedures?
    6. With respect to proposed paragraph (a)(3)(ii) of new Rule 17g-8,
should the Commission consider prescribing specific time frames such as
1, 2, 3, 4, 5, 6 or more months to apply the new procedures and
methodologies to existing credit ratings? Should the time frame depend
on the methodology used to determine credit ratings (i.e., quantitative
as opposed to qualitative)? As another alternative, should the
Commission prescribe a timeframe based on the number of outstanding
credit ratings? For example, should the Commission consider requiring
that the new procedures and methodologies be applied to existing credit
ratings in tranches such as 10 credit ratings per week or 60 credit
ratings per month or some other ratio of the period of time to the
number of credit ratings? Should such a ratio depend on the methodology
used to determine credit ratings (i.e., quantitative as opposed to
qualitative)?
    7. Would proposed paragraph (a)(4)(i) of new Rule 17g-8 requiring
an 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 appropriately meet the mandates
identified in Sections 15E(r)(3)(B), 15E(r)(2)(C) and 15E(r)(3)(D) of
the Exchange Act? If not, how should the proposal be modified to
provide more guidance to NRSROs about how to design their policies and
procedures?
    8. Would proposed paragraph (a)(4)(ii) of new Rule 17g-8 requiring
an NRSRO to have policies and procedures that are reasonably designed
to ensure the NRSRO promptly publishes on an easily accessible portion
of 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 appropriately meet the mandates
identified in Section 15E(r)(3)(C) of the Exchange Act? If not, how
should the proposal be modified to provide more guidance to NRSROs
about how to design their policies and procedures? For example, should
the Commission define ``significant error''? If so, how should the term
be defined? Should the definition establish a materiality threshold? If
so, how should such a threshold be prescribed? Similarly, should the
Commission interpret the term ``may result in a change in current
credit ratings'' to, for example, clarify the level of likelihood
necessary to trigger the reporting requirement? For example, should
there be a reasonable likelihood that the error may result in a change
in current credit ratings?
    9. Would proposed paragraph (a)(5) of new Rule 17g-8 requiring an
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 appropriately
meet the mandates identified in Sections 15E(r)(3)(A) of the Exchange
Act? If not, how should the proposal be modified to provide more
guidance to NRSROs about how to design their policies and procedures?
2. Proposed Amendment to Rule 17g-2
    For the reasons discussed in Section II.A.2 of this release, the
Commission preliminarily believes that the policies and procedures that
would be required pursuant to proposed paragraph (a) of new Rule 17g-8
should be subject to the record retention and production requirements
of Rule 17g-2.\376\ 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.\377\
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    \376\ 17 CFR 240.17g-2.
    \377\ See proposed new paragraph (b)(13) to Rule 17g-2; see also
Section 17(a)(1) of the Exchange Act, which requires an NRSRO to
make and keep such records, and make and disseminate such reports,
as the Commission prescribes by rule as necessary or appropriate in
the public interest, for the protection of investors, or otherwise
in furtherance of the Exchange Act. 15 U.S.C. 78q(a)(1).
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Request for Comment
    The Commission generally requests comment on all aspects of
proposed new paragraph (a)(9) of Rule 17g-2.

G. Form and Certifications To Accompany Credit Ratings

    Section 932(a)(8) of the Dodd-Frank Act amended Section 15E of the
Exchange Act to add new paragraph (s).\378\ Sections 15E(s)(1) through
(4), among other things, set forth provisions specifying Commission
rulemaking with respect to disclosures an NRSRO must make with the
publication of a credit rating.\379\ The Commission proposes to
implement these provisions by adding new paragraph (a) to Rule 17g-
7.\380\ As discussed in detail below, the prefatory text of proposed
new paragraph (a) would require an NRSRO to publish two items when
taking a rating action: (1) A form containing information about the
credit rating resulting from or subject to the rating action; \381\ and
(2) any certification of a provider of third-party due diligence
services received by the NRSRO that relates to the credit rating.\382\
Proposed paragraph (a)(1) of Rule 17g-7 would contain three primary
components: paragraph (a)(1)(i) prescribing the format of the form;
\383\ paragraph (a)(1)(ii) prescribing the content of the form; \384\
and paragraph (a)(1)(iii) prescribing an attestation requirement for
the form.\385\ Proposed paragraph (a)(2) of Rule 17g-7 would identify
the certification from a provider of third-party due diligence services
as an item to be published with the rating action.\386\
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    \378\ See 15 U.S.C. 78o-7(s).
    \379\ See Public Law 111-203 Sec.  932(a)(8) and 15 U.S.C. 78o-
7(s)(1)-(4). Section 15E(s)(4) of the Exchange Act also establishes
requirements for issuers and underwriters of asset-backed
securities, NRSROs, and providers of third-party due diligence
services with respect to third-party due diligence services relating
to asset-backed securities. See 15 U.S.C. 78o-7(s)(4)(A)-(D). The
Commission's proposals to implement additional provisions in Section
15E(s)(4) are discussed below in Section II.H of this release.
    \380\ See proposed new paragraph (a) of Rule 17g-7.
    \381\ See proposed new paragraph (a)(1) of Rule 17g-7. As
discussed below, this paragraph would implement, in large part,
rulemaking specified in Sections 15E(s)(1), (2), and (3) of the
Exchange Act. See 15 U.S.C. 78o-7(s)(1), (2), and (3).
    \382\ See proposed new paragraph (a)(2) of Rule 17g-7. As
discussed below, this paragraph would implement, in part, rulemaking
specified in Section 15E(s)(4) of the Exchange Act. See 15 U.S.C.
78o-7(s)(4).
    \383\ See proposed new paragraph (a)(1)(i) of Rule 17g-7. As
discussed below, this paragraph would implement, in large part,
rulemaking specified in Section 15E(s)(2) of the Exchange Act. See
15 U.S.C. 78o-7(s)(2).
    \384\ See proposed new paragraph (a)(1)(ii) of Rule 17g-7. As
discussed below, this paragraph would implement, in large part,
rulemaking specified in Section 15E(s)(3) of the Exchange Act. See
15 U.S.C. 78o-7(s)(3).
    \385\ See proposed new paragraph (a)(1)(iii) of Rule 17g-7. As
discussed below, this paragraph would implement, in large part,
rulemaking specified in Section 15E(q)(2)(F) of the Exchange Act.
See 15 U.S.C. 78o-7(q)(2)(F).
    \386\ See proposed paragraph (a)(2) of Rule 17g-7.
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1. Paragraph (a)--Prefatory Text
    Section 15E(s)(1) of the Exchange Act provides that the Commission
shall require, by rule, an NRSRO to prescribe a form to accompany the
publication of each credit rating that discloses: (1) Information
relating to the assumptions underlying the credit rating procedures and
methodologies; the data that was relied on to determine the credit
rating; and if applicable, how the NRSRO used servicer or remittance
reports, and with what frequency, to conduct surveillance of the credit
rating; and (2) information that can be used by investors and other
users of credit ratings to better understand credit ratings in each
class of credit rating issued by the NRSRO.\387\ In addition, Section
15E(s)(2)(C) provides that the form shall be made readily available to
users of credit ratings, in electronic or paper form, as the Commission
may, by rule, determine.\388\ Finally, Section 15E(s)(4)(D) of the
Exchange Act provides that the Commission shall adopt rules requiring
an NRSRO at the time it produces a credit rating, to disclose any
certifications from providers of third-party due diligence services to
the public in a manner that allows the public to determine the adequacy
and level of due diligence services provided by the third-party.\389\
The Commission proposes to implement Sections 15E(s)(1), 15E(s)(2)(C),
and 15E(s)(4)(D) of the Exchange Act, in large part, through the
prefatory text of proposed paragraph (a) of Rule 17g-7.\390\
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    \387\ See 15 U.S.C. 78o-7(s)(1)(A) and (B).
    \388\ See 15 U.S.C. 78o-7(s)(2)(C).
    \389\ See 15 U.S.C. 78o-7(s)(4)(D).
    \390\ See proposed new paragraph (a) of Rule 17g-7. As discussed
below, the Commission proposes to implement Section
15E(s)(1)(A)(iii) of the Exchange Act--which relates to the use of
servicer or remittance reports--in proposed paragraph (a)(1)(i)(G)
of Rule 17g-7 because it specifies a particular item of information
that would need to be disclosed in the form. See 15 U.S.C. 78o-
7(a)(1)(i)(G).
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    The first sentence of the proposed prefatory text would provide
that an NRSRO must publish the items described in paragraphs (a)(1) and
(a)(2) of the proposed rule, as applicable, when taking a rating action
with respect to credit rating assigned to an obligor, security, or
money market instrument in a class of credit ratings for which the
NRSRO is registered.\391\ Proposed paragraph (a)(1) would identify the
form and proposed paragraph (a)(2) would identify the certification
from a provider of third-party due diligence services.\392\ The
Commission preliminarily intends that the requirement to publish the
form and, when applicable, the certification would be triggered each
time an NRSRO takes a rating action with respect to an obligor,
security, or money market instrument.\393\ Consequently, the second
sentence of the prefatory text of paragraph (a) would define the term
``rating action'' to mean any of the following: the publication of an
expected or preliminary credit rating assigned to an obligor, security,
or

money market instrument before the publication of an initial credit
rating; an initial credit rating; an upgrade or downgrade of an
existing credit rating (including a downgrade to, or assignment of,
default); a placement of an existing credit rating on credit watch or
review; an affirmation of an existing credit rating; and a withdrawal
of an existing credit rating. The inclusion of expected or preliminary
credit ratings in the list of ``rating actions'' would incorporate the
requirements in the note to current Rule 17g-7.\394\ As the Commission
explained when adopting Rule 17g-7, the definition of ``credit rating''
in the note is designed to address pre-sale reports, which are
typically issued by an NRSRO with respect to an asset-backed security
at the time the issuer commences the offering and typically include an
expected or preliminary rating and a summary of the important features
of a transaction.\395\ Consequently, disclosure at the time of issuance
of a pre-sale report is particularly important to investors, since such
reports provide them with important information prior to the point at
which they make an investment decision.\396\ The Commission
preliminarily believes that the importance of providing investors with
timely information to enable them to make informed investment decisions
applies equally to the broader range of disclosures mandated by Section
15E(s) of the Exchange Act.\397\ Accordingly, the Commission is
proposing that the requirement to publish the form and any
certifications be triggered upon the issuance of an expected or
preliminary credit rating.\398\ Furthermore, as the Commission stated
when adopting Rule 17g-7, the term ``preliminary credit rating''
includes any credit rating, any range of ratings, or any other
indications of a credit rating published prior to the assignment of an
initial credit rating for a new issuance.\399\
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    \391\ See proposed new paragraph (a) of Rule 17g-7.
    \392\ See proposed new paragraphs (a)(1) and (a)(2) of Rule 17g-
7.
    \393\ In other words, the form and any certifications would need
to be included when the NRSRO publishes an initial credit rating,
publishes an upgrade of an existing credit rating, publishes a
downgrade of an existing credit rating (including to a default
category), publishes a credit rating as being on credit watch or
review, publishes an affirmation of an existing credit rating, or
withdraws a credit rating.
    \394\ See Note to 17 CFR 240.17g-7, which provides that for the
purposes of the rule's current requirements, a ``credit rating''
includes any expected or preliminary credit rating issued by an
NRSRO.
    \395\ See Disclosure for Asset-Backed Securities Required by
Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR at 4503-4505 (Jan. 26, 2011).
    \396\ Id.
    \397\ 15 U.S.C. 78o-7(s).
    \398\ See proposed new paragraph (a) of Rule 17g-7.
    \399\ See Disclosure for Asset-Backed Securities Required by
Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR at 4503-4505 (Jan. 26, 2011).
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    The third sentence of the proposed prefatory text would provide
that the items described in the form and any applicable certifications
must be published in the same medium and made available to the same
persons who can receive or access the credit rating that is the result
of the rating action or the subject of rating action.\400\ In other
words, if the NRSRO publishes its credit ratings via a press release
disseminated through its corporate Internet Web site and/or through
other electronic information providers, the form and any applicable
certifications would need to be disseminated through the same venues.
The Commission preliminarily believes one way to accomplish this
disclosure would be to publish the credit rating and information in the
press release on the form along with the required contents of the form
(discussed below) and, if applicable, to attach any relevant
certifications to the form.\401\ In addition, the form and any
certifications would need to be disseminated to the same persons who
can receive or access the credit rating that is the result of the
rating action or the subject of the rating action. Consequently, if the
NRSRO publishes credit ratings for free on its corporate Internet Web
site, it would need to make the form and any certifications similarly
available. Alternatively, if the NRSRO operates under the subscriber-
pay business model, it would need to disseminate the form and any
certifications to the subscribers only.
---------------------------------------------------------------------------

    \400\ See proposed new paragraph (a) of Rule 17g-7. A credit
rating would be the ``result'' of a rating action in the case where
the rating action is either the publication of an expected or
preliminary credit rating assigned to an obligor, security, or money
market instrument before the publication of an initial credit
rating; an initial credit rating; or an upgrade or downgrade of an
existing credit rating (including a downgrade to, or assignment of,
default). A credit rating would be the ``subject'' of a rating
action in the case where the rating action is either a placement of
an existing credit rating on credit watch or review; an affirmation
of an existing credit rating; or a withdrawal of an existing credit
rating.
    \401\ As discussed below, the Commission is proposing that the
required contents of the form include the credit rating.
Consequently, if adopted, an NRSRO would be required to include the
credit rating on the form regardless of whether the NRSRO also
publishes the credit rating on a separate record. If the NRSRO
publishes the credit rating on a separate record, the NRSRO would be
required to publish the form (which would also contain the credit
rating) with the separate record under proposed new paragraph (a) of
Rule 17g-7.
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Request for Comment
    The Commission generally requests comment on all aspects of
proposed prefatory text to paragraph (a) of Rule 17g-7. The Commission
also seeks comment on the following:
    1. What practical issues should the Commission consider in
implementing the proposal that an NRSRO publish the form and the
certifications every time the NRSRO takes a rating action? For example,
should the certifications only be required to be included with the
publication of an expected, preliminary, or initial credit rating or do
they remain relevant for the term of the rated security or money market
instrument and, therefore, should they continue to be published with
subsequent rating actions? How could the proposal be modified to
address any practical issues identified without undermining the goal of
making this information available to users of the NRSRO's credit
ratings?
    2. What practical issues should the Commission consider in
implementing the proposal that an NRSRO publish the form and the
certifications in the same medium and make it available to the same
persons who can receive or access the credit rating resulting from or
subject to the rating action? How could the proposal be modified to
address any practical issues identified without undermining the goal of
making this information available to users of the NRSRO's credit
ratings?
    3. What practical issues should the Commission consider in
implementing the proposal to apply provisions of the current note to
Rule 17g-7--that the term ``rating action'' includes the publication of
any expected or preliminary credit rating by the NRSRO--to all of the
information required under Rule 17g-7 as it would be amended under
these proposals? How could the proposal be modified to address any such
practical issues without undermining the goal of the disclosure
requirements currently contained in Rule 17g-7, that is, to make
available to investors, if a credit rating is issued with respect to an
asset-backed security, a description of: (1) The representations,
warranties, and enforcement mechanisms available to investors; and (2)
how they differ from the representations, warranties, and enforcement
mechanisms in issuances of similar securities?
    4. The Commission has proposed to require issuers of asset-backed
securities using a registration statement on proposed Form SF-3 to file
a preliminary prospectus, under proposed Rule 424(h), containing
transaction-specific information at least 5 business days in advance of
the first sale of securities in the offering in order to allow
investors additional time to analyze the specific structure, assets,
and contractual rights regarding each transaction.\402\ Should the
Commission

explicitly require that the disclosures required by Rule 17g-7 be
provided no later than the time of the proposed Rule 424(h) preliminary
prospectus?
---------------------------------------------------------------------------

    \402\ See Asset Backed Securities, Securities Act Release No.
9117 (Apr. 7, 2010), 75 FR 23328 (May 3, 2010).
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    5. If the NRSRO publishes its credit ratings via a press release
disseminated through its corporate Internet Web site and/or through
other electronic information providers, would it be appropriate to
permit the NRSRO to accomplish the required disclosure by publishing
the credit rating and information in the press release on the form
along with the required contents of the form (as discussed below) and,
if applicable, attaching any relevant certifications to the form? What
other methods could be used to make the required disclosures?
2. Paragraph (a)(1)(i)--Format of the Form
    Proposed new paragraph (a)(1) of Rule 17g-7 would identify a form
generated by the NRSRO that meets the requirements of proposed new
paragraphs (a)(1)(i), (a)(1)(ii), and (a)(1)(iii) of Rule 17g-7 as the
first item that must be included with a credit rating.\403\ In this
regard, Section 15E(s)(2) of the Exchange Act provides that the form
developed by the NRSRO shall: (1) Be easy to use and helpful for users
of credit ratings to understand the information contained in the
report; \404\ (2) require the NRSRO to provide the required
quantitative content specified in Section 15E(s)(3)(B) in a manner that
is directly comparable across types of securities; \405\ and (3) be
made readily available to users of credit ratings, in electronic or
paper form, as the Commission may, by rule, determine.\406\ The
Commission preliminarily believes that the provisions identified in
items (1) and (2) above are high-level objectives that an NRSRO should
be required to achieve in developing the presentation of the form. As
discussed next, Section 15E(s)(3) of the Exchange Act identifies very
specific items of information that the Commission's rule shall require
an NRSRO to include in the form.\407\ Given the specificity in Section
15E(s)(3), the Commission preliminarily believes it would be
appropriate to use the higher level objectives specified in Section
15E(s)(2) to prescribe presentation requirements for the form.\408\
Consequently, the Commission is proposing rule text that would mirror
the statutory text.\409\ In particular, proposed new paragraph
(a)(1)(i)(A) of Rule 17g-7 would provide that the form generated by the
NRSRO would need to be easy to use and helpful for users of credit
ratings to understand the information contained in the form.\410\ For
example, the Commission preliminarily believes that a form that
presents the required information in complex mathematical equations
would not achieve this objective.
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    \403\ See proposed new paragraph (a)(1) of Rule 17g-7.
    \404\ See 15 U.S.C. 78o-7(s)(2)(A).
    \405\ See 15 U.S.C. 78o-7(s)(2)(B).
    \406\ See 15 U.S.C. 78o-7(s)(2)(C). As discussed above, the
Commission proposes to implement Section 15E(s)(2)(C) of the
Exchange Act through the prefatory text in proposed new paragraph
(a) of Rule 17g-7.
    \407\ See 15 U.S.C. 78o-7(s)(3)(A) and (B).
    \408\ See 15 U.S.C. 78o-7(s)(2) and 15 U.S.C. 78o-7(s)(3).
    \409\ See proposed new paragraphs (a)(1)(i)(A) and (B) of Rule
17g-7.
    \410\ Compare new paragraph (a)(1)(i)(A) of Rule 17g-7, with 15
U.S.C. 78o-7(s)(2)(A).
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    Similarly, proposed new paragraph (a)(1)(i)(B) of Rule 17g-7 would
mirror the statutory text by requiring that the content described in
proposed new paragraphs (a)(1)(ii)(K), (L) and (M) of Rule 17g-7 be
disclosed in a manner that is directly comparable across types of
obligors, securities, and money market instruments.\411\ As discussed
below, Section 15E(s)(3) of the Exchange Act identifies qualitative and
quantitative information that must be included in the form.\412\
Section 15E(s)(2)(B) provides that the quantitative content identified
in Section 15E(s)(3)(B) be directly comparable across types of
securities.\413\ The Commission is proposing that the quantitative
content specified in Section 15E(s)(3)(B) of the Exchange Act be
disclosed in the form pursuant to new paragraphs (a)(1)(ii)(K), (L),
and (M) of Rule 17g-7.\414\ Consequently, as proposed, new paragraph
(a)(1)(i)(B) of Rule 17g-7 would implement Section 15E(s)(2)(B) by
requiring an NRSRO to present this quantitative information in a manner
that is directly comparable across types of obligors, securities, and
money market instruments.
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    \411\ Compare new paragraph (a)(1)(i)(B) of Rule 17g-7, with 15
U.S.C. 78o-7(s)(2)(B). See also 15 U.S.C. 78o-7(s)(2)(B) and 15
U.S.C. 78o-7(s)(3)(B). While the statutory text only refers to
``securities,'' Section 3(a)(60) of the Exchange Act defines the
term ``credit rating'' to mean an ``assessment of the
creditworthiness of an obligor as an entity or with respect to
specific securities or money market instruments.'' See 15 U.S.C.
78c(a)(60). The Commission believes it would be appropriate to
expand this presentation requirement for the form to include credit
ratings of ``obligors'' and ``money market instruments'' to ensure
that it applies to all types of credit ratings and to be consistent
with the Commission's existing and proposed rules for NRSROs, which
commonly apply to credit ratings of ``obligors, securities, and
money market instruments.'' See, e.g., 17 CFR 240.17g-2 and 17 CFR
240.17g-3.
    \412\ See 15 U.S.C. 78o-7(s)(3).
    \413\ See 15 U.S.C. 78o-7(s)(3)(A) and (B).
    \414\ See proposed new paragraphs (a)(1)(ii)(K), (L), and (M) of
Rule 17g-7 and 15 U.S.C. 78o-7(s)(3)(B)).
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Request for Comment
    The Commission generally requests comment on all aspects of
proposed paragraph (a)(1)(ii) of proposed Rule 17g-7. The Commission
also seeks comment on the following:
    1. Is the objective that the form be easy to use and helpful for
users of credit ratings to understand the information contained in the
report sufficiently clear to provide NRSROs with guidance on how to
present the information in the form in accordance with this proposed
requirement? If not, how should the proposal be modified to provide
better guidance? Commenters should provide specific suggested rule text
and explain the rationale for it.
    2. Is the objective that the content described in proposed
paragraphs (a)(1)(ii)(K), (L) and (M) of Rule 17g-7 be disclosed in a
manner that is directly comparable across types of obligors,
securities, and money market instruments sufficiently clear to provide
NRSROs with guidance on how to present this information in the form in
accordance with this proposed requirement? If not, how should the
proposal be modified to provide better guidance? Commenters should
provide specific suggested rule text and explain the rationale for it.
In addition, how would adding ``obligors'' and ``money market
instruments'' to the presentation requirement expand its scope?
Finally, the Commission requests commenters to provide examples of
disclosures in these areas that are being made now (if such disclosures
are being made) and how the disclosures might be presented under the
proposed requirements.
    3. Should the Commission require that the information an NRSRO must
include in the form be presented in a certain order to enhance
comparability? For example, should the Commission require that the
information be disclosed in the order in which it is identified in
proposed paragraph (a)(1)(ii) of Rule 17g-7 discussed below? Are there
other means of enhancing the comparability of forms among NRSROs? For
example, should the Commission require a more standardized format for
the form?
3. Paragraph (a)(1)(ii)--Content of the Form
    Section 15E(s)(3) of the Exchange Act provides that the Commission
shall require, by rule, that the form accompanying the publication of a
credit rating contain specifically

identified items of information.\415\ In particular, Section
15E(s)(3)(A) identifies items of ``qualitative content'' and Section
15E(s)(3)(B) identifies items of ``quantitative content.'' \416\ The
Commission preliminarily believes that the items of information
identified in Sections 15E(s)(3)(A) and (B) are explicit and,
consequently, proposes rule text that would mirror the statutory
text.\417\ In addition, the Commission also is proposing that certain
additional information be included in the form.
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    \415\ See 15 U.S.C. 78o-7(s)(3).
    \416\ See 15 U.S.C. 78o-7(s)(3)(A) and (B).
    \417\ Compare proposed new paragraph (a)(1)(ii) of Rule 17g-7,
with 15 U.S.C. 78o-7(s)(3).
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    Prefatory Text of Paragraph (a)(1)(ii). The prefatory text of
proposed new paragraph (a)(1)(ii) of Rule 17g-7 would provide that the
form generated by the NRSRO must contain information about the credit
rating identified in paragraphs (a)(1)(ii)(A) through (N).\418\
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    \418\ See proposed new paragraph (a)(1)(ii) of Rule 17g-7.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(A). The first item of information would be
identified in proposed new paragraph (a)(1)(ii)(A) of Rule 17g-7.\419\
This paragraph would implement, in part, Section 15E(s)(3)(A)(i) of the
Exchange Act, which provides that the Commission's rule shall require
the NRSRO to disclose in the form the credit ratings produced by the
NRSRO.\420\ Specifically, paragraph (a)(1)(ii)(A) of Rule 17g-7 would
require the NRSRO to include the symbol, number, or score in the rating
scale used by the NRSRO to denote the credit rating categories and
notches within categories assigned to the obligor, security, or money
market instrument that is the subject of the rating action and the
identity of the obligor, security, or money market instrument.\421\ In
other words, the form would need to identify the symbol, number, or
score representing the notch in the applicable rating scale assigned to
the obligor, security, or money market instrument, which, as proposed
in the prefatory text to paragraph (a) of Rule 17g-7, would include a
preliminary credit rating, an initial credit rating, an upgrade or
downgrade of an existing credit rating (including a downgrade to, or
assignment of, default), a placement of an existing credit rating on
watch or review, an affirmation of an existing credit rating, or
withdrawal of an existing credit rating.\422\
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    \419\ See proposed new paragraph (a)(1)(ii)(A) of Rule 17g-7.
    \420\ See 15 U.S.C. 78o-7(s)(3)(A)(i).
    \421\ Id.
    \422\ See proposed new paragraph (a) of Rule 17g-7.
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    In addition, under proposed new paragraph (a)(1)(ii)(A) of Rule
17g-7, the form would need to contain the identity of the obligor,
security, or money market instrument that is the subject of the rating
action. The Commission preliminarily believes that the identity of the
obligor would be the person's legal name and any other name the obligor
uses in its business. Furthermore, the Commission preliminarily
believes that the identity of the security or money market instrument
would be the name of the security or money market instrument, if
applicable, and a description of the security or money market
instrument. For example, a bond could be identified as ``senior
unsecured debt issued by Company XYZ maturing in 2015.'' Providing the
CUSIP for the security or money market instrument also could be a way
to further identify it. The Commission preliminarily believes that the
disclosure on the form of the identity of the obligor, security, or
money market instrument must be sufficient to notify (and not confuse)
users of the form as to the identity of rated obligor, security, or
money market instrument. As discussed above, the Commission is
proposing in new paragraph (a)(1)(i)(A) of Rule 17g-7 that the NRSRO
must generate a form that is easy to use and helpful for users of
credit ratings to understand the information contained in the
form.\423\ The Commission preliminarily believes a form that does not
clearly identify the obligor, security, or money market instrument
subject to the rating action would not meet this requirement.
---------------------------------------------------------------------------

    \423\ See proposed new paragraph (a)(1)(i)(A) of Rule 17g-7.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(B). The second item of information would be
identified in proposed new paragraph (a)(1)(ii)(B) of Rule 17g-7.\424\
This paragraph would implement, in part, Section 15E(r)(3)(A) of the
Exchange Act.\425\ As discussed above in Section II.F.1 of this
release, Section 15E(r)(3)(A) provides that the rules adopted by the
Commission must ensure an NRSRO notifies users of credit ratings of the
version of a procedure or methodology, including the qualitative
methodology or quantitative inputs, used with respect to a particular
credit rating.\426\ The Commission is proposing to implement Section
15E(r)(3)(A), in part, through paragraph (a)(5) of new Rule 17g-8.\427\
Proposed paragraph (a)(5) of new Rule 17g-8 would require an NRSRO to
have policies and procedures that are reasonably designed to ensure the
NRSRO 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.
---------------------------------------------------------------------------

    \424\ See proposed new paragraph (a)(1)(ii)(B) of Rule 17g-7.
    \425\ See 15 U.S.C. 78o-7(r)(3)(A).
    \426\ Id.
    \427\ See proposed paragraph (a)(5) of new Rule 17g-8.
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    The Commission proposes to further implement Section 15E(r)(3)(A)
of the Exchange Act through proposed paragraph (a)(1)(ii)(B) of Rule
17g-7. Specifically, paragraph (a)(1)(ii)(B) would require the NRSRO to
disclose on the form the version of the procedure or methodology used
to determine the credit rating.\428\ The Commission preliminarily
believes that this disclosure could be made by identifying the name of
the procedure or methodology (including any number used to denote the
version), the date the procedure was implemented, and an Internet URL
where further information about the procedure or methodology can be
obtained.\429\ The Commission preliminarily believes that proposed
paragraph (a)(1)(ii)(B) of Rule 17g-7 would complement and work in
conjunction with proposed paragraph (a)(5) of new Rule 17g-8.\430\ Rule
17g-7 would require the disclosure and Rule 17g-8 would require the
NRSRO to have policies and procedures that are reasonably designed to
ensure the disclosure is made.\431\
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    \428\ See proposed paragraph (a)(1)(ii)(B) of Rule 17g-7.
    \429\ For example, a disclosure could resemble: ``RMBS Rating
Methodology 3.0, implemented February 12, 2011. For further
information go to [insert website address].''
    \430\ See 15 U.S.C. 78o-7(r)(3)(A), proposed new paragraph
(a)(1)(ii)(B) of Rule 17g-7, and proposed paragraph (a)(5) of Rule
17g-8.
    \431\ See proposed new paragraph (a)(1)(ii)(B) of Rule 17g-7 and
proposed paragraph (a)(5) of Rule 17g-8.
---------------------------------------------------------------------------

    The Commission also notes that Section 15E(s)(1)(B) of the Exchange
Act provides that the Commission shall require, by rule, each NRSRO to
prescribe a form to accompany the publication of a credit rating that
discloses information that can be used by investors and other users of
credit ratings to better understand credit ratings in each class of
credit rating issued by the NRSRO.\432\ The Commission preliminarily
believes that disclosing the version of the procedure or methodology
used to determine the credit rating would promote this goal. For
example, credit rating methodologies that are predominantly
quantitative rely on models to produce credit ratings. These models
periodically are updated and released as newer or different versions of
the

previous model. The Commission preliminarily believes disclosing the
version of a model used to produce a credit rating would help investors
and other users of credit ratings better understand the credit rating
and how the determination of the credit rating may differ from similar
products rated using an earlier version of the model.
---------------------------------------------------------------------------

    \432\ See 15 U.S.C. 78o-7(s)(1)(B).
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(C). The third item of information would be
identified in proposed new paragraph (a)(1)(ii)(C) of Rule 17g-7.\433\
This paragraph would implement Section 15E(s)(3)(A)(ii) of the Exchange
Act, which provides that the Commission's rule shall require the NRSRO
to disclose in the form the main assumptions and principles used in
constructing procedures and methodologies, including qualitative
methodologies and quantitative inputs and assumptions about the
correlation of defaults across underlying assets used in rating
structured products.\434\ The Commission preliminarily believes that
the statutory text is explicit with respect to the information to be
disclosed and, consequently proposed new paragraph (a)(1)(ii)(C) of
Rule 17g-7 would mirror the statutory text.\435\ In particular,
proposed new paragraph (a)(1)(ii)(C) of Rule 17g-7 would require the
NRSRO to disclose in the form the main assumptions and principles used
in constructing the procedures and methodologies used to determine the
credit rating, including qualitative methodologies and quantitative
inputs and, if the credit rating is for a structured finance product,
assumptions about the correlation of defaults across the underlying
assets.\436\
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    \433\ See proposed new paragraph (a)(1)(ii)(C) of Rule 17g-7.
    \434\ See 15 U.S.C. 78o-7(s)(3)(A)(ii).
    \435\ Compare 15 U.S.C. 78o-7(s)(3)(A)(ii), with proposed new
paragraph (a)(1)(ii)(C) of Rule 17g-7.
    \436\ See proposed new paragraph (a)(1)(ii)(C) of Rule 17g-7.
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    Paragraph (a)(1)(ii)(D). The fourth item of information would be
identified in proposed new paragraph (a)(1)(ii)(D) of Rule 17g-7.\437\
This paragraph would implement Section 15E(s)(3)(A)(iii) of the
Exchange Act, which provides that the Commission's rule shall require
the NRSRO to disclose in the form the potential limitations of the
credit ratings and the types of risks excluded from the credit ratings
that the NRSRO does not comment on, including liquidity, market, and
other risks.\438\ The Commission preliminarily believes that the
statutory text is explicit with respect to the information to be
disclosed and, consequently proposed new paragraph (a)(1)(ii)(D) of
Rule 17g-7 would mirror the statutory text.\439\ In particular,
proposed new paragraph (a)(1)(ii)(D) of Rule 17g-7 would require the
NRSRO to disclose in the form the potential limitations of the credit
rating, including the types of risks excluded from the credit rating
that the NRSRO does not comment on, including, as applicable,
liquidity, market, and other risks.\440\
---------------------------------------------------------------------------

    \437\ See proposed new paragraph (a)(1)(ii)(D) of Rule 17g-7.
    \438\ See 15 U.S.C. 78o-7(s)(3)(A)(iii).
    \439\ Compare 15 U.S.C. 78o-7(s)(3)(A)(iii), with proposed new
paragraph (a)(1)(ii)(D) of Rule 17g-7.
    \440\ See proposed new paragraph (a)(1)(ii)(D) of Rule 17g-7.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(E). The fifth item of information would be
identified in proposed new paragraph (a)(1)(ii)(E) of Rule 17g-7.\441\
This paragraph would implement Section 15E(s)(3)(A)(iv) of the Exchange
Act, which provides that the Commission's rule shall require the NRSRO
to disclose in the form information on the uncertainty of the credit
rating, including: (1) Information on the reliability, accuracy, and
quality of the data relied on in determining the credit rating; and (2)
a statement relating to the extent to which data essential to the
determination of the credit rating were reliable or limited, including
any limits on the scope of historical data; and any limits in
accessibility to certain documents or other types of information that
would have better informed the credit rating.\442\ The Commission
preliminarily believes that the statutory text is explicit with respect
to the information to be disclosed and, consequently proposed new
paragraph (a)(1)(ii)(E) of Rule 17g-7 would mirror the statutory
text.\443\ In particular, proposed new paragraph (a)(1)(ii)(E) of Rule
17g-7 would require the NRSRO to disclose in the form information on
the uncertainty of the credit rating, including: (1) Information on the
reliability, accuracy, and quality of the data relied on in determining
the credit rating; and (2) a statement relating to the extent to which
data essential to the determination of the credit rating were reliable
or limited, including: any limits on the scope of historical data; and
any limits in accessibility to certain documents or other types of
information that would have better informed the credit rating.\444\
---------------------------------------------------------------------------

    \441\ See proposed new paragraph (a)(1)(ii)(E) of Rule 17g-7.
    \442\ See 15 U.S.C. 78o-7(s)(3)(A)(iv).
    \443\ Compare 15 U.S.C. 78o-7(s)(3)(A)(iv), with proposed new
paragraph (a)(1)(ii)(E) of Rule 17g-7.
    \444\ See proposed new paragraph (a)(1)(ii)(E) of Rule 17g-7.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(F). The sixth item of information would be
identified in proposed new paragraph (a)(1)(ii)(F) of Rule 17g-7.\445\
This paragraph would implement Section 15E(s)(3)(A)(v) of the Exchange
Act, which provides that the Commission's rule shall require the NRSRO
to disclose in the form whether and to what extent third-party due
diligence services have been used by the NRSRO, a description of the
information that such third-party reviewed in conducting due diligence
services, and a description of the findings and conclusions of such
third-party.\446\ The Commission preliminarily believes that the
statutory text is explicit with respect to the information to be
disclosed and, consequently proposed new paragraph (a)(1)(ii)(F) of
Rule 17g-7 would mirror the statutory text.\447\ In particular,
proposed new paragraph (a)(1)(ii)(F) of Rule 17g-7 would require the
NRSRO to disclose in the form whether and to what extent third-party
due diligence services were used by the NRSRO, a description of the
information that such third-party reviewed in conducting due diligence
services, and a description of the findings or conclusions of such
third-party.\448\
---------------------------------------------------------------------------

    \445\ See proposed new paragraph (a)(1)(ii)(F) of Rule 17g-7.
    \446\ See 15 U.S.C. 78o-7(s)(3)(A)(v).
    \447\ Compare 15 U.S.C. 78o-7(s)(3)(A)(v), with proposed new
paragraph (a)(1)(ii)(F) of Rule 17g-7.
    \448\ See proposed new paragraph (a)(1)(ii)(F) of Rule 17g-7.
---------------------------------------------------------------------------

    The Commission notes that Section 15E(s)(4)(A) of the Exchange Act
contains a requirement that the issuer or underwriter of any asset-
backed security shall make publicly available the findings and
conclusions of any third-party due diligence report obtained by the
issuer or underwriter.\449\ In addition, Section 15E(s)(4)(B) of the
Exchange Act contains a self-executing requirement providing that in
any case in which third-party due diligence services are employed by an
NRSRO, an issuer, or an underwriter, the person providing the due
diligence services shall provide to any NRSRO that produces a rating to
which such services relate, written certification in a format
prescribed, by rule, by the Commission.\450\ Finally, as discussed
above in Section II.G.1 of this release and below in Section II.G.5,
the NRSRO would be required to disclose with the publication of a
credit rating any certifications it receives from a provider of third-
party due diligence services pursuant to Section 15E(s)(4)(B)

of the Exchange Act.\451\ The Commission preliminarily believes that
the disclosure that would be required pursuant to proposed paragraph
(a)(1)(ii)(F) of Rule 17g-7 would need to describe how the NRSRO used
the findings and conclusions of any third-party due diligence report
made publicly available by an issuer or underwriter pursuant to Section
15E(s)(4)(A) of the Exchange Act.\452\ Similarly, the Commission
preliminarily believes that the disclosure would need to describe how
the NRSRO used any certifications it receives from providers of third-
party due diligence services pursuant to Section 15E(s)(4)(B) of the
Exchange Act.\453\
---------------------------------------------------------------------------

    \449\ See 15 U.S.C. 78o-7(s)(4)(A). The Commission's proposals
for implementing this provision are discussed below in Section
II.H.1 of this release.
    \450\ See 15 U.S.C. 78o-7(s)(4)(B). The Commission's proposals
for implementing this provision are discussed below in Sections
II.H.2 and II.H.3 of this release.
    \451\ See proposed prefatory text of paragraph (a) and proposed
paragraph (a)(2) of Rule 17g-7.
    \452\ See 15 U.S.C. 78o-7(s)(4)(A).
    \453\ See 15 U.S.C. 78o-7(s)(4)(B).
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(G). The seventh item of information would be
identified in proposed new paragraph (a)(1)(ii)(G) of Rule 17g-7.\454\
This paragraph would implement Section 15E(s)(1)(A)(iii) of the
Exchange Act, which provides that the Commission's rule shall require
the NRSRO to disclose, if applicable, how the NRSRO used servicer or
remittance reports, and with what frequency, to conduct surveillance of
the credit rating.\455\ The Commission preliminarily believes that the
statutory text is explicit with respect to the information to be
disclosed and, consequently proposed new paragraph (a)(1)(ii)(G) of
Rule 17g-7 would mirror the statutory text.\456\ In particular,
proposed new paragraph (a)(1)(ii)(G) of Rule 17g-7 would require the
NRSRO to disclose in the form, if applicable, how servicer or
remittance reports were used, and with what frequency, to conduct
surveillance of the credit rating.\457\
---------------------------------------------------------------------------

    \454\ See proposed new paragraph (a)(1)(ii)(G) of Rule 17g-7.
    \455\ See 15 U.S.C. 78o-7(s)(1)(A)(iii).
    \456\ Compare 15 U.S.C. 78o-7(s)(1)(A)(iii), with proposed new
paragraph (a)(1)(ii)(G) of Rule 17g-7.
    \457\ See proposed new paragraph (a)(1)(ii)(G) of Rule 17g-7.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(H). The eighth item of information would be
identified in proposed new paragraph (a)(1)(ii)(H) of Rule 17g-7.\458\
This paragraph would implement Section 15E(s)(3)(A)(vi) of the Exchange
Act, which provides that the Commission's rule shall require the NRSRO
to disclose in the form a description of the data about any obligor,
issuer, security, or money market instrument that were relied upon for
the purpose of determining the credit rating.\459\ The Commission
preliminarily believes that the statutory text is explicit with respect
to the information to be disclosed and, consequently proposed new
paragraph (a)(1)(ii)(H) of Rule 17g-7 would mirror the statutory
text.\460\ In particular, proposed new paragraph (a)(1)(ii)(H) of Rule
17g-7 would require the NRSRO to disclose in the form a description of
the data about any obligor, issuer, security, or money market
instrument that was relied upon for the purpose of determining the
credit rating.\461\
---------------------------------------------------------------------------

    \458\ See proposed new paragraph (a)(1)(ii)(H) of Rule 17g-7.
    \459\ See 15 U.S.C. 78o-7(s)(3)(A)(vi).
    \460\ Compare 15 U.S.C. 78o-7(s)(3)(A)(vi), with proposed new
paragraph (a)(1)(ii)(H) of Rule 17g-7.
    \461\ See proposed new paragraph (a)(1)(ii)(H) of Rule 17g-7.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(I). The ninth item of information would be
identified in proposed new paragraph (a)(1)(ii)(I) of Rule 17g-7.\462\
This paragraph would implement Section 15E(s)(3)(A)(vii) of the
Exchange Act, which provides that the Commission's rule shall require
the NRSRO to disclose in the form a statement containing an overall
assessment of the quality of information available and considered in
producing a rating for the obligor, security, or money market
instrument, in relation to the quality of information available to the
NRSRO in rating similar obligors, securities, and money market
instruments.\463\ The Commission preliminarily believes that the
statutory text is explicit with respect to the information to be
disclosed and, consequently, proposed new paragraph (a)(1)(ii)(I) of
Rule 17g-7 would mirror the statutory text.\464\ In particular,
proposed new paragraph (a)(1)(ii)(I) of Rule 17g-7 would require the
NRSRO to disclose in the form a statement containing an overall
assessment of the quality of information available and considered in
producing a rating for an obligor, security, or money market
instrument, in relation to the quality of information available to the
NRSRO in rating similar obligors, securities, or money market
instruments.\465\
---------------------------------------------------------------------------

    \462\ See proposed new paragraph (a)(1)(ii)(I) of Rule 17g-7.
    \463\ See 15 U.S.C. 78o-7(s)(3)(A)(vii). The Commission notes
that the end of the statutory text refers to ratings of ``similar
issuances.'' Id. However, the preceding text refers to rating an
``obligor, security, or money market instrument.'' Id. As discussed
earlier, a credit rating of an ``obligor'' commonly means the rating
of the obligor as an entity rather than a rating of securities or
money market instruments issued by the obligor. Consequently, the
rating of an obligor may not relate to an ``issuance'' of a
particular security or money market instrument. Therefore, the
Commission proposes in new paragraph (a)(1)(ii)(I) of Rule 17g-7 to
use the term ``similar obligors, securities, or money market
instruments'' instead of the term ``similar issuances'' in the
statutory text.
    \464\ Compare 15 U.S.C. 78o-7(s)(3)(A)(vii), with proposed new
paragraph (a)(1)(ii)(I) of Rule 17g-7.
    \465\ See proposed new paragraph (a)(1)(ii)(I) of Rule 17g-7.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(J). The tenth item of information would be
identified in proposed new paragraph (a)(1)(ii)(J) of Rule 17g-7.\466\
This paragraph would implement, in part, Section 15E(s)(3)(A)(viii) of
the Exchange Act, which provides that the Commission's rule shall
require the NRSRO to disclose in the form information relating to
conflicts of interest of the NRSRO.\467\ The Commission preliminarily
believes that the statutory text of Section 15E(s)(3)(A)(viii) is
relatively general in that it does not specify the type of information
about conflicts of interest that should be disclosed.\468\ Accordingly,
the Commission is proposing to identify three specific items of
information that, at a minimum, would need to be disclosed about
conflicts of interest.\469\
---------------------------------------------------------------------------

    \466\ See proposed new paragraph (a)(1)(ii)(I) of Rule 17g-7.
    \467\ See 15 U.S.C. 78o-7(s)(3)(A)(viii).
    \468\ Id.
    \469\ See proposed new paragraph (a)(1)(ii)(J) of Rule 17g-7.
---------------------------------------------------------------------------

    The first type of disclosure would be identified in proposed new
paragraph (a)(1)(ii)(J)(1) of Rule 17g-7, which would require the NRSRO
to classify the credit rating as either ``solicited'' or
``unsolicited.'' \470\ Proposed new paragraphs (a)(1)(ii)(J)(1)(i),
(ii) and (iii) of Rule 17g-7 would define ``solicited'' and
``unsolicited'' credit ratings.\471\ In this regard, the Commission is
proposing two different sub-categories for solicited ratings:
``solicited sell-side'' and ``solicited buy-side.'' \472\ Proposed new
paragraph (a)(1)(ii)(J)(1)(i) of Rule 17g-7 would define ``Solicited
sell-side'' to mean the credit rating was paid for by the obligor being
rated or the issuer, underwriter, depositor, or sponsor of the security
or money market instrument being rated.\473\ In other words, the
``solicited sell-side'' classification would be used for issuer-paid
credit ratings. Proposed new paragraph (a)(1)(ii)(J)(1)(ii) of Rule
17g-7 would define ``Solicited buy-side'' to mean the credit rating was
paid for by a person other than the obligor being rated or the issuer,
underwriter, depositor, or sponsor of the security or money market
instrument being rated. For example, a potential investor in a security
may pay

an NRSRO to determine a credit rating for the security. The Commission
preliminarily believes this distinction is relevant because, depending
on the type of entity paying for the rating, the potential conflict may
exert different types of undue influence on the NRSRO. For example, a
sell-side purchaser of the credit rating presumably would want the
highest rating possible. However, a buy-side purchaser could want a
lower credit rating if the purchaser is maintaining a short position or
desiring a higher interest rate.
---------------------------------------------------------------------------

    \470\ See proposed new paragraph (a)(1)(ii)(J)(1) of Rule 17g-7.
    \471\ See proposed new paragraphs (a)(1)(ii)(J)(1)(i), (ii) and
(iii) of Rule 17g-7.
    \472\ See proposed new paragraph (a)(1)(ii)(J)(1)(i) and (ii) of
Rule 17g-7.
    \473\ See proposed new paragraph (a)(1)(ii)(J)(1)(i) of Rule
17g-7.
---------------------------------------------------------------------------

    Proposed new paragraph (a)(1)(ii)(J)(1)(iii) of Rule 17g-7 would
define an ``unsolicited'' credit rating to mean a credit rating the
NRSRO was not paid to determine.\474\ The Commission preliminarily
intends this definition to include credit ratings funded by selling
subscriptions to access the credit ratings (so-called ``subscriber-paid
credit ratings''). However, if a subscriber paid the NRSRO to determine
a credit rating for a specific obligor, security, or money market
instrument, the credit rating would need to be classified as either
``solicited sell-side'' if the subscriber also was the obligor being
rated or the issuer, underwriter, depositor, or sponsor of the security
or money market instrument being rated, or ``solicited buy-side'' if
the subscriber was not the obligor being rated or the issuer,
underwriter, depositor, or sponsor of the security or money market
instrument being rated. This would apply, for example, if the
subscriber was an investor or potential investor in the security or
money market instrument and hired the NRSRO to specifically rate the
security or money market instrument. In such a case, the credit rating
would need to be classified as ``solicited buy-side.''
---------------------------------------------------------------------------

    \474\ See proposed new paragraph (a)(1)(ii)(J)(1)(iii) of Rule
17g-7.
---------------------------------------------------------------------------

    The second type of conflict disclosure would be identified in
proposed new paragraph (a)(1)(ii)(J)(2) of Rule 17g-7.\475\ This
paragraph would provide that if the credit rating is classified as
either ``solicited sell-side'' or ``solicited buy-side'' the NRSRO
would be required to disclose whether the NRSRO provided services other
than determining credit ratings to the person that paid for the rating
during the most recently ended fiscal year.\476\ In other words, the
NRSRO would be required to indicate whether the person who purchased
the credit rating was a client with respect to other services provided
by the NRSRO. The Commission preliminarily believes clients paying an
NRSRO for services in addition to determining credit ratings may pose
an increased risk of exerting undue influence on the NRSRO with respect
to its determination of credit ratings.\477\ The Commission has adopted
rules that address consulting and advisory services under authority in
Section 15E(h)(2)(B).\478\ The Commission preliminarily believes that
the proposed disclosure requirement about other services would
complement these requirements.
---------------------------------------------------------------------------

    \475\ See proposed new paragraph (a)(1)(ii)(J)(2) of Rule 17g-7.
    \476\ Id.
    \477\ In this regard, the Commission notes that Section 939H of
the Dodd-Frank Act contains a sense of the Congress that the
Commission should exercise rulemaking authority under Section
15E(h)(2)(B) of the Exchange Act to prevent improper conflicts of
interest arising from employees of NRSROs providing services to
issuers of securities that are unrelated to the issuance of credit
ratings, including consulting, advisory, and other services. See
Public Law 111-203 Sec.  939H.
    \478\ See 17 CFR 240.17g-5(a) and (b)(3), (4) and (5) and 17 CFR
240.17g-5(c).
---------------------------------------------------------------------------

    The third type of conflict disclosure would be identified in
proposed new paragraph (a)(1)(ii)(J)(3) of Rule 17g-7.\479\ This
paragraph would require disclosure of information about a conflict of
interest influencing a credit rating action discovered as a result of a
look-back review conducted pursuant to Section 15E(h)(4)(A) of the
Exchange Act and proposed paragraph (c) of new Rule 17g-8.\480\
---------------------------------------------------------------------------

    \479\ See proposed new paragraph (a)(1)(ii)(J)(3) of Rule 17g-7.
    \480\ This information is discussed in detail above in Section
II.C.1 of this release.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(K). The eleventh item of information would be
identified in proposed new paragraph (a)(1)(ii)(K) of Rule 17g-7.\481\
This paragraph would implement Section 15E(s)(3)(B)(i) of the Exchange
Act, which provides that the Commission's rule shall require the NRSRO
to disclose in the form an explanation or measure of the potential
volatility of the credit rating, including: (1) Any factors that might
lead to a change in the credit ratings; and (2) the magnitude of the
change that a user can expect under different market conditions.\482\
The Commission preliminarily believes that the statutory text is
explicit with respect to the information to be disclosed and,
consequently proposed new paragraph (a)(1)(ii)(K) of Rule 17g-7 would
mirror the statutory text.\483\ In particular, proposed new paragraph
(a)(1)(ii)(K) of Rule 17g-7 would require the NRSRO to disclose in the
form an explanation or measure of the potential volatility of the
credit rating, including: (1) Any factors that might lead to a change
in the credit rating; and (2) the magnitude of the change that could
occur under different market conditions.\484\
---------------------------------------------------------------------------

    \481\ See proposed new paragraph (a)(1)(ii)(K) of Rule 17g-7.
    \482\ See 15 U.S.C. 78o-7(s)(3)(B)(i).
    \483\ Compare 15 U.S.C. 78o-7(s)(3)(B)(i), with proposed new
paragraph (a)(1)(ii)(K) of Rule 17g-7.
    \484\ See proposed new paragraph (a)(1)(ii)(K) of Rule 17g-7.
---------------------------------------------------------------------------

    Paragraph (a)(1)(ii)(L). The twelfth item of information would be
identified in proposed new paragraph (a)(1)(ii)(L) of Rule 17g-7.\485\
This paragraph would implement Section 15E(s)(3)(B)(ii) of the Exchange
Act, which provides that the Commission's rule shall require the NRSRO
to disclose in the form information on the content of the credit
rating, including: (1) The historical performance of the credit rating;
and (2) the expected probability of default and the expected loss in
the event of default.\486\ The Commission preliminarily believes that
the statutory text is explicit with respect to the information to be
disclosed and, consequently proposed new paragraph (a)(1)(ii)(L) of
Rule 17g-7 would mirror the statutory text.\487\ In particular,
proposed new paragraph (a)(1)(ii)(L) of Rule 17g-7 would require the
NRSRO to disclose in the form information on the content of the rating,
including: (1) If applicable, the historical performance of the rating;
and (2) the expected probability of default and the expected loss in
the event of default.\488\
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    \485\ See proposed new paragraph (a)(1)(ii)(L) of Rule 17g-7.
    \486\ See 15 U.S.C. 78o-7(s)(3)(B)(ii).
    \487\ Compare 15 U.S.C. 78o-7(s)(3)(B)(ii), with proposed new
paragraph (a)(1)(ii)(L) of Rule 17g-7.