[Federal Register: June 18, 2007 (Volume 72, Number 116)]
[Rules and Regulations]
[Page 33563-33636]
[DOCID:fr18jn07-13]

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Part II

Securities and Exchange Commission

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17 CFR Parts 240 and 249b

 Oversight of Credit Rating Agencies Registered as Nationally
Recognized Statistical Rating Organizations; Final Rule

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249b

[Release No. 34-55857; File No. S7-04-07]
RIN 3235-AJ78

Oversight of Credit Rating Agencies Registered as Nationally
Recognized Statistical Rating Organizations

AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Final rule.

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SUMMARY: The Commission is adopting rules to implement provisions of
the Credit Rating Agency Reform Act of 2006 (the ``Rating Agency
Act''), enacted on September 29, 2006. The Rating Agency Act defines
the term ``nationally recognized statistical rating organization,''
provides authority for the Commission to implement registration,
recordkeeping, financial reporting, and oversight rules with respect to
registered credit rating agencies, and directs the Commission to issue
final implementing rules no later than 270 days after its enactment (or
by June 26, 2007). The rule and form prescribing the process for a
credit rating agency to apply for registration are immediately
effective. The remaining rules are effective on June 26, 2007.

EFFECTIVE DATES: June 18, 2007, except that Sec. Sec.  240.17g-2,
240.17g-3, 240.17g-4, 240.17g-5, and 240.17g-6 are effective on June
26, 2007.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate
Director, at<PHONE_NUMBER>; Thomas K. McGowan, Assistant Director, at
(202) 551-5521; Randall W. Roy, Branch Chief, at<PHONE_NUMBER>; Rose
Russo Wells, Attorney, at<PHONE_NUMBER>; Sheila D. Swartz, Attorney,
at<PHONE_NUMBER>, Division of Market Regulation, Securities and
Exchange Commission, 100 F Street, NE., Washington, DC 20549-6628.

SUPPLEMENTARY INFORMATION:

I. Background

    The term nationally recognized statistical rating organization
(``NRSRO'') is used in federal and state statutes and regulations to
confer regulatory benefits or prescribe requirements based on credit
ratings issued by credit rating agencies identified as NRSROs.\1\ The
process of identifying NRSROs has historically been undertaken by the
Commission staff through the issuance of no-action letters where the
staff has determined, among other things, that the credit rating agency
is recognized nationally by the predominant users of credit ratings as
issuing credible and reliable ratings.\2\ The Rating Agency Act
replaces the no-action letter process--which has been criticized as
lacking transparency--with a registration program and Commission
oversight of credit rating agencies that choose to be treated as
NRSROs.
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    \1\ See, e.g., federal statutes: 15 U.S.C. 78c(a)(41) (defining
the term ``mortgage related security''); 15 U.S.C. 78c(a)(53)(A)
(defining the term ``small business related security''); 15 U.S.C.
80a-6(a)(5)(A)(iv)(I) (exempting certain companies from the
provisions of the Investment Company Act of 1940''); Gramm-Leach-
Bliley Act, Pub. L. No. 106-102 (1999); Transportation Equity Act
for the 21st Century, Pub. L. No. 105-178 (1998); Reigle Community
Development and Regulatory Improvement Act of 1994, Pub. L. No. 103-
325 (1994); Department of Commerce, Justice, and State, The
Judiciary, and Related Agencies Appropriations Act, FY2001, Pub. L.
No. 106-553 (2000); Higher Education Amendments of 1992, Pub. L. No.
102-325 (1992); Housing and Community Development Act of 1992, Pub.
L. No. 102-550 (1992); Federal Deposit Insurance Corporation
Improvement Act of 1991, Pub. L. No. 102-242 (1991); and Financial
Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L.
No. 101-72 (1989); Commission rules: 17 CFR 228.10(e), 229.10(c),
230.134(a)(14), 230.436(g), 239.13, 239.32, 239.33, 240.3a1-1(b)(3),
240.10b-10(a)(8), 240.15c3-1(c)(2)(vi)(E), (F), and (H), 240.15c3-
1a(b)(1)(i)(C), 240.15c3-1f(d), 240.15c3-3a, Item 14, Note G,
242.101(c)(2), 242.102(d), 242.300(k)(3) and (l)(3), 270.2a-
7(a)(10), 270.3a-7(a)(2), 270.5b-3(c), and 270.10f-3(a)(3); and
state rule: Cal. Ins. Code 1192.10.
    \2\ See letter from Nelson S. Kibler, Assistant Director,
Division of Market Regulation, Commission, to John T. Anderson,
Esquire, of Lord, Bissell & Brook, on behalf of Duff & Phelps, Inc.
(February 24, 1982); letter from Michael A. Macchiaroli, Assistant
Director, Division of Market Regulation, Commission, to Paul
McCarthy, President, McCarthy, Crisanti & Maffei, Inc. (September
13, 1983); letter from Michael A. Macchiaroli, Assistant Director,
Division of Market Regulation, Commission, to Robin Monro-Davies,
President, IBCA Limited (November 27, 1990); letter from Michael A.
Macchiaroli, Assistant Director, Division of Market Regulation,
Commission, to David L. Lloyd, Jr., Dewey Ballentine, Bushby, Palmer
& Wood (October 1, 1990); letter from Michael A. Macchiaroli,
Assistant Director, Division of Market Regulation, Commission, to
Gregory A. Root, President, Thomson BankWatch, Inc. (August 6,
1991); letter from Michael A. Macchiaroli Assistant Director,
Division of Market Regulation, Commission, to Lee Pickard, Pickard
and Djinis LLP (January 25, 1999); letter from Annette L. Nazareth,
Director, Division of Market Regulation, Commission, to Mari-Anne
Pisarri, Pickard and Djinis LLP (February 24, 2003); letter from
Mark M. Attar, Special Counsel, Division of Market Regulation,
Commission, to Arthur Snyder, President, A.M. Best Company, Inc.
(March 3, 2005); letter from Erik R. Sirri, Director, Division of
Market Regulation, Commission, to Neal E. Sullivan, Bingham
McCutchen LLP (May 21, 2007); letter from Erik R. Sirri, Director,
Division of Market Regulation, Commission, to Yoshihiro Saito,
Perkins Coie LLP (May 23, 2007).
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    The Rating Agency Act implements the program for NRSRO registration
and oversight by adding definitions to Section 3 of the Securities
Exchange Act of 1934 (``Exchange Act''),\3\ creating a new Section 15E
of the Exchange Act,\4\ and amending Section 17 of the Exchange Act.\5\
Under these new statutory provisions, a credit rating agency seeking to
be treated as an NRSRO must apply for, and be granted, registration
with the Commission, make public in its application certain information
to help persons assess its credibility, and implement procedures to
manage the handling of material nonpublic information and conflicts of
interest. In addition, the Rating Agency Act provides the Commission
with rulemaking authority to prescribe: the form of the application
(including requiring the furnishing of additional information); the
records an NRSRO must make and retain; the financial reports an NRSRO
must furnish to the Commission on a periodic basis; the specific
procedures an NRSRO must implement to manage the handling of material
nonpublic information; the conflicts of interest an NRSRO must manage
or avoid altogether; and the practices that an NRSRO must not engage in
if the Commission determines they are unfair, coercive, or abusive.
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    \3\ 15 U.S.C. 78c.
    \4\ 15 U.S.C. 78o-7.
    \5\ 15 U.S.C. 78q.
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II. Timing of Final Rules

    On February 2, 2007, the Commission proposed a package of rules
pursuant to these grants of rulemaking authority.\6\ The rules
published today incorporate many of the proposed provisions but also
include significant revisions based on the comments received.\7\ The
Commission, in adopting these rules today, intends that Rule 17g-1 (17
CFR 240.17g-1), Form NRSRO, and 17 CFR 249b.300 be issued in final form
and be effective on the date of their publication in the Federal
Register. The Commission further intends that Rules 17g-2 (17 CFR
240.17g-2), 17g-3 (17 CFR 240.17g-3), 17g-4 (17 CFR 240.17g-4), 17g-5
(17 CFR 240.17g-5), and 17g-6 (17 CFR 240.17g-6) be issued in final
form on June 26, 2007 and become effective on that date.
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    \6\ See Exchange Act Release No. 55231 (February 2, 2007), 72 FR
6378 (February 9, 2007) (``Proposing Release'').
    \7\ These comments are available on the Commission's Internet
Web site, located at http://www.sec.gov/comments/s7-04-07/s70407.shtml
, and in the Commission's Public Reference Room in its

Washington, DC headquarters.
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III. Effective Date

    Section 553(d) of the Administrative Procedure Act generally
provides that, unless an exception applies, a substantive rule may not
be made effective less than 30 days after notice of the rule has been
published in the

Federal Register.\8\ One exception to the 30-day requirement is an
agency's finding of good cause for providing a shorter effective
date.\9\
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    \8\ 5 U.S.C. 553(d).
    \9\ Id.
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    The Rating Agency Act provides that the new program for NRSRO
registration and oversight shall apply on the earlier of the date on
which regulations are issued in final form under Section 15E(n) of the
Exchange Act, or 270 days after the enactment of the Rating Agency Act,
which will be June 26, 2007.\10\ The Rating Agency Act voids existing
Commission staff no-action letters on and after the effective date of
the new program for NRSRO registration and oversight, but creates a
transitional measure allowing credit rating agencies with existing no-
action letters to continue to act as NRSROs ``during Commission
consideration of the application, if such entity has furnished an
application for registration.'' \11\ Consequently, as noted above, the
Commission intends that Rule 17g-1 and Form NRSRO be effective
immediately upon publication. Further, the Commission intends that the
remaining rules, Rule 17g-2 through Rule 17g-6, be effective on June
26, 2007, the statutory deadline.
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    \10\ 15 U.S.C. 78o-7(p).
    \11\ 15 U.S.C. 78o-7(l).
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    Immediate effectiveness of Form NRSRO and Rule 17g-1 is necessary
to allow credit rating agencies that are currently the subject of staff
no-action letters identifying them as NRSROs to have a period of time
to submit applications for registration as NRSROs before the provisions
of the Rating Agency Act and the recordkeeping, reporting, and conduct
rules issued under the Rating Agency Act become effective, and thus
before the no-action letters become void. This will avoid a gap in time
when no NRSROs exist, which would disrupt the regulatory use of that
term in applicable statutes and regulations, resulting in uncertainty
in the marketplace for all persons that rely upon credit ratings issued
by NRSROs. Further, this result would be inconsistent with
Congressional intent in creating the transitional measure. Finally, the
accelerated effectiveness for the remaining rules, Rule 17g-2 through
Rule 17g-6, is necessary to meet the statutory deadline.
    The primary purpose of the 30-day delayed effectiveness requirement
is to give affected parties a reasonable period of time to adjust to
the new rules. Here, the existing NRSROs would not be harmed by
immediate effectiveness, and would in fact benefit from the opportunity
to utilize the transitional measure Congress provided. Further, an
entity would not be required to comply with Rule 17g-2 through Rule
17g-6 until its voluntary registration has been approved.
    The Commission acted expeditiously in proposing and adopting these
rules under a very tight, statutorily-imposed deadline. The Rating
Agency Act was enacted on September 29, 2006. Just over four months
later, on February 2, 2007, the Commission voted to propose the new
rules and form, which were designed to comply with the statutory
mandate to establish an entirely new regulatory regime for NRSROs. The
Commission voted to adopt these rules and Form NRSRO on May 23, 2007,
over a month before the statutory deadline. In doing so, the Commission
carefully responded to industry, user, and investor perspectives to
ease the transition to a new, Congressionally-created registration and
regulatory scheme.
    Failure to accelerate effectiveness of Rule 17g-1 through Rule 17g-
6 and Form NRSRO could interfere with the goals of the Rating Agency
Act. For these reasons, the Commission finds that good cause exists for
Rule 17g-1 and Form NRSRO to be immediately effective upon publication,
and for Rule 17g-2 through Rule 17g-6 to be effective on June 26, 2007.

IV. Review of Commission Rules

    Section 15E(n)(2) of the Exchange Act requires the Commission to
review its existing rules using the term ``NRSRO'' within 270 days of
its enactment.\12\ The statute further provides that the Commission
shall amend or revise the rules in accordance with Section 15E(n)(2) of
the Exchange Act.\13\ The Commission has reviewed all of its rules
using the term ``NRSRO.'' The Commission does not believe these rules
need to be amended at this time. The term ``NRSRO'' in each rule will
refer to an ``NRSRO'' as that term is defined in the Rating Agency Act
when the statutory provisions become effective.\14\ For example,
Commission Rule 15c3-1 (the broker-dealer net capital rule) uses the
term ``nationally recognized statistical rating organization'' to
prescribe the amount a broker-dealer must haircut proprietary corporate
debt securities when computing its regulatory capital.\15\ The rule
does not otherwise define the term ``nationally recognized statistical
rating organization.'' Consequently, after the effective date of the
NRSRO regulatory program, the term, as used in this rule, will refer to
a credit rating agency that is an NRSRO as determined by the provisions
of the Rating Agency Act.\16\
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    \12\ 15 U.S.C. 78o-7(n)(2).
    \13\ Id.
    \14\ See Sections 3(a)(62) and 15E(l)(2) of the Exchange Act (15
U.S.C. 78c(a)(62) and 15 U.S.C. 78o-7(l)(2)).
    \15\ See 17 CFR 240.15c3-1(c)(2)(vi)(F).
    \16\ See Sections 3(a)(62) and 15E(l)(2) of the Exchange Act (15
U.S.C. 78c(a)(62) and 15 U.S.C. 78o-7(l)(2)).
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    The Commission notes that several commenters raised potential
concerns about how other Commission rules may operate after the NRSRO
registration and oversight program takes effect.\17\ These commenters
suggested that requirements in Rule 2a-7 \18\ under the Investment
Company Act of 1940,\19\ which regulates the operation of money market
funds, may need to be modified depending on the number of credit rating
agencies that become registered as NRSROs.\20\ For example, one
commenter noted that Rule 2a-7(c)(6)(i)(A)(2) requires a money market
fund to re-assess the minimal credit risk of its portfolio whenever it
becomes aware that any unrated or second tier security held by the fund
has been given a credit rating by any NRSRO below the NRSRO's second
highest category.\21\ Another commenter noted that Rule 2a-7 prescribes
that money market funds determine whether a security is eligible for
purchase based on whether it has received a credit rating in one of the
two highest categories from any NRSRO.\22\ This commenter was concerned
that this might lead to money market funds filling portfolios that most
NRSROs consider third tier.\23\ One of the these commenters also
expressed concern that the proposal did not require that an NRSRO have
a particular number of credit rating categories or that the categories
of one NRSRO might not correspond to those of another NRSRO.\24\ Based
on the uncertainty of how many credit rating agencies ultimately will
register as NRSROs, the Commission intends to monitor for now how the
NRSRO regulatory program impacts Rule 2a-7 and the Commission's other
rules using the term ``NRSRO.'' As the program develops, the

Commission will evaluate whether modifications to these rules would be
appropriate.
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    \17\ See letter dated March 12, 2007 from Elizabeth Krentzman,
General Counsel, Investment Company Institute (``ICI Letter'');
letter dated March 12, 2007 from Stephen A. Keen, Attorney, on
behalf of Federated Investors, Inc. (``FI Letter''); letter dated
April 4, 2007 from Charles S. Morrison, Senior Vice President and
Money Market Group Leader, Fidelity Management and Research Company
(``FMRC Letter'').
    \18\ 17 CFR 270.2a-7.
    \19\ 15 U.S.C. 80a-1 et seq.
    \20\ See ICI Letter; FI Letter; FMRC Letter.
    \21\ See FI Letter.
    \22\ See FMRC Letter.
    \23\ Id.
    \24\ See FI Letter.
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V. The Final Rules

A. Rule 17g-1--Registration Requirements

    The Rating Agency Act, through the enactment of new Section 15E of
the Exchange Act, provides the Commission with rulemaking authority
with respect to the process for applying for registration as an NRSRO,
keeping an NRSRO registration current, and withdrawing an NRSRO
registration.\25\ The Commission proposed to implement its rulemaking
authority in these areas through a new rule, Rule 17g-1. The provisions
of proposed Rule 17g-1 would have prescribed: How a credit rating
agency must apply to be registered as an NRSRO; the form of the
application; how an NRSRO must make non-confidential information in the
application public; how an NRSRO must apply to be registered in an
additional class of credit ratings; how an NRSRO must update its
application; how an NRSRO must annually certify that the information
and documents in its registration continue to be accurate; and how an
NRSRO must provide notice of the withdrawal of its registration.
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    \25\ 15 U.S.C. 78o-7.
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    As discussed below, the Commission is adopting Rule 17g-1 with
certain modifications that address issues raised by commenters,
restructure the order of the paragraphs, and remove text that was
unnecessary. Any textual changes not specifically discussed are non-
substantive and designed to make the rule text more cohesive and
consistent both within the rule and across the other NRSRO rules
published today.
1. Paragraph (a) of Rule 17g-1
    As adopted, paragraph (a) of Rule 17g-1 provides that a credit
rating agency applying to register with the Commission as an NRSRO must
furnish an application on Form NRSRO. Section 15E(a)(1)(A) of the
Exchange Act provides that a credit rating agency applying for
registration must furnish the Commission with an application in a form
prescribed by Commission rule.\26\ Paragraph (a) of Rule 17g-1, as
proposed, similarly provided that a credit rating agency applying to be
registered with the Commission as an NRSRO must furnish the Commission
with an application on Form NRSRO that follows all instructions for the
Form. The Commission did not receive any comments on the proposed rule
text of this paragraph and is adopting it substantially as proposed
with one modification. Specifically, there is no longer a reference in
the text to the ``credit ratings described in section 3(a)(62)(B) of
the [Exchange] Act (15 U.S.C. 78c(a)(62)).'' This reference to a
component of the statutory definition of ``NRSRO'' in the proposed rule
was redundant and unnecessary. A credit rating agency, by statutory
definition, must apply to be registered in one or more of the classes
of credit ratings identified in section 3(a)(62)(B) of the Exchange
Act.\27\
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    \26\ 15 U.S.C. 78o-7(a)(1)(A).
    \27\ See 15 U.S.C. 78c(a)(62).
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2. Paragraph (b) of Rule 17g-1
    As adopted, paragraph (b) of Rule 17g-1 provides a mechanism for an
NRSRO registered for fewer than the five classes of credit ratings
identified in the definition of NRSRO to apply to be registered in an
additional class.\28\ Specifically, the NRSRO must apply by furnishing
an amendment on Form NRSRO.\29\ This provision was proposed in
paragraph (e) of Rule 17g-1.
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    \28\ See 15 U.S.C. 78c(3)(a)(62)(B).
    \29\ This provision further implements Section 15E(a)(1) of the
Exchange Act, which requires the Commission, by rule, to prescribe
the form of an application for registration (15 U.S.C. 78o-7(a)(1)).
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    Section 15E(a)(1)(B) of the Exchange Act, prescribes certain
minimum information the credit rating agency must provide in its
application for registration as an NRSRO.\30\ This includes information
regarding the classes of credit ratings set forth in the definition of
``NRSRO'' in Section 3(a)(62)(B) of the Exchange Act with respect to
which the credit rating agency ``intends to apply for registration.''
\31\ A credit rating agency may apply to be registered for fewer than
all five classes of credit ratings described in Section 3(a)(62)(B) of
the Exchange Act.\32\ Accordingly, this provision provides a mechanism
for an NRSRO to apply to be registered in an additional class.\33\
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    \30\ 15 U.S.C. 78o-7(a)(1)(B).
    \31\ See Section 15E(a)(1)(B)(vii) of the Exchange Act (15
U.S.C. 78o-7(a)(1)(B)(vii)).
    \32\ 15 U.S.C. 78c(a)(62)(B).
    \33\ This provision further implements Section 15E(a)(1) of the
Exchange Act, which requires the Commission, by rule, to prescribe
the form of an application for registration (15 U.S.C. 78o-7(a)(1)).
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    The application to register for an additional class will be subject
to the requirements in Section 15E of the Exchange Act \34\ applicable
to an application to be registered as an NRSRO. This means the time
periods for the Commission to act on the application set forth in
Sections 15E(a)(2)(A) and (B) of the Exchange Act also will apply to an
application to be registered in an additional class of credit
ratings.\35\
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    \34\ 15 U.S.C. 78o-7.
    \35\ 15 U.S.C. 78o-7(a)(2)(A) and (B).
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    Finally, the provisions of paragraphs (c) and (h) respectively,
regarding the requirement to notify the Commission and amend the
application prior to final Commission action and when an application is
deemed to have been furnished to the Commission also apply to these
applications.
    The Commission did not receive any comments on these provisions.
The Commission is adopting them substantially as proposed with several
technical modifications. The rule text is modified to delete language
instructing the NRSRO to indicate where appropriate on the form the
additional class of credit ratings for which it is applying for
registration. In its place, the rule text provides that the NRSRO must
follow all applicable instructions for the Form, which include an
instruction to indicate where appropriate on the Form the additional
class of credit ratings for which registration is sought. The
Commission is adopting the provision with the modifications discussed
above.
3. Paragraph (c) of Rule 17g-1
    As adopted, paragraph (c) of Rule 17g-1 provides that an applicant
for registration and an NRSRO applying to be registered in an
additional class of credit ratings must promptly furnish the Commission
with a notice if information in the application becomes, or is found to
be, materially inaccurate before the Commission has granted or denied
the application. Thereafter, the applicant will be required to update
the application with complete and accurate information by submitting an
amended application on Form NRSRO.\36\
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    \36\ This provision is being implemented under the Commission's
authority in Section 15E(a)(1)(A) of the Exchange Act to prescribe
the form of the application (15 U.S.C. 78o-7(a)(1)(A)).
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    These provisions were proposed in paragraphs (c) and (e) of Rule
17g-1 for initial applicants and for NRSROs applying to be registered
in an additional class of credit ratings, respectively. The
notification provision is designed to alert the Commission as soon as
possible that the application under consideration is materially
inaccurate. The intent is to avoid situations where the Commission
continues to review an application that is no longer materially
accurate. The Commission has modified Form NRSRO to further clarify how
a pending application should be updated using Form NRSRO. Specifically,
the Form now has a check box for ``Application Supplement'' and
specific instructions

about how to complete the Form in this instance. The Commission did not
receive any comments on these provisions and is adopting them with the
modifications discussed above.
4. Paragraph (d) of Rule 17g-1
    As adopted, paragraph (d) of Rule 17g-1 provides a mechanism for an
entity that has applied to be registered as an NRSRO, or an NRSRO that
has applied to be registered in an additional class of credit ratings,
to withdraw the registration application before the Commission takes
final action on the application.\37\ Specifically, it requires the
applicant to furnish the Commission with a written notice of withdrawal
executed by a duly authorized person.
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    \37\ The withdrawal of a granted registration is discussed
separately below.
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    The application provisions were proposed in paragraphs (b)(2) and
(e) of Rule 17g-1 for initial applicants and for applications to be
registered in an additional class of credit ratings, respectively. The
requirement for execution by a duly authorized person is designed to
ensure that the withdrawal notice reflects the intent of the credit
rating agency. The Commission did not receive any comments on these
provisions and is adopting them substantially as proposed.
5. Paragraph (e) of Rule 17g-1
    As adopted, paragraph (e) of Rule 17g-1 provides that an NRSRO
updating its application for registration pursuant to Section 15E(b)(1)
of the Exchange Act \38\ must promptly furnish the amendment to the
Commission on Form NRSRO.\39\ Section 15E(b)(1) of the Exchange Act
requires an NRSRO to promptly update its application for registration
if, after registration, any information or document provided as part of
the application becomes materially inaccurate.\40\ The statute further
provides that the information on credit ratings performance statistics
(discussed below) must only be updated on an annual basis and that the
certifications from qualified institutional buyers (QIBs), discussed
below, are not required to be updated.\41\ This provision was proposed
in paragraph (f) of Rule 17g-1.
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    \38\ 15 U.S.C. 78o-7(b)(1).
    \39\ The Commission is implementing this provision under Section
15E(a)(1) of the Exchange Act (15 U.S.C. 78o-7(a)(1)), which
requires the Commission, by rule, to prescribe the form of an
application for registration.
    \40\ 15 U.S.C. 78o-7(b)(1).
    \41\ Id.
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    The Commission has added in the instructions to Form NRSRO a
description of this statutory requirement as a means to alert NRSROs
that they must promptly update information or a document submitted on
or with their Form NRSRO that has become materially inaccurate.
    The Commission is not defining the term ``promptly'' as used in
Section 15E(b)(1) of the Exchange Act.\42\ The Commission, however, did
express its view in the proposing release that meeting the statutory
requirement to update a registration when information becomes
materially inaccurate should not take more than two days. In response,
five commenters stated that it would be unreasonable to expect an NRSRO
to submit an amendment in two days.\43\ Three commenters proposed that
the Commission define the term ``promptly'' to mean 10 days.\44\ One
commenter suggested 20 days.\45\ Another commenter suggested the
Commission use a facts and circumstances standard for determining
whether an amendment was ``promptly'' furnished.\46\ The Commission
agrees that the analysis of whether an amendment is furnished promptly
will depend on the facts and circumstances. For example, if an NRSRO
changes its principal business address, it should not take more than a
few days to complete Form NRSRO (inputting the new information), have
the Form executed, and furnish the Form to the Commission. On the other
hand, it may take a few days longer to complete the Form if the
information or documents in an Exhibit become materially inaccurate.
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    \42\ Id.
    \43\ See letter dated March 12, 2007 from William G. Connolly,
on behalf of A.M. Best Company, Inc. (``A.M. Best Letter''); letter
dated March 12, 2007 from Yasuhiro Harada, President, Ratings &
Investment Information (``R&I Letter''); letter dated March 12, 2007
from Jeanne M. Dering, Executive Vice President, Moody's Investors
Services (``Moody's Letter''); letter dated March 12, 2007 from Kent
Wideman, Group Managing Director, and Mary Keogh, Managing Director,
Dominion Bond Rating Service (``DBRS Letter''); letter dated March
12, 2007 from Charles D. Brown, General Counsel, Fitch Ratings
(``Fitch Letter'').
    \44\ See R&I Letter; A.M. Best Letter; and Fitch Letter.
    \45\ See Moody's Letter.
    \46\ See DBRS Letter.
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    One commenter also stated that the rule should require an update of
the registration application only when the information in the current
registration application becomes ``materially inaccurate.'' \47\ In
response, the Commission notes that the requirement to update an
application arises from Section 15E(b)(1) of the Exchange Act, which
provides, in pertinent part, that an NRSRO shall promptly update its
application for registration ``if any information or document provided
therein becomes materially inaccurate.'' \48\ As noted above, the
instructions to Form NRSRO have been modified to include a description
of this statutory provision.
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    \47\ See Moody's Letter.
    \48\ 15 U.S.C. 78o-7(b)(1).
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    In all other respects, the Commission is adopting the provision
substantially as proposed.
6. Paragraph (f) of Rule 17g-1
    As adopted, paragraph (f) of Rule 17g-1 provides that an NRSRO
updating its application for registration pursuant to Section 15E(b)(2)
of the Exchange Act \49\ (the annual certification) must furnish the
amendment to the Commission on Form NRSRO.\50\ Section 15E(b)(2) of the
Exchange Act requires an NRSRO to furnish the Commission with an
amendment to its registration not later than 90 days after the end of
each calendar year.\51\ This section further provides that the
amendment must (1) certify that the information and documents provided
in the application for registration (except the QIB certifications)
continue to be accurate and (2) list any material change to the
information and documents during the previous calendar year.\52\
---------------------------------------------------------------------------

    \49\ 15 U.S.C. 78o-7(b)(2).
    \50\ The Commission is implementing this provision under Section
15E(b)(2) of the Exchange Act (15 U.S.C. 78o-7(b)(2)), which
requires the Commission, by rule, to prescribe the form of the
annual certification.
    \51\ 15 U.S.C. 78o-7(b)(2).
    \52\ Id.
---------------------------------------------------------------------------

    This provision was proposed in paragraph (g) of Rule 17g-1. A
commenter suggested that the proposed provision should be revised to
permit the filing of the annual certification within 90 days after the
end of an NRSRO's fiscal year (if different than the end of the
calendar year).\53\ However, as noted, the calendar year requirement is
statutory. The instructions to Form NRSRO have been modified from those
proposed to include a description of this statutory provision. In all
other respects, the Commission is adopting the provision substantially
as proposed.
---------------------------------------------------------------------------

    \53\ See Fitch Letter.
---------------------------------------------------------------------------

7. Paragraph (g) of Rule 17g-1
    As adopted, paragraph (g) of Rule 17g-1 provides that an NRSRO
withdrawing its registration pursuant to Section 15E(e)(1) of the
Exchange Act \54\ must furnish the Commission with a notice of
withdrawal on Form NRSRO. The rule further provides that the withdrawal
becomes effective 45

calendar days after the furnishing of the form. Section 15E(e)(1) of
the Exchange Act \55\ provides that an NRSRO may withdraw from
registration, subject to such terms and conditions the Commission may
establish as necessary in the public interest or for the protection of
investors, by furnishing the Commission with a written notice of
withdrawal.\56\ The rule text references this statutory standard.
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78o-7(e)(1).
    \55\ Id.
    \56\ Id.
---------------------------------------------------------------------------

    This provision was proposed in paragraph (h) of Rule 17g-1 without
specifying the form of the notice or the conditions for withdrawal. A
commenter suggested that the withdrawal provision be modified to
provide that the withdrawal of the registration becomes effective
within 90 days of the notice and that the notice be provided through an
amendment to registration furnished on Form NRSRO.\57\ The Commission
did note in the proposing release that the conditions for withdrawal
potentially could include a requirement that the NRSRO provide public
notice that its credit ratings will cease to be eligible for regulatory
use.
---------------------------------------------------------------------------

    \57\ See Moody's Letter.
---------------------------------------------------------------------------

    The Commission agrees with the commenter that the notice should be
furnished on Form NRSRO. This provides for public notice of the
withdrawal, since the current Form NRSRO must be made publicly
available pursuant to Section 15E(a)(3) of the Exchange Act \58\ and
Rule 17g-1(i) discussed below. The Commission also agrees with the
commenter that in the normal course an NRSRO's withdrawal of
registration should become effective within a prescribed time period.
This will provide a degree of certainty to the NRSRO as to when it will
no longer be subject to the Commission's regulatory program. It also
will be consistent with withdrawal requests by certain other regulated
entities. For example, a broker-dealer's request for withdrawal of its
registration becomes effective within 60 days of the filing of the
appropriate form.\59\ The Commission also believes users of credit
ratings should have adequate prior notice of an NRSRO's intent to
withdraw its application. This will give them notice that they will no
longer be able to rely on the entity's credit ratings to meet statutory
or regulatory requirements using the term ``NRSRO.'' It also will
provide them with notice that the entity will no longer be subject to
the Commission's oversight, including requirements to disclose
information about its performance, methodologies, procedures, and
organization.
---------------------------------------------------------------------------

    \58\ 15 U.S.C. 78o-7(a)(3).
    \59\ See 17 CFR 240.15b6-1.
---------------------------------------------------------------------------

    The Commission believes the 45 calendar day time period for the
withdrawal to become effective is necessary in the public interest or
for the protection of investors for several reasons. First, as
discussed below, pursuant to paragraph (i) of Rule 17g-1, an NRSRO must
make its current Form NRSRO publicly available within 10 business days
of being furnished to the Commission. Consequently, notice of an
NRSRO's withdrawal will be made publicly available at least 30 calendar
days before becoming effective. This notice will provide users of
credit ratings with time to prepare for the NRSRO's withdrawal. Second,
subject to certain limited exceptions, an entity acting as a ``broker''
or ``dealer'' as defined in Sections 3(a)(4) and (5) of the Exchange
Act \60\ respectively must register with the Commission.\61\
Conversely, an entity may act as a ``credit rating agency'' as defined
in Section 3(a)(61) of the Exchange Act \62\ without being required to
register with the Commission. In this sense, registration as an NRSRO
is more voluntary than registration as a broker-dealer. Therefore, a
shorter time period to withdraw an NRSRO registration is appropriate.
---------------------------------------------------------------------------

    \60\ 15 U.S.C. 78c(a)(4) and (5).
    \61\ See Section 15 of the Exchange Act (15 U.S.C. 78o).
    \62\ 15 U.S.C. 78c(a)(61).
---------------------------------------------------------------------------

    Form NRSRO has been modified to include a checkbox to indicate when
the Form is being furnished to withdraw a registration and the
instructions for the Form have been modified from those proposed to
include an explanation of how to complete the Form in this case.
Specifically, an NRSRO would complete each Item on the Form, except
Item 6, and have the Form executed.
    For these reasons, the Commission is adopting the provision in Rule
17g-1 concerning a withdrawal of registration with the modifications
described above.
8. Paragraph (h) of Rule 17g-1
    As adopted, paragraph (h) of Rule 17g-1 provides that a Form NRSRO
submitted to the Commission pursuant to any provision in Rule 17g-1
will be deemed furnished to the Commission on the date that the
Commission receives a complete and properly executed Form NRSRO that
follows all applicable instructions for the form.\63\ The requirement
for completeness comports with the requirements imposed on other types
of registrants under the Exchange Act.\64\ In addition,
Section15E(a)(2)(A) of the Exchange Act requires the Commission to
grant an application for registration as an NRSRO or commence
proceedings on whether to deny the application within 90 days from the
date the application is furnished to the Commission or a longer period
if the applicant consents.\65\ Further, if proceedings are commenced,
Section 15E(a)(2)(B) of the Exchange Act \66\ requires the Commission
to conclude them within 120 days of the date the application is
furnished to the Commission.\67\ These statutory requirements make it
necessary for the Commission to receive a complete initial application
before the 90-day and 120-day periods begin to run.
---------------------------------------------------------------------------

    \63\ This provision is adopted under the Commission's authority
in Section 15E(a)(1)(A) of the Exchange Act to prescribe the form of
the application (15 U.S.C. 78o-7(a)(1)(A)).
    \64\ See, e.g., 17 CFR 240.15b1-1 and 17 CFR 240.15b3-1 (broker-
dealers); 17 CFR 240.15Ba2-1 (municipal securities dealers); 17 CFR
240.17Ab2-1 (clearing agencies); and 17 CFR 240.17Ac2-1 (transfer
agents).
    \65\ 15 U.S.C. 78o-7(a)(2)(A).
    \66\ 15 U.S.C. 78o-7(a)(2)(B).
    \67\ Under Section 15E(a)(2)(B)(iii) of the Exchange Act, the
Commission can extend this period for an additional 90 days for good
cause or for such other period as the applicant consents (15 U.S.C.
78o-7(a)(2)(B)(iii)). An applicant will be required to consent to
extend both the period for the Commission to make the initial
determination and the 120-day period to conclude proceedings; since
the 120-day period begins when the application is furnished to the
Commission, not when the Commission determines to commence
proceedings.
---------------------------------------------------------------------------

    Rule 17g-1, as proposed, explicitly applied the standard described
above for when a Form NRSRO would be deemed ``furnished'' for
submissions of the Form to apply for registration and to add a class of
credit ratings to an existing registration. The Commission did not
receive any comments on these provisions as proposed.
    Rule 17g-1, as adopted, clarifies that the ``when furnished''
standard also applies to furnishings of Form NRSRO to update a
registration, make the annual certification, and withdraw a
registration. As discussed above, amendments to update materially
inaccurate information must be furnished promptly, annual
certifications must be furnished within 90 days of the end of the
calendar year, and withdrawals of registration become effective in 45
calendar days. Therefore, a Form NRSRO submitted for these purposes
will be deemed ``furnished'' upon the submission of a complete and
properly executed form.
    Rule 17g-1(h), as adopted, contains a provision stating that the
Commission will, to the extent permitted by law, keep confidential
information that is furnished on a confidential basis and requested to
be kept confidential. As in

any situation where a person wishes to obtain confidential treatment
for information provided to the Commission, an applicant and NRSRO must
comply with the requirements of the Exchange Act governing confidential
treatment.\68\ This provision has been added to highlight for credit
rating agencies and NRSROs the fact that information required by Form
NRSRO includes information that will be furnished ``on a confidential
basis.'' \69\ Some of the information to be furnished to the Commission
``on a confidential basis'' in the Form is required by Section
15E(a)(1)(B) of the Exchange Act,\70\ and the Commission will consider
requests for confidential treatment for that information. In addition,
certain other information also is required in the Form and it may be
appropriate for the Commission to provide confidential treatment to
some of this information. The Commission will evaluate all requests for
confidential treatment under the existing rules governing confidential
treatment for information furnished to the Commission.\71\
---------------------------------------------------------------------------

    \68\ See, e.g., Section 24 of the Exchange Act (15 U.S.C. 78x),
17 CFR 240.24b-2, 17 CFR 200.80 and 17 CFR 200.83.
    \69\ See, e.g., Section 15E(a)(1)(B)(viii) of the Exchange Act.
    \70\ See Sections 15E(a)(1)(B)(viii) and (ix) of the Exchange
Act (15 U.S.C. 78o-7(a)(1)(B)(viii) and (ix)).
    \71\ See 17 CFR 200.80 and 17 CFR 200.83.
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting the provision in Rule
17g-1 concerning when a Form NRSRO will be deemed to have been
furnished with the modifications described above.
9. Paragraph (i) of Rule 17g-1
    As modified, paragraph (i) of Rule 17g-1 requires that an NRSRO
make its current Form NRSRO and information and documents submitted in
Exhibits 1 though 9 publicly available within 10 business days of being
granted an initial registration or registration in an additional class
of credit ratings and within 10 business days of furnishing an update
to amend information on the form, to provide the annual certification,
and to withdraw a registration. Section 15E(a)(3) of the Exchange Act
provides that the Commission, by rule, shall require an NRSRO, after
registration, to make the information submitted in its application and
any amendments publicly available on its Web site or through another
comparable, readily accessible means.\72\ The 10 business day period is
intended to provide the NRSRO with sufficient time to make the
information public and designed to ensure that users of credit ratings
have access to the information within a reasonably short timeframe.
---------------------------------------------------------------------------

    \72\ 15 U.S.C. 78o-7(a)(3).
---------------------------------------------------------------------------

    This provision was proposed in paragraph (d) of Rule 17g-1, except
that the time period to make the information publicly available was
proposed to be five business days. The Commission received three
comments on the five business day time period. Two commenters stated
that five business days was not enough time to make their application
information publicly available, given the volume of information.\73\
They commented that the time period should be 15 and 20 business days,
respectively.\74\ The third commenter stated that the five business day
time period should not be lengthened as the information is an important
way for users of credit ratings to become familiar with a new
NRSRO.\75\
---------------------------------------------------------------------------

    \73\ See DBRS Letter; Fitch Letter.
    \74\ See Fitch Letter and DBRS Letter, respectively.
    \75\ See ICI Letter.
---------------------------------------------------------------------------

    The Commission agrees with the third commenter that making the
information publicly available as soon as possible will be an important
means for users of credit ratings to understand the methodologies,
procedures, and business models of new NRSROs. At the same time, the
Commission agrees with the two other commenters that larger more
complex NRSROs could have substantial amounts of information in their
applications, which may make it difficult to provide all this
information in a publicly available format in five business days.
Therefore, the Commission is lengthening the time period to ten
business days. This is shorter than the 15 and 20 day periods advocated
by the two commenters. However, as discussed below, Form NRSRO has been
modified in ways that reduce the volume of information that must be
made publicly available. Consequently, the Commission believes 10
business days will be a sufficient amount of time.
    Finally, while Section 15E(a)(3) of the Exchange Act \76\ does not
address whether an application to register as an NRSRO shall be made
publicly available prior to registration, this type of information
typically would be made available by the Commission to members of the
public before the application is acted on by the Commission.\77\ Two
commenters, both current NRSROs, stated that the Commission should not
make information in the application available to the public until after
registration was granted.\78\ The Commission notes that an applicant
can seek confidential treatment for information in the application
under existing laws and rules governing confidential treatment.\79\ The
Commission will accord this information confidential treatment to the
extent permitted by law. This is consistent with how the Commission
treats applications of other entities.
---------------------------------------------------------------------------

    \76\ 15 U.S.C. 78o-7(a)(3).
    \77\ See 17 CFR 200.80(b)(4) and 17 CFR 200.80a. 17 CFR 200.80a
contains a compilation of records generally available at the public
reference room in the principal office of the Commission, including,
for example, applications for registration as a broker-dealer or
investment adviser.
    \78\ See DBRS Letter; A.M. Best Letter.
    \79\ See 17 CFR 200.80 and 17 CFR 200.83.
---------------------------------------------------------------------------

B. Form NRSRO

    The Commission proposed Form NRSRO to serve four functions: For a
credit rating agency to apply for registration as an NRSRO; for an
NRSRO to apply to be registered in an additional class of credit
ratings; for an NRSRO to update public information required to be
disclosed and kept accurate on the Form; and for an NRSRO to make an
annual certification. Proposed instructions for the Form described how
an applicant, and after registration, an NRSRO, should complete the
Form in each of these circumstances.
    The Commission believes that having just one form (and one set of
instructions) will reduce the burden on applicants, NRSROs, and
Commission staff. For example, it will reduce the complexity of having
different forms for the application, amendments, and annual
certification. Using one form also will allow NRSROs to more quickly
become familiar with the Form and its instructions, which will reduce
the potential for making mistakes in completing the Form. It also will
assist users of credit ratings in understanding the Form and public
Exhibits and where to look on the Form for specific information.
    As discussed below, the Commission is adopting Form NRSRO with
substantial modifications that address issues commenters raised and
allow the Form to be used to furnish a notice of withdrawal of
registration. Much of the information elicited in the Form is required
to be submitted to the Commission pursuant to Section 15E(a)(1)(B) of
the Exchange Act.\80\ The Commission, under authority in Section
15E(a)(1)(B)(x), is requiring certain additional information.\81\ The
Commission believes this additional information elicited in the Form is
necessary or appropriate in the public

interest or for the protection of investors because, as discussed
below, it will: (1) Assist the Commission in making the findings
required in Section 15E(a)(2)(C) of the Exchange Act with respect to
whether an applicant should be granted registration as an NRSRO; \82\
(2) assist the Commission in making the findings required in Section
15E(d) of the Exchange with respect to whether the Commission should
censure, place limitations on the activities, functions or operations
of, suspend for a period not exceeding 12 months, or revoke the
registration of an NRSRO; \83\ (3) assist the Commission in reviewing
whether an NRSRO is complying with Section 15E of the Exchange Act \84\
and the Commission's rules thereunder; and (4) provide users of credit
ratings with information that will assist them in comparing NRSROs and
understanding how a given NRSRO conducts its activities.
---------------------------------------------------------------------------

    \80\ 15 U.S.C. 78o-7(a)(1)(B).
    \81\ 15 U.S.C. 78o-7(a)(1)(B)(x).
    \82\ 15 U.S.C. 78o-7(a)(2)(C).
    \83\ 15 U.S.C. 78o-7(d).
    \84\ 15 U.S.C. 78o-7.
---------------------------------------------------------------------------

1. Checkboxes Indicating Nature of Submission
    The first entry an applicant or NRSRO must make on Form NRSRO is to
indicate, by checking the appropriate box, the reason the form is being
furnished: To apply for registration as an NRSRO; to apply to be
registered in an additional class of credit ratings; to supplement
either type of application while the application is pending; to update
public information on the Form that has become materially inaccurate;
to make the annual certification; and to provide notice of a withdrawal
of registration. If the Form is furnished to supplement an application
or update a registration, the NRSRO also must identify by number the
specific items or Exhibits on the form that are being supplemented or
amended. For example, if the NRSRO is furnishing an update to its
registration because its address and organizational structure have
changed, the NRSRO is required to enter ``Item 1C'' and ``Exhibit 4''
in the appropriate field on the Form. The Form, as proposed, required a
brief description of the nature of the amendment. This requirement has
been eliminated to simplify the process of completing the Form.
    The Commission also has added two checkboxes that were not on the
proposed version of the Form. The first new checkbox--``Application
Supplement''--is for when a credit rating agency applying for
registration as an NRSRO or an NRSRO applying to be registered in an
additional class of credit ratings must furnish an amendment to its
application because information submitted in the application is or has
become materially inaccurate. As proposed, an NRSRO would have checked
the more generic ``Amendment'' checkbox. The Commission added a
separate checkbox to distinguish amendments relating to a pending
application from other amendments, which will make the reason for the
furnishing of the Form more transparent.
    Second, the Commission added a checkbox to indicate when the Form
is being furnished to withdraw a registration in light of the change to
Rule 17g-1 requiring the notice of withdrawal to be furnished on Form
NRSRO.
2. Item 1 (Identifying Information)
    As adopted, Item 1 requires an applicant and NRSRO to enter on to
Form NRSRO identifying information about itself and its contact person.
The instructions for Form NRSRO provide that the individual listed as
the contact person must be authorized to receive all communications and
papers from the Commission and will be responsible for their
dissemination within the NRSRO. One commenter suggested that Item 1
require the telephone number, fax, and email address of the contact
person.\85\ The Commission elicits the telephone number for broker-
dealer contact persons.\86\ The number of NRSROs will be substantially
smaller than the number of registered broker-dealers. The Commission
believes at this time it will be able to easily obtain the contact
information for the contact person without the necessity of having the
information disclosed on the Form.
---------------------------------------------------------------------------

    \85\ See DBRS Letter.
    \86\ See Form BD--Uniform Application for Broker-Dealer
Registration.
---------------------------------------------------------------------------

    The instructions to Item 1 of Form NRSRO indicate that the name
entered on Line A of Item 1 must be the ``person'' that is applying for
registration or registered as the NRSRO. The instructions further
clarify through the definition of ``person'' that a separately
identifiable department or division of a corporation or company may be
registered as an NRSRO. This clarification had been made because
certain credit rating agencies provide their credit rating services
through operating divisions that may be a part of a larger legal entity
or encompass several different legal entities located throughout the
world.\87\ In an effort to more narrowly tailor the requirements for
registration, the Commission believes it is appropriate in these
circumstances to permit the operating division to register as the NRSRO
as opposed to the larger legal entity that may engage in activities not
intended to be regulated under the Rating Agency Act. Similarly, the
Commission believes it is appropriate that the registered operating
division include each separate legal entity that provides credit rating
services, provided the operating division treats the credit ratings of
the separate legal entities as its own and has global procedures,
methodologies, policies, and controls that apply to the separate legal
entities.
---------------------------------------------------------------------------

    \87\ See, e.g., letter dated March 12, 2007 from Vickie A.
Tillman, Executive Vice President, Standard & Poors (``S&P
Letter''); DBRS Letter; Fitch Letter; Moody's Letter.
---------------------------------------------------------------------------

    The instructions to Form NRSRO now include a definition of
``separately identifiable department or division'' that is designed
with these goals in mind.\88\ The first component of the definition is
that the operating division must be a unit of a corporation or company
that is under the direct supervision of an officer or officers
designated by the board of directors of the corporation as responsible
for the day-to-day conduct of the corporation's credit rating
activities for one or more affiliates, including the supervision of all
employees engaged in the performance of such activities. The second
component of the definition is that all of the records relating to the
operating division's credit rating activities must be separately
created or maintained in or extractable from its own facilities or the
facilities of the corporation, and such records must be maintained or
otherwise accessible to permit independent examination for, and
enforcement by, the Commission of Section 15E of the Exchange Act \89\
and rules and regulations promulgated thereunder.
---------------------------------------------------------------------------

    \88\ See 15 U.S.C. 80b-2 for a similar definition of separately
identifiable departments or divisions of banks.
    \89\ 15 U.S.C. 78o-7.
---------------------------------------------------------------------------

    In all other respects, Item 1 to Form NRSRO is being adopted
substantially as proposed.
3. Certification
    The applicant or NRSRO must have a duly authorized individual
execute a certification that the information and statements furnished
in the Form NRSRO are accurate in all significant respects. The
Commission added the ``in all significant respects'' language to the
certification in response to comments that the certification, as
proposed, could have been construed to hold the certifying individual
to an unrealistic standard of having to ensure the Form

did not include even trivial inaccuracies.\90\ The additional language
is intended to allay these concerns. In light of this new language, the
instructions for the Form now clarify that the Chief Executive Officer
or the President of the applicant or NRSRO, or an individual with
similar responsibilities, must execute the certification. This is
designed to ensure that the person executing the certification has
responsibilities that will make the person aware of the basis for the
information being provided in the form.
---------------------------------------------------------------------------

    \90\ See Letter dated March 26, 2007 from Vickie A. Tillman,
Executive Vice President, Standard & Poors (``S&P 2nd Letter'');
Moody's Letter.
---------------------------------------------------------------------------

    In all other respects, the language of the certification is being
adopted substantially as proposed.
4. Item 2 (Legal Status, Place of Formation, Fiscal Year End)
    As adopted, Item 2 requires an applicant and NRSRO to enter on to
Form NRSRO information about its legal status (for example, corporation
or partnership), the place and date of its formation, and its fiscal
year end. The information with respect to the fiscal year end of the
applicant or NRSRO is relevant because Form NRSRO requires applicants
to submit audited financial statements with the application and Rule
17g-3 requires NRSROs to annually furnish the Commission with audited
financial statements covering the previous fiscal year. The Commission
did not receive any comments on this provision and is adopting it
substantially as proposed.
5. Item 3 (Credit Rating Affiliates)
    As discussed above, commenters with global operations stated that a
credit rating agency with separate legal entities in different
countries should be able to include them in a single NRSRO
registration.\91\ The Commission agrees that permitting a single
registration is appropriate in that it will lessen the burden of having
a parent company register multiple legal entities that make up the
parent company's credit rating division. Consequently, an applicant
with affiliates that would be, or an NRSRO with affiliates that are, a
part of its registered separately identifiable department or division
must identify and provide the address of each such affiliate. The
instructions to Form NRSRO clarify that any credit rating issued by a
credit rating affiliate will be considered a credit rating issued by
the NRSRO for purposes of Section 15E of the Exchange Act \92\ and the
regulations thereunder. For example, the provisions in Rule 17g-5 with
respect to issuing or maintaining credit ratings while having certain
conflicts of interest will apply.
---------------------------------------------------------------------------

    \91\ See DBRS Letter; Fitch Letter.
    \92\ 15 U.S.C. 78o-7.
---------------------------------------------------------------------------

    The instructions also provide that an applicant and NRSRO in
completing Form NRSRO must incorporate information about the credit
ratings, methodologies, procedures, policies, financial condition,
results of operations, and organizational structure of each credit
rating affiliate identified in Item 3 in the other items and Exhibits.
For example, the description of the procedures and methodologies for
determining credit ratings in Exhibit 2 must include the procedures and
methodologies used by the credit rating affiliates.
    For these reasons, the Commission is adopting Item 3 to Form NRSRO
as described above.
6. Item 4 (Compliance Officer)
    As adopted, Item 4 requires an applicant and NRSRO to provide the
name and address of its designated compliance officer required under
Section 15E(j) of the Exchange Act.\93\ This person is responsible for
administering the policies and procedures of the credit rating agency
to prevent the misuse of nonpublic information, to manage conflicts of
interest, and to ensure compliance with the securities laws and the
rules and regulations under those laws. The Commission did not receive
any comments on this provision and is adopting it substantially as
proposed.
---------------------------------------------------------------------------

    \93\ 15 U.S.C. 78o-7(j).
---------------------------------------------------------------------------

7. Item 5 (Method of Making Form and Exhibits Publicly Available)
    As adopted, Item 5 requires an applicant and NRSRO to describe how
it will make, or makes, its current Form NRSRO and Exhibits 1 through 9
publicly available pursuant to Section 15E(a)(3) of the Exchange Act
\94\ and Rule 17g-1(i) thereunder. As discussed above, paragraph (i) of
Rule 17g-1 is being adopted under Section 15E(a)(3) of the Exchange
Act, which provides that the Commission shall, by rule, require an
NRSRO, upon the granting of its registration, to make the information
submitted to the Commission in the initial application, amendments, or
annual certifications publicly available on the NRSRO's Web site or
through another comparable, readily accessible means.\95\ As discussed
above, paragraph (i) of Rule 17g-1 requires an NRSRO to make its
current Form NRSRO and Exhibits 1 through 9 publicly available within
10 business days after the date of the Commission order granting an
initial application and an application to be registered in an
additional class of credit ratings and within 10 business days after
furnishing the Commission with an amendment on Form NRSRO (including an
annual certification and withdrawal of registration). This information
elicited in Item 5 will assist the Commission in reviewing whether the
NRSRO is complying with this requirement and assist the public in
locating the information.
---------------------------------------------------------------------------

    \94\ 15 U.S.C. 78o-7(a)(3).
    \95\ Id.
---------------------------------------------------------------------------

    The Commission did not receive any comments on this provision and
is adopting it substantially as proposed.
8. Item 6 (Classes of Credit Ratings for Which Registration Is Sought
and QIB Certifications)
    An applicant for registration as an NRSRO or an NRSRO applying to
add another class of credit ratings to its registration must complete
Item 6 of Form NRSRO. This item elicits information about the classes
of credit ratings for which the applicant is applying to be registered.
It also requires the applicant to attach the requisite number of QIB
certifications (two for each class of credit rating for which
registration is sought and at least 10 with an initial application).
    Item 6 elicits the approximate number of credit ratings issued in
each class as of the application date. Commenters objected to the
requirement to provide the number of credit ratings in a particular
class because it could make it more difficult for new entrants to
obtain business.\96\ The Commission believes that users of credit
ratings will find this information useful in understanding an NRSRO.
For example, it will provide information as to how broad an NRSRO's
coverage is with respect to issuers and obligors within a particular
class of credit ratings.
---------------------------------------------------------------------------

    \96\ See, e.g., A.M. Best Letter.
---------------------------------------------------------------------------

    Item 6 also elicits the date the applicant first began issuing
credit ratings in that class on a continuous basis without
interruption. The Form, as proposed, required the applicant to provide
the number of years it has been issuing credit ratings on a continuous
basis. One commenter suggested that an NRSRO be required to provide the
date of first issuance, instead of the number of years, to avoid the
necessity of having to frequently update the information.\97\ The
Commission agrees with the commenter that this will make the
information submitted on the Form less subject to change and reduce the

requirement to, and burden of, updating the Form. Consequently, the
Commission has modified Items 6 and 7 accordingly. The information on
how long an NRSRO has issued credit ratings in a particular class will
assist users of credit ratings in assessing the NRSRO's level of
experience.\98\ Section 15E(a)(1)(C) of the Exchange Act also requires
that the QIB certifications include a representation that the QIB has
used the credit ratings of the applicant in the class of credit ratings
for at least the three years immediately preceding the date of the
application. The instructions provide that an applicant cannot tack on
periods when a credit rating affiliate issued credit ratings in the
particular class if the entity was not an affiliate during that time
period. This provision is designed to avoid the submission of
misleading information by providing that only credit ratings issued by,
or on behalf of, the NRSRO are used in determining the start date.
---------------------------------------------------------------------------

    \97\ See letter dated March 8, 2007 from Majorie E. Gross
(``Gross Letter'').
    \98\ Because Item 7, discussed below, will not be filled out
when the NRSRO applies for registration, it will remain blank for a
period of time between the granting of an initial registration and
the time when the NRSRO furnishes a new Form NRSRO either as an
amendment or annual certification. Item 6, however, will have been
filled out as part of the application for registration. This item
requires the same information as Item 7. Therefore, users of credit
ratings will have the access to the information through Item 6 until
the NRSRO furnishes an annual certification. Thereafter, the
information will be located in Item 7 and updated annually with each
new annual certification.
---------------------------------------------------------------------------

    Item 6 also elicits a brief description of how the credit rating
agency issues its credit ratings on the Internet or through another
readily accessible means, for free or for a reasonable fee. The
Commission will use this information to review whether the applicant is
in the business of issuing credit ratings on the Internet or through
another readily accessible means, for free or for a reasonable fee.\99\
The Rating Agency Act does not define ``readily accessible.'' The
information about how an applicant issues credit ratings on the
Internet or through another readily accessible means, for free or for a
reasonable fee also will inform the public about where and, if
applicable, the cost to access an NRSRO's credit ratings.
---------------------------------------------------------------------------

    \99\ Section 3(a)(61)(A) of the Exchange Act (15 U.S.C.
78c(a)(61)(A)).
---------------------------------------------------------------------------

    Further, the Rating Agency Act does not define ``reasonable fee.''
In the proposing release, the Commission sought comment on whether it
should define ``reasonable fee.'' In response, four commenters stated
that the Commission should not in any way regulate the fees an NRSRO
charges for its credit ratings.\100\ The Commission has determined not
to define ``reasonable fee'' at this time in order to gain experience
on the issue. Item 6 is designed to assist the Commission in gaining
this experience.
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    \100\ See letter dated March 12, 2007 from Cate Long, Multiple
Markets (``MM Letter''); letter dated March 12, 2007 from Lawrence
J. White, Professor of Economics, Stern School of Business (``White
Letter''); Letter dated March 12, 2007 from Alex J. Pollack,
Resident Fellow, American Enterprise Institute (``AEI Letter'');
Gross Letter.
---------------------------------------------------------------------------

    One commenter stated that Item 6, as proposed, does not elicit
information that would be helpful in understanding the fees charged for
obtaining or accessing credit ratings.\101\ The Commission notes that,
to the extent that several NRSROs indicate that they make their credit
ratings available for free, the Commission will have assurance that
regulatory users have ready access to NRSRO credit ratings. However,
the Commission believes the form should elicit more information about
fees so that the information will be disclosed to users of credit
ratings. This will improve price transparency, which may lead to
greater competition. Accordingly, the instructions for Item 6 and Item
7 now provide that an applicant that charges a fee for accessing its
credit ratings must describe the fee or include a fee schedule in the
form.
---------------------------------------------------------------------------

    \101\ See Gross Letter.
---------------------------------------------------------------------------

    Finally, Item 6 requires the applicant to provide the QIB
certifications mandated pursuant to Section 15E(a)(1)(B)(ix) of the
Exchange Act.\102\ Under this provision, an applicant must submit a
minimum of ten QIB certifications. An NRSRO will not be required to
make the QIB certifications publicly available pursuant to Section
15E(a)(3) of the Exchange Act \103\ and Rule 17g-1(i) thereunder or
update them after registration.\104\ Sections 15E(a)(1)(C)(i), (ii),
and (iii) further provide, respectively, that: (1) The certifying QIB
must not be affiliated with the applicant; (2) the certification may
address more than one of the categories of obligors identified in the
definition of NRSRO; and (3) at least two of the certifications must
address each category of obligor.\105\ Section 15E(a)(1)(C)(iv)
provides that the QIB must state in the certification that it meets the
definition of a ``QIB'' in Section 3(a)(64) of the Exchange Act \106\
and that the QIB has used the credit ratings of the applicant for at
least three years immediately preceding the date of the application in
the subject category or categories of obligors.\107\ The Senate report
(``Senate Report'') accompanying the Rating Agency Act explained that
the term ``used'' was intended to mean the QIB ``seriously considered
the ratings in some of [its] investment decisions.'' \108\ The Senate
Report further explained that ``a QIB whose analysts regularly read and
consider [a credit rating agency's] ratings in the course of making
investment decisions would have ``used'' them under the meaning of the
bill.'' \109\ The required representation for the QIB certification is
that the QIB ``has seriously considered the credit ratings of [the
credit rating agency] in the course of making some of its investment
decisions for at least the three years immediately preceding the date
of this certification, in the following classes of credit ratings.'' In
addition, as a measure designed to ensure the impartiality of the QIB's
representation, the QIB must certify that it has not received
compensation for providing the certification.
---------------------------------------------------------------------------

    \102\ 15 U.S.C. 78o-7(a)(1)(B)(ix).
    \103\ 15 U.S.C. 78o-7(a)(3).
    \104\ An applicant can request that this information be kept
confidential to the extent permitted by law. See 17 CFR 200.80 and
17 CFR 200.83.
    \105\ See 15 U.S.C. 78o-7(a)(1)(C)(i), (ii) and (iii),
respectively.
    \106\ 15 U.S.C. 78c(a)(64).
    \107\ 15 U.S.C. 78o-7(a)(1)(C)(iv).
    \108\ See Report of the Senate Committee on Banking, Housing,
and Urban Affairs to Accompany S. 3850, Credit Rating Agency Reform
Act of 2006, S. Report No. 109-326, 109th Cong., 2d Sess. (Sept. 6,
2006) (``Senate Report''). The Senate Report further explained that
a QIB whose employees subscribe to or regularly receive the ratings
but do not read them or, if they read them, rarely or never consider
them in making their investment decisions would not be deemed to
have `used' the ratings.''
    \109\ Id (emphasis added).
---------------------------------------------------------------------------

    The certification must be executed by a person duly authorized by
the QIB to make the certification on behalf of the QIB. This is
designed to ensure that the certification is that of the QIB and not an
employee of the QIB who may have an interest (distinct from that of the
QIB) in providing the certification to the applicant. The form of the
certification now requires that the printed name and title of the
person be provided under the signature. This will clarify the identity
and level of responsibility of the person executing the certification.
    The Commission did not receive any comments on the form of the QIB
certification and is adopting it substantially as proposed with the two
modifications described above.
    Item 6 of proposed Form NRSRO also requires the applicant to
indicate whether it is submitting the QIB certifications and, if so,
how many certifications are being submitted or that the applicant is
exempt from the requirement to provide the certifications. Under
Section 15E(a)(1)(D) of the Exchange Act, a

credit rating agency is not required to submit the QIB certifications
if it was identified as an NRSRO in a Commission staff no-action letter
issued before August 2, 2006.\110\
---------------------------------------------------------------------------

    \110\ 15 U.S.C. 78o-7(a)(1)(D).
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting Item 6 with the
modifications discussed above.
9. Item 7 (Classes of Credit Ratings Covered by Current Registration)
    As adopted, Item 7 requires an NRSRO to provide information about
the classes of credit ratings for which the NRSRO is currently
registered, the approximate number of credit ratings issued in each
class as of the previous calendar year end, and the date the NRSRO
first issued credit ratings in that class on a continuous basis. The
NRSRO also must provide information about how the NRSRO makes its
credit ratings readily accessible. Item 7 has been modified from the
proposed form to make the information provided in the item less subject
to change, which will reduce the frequency of having to furnish updated
information. Specifically, as discussed above, the number of years the
NRSRO has issued credit ratings in a particular class is now indicated
by having the NRSRO provide the date it first issued credit ratings in
that class. As proposed, the NRSRO would have had to provide the number
of years it had issued credit ratings in that class, which would
constantly change with the advance of time. Also, the number of credit
ratings issued in a particular class is now as of the end of the
previous calendar year. Therefore, this information will change once a
year and only be required to be updated on an annual basis. The
instructions to the Form provide that this update can be made with the
annual certification and within the 90-day time period for providing
the annual certification.
10. Item 8 (Potential Statutory Disqualifications)
    An applicant and NRSRO will be required to disclose, if applicable,
if it or any person within its credit rating organization have been, or
are, subject to certain legal judgments or orders, or regulatory
findings. As explained in the proposing release, Section
15E(a)(2)(C)(ii)(II) of the Exchange Act \111\ directs the Commission
to deny a credit rating agency's application for registration as an
NRSRO if the Commission finds that the applicant, if granted
registration, would be subject to suspension or revocation of its
registration under Section 15E(d) of the Exchange Act.\112\ Section
15E(d) of the Exchange Act \113\ provides that the Commission, by
order, shall censure, place limitations on the activities, functions,
or operations of, suspend for a period not exceeding 12 months, or
revoke the registration of an NRSRO, if the Commission finds that the
NRSRO or a person associated with the NRSRO has committed or omitted
any act, or is subject to an order or finding enumerated in Sections
15(b)(4)(A), (D), (E), (G), or (H) of the Exchange Act,\114\ has been
convicted of any offense specified in Section 15(b)(4)(B) of the
Exchange Act,\115\ or is enjoined from any action, conduct, or practice
specified in Section 15(b)(4)(C) of the Exchange Act.\116\ The
Commission also can take these actions if the NRSRO or a person
associated with the NRSRO has been convicted of any crime punishable by
imprisonment for 1 or more years that is not described in Section
15(b)(4)(B) of the Exchange Act \117\ or a substantially equivalent
crime in a foreign court of competent jurisdiction, or if a person
associated with the NRSRO is subject to any order of the Commission
barring or suspending the right of the person to be associated with an
NRSRO.\118\ Item 8 of Form NRSRO requires an applicant or NRSRO to
answer whether the applicant or the NRSRO or any person within their
credit rating organizations, is subject to these acts, convictions, or
orders described in Section 15E(d) of the Exchange Act.\119\
---------------------------------------------------------------------------

    \111\ 15 U.S.C. 78o-7(a)(2)(C)(ii)(II).
    \112\ 15 U.S.C. 78o-7(d).
    \113\ Id.
    \114\ 15 U.S.C. 78o(b)(4)(A), (D), (E), (G) and (H).
    \115\ 15 U.S.C. 78o(b)(4).
    \116\ 15 U.S.C. 78o(b)(4)(C).
    \117\ 15 U.S.C. 78o(b)(4)(B).
    \118\ 15 U.S.C. 78o-7(d).
    \119\ Id.
---------------------------------------------------------------------------

    If an applicant answers ``yes'' to a question, the credit rating
agency is required to provide additional information on a Disclosure
Reporting Page (DRP) NRSRO as set forth in the instructions for Form
NRSRO. An NRSRO will not be required to make the disclosure reporting
pages publicly available pursuant to Section 15E(a)(3) of the Exchange
Act \120\ and Rule 17g-1(i) thereunder.\121\ If an applicant answers
``yes'' to a question in Item 8, the Commission will use the disclosure
reporting pages to evaluate whether the applicant's registration could
be granted in light of the disclosure. After registration, if an NRSRO
answers ``yes'' to one of the questions, the Commission will use the
disclosure reporting pages to evaluate pursuant to the process under
Section 15E(d) of the Exchange Act whether it would be appropriate to
issue an order censuring, placing limitations on the activities,
functions, or operations of, suspending for a period not exceeding 12
months, or revoking the registration of the NRSRO.\122\
---------------------------------------------------------------------------

    \120\ 15 U.S.C. 78o-7(a)(3).
    \121\ An applicant can request that this information be kept
confidential to the extent permitted by law. See 17 CFR 200.80 and
17 CFR 200.83.
    \122\ 15 U.S.C. 78o-7(d).
---------------------------------------------------------------------------

    Two commenters stated that Item 8, as proposed, was overly broad
because, in asking about any person ``associated'' with the applicant
and NRSRO, it reached employees in areas of a large conglomerate that
performed functions wholly unrelated to credit rating services.\123\
The Commission notes that its authority under Sections
15E(a)(2)(C)(ii)(II) \124\ and 15E(d) \125\ of the Exchange Act can be
triggered by legal judgments and orders, and regulatory findings
involving persons ``associated'' with the applicant and NRSRO. In
considering these comments, the Commission evaluated when a disclosure
would be more likely to trigger Commission action. The Commission
concluded that it would involve disclosures relating to the credit
rating agency and the persons directly involved in providing or
supporting credit rating services. Therefore, to lessen the burden on
applicants and NRSROs, the Commission believes it is appropriate to
narrow the scope of the disclosure requirement to ``persons within the
credit rating agency,'' which the instructions define as the credit
rating agency, any credit rating affiliates of the credit rating agency
identified in Item 3, and any partner, officer, director, branch
manager, or employee of the credit rating agency or credit rating
affiliates (or any person occupying a similar status or performing
similar functions).
---------------------------------------------------------------------------

    \123\ See S&P Letter; Moody's Letter.
    \124\ 15 U.S.C. 78o-7(a)(2)(C)(ii)(II).
    \125\ 15 U.S.C. 78o-7(d).
---------------------------------------------------------------------------

    One commenter requested that the Commission clarify that the
disclosures in Item 8 do not include disclosures relating to
accusations or arrests.\126\ The Commission notes that the disclosures
are triggered by the provisions of Section 15E(d) of the Exchange
Act,\127\ which refers to convictions (not arrests or accusations). A
second commenter suggested that the disclosure item not include the
name of the individual.\128\ The Commission believes it has reduced
this concern, in part, by narrowing the disclosure item to persons
within the credit rating agency and by providing

that the disclosure reporting pages are not required to be made
publicly available pursuant to Section 15E(a)(3) of the Exchange Act
\129\ and Rule 17g-1(i).\130\ The Commission believes the disclosure of
the name of a person providing or supporting credit ratings services
will be important as these persons may seek to associate with another
NRSRO if they are terminated from or leave the reporting NRSRO. The
Commission also notes that the events triggering an Item 8 disclosure
generally are matters of public record (e.g., convictions, regulatory
orders) and, consequently, there may be a reduced expectation of
confidentiality.
---------------------------------------------------------------------------

    \126\ See R&I Letter.
    \127\ 15 U.S.C. 78o-7(d).
    \128\ See A.M. Best Letter.
    \129\ 15 U.S.C. 78o-7(a)(3).
    \130\ An applicant can request that this information be kept
confidential to the extent permitted by law. See 17 CFR 200.80 and
17 CFR 200.83.
---------------------------------------------------------------------------

    Otherwise, Item 8 is being adopted substantially as proposed.
11. Exhibit 1 (Credit Ratings Performance Statistics)
    Section 15E(a)(1)(B)(i) of the Exchange Act requires that an
application for registration as an NRSRO contain credit ratings
performance measurement statistics over short-term, mid-term, and long-
term periods (as applicable).\131\ An applicant and NRSRO will provide
this information in Exhibit 1 to Form NRSRO. The Exchange Act does not
otherwise define or identify the particular credit rating performance
statistics to be provided with the application. Credit rating agencies
typically generate statistical reports showing historical default and
downgrade rates within each credit rating notch or grade.\132\ These
types of statistics are important indicators of the performance of a
credit rating agency in terms of its ability to assess the
creditworthiness of issuers and obligors and, consequently, will be
useful to users of credit ratings in evaluating an NRSRO.
---------------------------------------------------------------------------

    \131\ 15 U.S.C. 78o-7(a)(1)(B)(i).
    \132\ The credit rating categories of a credit rating agency
generally are represented by symbols, numbers or other designations
that are used to distinguish the creditworthiness of the obligors,
securities and money market instruments the credit rating agency
rates. For example, some credit rating agencies use symbols such as
AAA, AA, A, BBB, BB, B, CCC, and CC to distinguish the
creditworthiness of corporate debt securities. AAA would be the
highest rating and CC would be the lowest rating above the default
or regulatory supervision of the issuer.
---------------------------------------------------------------------------

    The instructions to Form NRSRO provide that an applicant and NRSRO
must include in the Exhibit definitions of the credit ratings (i.e., an
explanation of each category and notch) and explanations of the
performance measurement statistics, including the metrics used to
derive the statistics. One commenter requested that the Commission
clarify the instruction with respect to explaining ``the metrics used
to derive the statistics.'' \133\ The intent is that the NRSRO explain
in general terms how it calculates the default and downgrade rates. The
Commission believes that requiring this information is necessary or
appropriate in the public interest or for the protection of investors
because it will assist users of credit ratings in understanding how the
measurements were derived and in making comparisons with the
measurement statistics of other NRSROs.\134\
---------------------------------------------------------------------------

    \133\ See DBRS Letter.
    \134\ Section 15E(a)(1)(B)(x) of the Exchange Act provides that
the Commission can require additional information that it finds is
necessary or appropriate in the public interest or for the
protection of investors (15 U.S.C. 78o-7(a)(1)(B)(x)).
---------------------------------------------------------------------------

    The definitions of the categories and notches will assist the
Commission in assessing whether the NRSRO's credit ratings, as a
practical matter, can be used for certain Commission rules. For
example, paragraph(c)(2)(vi)(F) of Exchange Act Rule 15c3-1 specifies
lower haircuts for debt securities that are rated in one of the ``four
highest rating categories'' of at least two NRSROs.\135\ This provision
was designed based on the practice of many credit rating agencies to
have at least eight categories for their debt securities with the top
four commonly referred to as ``investment grade.'' If an NRSRO uses
less than eight categories, the Commission will be required to evaluate
whether, based on the NRSRO's definitions, securities included in the
top four categories would be suitable for the lower haircuts specified
in paragraph(c)(2)(vi)(F) of Rule 15c3-1.\136\
---------------------------------------------------------------------------

    \135\ 17 CFR 240.15c3-1(c)(2)(vi)(F).
    \136\ Id.
---------------------------------------------------------------------------

    The Commission requested comment on whether the performance
measurement statistics should use standardized inputs, time horizons,
and metrics to allow for greater comparability. This request elicited
numerous comments.\137\ Three commenters supported the use of
standardized measures because it would make it easier to compare
NRSROs.\138\ A number of commenters opposed the use of standardized
measures for several reasons, including that such measures would be
impractical because credit rating agencies use different methodologies
to determine credit ratings and different definitions of default and
that the use of such measures could interfere with the methodologies
for determining credit ratings.\139\ In light of the varying approaches
cited in the comments, the Commission is not prepared to prescribe
standard metrics at this time. The Commission intends to continue to
consider this issue to determine the feasibility, as well as the
potential benefits and limitations, of devising measurements that would
allow reliable comparisons of performance between NRSROs. As adopted,
the Exhibit requires NRSROs to describe how they derive their
statistics in sufficient detail to allow users of credit ratings to
understand the measures. This will provide users with some basis to
compare different NRSROs even if the statistics are not derived from
similar measures.
---------------------------------------------------------------------------

    \137\ See letter dated March 12, 2007 from Richard M. Whiting,
Executive Director and General Counsel, Financial Services
Roundtable (``FSR Letter''); letter dated March 12, 2007 from Herwig
M. Langohr, Professor, INSEAD Business School, Patricia T. Langohr,
Professor, ESSEC Business School (``Langohr Letter''); letter dated
March 22, 2007 from George P. Miller, Executive Director, American
Securitization Forum (``ASF Letter''); letter dated March 16, 2007
from Makoto Utsumi, President & CEO, Ratings & Investment
Information (``JCR 2nd Letter''); ICI Letter; Gross Letter; R&I
Letter; MM Letter; White Letter; DBRS Letter; A.M. Best Letter; S&P
Letter; AEI Letter; Moody's Letter.
    \138\ See Gross Letter; ICI Letter; JCR 2nd Letter.
    \139\ See, e.g., R&I Letter; A.M Best Letter; S&P Letter;
Moody's Letter; ASF Letter.
---------------------------------------------------------------------------

    The Commission requested comment on whether other performance
measurement statistics would be appropriate as an alternative, or in
addition, to historical default and downgrade rates. For example, the
Commission requested comment on whether Exhibit 1 should require
measurement of the performance of a given credit rating by comparing or
mapping it to the market value of the rated security or to extreme
declines in the market value of the security after the rating. Although
the Commission is not taking action in this regard at this time, the
Commission intends to study these issues and consider possible future
action.
    For these reasons, Exhibit 1 to Form NRSRO and the instructions for
the Exhibit are being adopted substantially as proposed.
12. Exhibit 2 (Procedures and Methodologies for Determining Credit
Ratings)
    Section 15E(a)(1)(B)(ii) of the Exchange Act requires that an
application for registration as an NRSRO contain information regarding
the procedures and methodologies used by the credit rating agency to
determine credit ratings.\140\ An applicant and NRSRO will provide this
information in Exhibit 1 to Form NRSRO. The Exchange Act does not
otherwise define

or identify the procedures and methodologies that must be provided
under this section.\141\ However, the definition of ``credit rating
agency'' in Section 3(a)(61) of the Exchange Act provides that a
``credit rating agency'' is an entity that, among other things,
``employ[s] either a quantitative or qualitative model, or both, to
determine credit ratings.'' \142\
---------------------------------------------------------------------------

    \140\ 15 U.S.C. 78o-7(a)(1)(B)(ii).
    \141\ See 15 U.S.C. 78a et seq.
    \142\ See particularly, Section 3(a)(61)(B) of the Exchange Act
(15 U.S.C. 78c(a)(61)(B)).
---------------------------------------------------------------------------

    Credit rating agencies may establish procedures and methodologies
for determining credit ratings in the following areas: The
determination of whether to initiate a credit rating; the use of public
and non-public sources of information to perform credit rating
analysis, including information and analysis provided by third-party
vendors; the use of quantitative and qualitative models and metrics to
determine credit ratings; the interaction with the management of a
rated obligor or issuer of rated securities; the establishment of the
structure and voting process of committees that review or approve
credit ratings; the notification of rated obligors or issuers of rated
securities about credit rating decisions and for appeals of final or
pending credit rating decisions; the monitoring, reviewing, and
updating of credit ratings; and the withdrawal, or suspension of the
maintenance, of a credit rating.
    The list identifies areas where a credit rating agency may
establish procedures and methodologies for determining credit ratings.
The applicability of certain areas to a particular credit rating agency
will depend on whether it uses subjective qualitative analysis, purely
quantitative models, or a combination of both.\143\ Consequently, a
credit rating agency might not establish a procedure or methodology in
a given area if doing so would not be relevant to how the credit rating
agency determines credit ratings.
---------------------------------------------------------------------------

    \143\ See Section 3(a)(61) of the Exchange Act defining the term
``credit rating agency'' (15 U.S.C. 78c(a)(61)).
---------------------------------------------------------------------------

    In addition, credit rating agencies that issue ``unsolicited''
credit ratings may establish procedures and methodologies in the areas
described above that are unique for such ratings. Credit rating
agencies that use a subscription fee based business model may only
issue unsolicited ratings because that business model does not rely on
fees charged issuers, obligors, and underwriters to determine specific
credit ratings (issuers, obligors, and underwriters, however, may
subscribe to receive the credit ratings of such credit rating
agencies). The procedures and methodologies these credit rating
agencies employ, in some respects, may be unique to this business
model.
    Credit rating agencies that are paid by issuers, obligors, and
underwriters to determine specific credit ratings sometimes also issue
unsolicited credit ratings. This practice has led to concerns that
unsolicited ratings may be used to coerce issuers and obligors into
ultimately paying the credit rating agency to determine and maintain
the credit rating. Consequently, credit rating agencies that rely on
fees from issuers, obligors, and underwriters to determine specific
credit ratings, but also issue unsolicited ratings, often establish
procedures and methodologies for determining unsolicited credit ratings
that are designed to address this concern and the fact that the issuer
or obligor may not have participated in the determination of the credit
rating (as is most often the case with a solicited credit rating).
    The Commission believes that the information about any procedures
and methodologies established in the areas described above, including
any with respect to unsolicited credit ratings, will be useful to users
of credit ratings. The information will provide them with an
understanding of the nature of the credit rating agency (i.e., a user
of quantitative models, qualitative analysis, or a combination of both)
and how the credit rating agency produces credit ratings. This will
provide a basis for comparing NRSROs.
    Several commenters stated that the Exhibit should require that an
applicant and NRSRO describe its procedures and methodologies rather
than submit and disclose each actual procedure and methodology.\144\
These commenters pointed out that large credit rating agencies that
issue multiple types of credit ratings generally have volumes of
detailed procedures that credit analysts must follow in the course of
determining a credit rating.\145\ They noted that disclosing all this
information would be burdensome and could be difficult for users of
credit ratings to parse.\146\ They also noted that some of the
procedures and methodologies may involve the use of proprietary
models.\147\
---------------------------------------------------------------------------

    \144\ See White Letter; DBRS Letter; A.M. Best Letter; Fitch
Letter; Moody's Letter.
    \145\ See, e.g., DBRS Letter; A.M. Best Letter; Fitch Letter;
Moody's Letter.
    \146\ Id.
    \147\ Id.
---------------------------------------------------------------------------

    The Commission agrees with these commenters that disclosing all the
procedures could be burdensome and could result in an overload of
information that would be less helpful to users of credit ratings.
Therefore, the Commission has modified the instructions to require that
the Exhibit contain a description of the procedures and methodologies
(not the submission and disclosure of each actual procedure and
methodology). The instructions provide that the description must be
sufficiently detailed to provide users of credit ratings with an
understanding of the processes the applicant or NRSRO employs to
determine credit ratings.
    As discussed below, rather than have a credit rating agency submit
its procedures and methodologies in Exhibit 2, the Commission is
adopting a requirement in Rule 17g-2 that an NRSRO must document them
internally. Moving this requirement from Exhibit 2 to the recordkeeping
rule is designed to reduce the burden on NRSROs, while making these
procedures and methodologies available to Commission examination staff.
These records are important to the Commission's oversight. For example,
Rule 17g-6 prohibits, among other things, an NRSRO from issuing or
modifying or threatening to issue or modify a credit rating contrary to
the NRSRO's established procedures and methodologies. The Commission's
ability to enforce this prohibition will depend on the Commission staff
being able to access an NRSRO's documented procedures and
methodologies.\148\
---------------------------------------------------------------------------

    \148\ See letter dated March 12, 2007 from James A. Kaitz,
President & CEO, Association for Financial Professionals (``AFP
Letter'') stating the importance of monitoring whether an NRSRO
adheres to its stated procedures and methodologies for determining
credit ratings.
---------------------------------------------------------------------------

    Two commenters also suggested changes to the Commission's
description of an ``unsolicited credit rating'' in the proposed
instructions to Form NRSRO as being a credit rating that is not
requested by the issuer or underwriter of the rated securities or the
rated obligor.\149\ The commenters noted that issuers and obligors may
consent to the issuance and participate in the determination of a
credit rating even if they did not specifically request that the credit
rating be issued. As discussed below, the Commission has eliminated the
prohibition in Rule 17g-6 relating to unsolicited credit ratings, in
part, because of difficulties with defining the term. Therefore, the
Commission has removed the definition from the instructions to Exhibit
2. The Commission wants to gain a better understanding through its
examination function of how credit rating agencies define ``unsolicited
credit ratings'' and

the practices they employ with respect to these ratings.
---------------------------------------------------------------------------

    \149\ See A.M. Best Letter; Moody's Letter.
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting Exhibit 2 and the
instructions for the Exhibit with the modifications described above.
13. Exhibit 3 (Procedures To Prevent the Misuse of Material Non-Public
Information)
    Section 15E(g)(1) of the Exchange Act \150\ requires an NRSRO to
establish, maintain, and enforce written policies and procedures to
prevent the misuse of material, nonpublic information in violation of
the Exchange Act.\151\ Section 15E(g)(2) of the Exchange Act provides
that the Commission shall adopt rules requiring an NRSRO to establish
specific policies and procedures to prevent the misuse of material,
nonpublic information.\152\ As discussed below, Rule 17g-4 requires an
NRSRO's policies and procedures established pursuant to Section
15E(g)(1) of the Exchange Act \153\ to include certain specific types
of procedures.
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    \150\ 15 U.S.C. 78o-7(g)(1).
    \151\ 15 U.S.C. 78a et seq.
    \152\ 15 U.S.C. 78o-7(g)(2).
    \153\ 15 U.S.C. 78o-7(g)(1).
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    Section 15E(a)(1)(B)(iii) of the Exchange Act \154\ requires that
an application for registration as an NRSRO contain information
regarding policies or procedures adopted and implemented by the credit
rating agency to prevent the misuse of material, nonpublic information
in violation of Exchange Act \155\ provisions and rules. An applicant
and NRSRO will provide this information in Exhibit 3 to Form NRSRO.
Specifically, Exhibit 3 requires a copy of the policies and procedures
to prevent the misuse of material, nonpublic information established
pursuant to Section 15E(g) of the Exchange Act \156\ and Rule 17g-4.
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    \154\ 15 U.S.C. 78o-7(a)(1)(B)(iii).
    \155\ 15 U.S.C. 78a et seq.
    \156\ 15 U.S.C. 78o-7(g).
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    The Commission received two comments on this Exhibit, as
proposed.\157\ One commenter stated that the policies and procedures
should not have to be made publicly available because they may contain
proprietary information and disclosing them could hinder their
effectiveness.\158\ The Commission agrees that disclosing certain
components of these policies and procedures could make it easier for
persons to circumvent them. Therefore, the Commission has modified the
instructions to provide that the applicant or NRSRO is not required to
submit in the Exhibit any specific information in the policies and
procedures that is proprietary or would diminish the effectiveness of
the policies and procedures if such information is disclosed. The other
commenter stated that the procedures should be disclosed on the NRSRO's
Web site without further elaboration.\159\ The Commission notes that
Section 15E(a)(3) of the Exchange Act \160\ and Rule 17g-1 thereunder
require an NRSRO to make its Form NRSRO and Exhibits 1 through 9
publicly available by posting them on its Web site, or through another
comparable, readily accessible means.
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    \157\ See letter dated March 12, 2007 from Ayal Rosenthal
(``Rosenthal Letter''); R&I Letter.
    \158\ See R&I Letter.
    \159\ See Rosenthal Letter.
    \160\ 15 U.S.C. 78o-7(a)(3).
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    For these reasons, the Commission is adopting Exhibit 3 and the
instructions for the Exhibit with the modifications described above.
14. Exhibit 4 (Organizational Information)
    Section 15E(a)(1)(B)(iv) of the Exchange Act requires that an
application for registration as an NRSRO contain information regarding
the organizational structure of the applicant.\161\ An applicant and
NRSRO will provide this information in Exhibit 4 to Form NRSRO. The
Exchange Act does not otherwise define or identify the specific type of
organizational information that must be provided under Section
15E(a)(1)(B)(iv) of the Exchange Act.\162\ Companies typically create,
as applicable, an organizational chart showing ultimate and sub-holding
companies, subsidiaries, and material affiliates; an organizational
chart showing divisions, departments, and business units within the
entity; and an organizational chart showing the management structure
and senior management reporting lines within the entity. Users of
credit ratings will benefit from this information and, consequently,
the Commission proposed that it be provided in this Exhibit. One
commenter disagreed that users of credit ratings would find the
information helpful in assessing or understanding the NRSRO.\163\ For
the reasons discussed below, the Commission continues to believe these
three charts will be valuable to users of credit ratings and the
Commission.
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    \161\ 15 U.S.C. 78o-7(a)(1)(B)(iv).
    \162\ Id. See also, 15 U.S.C. 78a et seq.
    \163\ See MM Letter.
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    The first required organizational chart will show the credit rating
agency's ultimate and sub-holding companies, subsidiaries, and material
affiliates, if applicable. This chart will reveal where potential
conflicts of interest relating to the business activities of related
companies might arise. Also, the fact that a credit rating agency has a
holding company that potentially could provide financial support will
be relevant to the Commission's evaluation of whether an applicant or
NRSRO has adequate financial resources as required under the Exchange
Act.\164\ One commenter requested that the Commission define the term
``material affiliate.''\165\ At present, the Commission believes it is
more appropriate to rely on the judgment of the credit rating agency to
define its material affiliates, given that the size and complexity of
NRSROs could vary widely.
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    \164\ See Sections 15E(a)(2)(C) and 15E(d) of the Exchange Act
(15 U.S.C. 78o-7(a)(2)(C) and (d)).
    \165\ See R&I Letter.
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    The second organizational chart will show the credit rating
agency's divisions, departments, and business units, if applicable.
This information will assist users of credit ratings and the Commission
in understanding where potential conflicts of interest relating to
ancillary business activities might arise.
    The third organizational chart will show the credit rating agency's
management structure and senior management reporting lines and include
in the chart its designated compliance officer under Section 15E(j) of
the Exchange Act.\166\ The Commission will benefit from this chart as
it will assist in evaluating whether an applicant and NRSRO has
adequate managerial resources as required under the Exchange Act.\167\
Users of credit ratings will be able to use this information to compare
the managerial resources of different NRSROs.
---------------------------------------------------------------------------

    \166\ 15 U.S.C. 78o-7(j).
    \167\ See Sections 15E(a)(2)(C) and 15E(d) of the Exchange Act
(15 U.S.C. 78o-7(a)(2)(C) and (d)).
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    Including the compliance officer in the chart will assist the
Commission and users of credit ratings in understanding the degree of
the compliance officer's independence from the business managers.\168\
The compliance officer's reporting lines are relevant in assessing the
integrity of the credit rating process of a particular NRSRO, since the
officer is responsible for administering the credit rating agency's
policies and procedures required by Sections 15E(g) and (h) of the
Exchange Act \169\ and for ensuring the NRSRO's compliance with the
securities laws and rules and regulations thereunder.\170\ In carrying

out these responsibilities, a compliance officer will be required to
review activities overseen by senior business managers. The ability of
the compliance officer to objectively review an area can be impacted by
whether the officer reported to the senior manager responsible for the
area. Thus, the relative independence of the compliance officer will be
relevant in assessing the NRSRO's ability to ensure compliance with its
policies and procedures.
---------------------------------------------------------------------------

    \168\ See Section 15E(a)(1)(B)(x) of the Exchange Act (15 U.S.C.
78o-7(a)(1)(B)(x)).
    \169\ 15 U.S.C. 78o-7(g) and (h).
    \170\ Section 15E(j) of the Exchange Act (15 U.S.C. 78o-7(j)).
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    For these reasons, the Commission is adopting Exhibit 4 and the
instructions for the Exhibit substantially as proposed.
15. Exhibit 5 (Code of Ethics)
    Section 15E(a)(1)(B)(v) of the Exchange Act requires that an
application for registration as an NRSRO disclose whether the applicant
has a code of ethics in effect or an explanation of why the applicant
has not established a code of ethics.\171\ Exhibit 5 of Form NRSRO
elicits this information by requiring an applicant and NRSRO to attach
a copy of any established code of ethics or an explanation of why it
does not have a code of ethics. The Commission believes the requirement
to include a copy of any established code of ethics in the Exhibit is
necessary or appropriate in the public interest or for the protection
of investors. A statement that an NRSRO has a code of ethics but no
further disclosure would not be particularly useful to users of credit
ratings. They would not be able to review the code of ethics and use it
as a means of comparing different NRSROs.
---------------------------------------------------------------------------

    \171\ 15 U.S.C. 78o-7(a)(1)(B)(v).
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    The Exchange Act does not otherwise define or identify the ``code
of ethics'' that should be provided under Section 15E(a)(1)(B)(v).\172\
The Commission believes each credit rating agency must have the
flexibility to establish a code of ethics appropriate for its business
model and organizational structure and, consequently, the Exhibit does
not prescribe any specific elements that must be in the code of ethics,
if any, furnished in this Exhibit.
---------------------------------------------------------------------------

    \172\ Id.
---------------------------------------------------------------------------

    The Commission received several comments on this Exhibit.\173\ Most
addressed whether the Exhibit also should require the credit rating
agency to disclose whether it complies with international principles
and codes of conduct related to credit rating agencies.\174\ One
commenter suggested that the Exhibit not refer to a code of ``ethics''
but rather to a code of ``conduct.''\175\ Another commenter requested
that the Exhibit not require the credit rating agency to ``certify''
that it is complying with international principles and codes of conduct
because some principles permit an entity to comply or explain.
---------------------------------------------------------------------------

    \173\ See letter dated March 12, 2007 from John Grout, Policy
and Technical Director, The Association of Corporate Treasurers
(``AST Letter''); Gross Letter; DBRS Letter; S&P Letter; Moody's
Letter; Langohr Letter; JCR 2nd Letter.
    \174\ A number of these commenters endorsed a requirement that
the credit rating agency disclose whether it has adopted a code of
conduct consistent with the principles contained in the report:
Statement of Principles Regarding the Activities of Credit Rating
Agencies, Technical Committee, International Organization of
Securities Commissions (``IOSCO'') (September 25, 2003). See also
Code of Conduct Fundamentals for Credit Rating Agencies, Technical
Committee of IOSCO (December 2004).
    \175\ See Moody's Letter.
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    The Commission reiterates that Exhibit 5 does not prescribe any
requirements that must be in an NRSRO's code of ethics and that Section
15E(a)(1)(B)(v) of the Exchange Act does not require an NRSRO to have a
code of ethics.\176\ An applicant or NRSRO can submit a statement of
why it does not have a code of ethics.\177\ The Commission believes
that the Exhibit should not require the inclusion of any particular
type of code of conduct. It could be the case that the code of ethics
provided by an applicant or NRSRO is part of a broader code of conduct.
For the foregoing reasons, the Commission is adopting Exhibit 5
substantially as proposed.
---------------------------------------------------------------------------

    \176\ 15 U.S.C. 78o-7(a)(1)(B)(v).
    \177\ Id.
---------------------------------------------------------------------------

16. Exhibit 6 (Conflicts of Interest)
    Section 15E(a)(1)(B)(vi) of the Exchange Act requires that an
application for registration as an NRSRO contain information regarding
any conflict of interest relating to the issuance of credit ratings by
the applicant and NRSRO.\178\ The Exchange Act does not otherwise
define or identify the types of conflicts of interest that should be
disclosed under Section 15E(a)(1)(B)(vi) of the Exchange Act.\179\
Exhibit 6, as proposed, would have required an applicant and NRSRO to
describe in general terms each type of conflict that arises, or may
arise, from its business model and credit rating activities. Thus, if
an NRSRO receives payment from issuers to rate their securities, the
NRSRO would have been required to disclose that fact. It would not have
had to make a disclosure each time it received payment from an issuer.
The purpose of the proposed disclosure was to alert users of credit
ratings to the NRSRO's business model (subscriber fee-based, issuer
fee-based, or a combination of both), and to potential conflicts that
arise from the business model.
---------------------------------------------------------------------------

    \178\ 15 U.S.C. 78o-7(a)(1)(B)(vi).
    \179\ Id, see also 15 U.S.C. 78a et seq.
---------------------------------------------------------------------------

    The Commission continues to believe that disclosing the types of
conflicts that arise from an NRSRO's business model will assist the
Commission in evaluating whether an applicant has sufficient financial
and managerial resources to comply with the procedures for managing
conflicts of interest required under Section 15E(h) of the Exchange
Act,\180\ given the types of conflicts of interest identified by the
applicant.\181\ The information also will be useful to users of credit
ratings in assessing an NRSRO by, for example, comparing the types of
conflicts disclosed by the entity in Exhibit 6 with the procedures for
managing conflicts of interest disclosed by the entity in Exhibit 7.
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    \180\ 15 U.S.C. 78o-7(h).
    \181\ See Section 15E(a)(2)(C) Exchange Act (15 U.S.C. 78o-
7(a)(2)(C)).
---------------------------------------------------------------------------

    Exhibit 6 of Form NRSRO, as adopted, requires an applicant and
NRSRO to provide a list describing in general terms the types of
conflicts of interest that arise from its business activities. The
instructions to the Exhibit have been modified to include a list of 10
different generic conflicts of interest that may apply to a credit
rating agency based on its business model and activities. These
conflicts were included in the proposed instructions as examples of
conflicts. These are the types of conflicts that generally arise from
the business of issuing credit ratings depending on the business model
of the credit rating agency. The instructions further provide that the
credit rating agency can use the descriptions provided in the
instructions to identify an applicable conflict of interest and is not
required to provide any further information. Thus, the credit rating
agency can review each item on the list and determine whether it
describes an applicable conflict. This modification is intended to make
it simpler for the credit rating agency to create the Exhibit since it
may rely on the language in the instructions to identify a conflict. A
credit rating agency can choose to provide its own description of the
conflict or further explanation to one of the descriptions in the
instructions.
    Several commenters raised concerns with the Commission's
identification as a potential conflict the fact that a subscriber may
use the entity's credit ratings for regulatory purposes.\182\ They

argued that it would be impractical to determine how subscribers might
be using their credit ratings.\183\ The Commission did not intend to
require NRSROs to actively monitor how their subscribers were using
their credit ratings. Rather, the intent is to require NRSROs to
disclose that subscribers, while they do not pay to have a credit
rating issued, may have an interest in a specific credit rating.
Therefore, the fact that they compensate the NRSRO could give rise to a
conflict of interest. The instructions now describe the conflict as the
fact that subscribers may use the credit ratings for regulatory
purposes. This means that any credit rating agency that charges
subscribers to access its credit ratings will be required to identify
this conflict. The credit rating agency is not required to determine
whether, or how, the subscribers are using the credit ratings to comply
with statutes and regulations. The purpose of the disclosure is to
alert users of credit ratings to the fact that the NRSRO's business
model includes charging subscribers to access its credit ratings and
that a subscriber may have an interest in a particular credit rating.
For similar reasons, the Commission eliminated a provision in the
instructions requiring the identification of associated persons that
use credit ratings for regulatory purposes as this would have required
an applicant and NRSRO to monitor how another legal entity was using
its credit ratings.
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    \182\ See, e.g., DBRS Letter; S&P Letter.
    \183\ Id.
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    A commenter noted that subscribers who manage investment portfolios
also may have an interest in a particular credit rating.\184\ For
example, such a subscriber may be limited to investing in debt
securities that have investment grade credit ratings and, consequently,
would be required to sell, perhaps at a loss, a debt security that is
downgraded below investment grade. The Commission believes that,
similar to regulatory users, this type of subscriber could raise a
potential conflict of interest. Therefore, this type of conflict is
specifically identified in the instructions to the Exhibit.
---------------------------------------------------------------------------

    \184\ See DBRS Letter.
---------------------------------------------------------------------------

    The instructions to the Exhibit, as proposed, also required an
NRSRO to identify a person associated with the NRSRO that underwrites
securities or money market instruments that are subject to a credit
rating of the NRSRO. This type of conflict is identified in Section
15E(h)(2)(D) of the Exchange Act.\185\ The concerns raised by
commenters with respect to monitoring how subscribers use their credit
ratings also apply in this context. For example, the provision, as
proposed, could be interpreted to require an NRSRO to monitor whether
any person associated with the NRSRO is an ``underwriter'' as that term
is defined in Section 2(a)(11) of the Securities Act of 1933.\186\ The
Commission believes this could impose a very difficult compliance
standard in that it would involve continuous monitoring of the
securities trading activities of associated persons and legal judgments
as to whether they were acting as ``underwriters'' at any given moment.
---------------------------------------------------------------------------

    \185\ 15 U.S.C. 78o-7(h)(2)(D).
    \186\ 15 U.S.C. 77b(a)(11).
---------------------------------------------------------------------------

    At the same time, the Commission believes that where there is a
potential affiliation between an NRSRO and a securities underwriter
that it is necessary or appropriate in the public interest or for the
protection of investors to require it to be disclosed in this Exhibit.
Specifically, an affiliation between an NRSRO and a broker or dealer
that is in the business of underwriting securities would raise concerns
that the NRSRO might be influenced by the affiliation to issue
favorable credit ratings for these securities. The Commission further
believes that disclosing this type of affiliation does not present the
concerns discussed above since most persons associated with an NRSRO
likely are not broker-dealers in the business of underwriting
securities. Therefore, the NRSRO should be able to identify those
associated persons. Further, the requirement to identify these persons
is based on being affiliated with such an underwriter that may
underwrite securities rated by the NRSRO. Thus, the NRSRO will not need
to actively monitor whether it currently has rated such securities and
update the Exhibit each time this changes. Consequently, the
requirement to identify persons associated with the NRSRO that
underwrite securities rated by the NRSRO has been narrowed to a
requirement to identify any person associated with the NRSRO that is a
broker or dealer in the business of underwriting securities or money
market instruments.
    Finally, the Commission notes that the Exhibit contains a catchall
provision requiring the disclosure of any other material conflict of
interest. Consequently, the additional conflict added to the
instructions is expected to reduce the potential conflicts that must be
disclosed under the catchall. With respect to the catchall, the
instructions note that a ``material'' type of conflict will include one
that the NRSRO has established specific policies and procedures to
address.
    For these reasons, the Commission is adopting Exhibit 6 and the
instructions for the Exhibit with the modifications described above.
17. Exhibit 7 (Procedures To Manage Conflicts)
    An applicant or NRSRO will be required to furnish in Exhibit 7 a
copy of the written policies and procedures it establishes, maintains,
and enforces to address and manage conflicts of interest pursuant to
Section 15E(h) of the Exchange Act.\187\ Requiring inclusion of these
policies and procedures in the Form is necessary or appropriate in the
public interest or for the protection of investors.\188\ First, their
disclosure will assist the Commission in monitoring whether an NRSRO is
complying with Section 15E(h) of the Exchange Act.\189\ Second, their
disclosure will assist the Commission in evaluating whether an
applicant or NRSRO has adequate financial and managerial resources to
materially comply with Section 15E(h) of the Exchange Act.\190\ Third,
their disclosure will allow users of credit ratings to compare an
NRSRO's policies and procedures for managing conflicts of interest with
the types of conflicts disclosed in Exhibit 7.
---------------------------------------------------------------------------

    \187\ 15 U.S.C. 78o-7(h).
    \188\ See Section 15E(a)(1)(B)(x) of the Exchange Act (15 U.S.C.
78o-7(a)(1)(B)(x)).
    \189\ 15 U.S.C. 78o-7(h).
    \190\ Id.
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    One commenter stated that these policies and procedures should not
have to be made publicly available because they may contain proprietary
information and disclosing them could hinder their effectiveness.\191\
As with the Exhibit 3 policies and procedures, the Commission has
modified the instructions for this Exhibit to provide that the
applicant or NRSRO is not required to submit in the Exhibit any
specific information in the policies and procedures that is proprietary
or would diminish the effectiveness of the policies and procedures if
such information were disclosed.
---------------------------------------------------------------------------

    \191\ See R&I Letter.
---------------------------------------------------------------------------

    For these reasons, the Commission is adopting Exhibit 7 and the
instructions for the Exhibit with the modification described above.
18. Exhibit 8 (Credit Analyst Information)
    Exhibit 8, as proposed, would have required an applicant and NRSRO
to provide certain background information (e.g., employment history and
education) with respect to each credit analyst and credit analyst
supervisor.

Consistent with its reasons for proposing this request, the Commission