rating process. The Commission preliminarily believes that the
transparency of an NRSRO's procedures and methodologies for determining
credit ratings is enhanced when the NRSRO explains to obligors and
issuers the bases, assumptions, and rationales behind rating decisions.
For example, the Commission understands that in the structured finance
area, NRSROs may provide information to arrangers about the output of
expected loss and cash flow models. The information provided by the
NRSRO during the rating process allows the arranger to better
understand the relationship between model outputs and the NRSRO's
decisions with respect to necessary credit enhancement levels to
support a particular rating. The arranger then can consider the
feedback and determine independently the steps it will take, if any, to
adjust the structure, credit enhancement levels, or asset pool.
However, if the feedback process turns into recommendations by the
NRSRO about changes the arranger could make to the structure or asset
pool that would result in a desired credit rating, the NRSRO's role
would transition from an objective credit analyst to subjective
consultant. In this case, the Commission believes it would be difficult
for the NRSRO to remain impartial since the expectation would be that
the changes suggested by the NRSRO would result in the credit ratings
sought by the arranger.
    The prohibition would extend to recommendations by persons
associated with the NRSRO to address affiliates. For example, an
NRSRO's holding company could establish an affiliate to provide
consulting services to issuers about how to obtain desired credit
ratings from the NRSRO subsidiary. The Commission believes it would be
difficult for the NRSRO to remain objective in this situation since the
financial success of the affiliate would depend on issuers getting the
ratings they desired after taking any steps recommended by the
affiliate. This would create undue pressure on the NRSRO's credit
analysts to determine credit ratings that favored the affiliate.
    The Commission generally requests comment on all aspects of this
proposed amendment. In addition, the Commission requests comment on the
following questions related to the proposal.
     Is this type of conflict one that could be addressed
through disclosure and procedures to manage it instead of prohibiting
it? Should the Commission,

rather than prohibiting it, add this type of conflict to the list of
conflicts in paragraph (b) of Rule 17g-5, which, under paragraph (a) of
the rule, must be addressed through disclosure and procedures to manage
them?
     Would there be practical difficulties for an NRSRO that is
part of a large conglomerate in monitoring the business activities of
persons associated with the NRSRO such as affiliates located in other
countries to comply with the proposed requirement? If so, given the
greater separation between the NRSRO and these types of persons
associated with the NRSRO, should the Commission require instead that,
for these types of persons associated with the NRSRO only, the NRSRO
disclose this conflict and manage it through information barriers
rather than prohibit it?
     The Commission recognizes that the line between providing
feedback during the rating process and making recommendations about how
to obtain a desired rating may be hard to draw in some cases.
Consequently, should the Commission specify the type of interactions
between an NRSRO and the person seeking the rating that would and would
not constitute recommendations for the purposes of this rule?
Commenters that believe the Commission should provide more guidance on
this issue should provide suggested definitions.
3. Rule 17g-5 Prohibition on Conflict of Interest Related to the
Participation of Certain Personnel in Fee Discussions
    The Commission is proposing to amend Rule 17g-5 \112\ by adding a
new paragraph (c)(6) of Rule 17g-5 to address the conflict of interest
that arises when a fee paid for a rating is discussed or arranged by a
person within the NRSRO who has responsibility for participating in
determining credit ratings (including analysts and rating committee
members) or for developing or approving procedures or methodologies
used for determining credit ratings, including qualitative and
quantitative models.
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    \112\ 17 CFR 240.17g-5.
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    The Commission is proposing this amendment to Rule 17g-5, in part,
pursuant to the authority in Section 15E(h)(2) of the Exchange
Act.\113\ The provisions of this section of the statute provide the
Commission with authority to prohibit, or require the management and
disclosure of, any potential conflict of interest relating to the
issuance of credit ratings by an NRSRO.\114\ The Commission
preliminarily believes the proposed amendment is necessary and
appropriate in the public interest or for the protection of investors
because it would address a potential practice that could impair the
objectivity, and, correspondingly, the quality, of a credit rating.
This amendment is designed to effectuate the separation within the
NRSRO of persons involved in fee discussions from persons involved in
the credit rating analytical process. While the incentives of the
persons discussing fees could be based primarily on generating revenues
for the NRSRO; the incentives of the persons involved in the analytical
process should be based on determining accurate credit ratings. There
is a significant potential for these distinct incentive structures to
conflict with one another where persons within the NRSRO are engaged in
both activities.
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    \113\ 15 U.S.C. 78o-7(h)(2).
    \114\ Id.
---------------------------------------------------------------------------

    The potential consequences are that a credit analyst or person
responsible for approving credit ratings or credit rating methodologies
could, in the context of negotiating fees, let business considerations
undermine the objectivity of rating process. For example, an individual
involved in a fee negotiation with an issuer might not be impartial
when it comes to rating the issuer's securities. In addition, persons
involved in approving the methodologies and processes used to determine
credit ratings could be reluctant to adjust a model to make it more
conservative if doing so would make it more difficult to negotiate fees
with issuers. For these reasons, the Commission preliminarily believes
that this conflict should be prohibited.
    The Commission generally requests comment on all aspects of this
proposed amendment. In addition, the Commission requests comment on the
following items related to the proposal.
     Should the proposed prohibition also be extended to cover
participation in fee negotiations by NRSRO personnel with supervisory
authority over the NRSRO personnel participating in determining credit
ratings or developing or approving procedures or methodologies used for
determining credit ratings?
     Instead of prohibiting this conflict outright, would
disclosure and procedures to manage the conflict adequately address the
conflict? If so, what specific disclosures should be required? What
other measures should be required in addition to disclosures?
     Would there be practical difficulties in separating
analytic and fee discussions for a small NRSRO, including one that has
limited staff, that are significant enough that the Commission should
consider a different mechanism to address the conflict? If so, what
sort of mechanism and with what conditions? Should the Commission adopt
an exemption from the prohibition for small NRSROs and, instead,
require them to disclose the conflict and establish procedures to
manage it? For example, the exemption could apply to NRSROs that have
less than 10, 20, or 50 associated persons. Commenters that endorse an
exemption for small NRSROs should provide specific details as to how
the Commission should define an NRSRO as ``small'' for purposes of the
exemption. For example, for purposes of the Final Regulatory
Flexibility Analysis for the Adopting Release the Commission concluded
that an NRSRO with total assets of $5 million or less was a ``small''
entity for purposes of the Regulatory Flexibility Act.\115\ Would that
be an appropriate way to define a small NRSRO for purposes of this
exemption?
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    \115\ See Adopting Release, 72 FR at 33618.
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4. Rule 17g-5 Prohibition of Conflict of Interest Related to Receipt of
Gifts
    The Commission is proposing to amend Rule 17g-5 \116\ by adding a
new paragraph (c)(7) that would prohibit an NRSRO from having a
conflict of interest relating to the issuance or maintenance of a
credit rating where a credit analyst who participated in determining or
monitoring the credit rating, or a person responsible for approving the
credit rating, received gifts, including entertainment, from the
obligor being rated, or from the issuer, underwriter, or sponsor of the
securities being rated, other than items provided in the context of
normal business activities such as meetings that have an aggregate
value of no more than $25. Thus, this proposed prohibition would
prohibit any gifts to credit analysts and persons on credit rating
committees from the obligors, issuers, underwriters, or sponsors with
respect to whom they had determined, monitored or approved credit
ratings. It also would create an exception for items provided during
normal business activities such as meetings to the extent they do not
in the aggregate exceed $25 per meeting. For example, the provision of
pens, notepads, or minor refreshments, such as soft drinks or coffee,
generally are incidental to meetings and other normal course business
interactions and not treated as gifts per se. The proposed $25
exception is designed to be high enough

to permit these types of exchanges without implicating the prohibition.
---------------------------------------------------------------------------

    \116\ 17 CFR 240.17g-5.
---------------------------------------------------------------------------

    The Commission is proposing these amendments to Rule 17g-5, in
part, pursuant to the authority in Section 15E(h)(2) of the Exchange
Act.\117\ The provisions in this section of the statute provide the
Commission with authority to prohibit, or require the management and
disclosure of, any potential conflict of interest relating to the
issuance of credit ratings by an NRSRO as the Commission deems
necessary or appropriate in the public interest or for the protection
of investors.\118\ The Commission preliminarily believes the proposed
amendment is necessary and appropriate in the public interest or for
the protection of investors because it would address a potential
practice that could impair the objectivity, and, correspondingly, the
quality, of a credit rating.
---------------------------------------------------------------------------

    \117\ 15 U.S.C. 78o-7(h)(2).
    \118\ Id.
---------------------------------------------------------------------------

    Persons seeking credit ratings for an obligor or debt security
could use gifts to gain favor with the analyst responsible for
determining the credit ratings and cause the analyst to be less
objective during the rating process. In the case of a substantial gift,
the potential to impact the analyst's objectivity could be immediate.
With smaller gifts, the danger is that over time the cumulative effect
of repeated gifts can impact the analyst's objectivity. Therefore, the
proposal would establish an absolute prohibition on gifts with the
exception of minor incidentals provided in business meetings.
    The Commission generally requests comment on all aspects of this
proposed amendment. In addition, the Commission request comment on the
following questions related to the proposal.
     Instead of prohibiting this conflict outright, should the
Commission require that NRSROs disclose it and establish procedures to
manage it? If so, what specific disclosures should be required?
     Instead of prohibiting gifts outright, should the
Commission establish a yearly limit on the aggregate value of gifts
that would be permitted under the prohibition? For example, the
Commission could provide in the rule that the prohibition would not be
triggered until the aggregate value of all gifts received from a
particular person in a twelve month period exceeded $100, $500 or
$1,000 or some other amount.
     Is the proposed $25 aggregate value an appropriate
threshold for incidentals provided at meetings, or should a higher or
lower threshold be applied?
     Should the Commission adopt a recordkeeping requirement
with respect to the receipt of gifts by analysts and persons
responsible for approving credit ratings in addition to the
prohibition? For example, the Commission could require an NRSRO to
document for each gift the identity of the person providing the gift,
the recipient, and the nature of the gift.

B. Amendments to Rule 17g-2

    The Commission adopted Rule 17g-2, in part, pursuant to authority
in Section 17(a)(1) of the Exchange Act requiring NRSROs to make and
keep such records, and make and disseminate such reports, as the
Commission prescribes by rule as necessary or appropriate in the public
interest, for the protection of investors, or otherwise in furtherance
of the Exchange Act.\119\ Rule 17g-2 requires an NRSRO to make and
retain certain records relating to its business and to retain certain
other business records made in the normal course of business
operations. The rule also prescribes the time periods and manner in
which all these records are required to be retained. The Commission is
proposing to amend this rule to require NRSROs to make and retain
certain additional records and to require that some of these proposed
new records be made publicly available.
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    \119\ See Section 5 of the Rating Agency Act and 15 U.S.C.
78q(a)(1).
---------------------------------------------------------------------------

1. A Record of Rating Actions and the Requirement That They Be Made
Publicly Available
    The Commission is proposing to amend Exchange Act Rule 17g-2 \120\
to add a new paragraph (8) to Rule 17g-2 that would require a
registered NRSRO to make and retain a record showing all rating actions
(initial rating, upgrades, downgrades, and placements on watch for
upgrade or downgrade) and the date of such actions identified by the
name of the security or obligor and, if applicable, the CUSIP for the
rated security or the Central Index Key (CIK) number for the rated
obligor. Furthermore, the Commission is proposing to amend Rule 17g-
2(d) to require that this record be made publicly available on the
NRSRO's corporate Internet Web site in an interactive data file that
uses a machine-readable computer code that presents information in
eXtensible Business Reporting Language (``XBRL'') in electronic format
(``XBRL Interactive Data File''). The purpose of this disclosure is to
provide users of credit ratings, investors, and other market
participants and observers the raw data with which to compare how the
NRSROs initially rated an obligor or security and, subsequently,
adjusted those ratings, including the timing of the adjustments. In
order to expedite the establishment of a pool of data sufficient to
provide a useful basis of comparison, this requirement would apply to
all currently rated securities or obligors as well as to all future
credit ratings.
---------------------------------------------------------------------------

    \120\ 17 CFR 240.17g-2.
---------------------------------------------------------------------------

    The goal of this proposal is to foster greater accountability of
the NRSROs with respect to their credit ratings as well as competition
among the NRSROs by making it easier for persons to analyze the actual
performance of the credit ratings the NRSROs issue in terms of accuracy
in assessing creditworthiness. The disclosure of this information on
the history of each credit rating would create the opportunity for the
marketplace to use the information to develop performance measurement
statistics that would supplement those required to be published by the
NRSROs themselves in Exhibit 1 to Form NRSRO. The intent is to tap into
the expertise and flexibility of credit market observers and
participants to create better and more useful means to compare credit
ratings. This goal is to make NRSROs more accountable for their ratings
by enhancing the transparency of the results of their rating processes
for particular securities and obligors and classes of securities and
obligors and encourage competition within the industry by making it
easier for users of credit ratings to judge the output of the NRSROs.
    As noted above, the proposed amendments would require that the
record be made publicly available on the NRSRO's corporate Internet Web
site in an XBRL Interactive Data File that uses a machine-readable
computer code that presents information in XBRL. The Commission is
proposing to require that an NRSRO use this format to publicly disclose
the ratings action data because it would allow users to dynamically
search and analyze the information, thereby facilitating the comparison
of information across different NRSROs. In addition, an XBRL
Interactive Data File would enable investors, analysts, and the
Commission staff to capture and analyze the ratings action data more
quickly and at less of a cost than is possible using another format.
The Commission further believes that the XBRL Interactive Data File
would be compatible with a wide range of open source and proprietary
XBRL software applications and that as the ratings action data becomes
more widely available, advances in interactive data software, online
viewers, search

engines, and other Web-based tools may further enhance the
accessibility and usability of the data.
    The Commission's experience in having certain issuers use XBRL for
EDGAR filings has demonstrated the benefits of this format to
investors, filers, and Commission staff.\121\ Expanding its use to
NRSRO ratings history data would be consistent with Commission policy
to utilize this format where practical.
---------------------------------------------------------------------------

    \121\ See Extension of Interactive Data Voluntarily Reporting
Program in the EDGAR System to Include Mutual Fund Risk/Return
Summary Information. Securities Act Release No. 8823 (August 20,
2007).
---------------------------------------------------------------------------

    The proposed amendment to Rule 17g-2(d) also would provide that the
records be made publicly available no later than six months after the
date of the rating action. The Commission anticipates that the record
required under this amendment would need to be updated frequently as
new credit ratings are issued and existing credit ratings are upgraded,
downgraded and put on ratings watch. For purposes of the internal
record, the NRSRO would need to keep the record current to reflect the
complete ratings history of each extant credit rating. However, for
purposes of the requirement to make the record publicly available, the
NRSRO would be permitted to disclose the record on its Internet Web
site six months after the record is updated to reflect a new ratings
action. The proposed six-month time lag for publicly disclosing the
updated record is designed to accommodate NRSROs that operate using the
subscriber-pay model because they are paid for access to their current
credit ratings. It also is designed to preserve the revenues that
NRSROs operating using the issuer-pay model derive from selling
download access to their current credit ratings.\122\ The Commission
preliminarily believes the six-month time lag would not have any
negative effect on the goal of this proposed amendment because the
information on credit ratings actions that would be disclosed--perhaps
many years' worth for some credit ratings--should be sufficient to
develop meaningful performance metrics for comparing NRSROs.
---------------------------------------------------------------------------

    \122\ The accommodation of subscriber-pay models acknowledges
the Rating Agency Act's intent to encourage the subscriber-pays
model (see Senate Report, p. 7) while simultaneously ensuring equal
treatment for NRSROs operating under an issuer-pays model.
---------------------------------------------------------------------------

    Finally, the proposed amendments also would amend the instructions
to Exhibit 1 to Form NRSRO to require the disclosure of the Web address
where the XBRL Interactive Data File could be accessed. This is
designed to inform persons who use credit ratings where the ratings
histories can be obtained.
    The Commission is proposing these amendments, in part, under
authority to require NRSROs to make and keep for prescribed periods
such records as the Commission prescribes as necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Exchange Act.\123\ The Commission
preliminarily believes the proposed new recordkeeping and disclosure
requirements are necessary and appropriate in the public interest and
for the protection of investors, or otherwise in furtherance of the
purposes of the Exchange Act. Specifically, by proposing to require
NRSROs to make ratings actions publicly available in an XBRL
Interactive Data File, market participants would be able to create
their own performance measurement metrics, including default and
transition matrices, by which to judge the accuracy of NRSRO ratings.
In addition, users of credit ratings would be able to compare side-by-
side how each NRSRO initially rated a particular security, when the
NRSRO took actions to adjust the rating upward or downward, and the
degree of those adjustments. Furthermore, users of credit ratings,
academics and information venders could use the raw data to perform
analyses comparing how the NRSROs differ in their initial ratings and
their monitoring for different types of asset classes. This could
identify an NRSRO that is an outlier in terms of issuing high or low
credit ratings or consistently reassesses ratings on a delayed basis
for some or all asset classes when compared to other NRSROs. It also
could help identify NRSROs that are consistently more or less accurate
than others. This information also may identify NRSROs whose
objectivity may be impaired because of conflicts of interest.
---------------------------------------------------------------------------

    \123\ See Section 17(a)(1) of the Exchange Act (15 U.S.C.
78q(a)(1)).
---------------------------------------------------------------------------

    The Commission generally requests comment on all aspects of this
proposed amendment. In addition, the Commission requests comment on the
following questions related to the proposal.
     Is the six-month delay before publicly disclosing a rating
action sufficiently long to address the business concerns of the
subscriber-based NRSROs and the issuer-paid NRSROs? Should the delay be
for a longer period such as one or two years or even longer?
Alternatively, is six months too long and should it be a shorter period
of time such as three months or even shorter?
     Should the rule require that a notice be published along
with the XBRL Interactive Data File warning that because of the
permitted delay in updating the record some of the credit ratings in
the record may no longer reflect the NRSRO's current assessment of the
creditworthiness of the obligor or debt security? For example, the
notice could explain that the information in the record is sixth months
old and state that the credit ratings contained in record may not be
up-to-date.
     Are there ways in which the NRSROs should be required to
sort the credit ratings contained on the record such as by asset class
or type of ratings?
     What mechanisms are appropriate for identifying rated
securities? Are there other identifiers in addition, or as an
alternative, to CUSIP or CIK number that could be used in the rule?
     Should the Commission allow the ratings action data to be
provided in a format other than XBRL, such as pipe delimited text data
(``PDTD'') or eXtensible Markup Language (``XML'')? Is there another
format that is more widely used or would be more appropriate than XBRL
for NRSRO data? What are the advantages/disadvantages of requiring the
XBRL format?
     Should the Commission require that the information on the
assets underlying a structured finance products discussed in Section
II.A.1.a above be provided in a specific format such as PDTD, XML, or
XBRL? Again, is there another format that is more widely used or would
be more appropriate for such data? What are the advantages/
disadvantages of requiring a specific format?
     Should the Commission take the lead in creating the new
tags that are needed for the XBRL format or should it allow the tags to
be created by another group and then review the tags? How long would it
take to create new tags?
     The Commission anticipates that the data provided by
NRSROs would be simple and repetitive (i.e., the data would be name,
CUSIP, date, rating, date, rating, etc.). Is there a need for more
detailed categories of data?
     What would be the costs to an NRSRO to provide data in the
XBRL format? Would there be a cost burden on smaller NRSROs? Is there
another format that would cost less but still allow investors and
analysts to easily download and analyze the data?
     Should the Commission institute a test phase for providing
this information in an XBRL format (such as a voluntary pilot program,
similar to what it is currently doing for EDGAR filings)? How long
should this test phase last?
     Where is the best place to store the data provided by
NRSROs? Currently,

information that needs to be made publicly available is stored on each
NRSRO's Web site. Should the Commission create a central database to
store the information? If so, should it use the EDGAR database or
should it create a new database?
2. A Record of Material Deviation From Model Output
    The Commission is proposing to amend paragraph (a)(2) of Rule 17g-2
to add an additional record that would be required to be made for each
current credit rating, namely, if a quantitative model is a substantial
component in the process of determining the credit rating, a record of
the rationale for any material difference between the credit rating
implied by the model and the final credit rating issued. The NRSRO
issuing the rating would be responsible for making the determination of
what constituted a ``substantial component'' of the rating process as
well as what constituted a ``material'' difference between the rating
issued and the rating implied by the model.\124\ This proposal is
designed to enhance the recordkeeping processes of the NRSROs so that
Commission examiners (and any internal auditors of the NRSRO) could
reconstruct the analytical process by which a credit rating was
determined. This would facilitate their review of whether the NRSRO
followed its disclosed and internally documented procedures for
determining credit ratings.
---------------------------------------------------------------------------

    \124\ The Commission notes that it would consider the RMBS and
CDO rating process described above in Section I.C.2 as using a
quantitative model as a substantial component in the ratings
process.
---------------------------------------------------------------------------

    The requirement to make the record would be triggered in cases
where a quantitative model is a substantial component of the credit
ratings process for the type of obligor or security being rated and the
output of the model would result in a materially different conclusion
if the NRSRO relied on it without making an out-of-model adjustment.
For example, the Commission preliminarily believes the expected loss
and cash flow models used by the NRSROs to rate RMBS and CDOs are
substantial components of the rating process. The following
hypothetical scenario is intended as an illustrative example of an
instance when an out-of-model adjustment would be material to the RMBS
rating process thereby triggering the requirement to document the
rationale for the adjustment under the proposed rule. A credit analyst
uses the NRSRO's expected loss model to analyze a $1 billion (aggregate
principal amount) loan pool received from an arranger that is proposed
to collateralize an RMBS. The results of the model imply that the
senior RMBS tranche would need to have at least 20% subordination in
order to receive an AAA rating. However, the NRSRO's methodologies and
procedures for rating RMBS allow for the subordination level suggested
by the model output to be adjusted based on certain qualitative factors
such as the experience and competence of the loan servicer or the
recent performance of similar loan pools. Based on the superior
competence of the loan servicer, the analyst concludes that the senior
tranche only needs 19% subordination and, ultimately, the ratings
committee agrees. Consequently, the RMBS is issued with a senior
tranche having 19% subordination and receiving an AAA rating from the
NRSRO. In this case, under the proposed amendment, the NRSRO would be
required to make a record that identified the rationale--the servicer's
superior competence--for determining a credit rating that was different
from the rating implied by the model.
    As the above scenario demonstrates, the failure to make such a
record could hamper the ability of the Commission to review whether an
NRSRO was following its stated procedures for determining credit
ratings. In the above scenario, the analyst could adjust the rating
requirements implied by the model by applying qualitative factors with
respect to the loan servicer or the performance of similar pools. A
record indicating which rationale was applied would make it easier for
the Commission to review whether the procedures were followed.
    The Commission is proposing this amendment, in part, under
authority to require NRSROs to make and keep for prescribed periods
such records as the Commission prescribes as necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Exchange Act.\125\ The Commission
preliminarily believes this proposed new recordkeeping requirement is
necessary and appropriate in the public interest and for the protection
of investors, or otherwise in furtherance of the purposes of the
Exchange Act. Specifically, as explained above, the Commission
preliminarily believes that maintaining records identifying the
rationale for material divergences from the ratings implied by
qualitative models used as a substantial component in the ratings
process would assist the Commission in evaluating whether an NRSRO is
adhering to its disclosed procedures for determining ratings. Further,
as the Commission noted in the Adopting Release, ``books and records
rules have proven integral to the Commission's investor protection
function because the preserved records are the primary means of
monitoring compliance with applicable securities laws.'' In the absence
of such a recordkeeping requirement, there may be no way to determine
whether an analyst modified the requirements for obtaining a certain
category of credit rating (e.g. AAA) as indicated by the model results
by applying appropriate qualitative factors permitted under the NRSRO's
documented procedures or because of undue influence from the person
seeking the credit rating or other inappropriate reasons such as those
prohibited by Rule 17g-6.\126\
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    \125\ See Section 17(a)(1) of the Exchange Act (15 U.S.C.
78q(a)(1)).
    \126\ 17 CFR 240.17g-6. Rule 17g-6 prohibits an NRSRO from
engaging in certain unfair, abusive or coercive practices such as
issuing a credit rating that is not determined in accordance with
the NRSRO's established procedures and methodologies for determining
credit ratings based on whether the rated person will purchase the
credit rating. See 17 CFR 240.17g-6(a)(2).
---------------------------------------------------------------------------

    The Commission generally requests comment on all aspects of this
proposed amendment. In addition, the Commission requests comment on the
following questions related to the proposal.
     Would this proposal have the impermissible effect of
regulating the substance of credit ratings in any way?
     Should the Commission define in the rule when the use of a
model would be a ``substantial component'' in the process of
determining a credit rating? Commenters endorsing the adoption of such
a definition should provide specific proposals.
     Are there certain types of rated products (e.g., corporate
debt, municipal bonds) which generally employ a quantitative model as a
substantial component of the ratings process? Commenters should
identify the types of bonds and a general description of the models
used to rate them.
     Should the Commission define in the rule when the
divergence from a model would be ``material''? Commenters endorsing the
adoption of such a definition should provide specific proposals.
     Is the hypothetical scenario of the RMBS rating process
used to illustrate when a divergence would be material for purposes of
the proposed amendment reasonable? For example, is the adjustment of
the subordination level from 20% to 19% for a $1 billion loan pool a
material divergence? Would

a lesser adjustment of the subordination level (e.g., 20% to 19.5%)
also be material?
     Are there alternative types of records that may be created
or retained by an NRSRO that would allow the Commission to understand
when and why an NRSRO's final rating differed materially from the
rating implied by the model?
     Should the Commission require that the information about
material deviations from the rating implied by the model be publicly
disclosed by the NRSRO in the presale report or when the rating is
issued?
3. Records Concerning Third-Party Analyst Complaints
    The Commission is proposing an amendment to Exchange Act Rule 17g-2
\127\ to add a requirement that an NRSRO retain records of any
complaints regarding the performance of a credit analyst in determining
credit ratings. Specifically, the proposed amendment would add a new
paragraph (b)(8) to Rule 17g-2 to require an NRSRO to retain any
communications that contain complaints about the performance of a
credit analyst in initiating, determining, maintaining, monitoring,
changing, or withdrawing a credit rating.
---------------------------------------------------------------------------

    \127\ 17 CFR 240.17g-2.
---------------------------------------------------------------------------

    The Commission is proposing these amendments, in part, under
authority to require NRSROs to make and keep for prescribed periods
such records as the Commission prescribes as necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in the furtherance of the Exchange Act.\128\ The Commission
preliminarily believes the proposed new recordkeeping requirements are
necessary and appropriate in the public interest and for the protection
of investors, or otherwise in furtherance of the Exchange Act, because
they would assist the Commission in reviewing how NRSROs address
conflicts interest that could impair the integrity of their credit
rating processes. For example, an NRSRO might respond to complaints
from issuers that an analyst is too conservative by removing the
analyst from the responsibility of rating the securities of those
issuers and assigning a new analyst that is more willing to determine
credit ratings desired by the issuers. As discussed above with respect
to the proposed amendments to Rule 17g-5, the potential for this type
of response to complaints about analysts is particularly acute in the
structured finance area given that certain arrangers of structured
finance products repeatedly bring ratings business to the NRSROs.\129\
The pressure to maintain the business relationship with these arrangers
could cause an NRSRO to remove an analyst responsible for rating the
structured finance products these arrangers bring to market if they
complained about how the analyst was determining credit ratings and
implied that they might take their business to other NRSROs.
---------------------------------------------------------------------------

    \128\ See Section 17(a)(1) of the Exchange Act (15 U.S.C.
78q(a)(1)).
    \129\ See e.g., Coffee April 22, 2008 Senate Testimony, pp. 4-6.
---------------------------------------------------------------------------

    The records proposed under these amendments would allow the
Commission, in evaluating the integrity of the NRSRO's ratings process,
to better assess whether analyst reassignments or terminations were for
reasons unconnected to a conflict of interest (e.g., the analyst's poor
performance) or as a result of the ``arranger-pay'' conflict of
interest described above. For example, the examiners could review the
complaint file that would be established by this proposed amendment and
follow-up with the relevant persons within the NRSRO as to how the
complaint was addressed. The potential for such a review by Commission
examiners could reduce the willingness of an NRSRO to re-assign or
terminate a credit analyst for inappropriate business considerations.
    The Commission generally requests comment on all aspects of this
proposed amendment. In addition, the Commission requests comment on the
following questions related to the proposal.
     In addition to the proposed recordkeeping requirement,
should the Commission require the NRSROs to publicly disclose when an
analyst has been re-assigned from the responsibility to rate an obligor
or the securities of an issuer, underwriter, or sponsor?
     Should the Commission require NRSROs to retain any
communications containing a request from an obligor, issuer,
underwriter, or sponsor that the NRSRO assign a specific analyst to a
transaction in addition to the proposed requirement to retain
complaints about analysts?
4. Clarifying Amendment to Rule 17g-2(b)(7)
    Paragraph (b)(7) of Rule 17g-2 currently requires an NRSRO to
retain all internal and external communications that relate to
``initiating, determining, maintaining, changing, or withdrawing a
credit rating.'' The Commission is proposing to add the word
``monitoring'' to this list. The intent is to clarify that NRSRO
recordkeeping rules extend to all aspects of the credit rating
surveillance process as well as the initial rating process. This was
the intent when the Commission originally adopted the rule as indicated
by the use of the term ``maintaining.'' The Commission believes that
adding the term ``monitoring''--a term of art in the credit rating
industry--would better clarify this requirement.
    The Commission generally requests comment on all aspects of this
proposed amendment. In addition, the Commission requests comment on the
following question related to the proposal.
     Should the Commission delete the term ``maintaining'' from
paragraph (b)(7) and proposed new paragraph (b)(8) of Rule 17g-2 as it
has the same meaning as ``monitoring?''

C. Amendments to the Instructions for Form NRSRO

    Form NRSRO is the means by which credit rating agencies apply to be
registered with the Commission and registered NRSROs update information
they must publicly disclose. Much of the information elicited in Form
NRSRO is required to be submitted to the Commission pursuant to the
statutory requirements of Section 15E(a)(1)(B) of the Exchange
Act.\130\ The Commission added certain additional information to be
submitted in the Form.\131\ As discussed below, the Commission, in
part, under its authority pursuant to Section 15E(a)(1)(B)(x), is now
proposing to amend Form NRSRO to further enhance the quality and
usefulness of the information to be furnished and disclosed by
registered NRSROs by requiring specified information in addition to
that which is statutorily defined in the Section 15E of the Exchange
Act.
---------------------------------------------------------------------------

    \130\ 15 U.S.C. 78o-7(a)(1)(B).
    \131\ 15 U.S.C. 78o-7(a)(1)(B)(x).
---------------------------------------------------------------------------

1. Enhanced Ratings Performance Measurement Statistics on Form NRSRO
    As discussed above, the Commission is proposing to require the
disclosure of the historical rating actions relating to each current
credit rating of an NRSRO through amendments to Rule 17g-2. The intent
is to make available the raw data necessary for the marketplace to
develop and apply credit ratings performance metrics. At the same time,
the Commission is proposing to amend the instructions to Exhibit 1 to
Form NRSRO to enhance the comparability of the performance measurement
statistics the NRSROs are required to publicly disclose in the Form.
Currently, the

instructions require the disclosure of ``performance measurement
statistics of the credit ratings of the Applicant/NRSRO over short-
term, mid-term, and long-term periods (as applicable) through the most
recent calendar year-end.'' The Commission, in adopting this
requirement, did not require disclosure of performance statistics in
Form NRSRO beyond those specified in Section 15E(a)(1)(B)(i) of the
Exchange Act.\132\ In the Adopting Release, the Commission explained
that it was not prepared to prescribe standard metrics at that time in
light of the varying approaches suggested by some commenters and the
opposition of other commenters to having the Commission impose any
standards.\133\ The Commission also stated that it would continue to
consider the issue to determine the feasibility, as well as the
potential benefits and limitations, of devising measurements that would
allow reliable comparisons of the accuracy of the NRSROs' credit
ratings.\134\
---------------------------------------------------------------------------

    \132\ See 15 U.S.C. 78o-7(a)(1)(B)(i).
    \133\ See Adopting Release, 72 FR at 33574.
    \134\ Id.
---------------------------------------------------------------------------

    The Commission, with the benefit of further consideration of the
issue, now preliminarily believes that the instructions to Exhibit 1
can prescribe greater specificity about how the performance statistics
must be generated without intruding into the processes and
methodologies by which NRSROs determine credit ratings. For example,
through the examination process, the Commission has become more
familiar with the procedures and methodologies used by the NRSROs to
determine credit ratings. Through this experience, the Commission
preliminarily believes it can prescribe generic requirements for the
performance statistics that would accommodate the different procedures
and methodologies used by the NRSROs.
    The first proposed amendment would augment the instructions to
Exhibit 1 by requiring the disclosure of separate sets of default and
transition statistics for each asset class of credit rating for which
an applicant is seeking registration as an NRSRO or an NRSRO is
registered and any other broad class of credit ratings issued by the
NRSRO. This would result in the generation of performance statistics
that are specific to each class of credit ratings for which the NRSRO
is registered (or an applicant is seeking registration). This proposal
is designed to make it easier for users of credit ratings to compare
the accuracy of NRSRO credit ratings on a class-by-class basis.
    The proposed amendment also would require an NRSRO registered in
the class of credit ratings described in Section 3(a)(62)(B)(iv) of the
Rating Agency Act\135\ (or an applicant seeking registration in that
class) when generating the performance statistics for that class to
include credit ratings of any security or money market instrument
issued by an asset pool or as part of any asset-backed or mortgage-
backed securities transaction. This is designed to ensure the inclusion
of ratings actions for credit ratings of structured finance products
that do not meet the narrower statutory definition of ``issuers of
asset-backed securities (as that term is defined is section 1101(c) of
part 229 of title 17, Code of Federal Regulations).''\136\
---------------------------------------------------------------------------

    \135\ 15 U.S.C. 78c(a)(62)(B)(iv).
    \136\ See Id.
---------------------------------------------------------------------------

    The second proposed amendment would require that these class-by-
class disclosures be broken out over 1, 3 and 10-year periods. Section
15E(a)(1)(B)(i) of the Exchange Act requires that the performance
statistics be over short, mid, and long-term periods.\137\ The proposed
amendment would define those statutorily prescribed periods in specific
years so that the performance statistics generated by the NRSROs cover
comparable time periods. The Commission preliminarily believes that 1,
3, and 10 year periods are reasonable definitions of the terms ``short-
term, mid-term, and long-term periods'' as used in Section
15E(a)(1)(B)(i) of the Exchange Act.\138\ For example, the 1 year
period would provide users with information about how the credit
ratings are currently performing. In effect, it could serve as an early
warning mechanism if a problem developed in an NRSRO's rating processes
due to flaws or conflicts. Similarly, the 3 year period would provide
information about the how the ratings were currently performing but, by
including more historical data, smooth out spikes in the 1 year
statistics to give a better sense of how the ratings perform over time.
The 3 year statistics also would serve as a bridge to the longer term
10 year statistics. The 10 year statistics would show users how the
ratings in a particular class of securities perform over the long
range.
---------------------------------------------------------------------------

    \137\ 15 U.S.C. 78o-7(a)(1)(B)(i).
    \138\ 15 U.S.C. 78o-7(a)(1)(B)(i).
---------------------------------------------------------------------------

    The third proposed amendment would modify what ratings actions are
required to be included in these performance measurement statistics by
replacing the term ``down-grade and default rates'' with ``ratings
transition and default rates.'' The proposed switch to ``ratings
transition'' rates from ``downgrade'' rates is designed to clarify that
upgrades (as well as downgrades) should be included in the statistics.
The fact that an NRSRO upgrades a substantial amount of credit ratings
may be just as indicative of a flaw in the initial rating as a large
number of downgrades. For example, an NRSRO could try to manipulate its
performance statistics by issuing overly conservative ratings.
    The final proposed amendment would specify that the default
statistics required under the exhibit must show defaults relative to
the initial rating and incorporate defaults that occur after a credit
rating is withdrawn. This amendment is designed to prevent an NRSRO
from manipulating the performance statistics by not including defaults
when generating statistics for a category of credit ratings (e.g., AA)
because the defaults occur after the rating is downgraded to a lower
category (e.g., CC) or withdrawn.
    The Commission is proposing these amendments, in part, under
authority to require such additional information in the application as
it finds necessary or appropriate in the public interest or for the
protection of investors.\139\ The Commission preliminarily believes the
proposed new disclosure requirements for Exhibit 1 are necessary and
appropriate and in the public interest or for the protection of
investors. Specifically, the information that would be required under
the proposed amendments would aid investors by allowing them to
evaluate how the credit ratings of an NRSRO perform (i.e., the
percentage of credit ratings that migrate to another category of credit
rating and the percentage of rated obligors and securities that
default) on a class-by-class basis. This would provide better
information on how an NRSRO's ratings have performed within the field
of financial products relevant to any given user of credit ratings and
investor. For example, an investor contemplating the purchase of a
highly-rated subprime RMBS would be able to consider the performance of
an NRSRO's ratings of structured finance products, which would be more
useful than the NRSRO's general performance statistics across all
classes of credit ratings. Specifically, an NRSRO may be much better at
assessing the creditworthiness of corporate debt securities than of
structured finance products. Consequently, performance statistics of
such an NRSRO that incorporate all classes of credit ratings

(e.g., corporate debt and structured finance products) would be less
precise in terms of evaluating the performance of the NRSRO's credit
ratings for structured finance products.
---------------------------------------------------------------------------

    \139\ See Section 15E(a)(1)(B)(x) of the Exchange Act (15 U.S.C.
78o-7(a)(1)(B)(x)).
---------------------------------------------------------------------------

    Furthermore, by defining ``short-term, mid-term, and long-term''
periods as 1, 3, and 10-year timeframes, the proposed amendment would
provide a better basis for comparing the performance of different
NRSROs as the statistics for each NRSRO would cover the same periods.
Finally, the replacement of the ``down-grade'' requirement with a
``ratings transition'' requirement and the clarification of what
default statistics would need to be incorporated into the ratings
performance statistics would further enhance investor understanding of
NRSRO performance by requiring that similar information be captured in
the NRSROs' performance rating statistics and eliminating certain ways
that could be used to ``pad'' statistics.
    The Commission generally requests comment on all aspects of these
proposed amendments. In addition, the Commission requests comment on
the following questions related to the proposals.
     Should the Commission prescribe specific standards for the
performance statistics, such as requiring an NRSRO to disclose how its
credit ratings performed relative to metrics such as credit spreads?
Commenters endorsing such an approach should provide specific details
as to how it could be implemented; taking into consideration factors
such as the issues related to the difficulty of obtaining timely and
consistent pricing information for many debt instruments and the
volatility of credit spreads.
     Should the Commission require performance statistics in a
more granular form than by class of credit ratings? For example, should
the Commission require for structured finance products statistics by
more narrowly defined asset classes such as CDOs and RMBS or types of
asset-backed securities such as those backed by home loans, credit
cards, or commercial real estate? Commenters endorsing greater
granularity should provide specific details, including definitions of
the credit rating classes.
     Should the Commission prescribe different time periods for
the short, medium, and long term statistics than 1, 3, and 10 years,
respectively. For example, should the periods be 6 months, 2 years and
7 years or 2, 5, and 15 years or some other set of time periods?
2. Enhanced Disclosure of Ratings Methodologies
    The Commission is proposing to amend the instructions for Exhibit 2
to Form NRSRO to require enhanced disclosures about the procedures and
methodologies an NRSRO uses to determine 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 firm to determine credit ratings.\140\
The Commission implemented this requirement by prescribing through the
instructions to Form NRSRO that an applicant and NRSRO must provide
general descriptions of their procedures and methodologies for
determining credit ratings and that the descriptions must be
sufficiently detailed to provide users of credit ratings with an
understanding of the procedures and methodologies. The instructions
also identified various areas that are required to be addressed in
Exhibit 2, including, as applicable, descriptions of the NRSRO's
policies for determining whether to initiate a credit rating; the
public and non-public sources of information used in determining credit
ratings, including information and analysis provided by third-party
venders; and the quantitative and qualitative models and metrics used
to determine credit ratings.
---------------------------------------------------------------------------

    \140\ 15 U.S.C. 78o-7(a)(1)(B)(ii).
---------------------------------------------------------------------------

    The Commission is proposing to add three additional areas that an
applicant and a registered NRSRO would be required to address in the
descriptions of its procedures and methodologies in Exhibit 2. The
inclusion of these would serve to better disclose the actions an
applicant and NRSRO is, or is not taking, in determining credit
ratings. The additional areas required to be addressed in the exhibit
would be:
     Whether and, if so, how information about verification
performed on assets underlying or referenced by a security or money
market instrument issued by an asset pool or as part of any asset-
backed or mortgage-backed securities transaction is relied on in
determining credit ratings;
     Whether and, if so, how assessments of the quality of
originators of assets underlying or referenced by a security or money
market instrument issued by an asset pool or as part of any asset-
backed or mortgage-backed securities transaction play a part in the
determination of credit ratings; and
     How frequently credit ratings are reviewed, whether
different models or criteria are used for ratings surveillance than for
determining initial ratings, whether changes made to models and
criteria for determining initial ratings are applied retroactively to
existing ratings, and whether changes made to models and criteria for
performing ratings surveillance are incorporated into the models and
criteria for determining initial ratings.
    The Commission is proposing these amendments, in part, under
authority to require such additional information in the application as
it finds necessary or appropriate in the public interest or for the
protection of investors.\141\ The Commission preliminarily believes the
proposed new disclosure requirements for Exhibit 2 are necessary and
appropriate and in the public interest or for the protection of
investors. Specifically, they are designed to provide greater clarity
around three areas of the NRSROs' rating processes, particularly for
structured finance products, where questions have been raised in the
context of the credit market turmoil: Namely, the verification
performed on information provided in loan documents; the quality of
loan originators; and the surveillance of existing ratings and how
changes to models are applied to existing ratings. The amendments are
designed to enhance the disclosures NRSROs make in these areas and,
thereby, allow users of credit ratings to better evaluate the quality
of their ratings processes.
---------------------------------------------------------------------------

    \141\ See Section 15E(a)(1)(B)(x) of the Exchange Act (15 U.S.C.
78o-7(a)(1)(B)(x)).
---------------------------------------------------------------------------

    The first proposed amendment would require an NRSRO to disclose
whether it considers in its rating process for structured finance
product steps taken to verify information about the assets in the pool
backing the structured finance product. Underwriters and sponsors of
structured finance products frequently take some steps to verify
information provided by borrowers in loan documentation. Generally,
they have been reluctant to provide this information to NRSROs for
proprietary reasons. The proposed amendment would not require that the
NRSROs incorporate verification (or the lack of verification) into
their ratings processes. Rather, it would require an NRSRO to disclose
whether and, if so, how information about verification performed on the
assets is relied on in determining credit ratings for structured
finance products. For example, an NRSRO would need to disclose, as
applicable: If it does not consider steps taken to verify the
information; if it

requires some minimum level of verification to be performed before it
will determine a credit rating for a structured finance product; and
how it incorporates the level of verification performed into its
procedures and methodologies for determining credit ratings (e.g., if
it compensates for the lack of verification by requiring greater levels
of credit enhancement for the tranche securities).
    The Commission preliminarily believes this disclosure would benefit
users of credit ratings by providing information about the potential
accuracy of an NRSRO's credit ratings. As noted above, the NRSROs
determine credit ratings for structured finance products based on
assumptions in their models as to how the assets underlying the
instruments will perform under varying levels of stress. These
assumptions are based on the characteristics of the assets (e.g., value
of the property, income of the borrower) as reported by the arranger of
the structured finance product. If this information is inaccurate, the
capacity of the model to predict the potential future performance of
the assets may be significantly impaired. Consequently, information
about whether an NRSRO requires that some level of verification be
performed or takes other steps to account for the lack of verification
or a low level of verification would be useful to users of credit
ratings in assessing the potential for an NRSRO's credit ratings to be
adversely impacted by bad information about the assets underlying a
rated structured finance product.
    The second proposed amendment would require an NRSRO to disclose
whether it considers qualitative assessments of the originator of
assets underlying a structured finance product in the rating process
for such products. Certain qualities of an asset originator, such as
its experience and underwriting standards, may impact the quality of
the loans it originates and the accuracy of the associated loan
documentation. This, in turn, could influence how the assets ultimately
perform and the ability of the NRSRO's models to predict their
performance. Consequently, the failure to perform any assessment of the
loan originators could increase the risk that an NRSRO's credit ratings
may not be accurate. Therefore, disclosures as to whether the NRSRO
performs any qualitative assessments of the originators would be useful
in comparing the efficacy of the NRSRO's procedures and methodologies.
    The third proposed amendment would require an NRSRO to disclose the
frequency of its surveillance efforts and how changes to its
quantitative and qualitative ratings models are incorporated into the
surveillance process. The Commission believes that users of credit
ratings would find information about these matters useful in comparing
the ratings methodologies of different NRSROs. For example, how often
and with what models an NRSRO monitors its credit ratings would be
relevant to assessing the accuracy of the ratings insomuch as ratings
based on stale information and outdated models may not be as accurate
as ratings of like products determined using newer data and models.
Moreover, with respect to new types of rated obligors and debt
securities, the NRSROs refine their models as more information about
the performance of these obligors and debt securities is observed and
incorporated into their assumptions. Consequently, as the models evolve
based on more robust performance data, credit ratings of obligors or
debt securities determined using older models may be at greater risk
for being inaccurate than the newer ratings. Therefore, whether the
NRSRO verifies the older ratings using the newer methodologies would be
useful to users of credit ratings in assessing the accuracy of the
credit ratings.
    The Commission generally requests comment on all aspects of the
proposed amendments. In addition, the Commission requests comment on
the following question related to the proposals.
     Are there other areas of the ratings process where
enhanced disclosure on Form NRSRO would benefit investors and other
users of credit ratings? Commenters endorsing further disclosures
should specifically identify them.

D. Amendment to Rule 17g-3 (Report of Credit Rating Actions)

    The Commission adopted Rule 17g-3 pursuant to authority in Section
15E(k) \142\ of the Exchange Act, which requires an NRSRO to furnish to
the Commission, on a confidential basis \143\ and at intervals
determined by the Commission, such financial statements and information
concerning its financial condition as the Commission, by rule, may
prescribe as necessary or appropriate in the public interest or for the
protection of investors. The statute also provides that the Commission
may, by rule, require that the financial statements be certified by an
independent public accountant.\144\ In addition, Section 17(a)(1) of
the Exchange Act \145\ requires an NRSRO to make and keep such records,
and make and disseminate such reports, as the Commission prescribes by
rule as necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the Exchange
Act.\146\
---------------------------------------------------------------------------

    \142\ 15 U.S.C. 78o-7(k).
    \143\ An applicant can request that the Commission keep this
information confidential. See 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.
    \144\ Id.
    \145\ 15 U.S.C. 78q(a)(1).
    \146\ See Section 5 of the Rating Agency Act and 15 U.S.C.
78q(a)(1).
---------------------------------------------------------------------------

    Rule 17g-3 requires an NRSRO to furnish the Commission on an annual
basis the following reports: Audited financial statements; unaudited
consolidated financial statements of the parent of the NRSRO, if
applicable; an unaudited report concerning revenue categories of the
NRSRO; an unaudited report concerning compensation of the NRSRO's
credit analysts; and an unaudited report listing the largest customers
of the NRSRO. The rule further requires an NRSRO to furnish the
Commission these reports within 90 days of the end of its fiscal year.
    The Commission is proposing to amend Rule 17g-3 to require an NRSRO
to furnish the Commission with an additional annual report of the
number of credit rating actions during the fiscal year in each class of
security for which the NRSRO is registered. Specifically, the amendment
would add a new paragraph (a)(6) to Rule 17g-3, which would require an
NRSRO to provide the Commission with a report of the number of credit
rating actions (upgrades, downgrades, and placements on watch for an
upgrade or downgrade) during the fiscal year in each class of credit
ratings for which the NRSRO is registered with the Commission. A note
to paragraph (a)(6) would clarify that for the purposes of reporting
credit rating actions in the asset-backed security class of credit
ratings described in Section 3(a)(62)(B)(iv) of the Rating Agency Act
\147\ an NRSRO would need to include credit rating actions on any
security or money market instrument issued by an asset pool or as part
of any asset-backed or mortgage-backed securities transaction. This is
designed to ensure the inclusion of information about ratings actions
for credit ratings of structured finance products that do not meet the
narrower statutory definition of ``issuers of asset-backed securities
(as that term is defined in section 1101(c) of part 229 of title 17,
Code of Federal Regulations).'' \148\
---------------------------------------------------------------------------

    \147\ 15 U.S.C. 78c(a)(62)(B)(iv).
    \148\ See Id.
---------------------------------------------------------------------------

    The Commission is proposing this amendment, in part, under
authority to require an NRSRO to ``make and

disseminate such reports as the Commission, by rule, prescribes as
necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of [the Exchange
Act].'' \149\ The Commission preliminarily believes this proposed
amendment is necessary and appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the purposes of
the Exchange Act because it would assist the Commission in its
examination function of NRSROs. Large spikes in ratings actions within
a class of credit ratings could indicate the processes for determining
the ratings may be compromised by inappropriate factors. For example, a
substantial increase in the number of downgrades in a particular class
of credit ratings may be indicative of the fact that the initial
ratings were higher than the NRSRO's procedures and methodologies would
have implied because the NRSRO sought to gain favor with issuers and
underwriters by issuing higher ratings. A substantial increase in
upgrades also could be the result of the NRSRO attempting to gain favor
with issuers and underwriters.
---------------------------------------------------------------------------

    \149\ See Section 17(a)(1) of the Exchange Act (15 U.S.C.
78q(a)(1)).
---------------------------------------------------------------------------

    The Commission recognizes that an increase in the number of ratings
actions in a particular class of credit ratings may be the result of
macroeconomic factors broadly impacting the rated obligors or
securities. In this case, the ratings actions would be the result of
appropriate credit analysis and not inappropriate extraneous factors.
On the other hand, large numbers of actions could be a signal that the
process for rating and monitoring ratings in the impacted class has
been compromised by improper practices such as failing to adhere to
disclosed and internally documented ratings procedures and
methodologies, having prohibited conflicts, failing to establish
reasonable procedures to manage conflicts, or engaging in unfair,
coercive, or abusive conduct. Consequently, the report would be a
valuable tool to improve the focus of examination resources.
    The Commission generally requests comment on all aspects of this
proposed amendment. In addition, the Commission requests comment on the
following questions related to the proposal.
     Could the performance statistics currently required in
Exhibit 1 to Form NRSRO, as well as the proposed enhancements to those
statistics, be used to target potential problem areas in an NRSRO's
credit rating processes in the same manner as this proposed report
thereby making the report redundant?
     Should the Commission also require NRSROs to furnish an
``early warning'' report to the Commission when the number of
downgrades in a class of credit ratings passes a certain percentage
threshold (e.g., 5%, 10%, 15%, or 20%) within a number of calendar or
business days (e.g., 2, 5, 10, or 15 days) after the threshold is
passed, similar to the broker-dealer notification rule (See 17 CFR
240.17a-11)?

III. Proposed New Rule 17g-7 (Special Reporting or Use of Symbols to
Differentiate Credit Ratings for Structured Finance Products)

    The Commission is proposing a new rule, Rule 17g-7, to address
concerns that certain investors assumed the risk characteristics for
structured finance products, particularly highly rated instruments,
were the same as for other types of similarly rated instruments. This
proposal also is designed to address concerns that some investors may
not have performed internal risk analysis on structured finance
products before purchasing them, although at least one survey indicates
that many institutional investors asserted that this was not a
widespread problem.\150\ Specifically, under proposed Rule 17g-7, each
time an NRSRO published a credit rating for a structured finance
product it also would be required to publish a report describing how
the credit ratings procedures and methodologies and credit risk
characteristics for structured finance products differ from those of
other types of rated instruments such as corporate and municipal debt
securities. The objective of this proposal is to alert investors that
there are different rating methodologies and risk characteristics
associated with structured finance products. As an alternative to
publishing the report, an NRSRO would be allowed to use ratings symbols
for structured finance products that differentiated them from the
credit ratings for other types of debt securities.
---------------------------------------------------------------------------

    \150\ See Introducing Assumption Volatility Scores and Loss
Sensitivities for Structured Finance Securities, Moody's, May 14,
2007, p. 3.
---------------------------------------------------------------------------

    More specifically, paragraph (a) of proposed Rule 17g-7 would
require an NRSRO to publish a report accompanying every credit rating
it publishes for a security or money market instrument issued by an
asset pool or as part of any asset-backed or mortgage-backed securities
transaction that describes the rating methodology used to determine the
credit rating and how it differs from a rating for any other type of
obligor or debt security and how the risks associated with a security
or money market instrument issued by an asset pool or as part of any
asset-backed or mortgage-backed securities transaction are different
from other types of rated obligors and debt securities. A possible risk
associated with this approach is that investors would come to view such
reports as ``boilerplate'' and therefore would not review them.
    However, the Commission preliminarily believes that requiring an
NRSRO to publish such a report along with each publication of a credit
rating for a structured finance product likely would provide certain
investors with useful information about structured finance products.
The goal of the proposal is to spur investors to perform more rigorous
internal risk analysis on structured finance products so that they do
not overly rely on NRSRO credit ratings in making investment decisions.
A possible ancillary benefit of such reports is that they could cause
certain investors to seek to better understand risks that are not
necessarily addressed in credit ratings of structured products, such as
market and liquidity risk.
    Because the goal of the rule is to foster greater independent
analysis by investors, the Commission preliminarily believes that
permitting an NRSRO to comply with the rule by differentiating its
structured finance product rating symbols would be an equally effective
alternative. The differentiated symbol would alert investors that a
structured product was being rated and, therefore, raise the question
of how it differs from other types of debt instruments.
    The Commission is not proposing to require that specific rating
symbols be used to distinguish credit ratings for structured finance
products. An NRSRO would be permitted to choose the appropriate symbol.
The Commission preliminarily believes that methods for identifying
credit ratings for structured finance products could include using a
different rating symbol altogether, such as a numerical symbol, or
appending identifying characters to existing ratings scales, e.g.,
``AAA.sf'' or ``AAASF.''
    The Commission is proposing these amendments under authority to
require an NRSRO to ``make and disseminate such reports as the
Commission, by rule, prescribes as necessary or appropriate in the
public interest, for the protection of investors, or otherwise in
furtherance of the purposes of [the Exchange Act].''\151\ The
Commission preliminarily believes these proposed amendments are

necessary and appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Exchange
Act because they are designed to encourage investors to perform greater
levels of internal risk assessment of structured finance products by
putting them on notice that these products have different
characteristics than other types of rated debt instruments. The
Commission does acknowledge the risks related to these proposals as
outlined above.
---------------------------------------------------------------------------

    \151\ See Section 17(a)(1) of the Exchange Act (15 U.S.C.
78q(a)(1)).
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    The Commission generally requests comment on all aspects of this
proposed rule. In addition, the Commission requests comment on the
following questions related to the proposal.
     Would the use of different rating symbols for structured
products impact automated securities trading, routing, settlement,
clearance, trade confirmation, reporting, processing, and risk
management systems and any other systems that are programmed to use
standard credit rating symbols across all product classes? Commenters
should describe how these systems may be impacted and associated costs
to address the impacts on the firm such as costs to change or update
the systems. Commenters also should describe how the impacts to these
systems could impact trading activity in the markets for structured
finance products.
     Is the proposed rule sufficiently clear about the types of
securities and money market instruments to which it applies? Are there
securities to which the proposal applies that should not be subject to
the requirement of a report or a differentiated symbol?
     Would the use of different rating symbols have
consequences for investment guidelines and covenants in legal documents
that use credit ratings to distinguish finance instruments? Commenters
should describe the potential consequences and associated costs to
market participants and to the finance markets more broadly.
     Would the use of different rating symbols or reports
dissuade purchases of structured finance products?
     Would the reports or differentiated symbols achieve the
Commission's stated goal of encouraging investors to perform more
internal risk assessments of structured finance products? Could the
reports cause investors to ignore other relevant disclosures or lead to
confusion?
     Should the rule be expanded to require reports or
different ratings symbols for each class of credit ratings identified
in Section 3(a)(62)(B) of the Exchange Act (15 U.S.C. 78c(a)(62)(B));
namely: (1) Financial institutions, brokers, or dealers; (2) insurance
companies; (3) corporate issuers; (4) issuers of asset-backed
securities; and (5) issuers of government securities, municipal
securities or securities issued by a foreign government? Alternatively,
should the rule be expanded to require reports or different ratings
symbols for only certain of these classes or subclasses such as for
municipal securities?
     Should the rule prohibit an NRSRO from using a common set
of symbols (e.g., AAA, AA, A, BBB, BB, B, CCC, CC, C) to rate different
types of obligors and debt securities (e.g., corporate debt and
municipal debt) where the NRSRO uses different methodologies for
determining such ratings? Would such a proposal raise any questions
relating to the scope of the Commission's legal authority in this area?
     Should the rule allow the use of a common set of symbols
only if the NRSRO determines additional types of ratings to distinguish
the different risk characteristics of the different types of obligors
and debt securities? For example, the rule could require the
determination of ratings to distinguish the potential volatility of the
credit ratings of different classes of obligors and debt securities or
the differing levels of market and liquidity risk associated with
different classes of debt securities. Would such disclosures raise any
concerns regarding liability if they were found to be deficient?

IV. Paperwork Reduction Act

    Certain provisions of the proposed rule amendments contain a
``collection of information'' within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\152\ The Commission is submitting
these proposed amendments and proposed rule to the Office of Management
and Budget (``OMB'') for review in accordance with the PRA. An agency
may not conduct or sponsor, and a person is not required to comply
with, a collection of information unless it displays a currently valid
control number. The titles for the collections of information are:
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    \152\ 44 U.S.C. 3501 et seq.; 5 CFR 1320.11.
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    (1) Rule 17g-1, Application for registration as a nationally
recognized statistical rating agency; Form NRSRO and the Instructions
for Form NRSRO (OMB Control Number 3235-0625);
    (2) Rule 17g-2, Records to be made and retained by nationally
recognized statistical rating organizations (OMB Control Number 3235-
0628);
    (3) Rule 17g-3, Annual reports to be furnished by nationally
recognized statistical rating organizations (OMB Control Number 3235-
0626);
    (4) Rule 17g-5, Conflicts of interest (a proposed new collection of
information); and
    (5) Rule 17g-7, Credit rating reports to be furnished by nationally
recognized statistical rating organizations (a proposed new collection
of information).

A. Collections of Information Under the Proposed Amendments

    The Commission is proposing for comment rule amendments to
prescribe additional requirements for NRSROs to address concerns that
have arisen with respect to their role in the credit market turmoil.
These proposed amendments would modify rules the Commission adopted in
2007 to implement registration, recordkeeping, financial reporting, and
oversight rules under the Rating Agency Act. Additionally, the
Commission is proposing a new rule under authority provided in the
Rating Agency Act.\153\ Certain of the proposed amendments and the
proposed new rule would contain recordkeeping and disclosure
requirements that would be subject to the PRA. The collection of
information obligations imposed by the proposed amendments and proposed
new rule would be mandatory. The proposed amendments and proposed new
rule, however, would apply only to credit rating agencies that are
registered with the Commission as NRSROs. Such registration is
voluntary.\154\
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    \153\ Proposed Rule 17g-7.
    \154\ See section 15E of the Exchange Act (15 U.S.C. 78o-7).
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    In summary, the proposed rule amendments and proposed new rule
would require: (1) An NRSRO to provide enhanced disclosure of
performance measurements statistics and the procedures and
methodologies used by the NRSRO in determining credit ratings for
structured finance products and other debt securities on Form NRSRO;
(2) an NRSRO to make, keep and preserve additional records under Rule
17g-2; \155\ (3) an NRSRO to make its rating actions and the date of
such actions from the initial credit rating to the current credit
rating publicly available in an XBRL Interactive Data File no later
than six months after the date of the rating action; \156\ (4) an NRSRO
to furnish the Commission with an additional annual report; \157\ (5)
disclosure of certain information about securities being rated
beginning on the date the issuer or depositor sets the offering price
of the securities being rated ;\158\ and (6) an

NRSRO to attach a report to its credit ratings for structured finance
products describing the rating methodology used and how it differs from
the determination of ratings for other types of securities or use a
symbol that identifies the rated security as a structured finance
product.\159\
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    \155\ 17 CFR 240.17g-2.
    \156\ See proposed Rule 17g-2(a)(2)(iv) and (d).
    \157\ See proposed Rule 17g-3(a)(6).
    \158\ See proposed Rule 17g-5(a)(3) and (b)(9).
    \159\ See proposed Rule 17g-7.
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B. Proposed Use of Information

    The proposed amendments and new rule would enhance the framework
for Commission oversight of NRSROs in response to the recent credit
market turmoil.\160\ The collections of information in the proposed
amendments and new rule are designed to assist the Commission in
effectively monitoring, through its examination function, whether an
NRSRO is conducting its activities in accordance with section 15E of
the Exchange Act \161\ and the rules thereunder. In addition, these
proposed amendments and the new rule are designed to assist users of
credit ratings by proposing to require the disclosure of additional
information with respect to an NRSRO that could be used to compare the
credit ratings quality of different NRSROs, particularly with respect
to structured finance products. The Commission believes that the
information that NRSROs would have to make public as a result of the
proposed amendments would advance one of the primary objectives of the
Rating Agency Act, as noted in the accompanying Senate Report, to
``facilitate informed decisions by giving investors the opportunity to
compare ratings quality of different firms.'' \162\
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    \160\ See 17 CFR 17g-1 through 17g-6, and Form NRSRO.
    \161\ 15 U.S.C. 78o-7.
    \162\ See Senate Report, p. 8.
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C. Respondents

    In adopting the final rules under the Rating Agency Act, the
Commission estimated that approximately 30 credit rating agencies would
be registered as NRSROs.\163\ The Commission believes that this
estimate continues to be appropriate for identifying the number of
respondents for purposes of the proposed amendments and for proposed
new Rule 17g-7. Since the initial set of rules under the Rating Agency
Act became effective in June 2007, nine credit rating agencies have
registered with the Commission as NRSROs.\164\ The registration program
has been in effect for less than a year; consequently, the Commission
expects additional entities will register. While 20 more entities may
not ultimately register, the Commission believes the estimate is within
reasonable bounds and appropriate given that it adds an element of
conservatism as it increases paperwork burden estimates as well as cost
estimates.
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    \163\ See Adopting Release, 72 FR at 33606-33607.
    \164\ A.M. Best Company, Inc.; DBRS Ltd.; Fitch.; Japan Credit
Rating Agency, Ltd.; Moody's; Rating and Investment Information,
Inc.; S&P LACE Financial Corp.; and Egan-Jones Rating Company.
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    In addition, proposed Rule 17g-5(a)(3) \165\ would require the
disclosure of certain information provided to, and used by, an NRSRO in
determining an initial rating for a security or money market instrument
issued by an asset pool or as part of any asset-backed or mortgage-
backed securities transaction and for monitoring those ratings. The
rule would not specify which party would disclose such information: The
NRSRO, sponsor, issuer, depositor, trustee or some other person. The
Commission believes that the most likely persons to disclose this
information would be structured finance product arrangers, managers, or
trustees as they are the entities that generate the information and
provide it to the NRSROs. For purposes of the PRA estimate for proposed
Rule 17g-5(a)(3), based on staff information gained from the NRSRO
examination process, the Commission estimates that there would be
approximately 200 respondents. As noted throughout the release, the
number of arrangers bringing structured finance products to market is
small relative to the number of deals.
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    \165\ See proposed Rule 17g-5(a)(3)(i) and (iii).
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    The Commission generally requests comment on all aspects of these
proposed estimates for the number of respondents. In addition, the
Commission requests specific comment on the following items related to
these estimates.
     Should the Commission use the number of credit rating
agencies currently registered as NRSROs rather the estimated number of
30 ultimate registrants? Alternatively, is there a basis to estimate a
different number of likely registrants?
     Is the Commission correct in believing that structured
product arrangers, managers, and trustees would be the entities that
disclose the information required under the proposed amendments to Rule
17g-5(a)?
     Are there sources that could provide credible information
that could be used to determine the number of credit rating agencies
and other NRSROs that would be subject to the proposed paperwork
burdens? Commenters should identify any such sources and explain how a
given source could be used to either support the Commission's estimate
or arrive at a different estimate.
    Commenters should provide specific data and analysis to support any
comments they submit with respect to these burden estimates.

D. Total Annual Recordkeeping and Reporting Burden

    As discussed in further detail below, the Commission estimates the
total recordkeeping burden resulting from the proposed amendments and
proposed new rule would be approximately 1,434,690 hours on an annual
basis \166\ and 64,500 hours on a one-time basis.\167\
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    \166\ This total is derived from the total annual hours set
forth in the order that the totals appear in the text: 390 + 300 +
4,000 + 150,000 + 1,280,000 = 1,434,690.
    \167\ This total is derived from the total one-time hours set
forth in the order that the totals appear in the text: 900 + 900 +
60,000 + 1,500 + 300 + 900 = 64,500.
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    The total annual and one-time hour burden estimates described below
are averages across all types of NRSROs expected to be affected by the
proposed amendment and new rule. The size and complexity of NRSROs
range from small entities to entities that are part of complex global
organizations employing thousands of credit analysts. Consequently, the
burden hour estimates represent the average time across all NRSROs. The
Commission further notes that, given the significant variance in size
between the largest NRSROs and the smallest NRSROs, the burden
estimates, as averages across all NRSROs, are skewed higher because the
largest firms currently predominate in the industry.
1. Amendments to Form NRSRO
    The proposed amendments to Form NRSRO would change the instructions
for the Form to require that NRSROs provide more detailed credit
ratings performance statistics in Exhibit 1 and disclose with greater
specificity information about the procedures and methodologies used to
determine structured finance and other credit ratings in Exhibit
2.\168\ The Commission expects these proposed amendments would not have
a material effect on the respondents' hour burden. The Commission
believes that the total annual burden hours of 2,100 currently approved
by OMB would not change for Rule 17g-1 and Form NRSRO materially
because the additional disclosures would be included within the overall
preparation of the initial Form NRSRO for new applicants. Additionally,
the Commission believes that the nine currently registered NRSROs could
be

required to prepare and furnish an amended Form NRSRO to update their
registration applications if the Commission were to adopt the proposed
amendments (i.e., nine amended Form NRSROs). However, the Commission
believes these potential nine furnishings of Form NRSRO are accounted
for in the currently approved PRA collection for Rule 17g-1, which
includes an estimate that each NRSRO would file two amendments to Form
NRSRO per year.\169\
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    \168\ 17 CFR 240.17g-1 and Form NRSRO.
    \169\ See Adopting Release, 72 FR at 33609. To date, only one of
the seven NRSROs that have been registered with the Commission since
September 2007 has furnished the Commission with an amended Form
NRSRO since registering with the Commission.
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    The Commission generally requests comment on all aspects of these
proposed burden estimates for Rule 17g-1 and Form NRSRO, proposed to be
amended. In addition, the Commission requests specific comment on the
following items related to these estimates:
     Would the proposed additional disclosure requirements
increase the burden hours from the amount currently budgeted for Rule
17g-1 and Form NRSRO?
Commenters should provide specific data and analysis to support any
comments they submit with respect to these burden estimates.
2. Amendments to Rule 17g-2
    Rule 17g-2 requires an NRSRO to make and keep current certain
records relating to its business and requires an NRSRO to preserve
those and other records for certain prescribed time periods.\170\ The
Commission's current estimate for the average one-time burden of
implementing a recordkeeping system to comply with Rule 17g-2 is 300
hours.\171\ Additionally, the total annual burden currently approved by
OMB for Rule 17g-2 is 7,620 hours, which represents the average annual
amount of time an NRSRO will spend to make and maintain these records
(254 hours per year) multiplied by 30 respondents.\172\
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    \170\ 17 CFR 240.17g-2.
    \171\ See Adopting Release, 72 FR at 33608.
    \172\ See Adopting Release, 72 FR at 33610.
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    The proposed amendments to Rule 17g-2 would require an NRSRO to
make and retain two additional records and retain a third type of
record. The records to be made and retained would be: (1) A record of
the rationale for any material difference between the credit rating
implied by the model and the final credit rating issued, if a
quantitative model is a substantial component in the process of
determining a credit rating;\173\ and (2) a record showing the history
and dates of all previous rating actions with respect to each current
credit rating.\174\ The proposed amendments to Rule 17g-2 would require
an NRSRO to make the second set of records--rating actions related to
current ratings--publicly available in an XBRL Interactive Data
File.\175\ In addition, the proposed amendments would require an NRSRO
to retain communications that contain any complaints by an obligor,
issuer, underwriter, or sponsor about the performance of a credit
analyst.\176\
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    \173\ Proposed paragraph (a)(2)(iii) of Rule 17g-2.
    \174\ Proposed paragraph (a)(8) of Rule 17g-2.
    \175\ Proposed amendment to Rule 17g-2(d).
    \176\ Proposed paragraph (b)(8) of Rule 17g-2.
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    With respect to the proposed amendments to Rule 17g-2, the
Commission estimates, based on staff information gained from the NRSRO
examination process, that the total one-time and annual record
recordkeeping burdens would increase approximately 10% and 5%,
respectively.\177\ Thus, the Commission estimates that the one-time
burden that each NRSRO would spend implementing a recordkeeping system
to comply with Rule 17g-2 as proposed to be amended would be
approximately 330 hours,\178\ for a total one-time burden of 9,900
hours for 30 NRSROs.\179\ The Commission estimates that an NRSRO would
spend an average of 267 hours per year\180\ to make and retain records
under Rule 17g-2 as proposed to be amended, for a total annual hour
burden under Rule 17g-2 of 8,010 hours.\181\ This estimate would result
in an increase in the currently approved PRA burden under Rule 17g-2 of
390 annual burden hours.\182\ As discussed above, the increase in
annual burden hours would result from the increase in the number of
records an NRSRO would be required to make and retain under the
proposed amendments to Rule 17g-2.
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    \177\ The Commission believes that the one-time burden to set up
and/or modify a recordkeeping system to comply with the proposed
amendments would be greater than the ongoing annual burden. Once an
NRSRO has set up or modified its recordkeeping system to comply with
the proposed amendments, its annual hour burden would be increased
only to the extent it would be required to make and retain
additional records.
    \178\ 300 hours x 1.10 = 330 hours. This would result in an
increase of approximately 30 hours per NRSRO for the one-time hour
burden.
    \179\ 330 hours x 30 respondents = 9,900 hours. The proposed
amendments would result in an increase of 900 total one-time burden
hours.
    \180\ 254 hours x 1.05 = 267 hours. The proposed amendments
would result in an increase of approximately 13 annual burden hours
per NRSRO for Rule 17g-2.
    \181\ 267 hours x 30 respondents = 8,010 hours.
    \182\ 8,010 hours - 7,620 hours = 390 hours.
---------------------------------------------------------------------------

    In addition, the proposed amendments to Rule 17g-2 would require an
NRSRO to make the records of its rating actions publicly available in
an XBRL Interactive Data File.\183\
---------------------------------------------------------------------------

    \183\ See proposed amendment to Rule 17g-2(d).
---------------------------------------------------------------------------

    The Commission believes that an NRSRO would choose to make this
information available through its Internet Web site and that each NRSRO
already has, or would have, an Internet Web site. Therefore, based on
staff information gained from the NRSRO examination process, the
Commission estimates that, on average, an NRSRO would spend
approximately 30 hours to publicly disclose the history of its rating
actions for each credit rating in an XBRL Interactive Data File and,
thereafter, 10 hours per year to update this information.\184\
Accordingly, the total aggregate one-time burden to the industry to
make the history of rating actions publicly available in an XBRL
Interactive Data File would be 900 hours,\185\ and the total aggregate
annual burden hours would be 300 hours.\186\
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    \184\ The Commission also bases this estimate on the current
one-time and annual burden hours for an NRSRO to publicly disclose
its Form NRSRO. No alternatives to these estimates as proposed were
suggested by commenters. See Adopting Release, 72 FR at 33609.
    \185\ 30 hours x 30 NRSROs = 900 hours.
    \186\ 10 hours x 30 NRSROs = 300 hours.
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    Under the currently approved PRA collection for Rule 17g-2, the
Commission estimated that an NRSRO may need to purchase recordkeeping
system software to establish a recordkeeping system in conformance with
Rule 17g-2.\187\ The Commission estimated that the cost of the software
would vary based on the size and complexity of the NRSRO. Also, the
Commission estimated that some NRSROs would not need such software
because they already have adequate recordkeeping systems or, given
their small size, such software would not be necessary. Based on these
estimates, the Commission estimated that the average cost for
recordkeeping software across all NRSROs would be approximately $1,000
per firm, with an aggregate one-time cost to the industry of $30,000.
The Commission estimates that the proposed amendments to Rule 17g-2
would not alter this estimate or that any increases in the cost would
be de minimis.
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    \187\ See Adopting Release, 72 FR at 33609, 33610.
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    The Commission generally requests comment on all aspects of these
proposed burden estimates for Rule 17g-2. In addition, the Commission
requests specific comment on the following items related to these
burden estimates:
     Are there publicly available reports or other data sources
the Commission

should consider in arriving at these burden estimates?
     Are the estimates that these amendments would result in an
increase to the current total one-time and annual recordkeeping burdens
of approximately 10% and 5% accurate? If not, should they be higher or
lower?
     Are the estimates that the requirement to make records of
rating actions publicly available in an XBRL Interactive Data File
would result in an increased one-time burden for each NRSRO of
approximately 30 hours to publicly disclose the history of its rating
actions for each credit rating in an XBRL Interactive Data File and,
thereafter, 10 hours per year to update this information accurate? If
not, should they be higher or lower?
     Is the estimate that the NRSROs would incur no additional
costs (or that any additional costs would be de minimis) to update
recordkeeping systems to comply with the proposed new recordkeeping
requirements accurate? If not, what would the additional costs be?
Commenters should provide specific data and analysis to support any
comments they submit with respect to these burden estimates.
3. Proposed Amendment to Rule 17g-3
    Rule 17g-3 requires an NRSRO to furnish certain financial reports
to the Commission on an annual basis, including audited financial
statements as well as other financial reports.\188\ The Commission is
proposing to amend Rule 17g-3 to require an NRSRO to furnish the
Commission with an additional report: an unaudited report of the number
of credit ratings that were changed during the fiscal year in each
class of credit ratings for which the NRSRO is registered with the
Commission.\189\
---------------------------------------------------------------------------

    \188\ 17 CFR 240.17g-3.
    \189\ See proposed Rule 17g-3(a)(6).
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    The total annual burden currently approved by OMB for Rule 17g-3 is
6,000 hours, based on the fact that it would take an NRSRO, on average,
approximately 200 hours to prepare for and file the annual
reports.\190\ In addition, the total annual cost burden currently
approved by OMB is $450,000 to engage the services of an independent
public accountant to conduct the annual audit as part of the
preparation of the first report required by Rule 17g-3.\191\ This
estimate is based on 30 NRSROs hiring an independent public accountant
on an annual basis for an average of $15,000.\192\
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    \190\ 200 hours x 30 NRSROs = 6,000 hours. See Adopting Release,
72 FR at 33610.
    \191\ Rule 17g-3 currently requires five reports. Only the first
report--financial statements--need be audited. The two new reports
proposed to be required by the amendments would not need to be
audited.
    \192\ $15,000 x 30 NRSROs = $450,000. See Adopting Release, 72
FR at 33610.
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    The Commission believes that the proposed amendment to Rule 17g-3
that would require a report on an NRSRO's rating changes during a
fiscal year would have a de minimis effect on the annual hour burden
for the current PRA collection for Rule 17g-3. The Commission
preliminarily believes that an NRSRO already would have this
information with respect to each class of credit ratings for which it
is registered. In addition, the proposed amendment does not prescribe a
format for the report. Consequently, the Commission estimates that
proposed Rule 17g-3(a)(6) would not have a significant effect on the
total annual hour burden currently approved for the PRA for Rule 17g-3.
    The Commission generally requests comment on all aspects of these
proposed burden estimates for Rule 17g-3. In addition, the Commission
requests specific comment on the following items related to these
burden estimates:
     Are there publicly available reports or other data sources
the Commission should consider in arriving at these burden estimates?
    Commenters should provide specific data and analysis to support any
comments they submit with respect to these burden estimates.
4. Amendments to Rule 17g-5
    Rules 17g-5 requires an NRSRO to manage and disclose certain
conflicts of interest.\193\ The rule also prohibits specific types of
conflicts of interest.\194\ The proposed amendments to Rule 17g-5 would
add an additional conflict to paragraph (b) of Rule 17g-5. This
proposed conflict of interest would be issuing or maintaining a credit
rating for a security or money market instrument issued by an asset
pool or as part of an asset-backed or mortgage-backed securities
transaction that was paid for by the issuer, sponsor, or underwriter of
the security or money market instrument.\195\ Under the proposal, an
NRSRO would be prohibited from issuing a credit rating for a structured
finance product, unless certain information about the transaction and
the assets underlying the structured finance product are
disclosed.\196\ Specifically, the following information would need to
be made publicly available beginning on the date the underwriter,
issuer or depositor set the offering price of the securities being
rated: (1) All information provided to the NRSRO that is used in
determining the initial credit rating, including information about the
characteristics of the assets underlying or referenced by the security
or money market instrument, and the legal structure; and (2) all
information provided to the NRSRO by the issuer, underwriter, sponsor,
depositor or trustee that is used by the NRSRO in undertaking credit
rating surveillance on the security or money market instrument.\197\ In
a private offering, the above information would need to be made
available on the date the underwriter and the issuer or depositor set
the offering price of the securities being rated only to credit rating
agencies and investors; it would need to be made publicly available,
however, no later than one business day after the offering closes.
---------------------------------------------------------------------------

    \193\ 17 CFR 240.17g-5.
    \194\ 17 CFR 240.17g-5(c).
    \195\ See proposed Rule 17g-5(b)(9). The current paragraph
(b)(9) would be renumbered as (b)(10).
    \196\ See proposed Rule 17g-5(a)(3).
    \197\ See proposed Rule 17g-5(a)(3)(i)-(iii).
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    The proposed rule would not specify which party would disclose the
information: the NRSRO, sponsor, issuer, depositor or trustee. The
Commission preliminarily believes that in order to avoid conflicts with
Securities Act prohibitions on general solicitations as well as to
avoid making the NRSRO liable for the accuracy of information that
would originally be supplied by the arrangers and trustees of
structured products, this information would likely be disclosed by
those arrangers and trustees. The Commission estimates that there would
be approximately 200 such entities. For purposes of this PRA, the
Commission estimates that it would take a respondent approximately 300
hours to develop a system, as well as policies and procedures, for the
disclosures required by the proposed rule. This estimate is based on
the Commission's experience with, and burden estimates for, the
recordkeeping requirements for NRSROs.\198\ Accordingly, the Commission
believes, based on staff experience, that a respondent would take
approximately 300 hours on a one-time basis to implement a disclosure
system to comply with the proposal in that a respondent would need a
set of policies and procedures for disclosing the information, as well
as a system for making the information publicly available. This would
result in a total one-time hour burden of 60,000 hours for 200
respondents.\199\
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    \198\ See Adopting Release, 72 FR at 33609.
    \199\ 300 hours x 200 respondents = 60,000 hours.

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    In addition to the one-time hour burden, disclosure would also be
required under the proposed rule on a transaction by transaction basis
when an initial rating is determined. Based on staff experience, the
Commission estimates that each respondent would disclose information
with respect to approximately 20 new transactions per year and that it
would take approximately 1 hour per transaction to make the information
publicly available. This estimate is based on the Commission's
expectation that the respondent will have already implemented the
system and policies and procedures for disclosure. The Commission
estimates that a large NRSRO would have rated approximately 2,000 new
RMBS and CDO transactions in a given year. The Commission is basing
this estimate on the number of new RMBS and CDO deals rated in 2006 by
two of the largest NRSROs which rated structured finance transactions.
The Commission adjusted this number to approximately 4,000 transactions
in order to include other types of structured finance products,
including commercial MBS and other consumer assets. Therefore, the
Commission estimates for purposes of the PRA that each respondent would
arrange approximately 20 new transactions per year: 4,000 new
transactions/200 arrangers = 20 new transactions. The Commission notes
that the number of new transactions arranged per year would vary by the
size of arranger and that this estimate would be an average across all
respondents. Larger respondents may arrange in excess of 20 new deals
per year, while a smaller entity may only arrange one or two new deals
on an annual basis. Based on this analysis, the Commission estimates
that it would take a respondent approximately 20 hours \200\ to
disclose this information under the proposed rule, on an annual basis,
for a total aggregate annual hour burden of 4,000 hours.\201\
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    \200\ 20 transactions x 1 hour = 20 hours.
    \201\ 20 hours x 200 respondents = 4,000 hours.
---------------------------------------------------------------------------

    In addition, proposed Rule 17g-5(a)(ii) would require disclosure of
information provided to an NRSRO that is used by an NRSRO in
undertaking credit rating surveillance on a security or money market
instrument. Because surveillance would cover more than just initial
ratings, the Commission estimates based on staff information gained
from the NRSRO examination process that monthly disclosure would be
required with respect to approximately 125 transactions on an ongoing
basis. Also based on staff information gained from the NRSRO
examination process, the Commission estimates that it would take a
respondent approximately 0.5 hours per transaction to disclose the
information. Therefore, the Commission estimates that each respondent
would spend approximately 750 hours \202\ on an annual basis disclosing
information under proposed Rule 17g-5, for a total aggregate annual
burden hours of 150,000 hours.\203\
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    \202\ 125 transactions x 30 minutes x 12 months = 45,000
minutes/60 minutes = 750 hours.
    \203\ 750 hours x 200 respondents = 150,000 hours.
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    The Commission generally requests comment on all aspects of these
proposed burden estimates for Rule 17g-5. In addition, the Commission
requests specific comment on the following items related to these
estimates:
     Are there publicly available reports or other data sources
the Commission should consider in arriving at these burden estimates?
     Are the estimates of the one-time and recurring burdens of
the proposed additional disclosures accurate? If not, should they be
higher or lower?
Commenters should provide specific data and analysis to support any
comments they submit with respect to these burden estimates.
5. Proposed Rule 17g-7
    The Commission is proposing a new rule--Rule 17g-7--which would
address concerns that investors believe that the risk characteristics
for a structured finance product are the same as for other types of
obligors or debt securities. Proposed Rule 17g-7 would require an NRSRO
to attach a report each time it publishes a credit rating for a
structured finance product describing how the ratings procedures and
methodologies differ from those for other types of obligors or debt
securities.\204\ Proposed Rule 17g-7 would include an exemption to this
requirement, however, if the NRSRO used credit rating symbols for
structured finance products that identify the product as such as
distinct from any other type of obligor or debt security. The
Commission believes that proposed Rule 17g-7 \205\ would provide users
of credit ratings with useful information either through the report or
the differentiated symbol upon which to base their investment
decisions.
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    \204\ See proposed Rule 17g-7.
    \205\ See proposed Rule 17g-7.
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    The Commission expects that most NRSROs already have documented
their methodologies and procedures in place to determine credit ratings
for structured finance products and corporate debt securities, and have
disclosed such policies and procedures if they have registered with the
Commission as an NRSRO. The Commission expects, however, that an NRSRO
would have to compile and/or modify these documents to comply with the
specific reporting requirements that would be mandated by the proposed
rule. Based on staff information gained from the NRSRO examination
process, the Commission estimates that it would take an NRSRO
approximately 50 hours \206\ to draft the report required under the
proposed rule for a total one-time hour burden of 1,500 hours.\207\
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    \206\ The Commission based this estimate on the estimated number
of hours it would take an NRSRO to comply with Rule 17g-4 to develop
policies and procedures to prevent the misuse of material nonpublic
information. See Adopting Release, 72 FR at 33611.
    \207\ 50 hours x 30 NRSROs = 1,500 hours.
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    The Commission also estimates that it would take an NRSRO
additional time to publish the report each time a credit rating for a
structured finance product is published and to monitor the publications
of structured finance credit ratings to ensure compliance with the
proposed rule. Based on the average number of credit ratings of asset-
backed securities outstanding as of the latest fiscal year of the three
largest NRSROs, the Commission estimates that an NRSRO would publish
approximately 128,000 asset-backed credit ratings per year.\208\ The
Commission notes that this number may not include all structured
finance ratings, since some may not fit within the statutory definition
of asset-backed security. However, the Commission also notes that the
issuance of RMBS has dropped dramatically off recent highs.
Accordingly, the Commission believes the number of asset-backed ratings
reported in Form NRSRO is a reasonable proxy for the number of
structured finance ratings. The Commission also notes that, as
discussed below, the burden estimate identifies 30 respondents.
However, most of the structured finance ratings are concentrated in the
largest 3 or 4 NRSROs. Accordingly, the average number of structured
finance ratings issued per NRSRO each year may be considerably lower
than 128,000. For these reasons, the Commission believes the estimate
is fairly conservative.
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    \208\ This estimate uses the average of the approximate number
of credit ratings for asset-based securities as defined in 17 CFR
229.1101(c) that S&P, Moody's and Fitch had outstanding as of the
most recent calendar year end as reported in their annual
certifications. (S&P: 197,700; Moody's: 110,000; and Fitch: 75,278).
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    The Commission estimates that an NRSRO would publish a rating
action

with respect to a particular structured finance rating approximately 4
times per year for a total of 512,000 publications.\209\ The Commission
notes that this estimate would include publication of an initial
rating, upgrades, downgrades and any affirmations published in a given
year. Based on staff experience, the Commission estimates that an NRSRO
would spend approximately 5 minutes ensuring that the required report
was published along with the credit rating, for a total of 42,667
annual burden hours \210\ per respondent, and a total of 1,280,000
hours \211\ across 30 NRSROs. Finally, the Commission estimates, based
on staff experience, that it would take an NRSRO approximately 10 hours
per year to review and update the report to ensure that the disclosure
was accurate and up-to-date for a total aggregate annual hour burden to
the industry of 300 hours.\212\ The Commission believes, therefore,
that the aggregate one-time and annual burden hours under proposed Rule
17g-7(a) would be 1,280,000 and 1,800 hours,\213\ respectively.
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    \209\ 128,000 x 4 = 512,000 ratings publications.
    \210\ 512,000 x 5 minutes per report = 2,560,000 minutes/60
minutes per hour = 42,667 hours.
    \211\ 42,667 hours x 30 NRSROs = 1,280,000 hours.
    \212\ This estimate is based on the number of hours it would
take an NRSRO to complete an annual certification on Form NRSRO. See
Adopting Release, 72 FR at 33609. 10 hours x 30 NRSROs = 300 hours.
    \213\ 1,500 + 300 hours.
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    The Commission believes, however, that most, if not all, NRSROs
would opt to differentiate their ratings under paragraph (b) of
proposed Rule 17g-7,\214\ rather than publish a report. The Commission
believes that an NRSRO would likely choose to use a specific credit
rating symbol to indicate that the particular credit rating relates to
structured product as distinct from a credit rating for any other
category of security or issuer. The Commission believes that an NRSRO
would choose to employ this symbology approach because it would be more
efficient and less burdensome than ensuring that the appropriate report
was published along with the credit rating. The Commission believes
that the implementation of a different rating symbol would entail a
one-time burden of approximately 30 hours to develop the symbol for a
total aggregate one-time burden to the industry of 900 hours.\215\
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    \214\ See proposed Rule 17g-7(b).
    \215\ 30 hours x 30 NRSROs.
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    Because the Commission believes that NRSROs will choose to
differentiate their ratings under paragraph (b) of proposed Rule 17g-7
rather than publish a report under paragraph (a) of the proposed new
rule, the Commission believes that the appropriate estimate for the
aggregate one-time burden to the industry under proposed Rule 17g-7 is
900 hours. The Commission generally requests comment on all aspects of
these proposed burden estimates for Rule 17g-7. In addition, the
Commission requests specific comment on the following items related to
these burden estimates:
     Is the Commission incorrect in its belief that NRSROs
would opt to use a different rating symbol rather than to publish a
report with each structured product rating? If so, what percentage of
NRSROs would be likely to opt to publish a report?

Commenters should provide specific data and analysis to support any
comments they submit with respect to these burden estimates.

E. Collection of Information Is Mandatory

    The recordkeeping and notice requirements for the proposed
amendment and the proposed new rule would be mandatory.

F. Confidentiality

    The disclosures proposed to be required under the amendments to
Rule 17g-1 and Form NRSRO would be made publicly available on Form
NRSRO. The books and records information proposed to be collected under
the proposed amendments to Rule 17g-2 would be stored by the NRSRO and
made available to the Commission and its representatives as required in
connection with examinations, investigations, and enforcement
proceedings. However, an NRSRO would be required to make the record of
rating actions under proposed Rule 17g-2(a)(8) publicly available in an
XBRL Interactive Data File no later than six months after the date of
the rating action.\216\ The information proposed to be collected under
the proposed amendment to Rule 17g-3 would be generated from the
internal records of the NRSRO and would be furnished to the Commission
on a confidential basis, to the extent permitted by law.\217\ The
information under Rule 17g-5(a)(3) would be made publicly available or
available to certain permitted persons. The information proposed to be
required under proposed new Rule 17g-7 would be made publicly
available.
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    \216\ See proposed Rule 17g-2(a)(8) and (d).
    \217\ 15 U.S.C. 78o-7(k).
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G. Record Retention Period

    The records required under the proposed amendments to Rule 17g-1
and Form NRSRO, Rule 17g-2, and 17g-3 would need to be retained by the
NRSRO for at least three years.\218\
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    \218\ 17 CFR 240.17g-2(c).
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H. Request for Comment

    The Commission requests comment on the proposed collections of
information in order to: (1) Evaluate whether the proposed collection
of information is necessary for the proper performance of the functions
of the Commission, including whether the information would have
practical utility; (2) evaluate the accuracy of the Commission's
estimates of the burden of the proposed collections of information; (3)
determine whether there are ways to enhance the quality, utility, and
clarity of the information to be collected; (4) evaluate whether there
are ways to minimize the burden of the collection of information on
those who respond, including through the use of automated collection
techniques or other forms of information technology; and (5) evaluate
whether the proposed rules would have any effects on any other
collection of information not previously identified in this section.
    Persons who desire to submit comments on the collection of
information requirements should direct their comments to the OMB,
Attention: Desk Officer for the Securities and Exchange Commission,
Office of Information and Regulatory Affairs, Washington, DC 20503, and
should also send a copy of their comments to Secretary, Securities and
Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090, and
refer to File No. S7-13-08. OMB is required to make a decision
concerning the collections of information between 30 and 60 days after
publication of this document in the Federal Register; therefore,
comments to OMB are best assured of having full effect if OMB receives
them within 30 days of this publication. Requests for the materials
submitted to OMB by the Commission with regard to these collections of
information should be in writing, refer to File No. S7-13-08, and be
submitted to the Securities and Exchange Commission, Records Management
Office, 100 F Street, NE., Washington, DC 20549-1110.

V. Costs and Benefits of the Proposed Rules

    The Commission is sensitive to the costs and benefits that result
from its rules. The Commission has identified

certain costs and benefits of the proposed amendments and the proposed
new rule and requests comment on all aspects of this cost-benefit
analysis, including identification and assessment of any costs and
benefits not discussed in the analysis.\219\ The Commission seeks
comment and data on the value of the benefits identified. The
Commission also welcomes comments on the accuracy of its cost estimates
in each section of this cost-benefit analysis, and requests those
commenters to provide data so the Commission can improve the cost
estimates, including identification of statistics relied on by
commenters to reach conclusions on cost estimates. Finally, the
Commission seeks estimates and views regarding these costs and benefits
for particular types of market participants, as well as any other costs
or benefits that may result from the adoption of these proposed rule
amendments.
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    \219\ For the purposes of this cost/benefit analysis, the
Commission is using salary data from the Securities Industry and
Financial Markets Association (``SIFMA'') Report on Management and
Professional Earnings in the Securities Industry 2007, which
provides base salary and bonus information for middle-management and
professional positions within the securities industry. The
Commission believes that the salaries for these securities industry
positions would be comparable to the salaries of similar positions
in the credit rating industry. Finally, the salary costs derived
from the report and referenced in this cost benefit section, are
modified to account for an 1800-hour work year and multiplied by
5.35 to account for bonuses, firm size, employee benefits and
overhead. The Commission used comparable assumptions in adopting the
final rules implementing the Rating Agency Act in 2007, requested
comments on such assumptions, and received no comments in response
to its request. See Adopting Release, 72 FR at 33611, note 576.
Hereinafter, references to data derived from the report as modified
in the manner described above will be cited as ``SIFMA 2007 Report
as Modified.''
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A. Benefits

    The purposes of the Rating Agency Act, as stated in the
accompanying Senate Report, are to improve ratings quality for the
protection of investors and in the public interest by fostering
accountability, transparency, and competition in the credit rating
industry.\220\ As the Senate Report states, the Rating Agency Act
establishes ``fundamental reform and improvement of the designation
process'' to further the belief that ``eliminating the artificial
barrier to entry will enhance competition and provide investors with
more choices, higher quality ratings, and lower costs. \221\
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    \220\ Senate Report, p. 2.
    \221\ Id, p. 7.
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    The proposed amendments and new rule would be issued pursuant to
specific grants of rulemaking authority in the Rating Agency Act as
well as the Commission's authority under the Exchange Act. The
amendments are designed to further the goals of the Rating Agency Act
and to enhance the Commission's oversight of NRSROs, in light of the
recent credit market turmoil. Since the adoption of the final rules
implementing the Rating Agency Act in 2007,\222\ and in response to the
recent concerns about the role of credit rating agencies in the credit
market turmoil, the Commission has identified a number of areas where
it would be appropriate to enhance the current regulatory program for
NRSROs.
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    \222\ See Adopting Release.
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    Consequently, the Commission is proposing amendments and a new rule
that are designed to address concerns raised about the role NRSROs
played in the credit turmoil by proposing to enhance the disclosure of
credit ratings performance measurement statistics; increase the