arranger must represent that it will post on the password-protected
Internet Web site all information the arranger provides to the NRSRO
for the purpose of undertaking credit rating surveillance on the
security or money market instrument, including information about the
characteristics and performance of the assets underlying or referenced
by the security or money market instrument at the same time such
information is provided to the NRSRO.
---------------------------------------------------------------------------

    \152\ The Commission expects that all the information will be
provided in the same format. For example, if the arranger provides
information to the hired NRSRO in downloadable and/or searchable
format, the Commission expects the arranger to provide the same
information in the same format on its Internet Web site. The
Commission will take seriously any concerns raised in this regard.
---------------------------------------------------------------------------

    The representations required to be obtained by an NRSRO, as
described in new paragraphs (a)(3)(iii)(A) through (D) of Rule 17g-5,
taken together, provide that an arranger of a structured finance
product agrees to make the information it provides to hired NRSROs,
whether provided for the purpose of determining an initial rating or
for monitoring a rating, available to other NRSROs. The hired NRSRO
must obtain from the arranger a representation that the arranger will
post that information on the arranger's Internet Web site at the same
time it is given to the hired NRSRO, and that any time the information
is updated or new information is given to the hired NRSRO, the arranger
will post that information on its Internet Web site contemporaneously.
An NRSRO also will be required to obtain from the arranger a
representation that the arranger will tag the information in a manner
that informs NRSROs accessing the Web site which information currently
is operative for the purpose of determining the credit rating in order
to ensure that NRSROs accessing the Internet Web site use the correct
information to determine their credit ratings. Paragraph (a)(3)(iii) of
Rule 17a-5, as adopted, adds the word ``written'' to the proposed text
in order to clarify that these representations must be obtained in
writing in order to ensure that they are formally documented and
executed.
    An NRSRO will violate Rule 17a-5(a)(3) if it determines an initial
credit rating or maintains an existing credit rating for a structured
finance product that is paid for by an arranger unless that NRSRO
obtains a written representation from the arranger, upon which the
NRSRO can reasonably rely, that the arranger will take the steps set
forth in paragraph (a)(3)(iii)(A) through (D). One commenter expressed
concern over the proposed amendment's standard of ``reasonable''
reliance on an arranger's representations.\153\ The question of whether
reliance was reasonable will depend on the facts and circumstances of a
given situation. Factors relevant to this analysis would include, but
not be limited to: (1) Ongoing or prior failures by the arranger to
adhere to its representations; or (2) a pattern of conduct by the
arranger where it fails to promptly correct breaches of its
representations. Further, the Commission recognizes that Internet Web
sites periodically malfunction. Depending on the facts, a limited
Internet Web site malfunction by itself would not cause the NRSRO to no
longer be able to rely reasonably on a written representation from that
arranger.
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    \153\ See Fitch Letter.
---------------------------------------------------------------------------

    In addition to the scope of the safe harbor, commenters raised a
number of other concerns in connection with paragraph (a)(3)(iii) as
proposed.\154\ Several commenters objected to the requirement that
NRSROs obtain representations from arrangers, arguing that doing so
inappropriately places NRSROs in the position of enforcing arranger
compliance with disclosure requirements.\155\ One commenter suggested
that the required representations be made to the Commission instead of
the hired NRSRO.\156\ The Commission believes that the structure of the
rule as amended is consistent with the Commission's regulation of
NRSROs. The Commission notes that the rule as amended is designed to
make clear the steps an NRSRO must take to provide a credit rating for
a particular arranger. An NRSRO is not required to enforce compliance;
however, if, for example, an NRSRO had knowledge that an arranger had
not complied with its representations, the NRSRO would be on notice
that future reliance on that arranger might not be reasonable. The
Commission believes it is likely that the required representations will
be part of the standard contracts entered into between NRSROs and
arrangers and that an arranger that fails to comply with its
representations will risk having the hired NRSRO withdraw the credit
ratings paid for by that arranger and being denied the ability to
obtain credit ratings from the hired NRSRO in the future, given that
the hired NRSRO may not be able to reasonably rely on the safe harbor.
The Commission believes that the consequences of losing the safe harbor
should provide sufficient incentive for NRSROs to ensure that they
obtain the representations from arrangers as set forth in paragraph
(a)(3)(iii) and that arrangers comply with their representations.
---------------------------------------------------------------------------

    \154\ See e.g., Council Letter; DBRS Letter; Fitch Letter; ASF/
SIFMA Letter; Moody's Letter; Realpoint Letter; ABA Committee
Letter; CMSA Letter; RiskMetrics Statement; Colorado PERA Letter.
    \155\ See Fitch Letter; Moody's Letter; ABA Committee Letter.
    \156\ See ABA Committee Letter.
---------------------------------------------------------------------------

    Another commenter argued that the duty to make the required
information available should fall entirely on the hired NRSRO.\157\ The
Commission believes that arrangers are best positioned to disclose the
information necessary to allow the NRSRO-users to determine credit
ratings. The disclosure representation to be obtained from an arranger
will apply to any information provided to a hired NRSRO, of which there
may be more than one. One of the hired NRSROs may ask for more
information than the other hired NRSROs. Allocating the responsibility
of disclosure to the arranger will promote the most consistent and
orderly dissemination of information to the NRSRO-users and allow them
to access all relevant deal information in a single location rather
than on multiple hired NRSROs' Internet Web sites.
---------------------------------------------------------------------------

    \157\ See ASF/SIFMA Letter.
---------------------------------------------------------------------------

    Another commenter argued that requiring NRSROs to obtain such
representations would have a chilling effect on oral communications by
the issuer to the NRSRO and argued that the proposed amendment was an
inappropriate means of regulating issuers' conduct.\158\ The
representations an NRSRO will be required to obtain from an arranger
are not intended to result in the arranger providing different
information to a hired NRSRO than it would otherwise, much less to
``regulate'' issuer conduct. The Commission acknowledges that the
requirements of paragraph (a)(3) of Rule 17g-5 as a whole likely will
formalize the process of information exchange from the arranger to the
NRSRO for structured finance products, including the written submission
of information that may, in the past, have been provided orally.
However, the Commission believes this will be a positive development.
First, conveying information in writing rather than orally may promote
credit rating accuracy in that the NRSRO analyst will be able to refer
back to a document containing the information rather than his or her
memory. Second, a more formal process of information exchange will
create a better record of the data provided to the NRSRO, which will
make it easier for Commission staff to understand the process used to
determine the credit rating during an after-the-fact review of whether
the NRSRO adhered to its procedures and methodologies for determining
such credit ratings. This will benefit the NRSRO's compliance

and internal audit functions as well as the Commission's examination
function and benefit users of credit ratings.
---------------------------------------------------------------------------

    \158\ See Moody's Letter.
---------------------------------------------------------------------------

    The Commission requested comment as to whether the NRSRO should be
required to obtain a representation from the arranger that the arranger
will not provide any information to the hired NRSRO that is material
without also disclosing that information on the arranger's Internet Web
site.\159\ The three commenters directly addressing this issue
responded in the affirmative.\160\ The Commission believes, however,
that the representations the hired NRSRO will be required to obtain
from an arranger, as set forth in paragraphs (a)(3)(iii)(C) and (D) as
proposed, are sufficient to advance the purposes of the rule as
amended. One commenter suggested that the Commission broaden the
proposed amendment to permit unsolicited, subscriber-paid NRSROs to
contact an arranger with questions regarding the information provided,
or to be provided, on its password-protected Internet Web site for
purposes of determining or monitoring a credit rating.\161\ The
Commission believes that the representations an NRSRO will be required
to obtain from an arranger are sufficient to accomplish the goals of
the rule, as amended, and that it would be beyond the intended scope of
the rule, as amended, to require arrangers to take on the
responsibility of answering questions from the non-hired NRSROs
obtaining access to the information that the arranger has disclosed.
---------------------------------------------------------------------------

    \159\ See February 2009 Proposing Release, 74 FR at 6496.
    \160\ See Council Letter; DBRS Letter; Realpoint Letter.
    \161\ See Realpoint Letter.
---------------------------------------------------------------------------

    Finally, one commenter stated that arranger, trustee, servicer and
special servicer information and reports should be included in the
arrangers' representation to disclose under paragraph (a)(3)(iii) of
Rule 17g-5.\162\ The Commission agrees with this comment. The
Commission recognizes that in many cases, the data required to monitor
the rating of a structured finance product is provided by third parties
such as trustees or loan servicers. In proposing the amendments to
paragraph (a) of Rule 17g-5, the Commission did not intend to exclude
such information from disclosure to non-hired NRSROs and potentially
provide arrangers with an incentive to delegate the provision of
information regarding a structured finance product to third parties in
order to avoid such disclosure. Accordingly, the Commission is adding
the language ``or contracts with a third party to provide to the
nationally recognized statistical rating organization'' to new
paragraphs (a)(3)(iii)(C) and (D) of Rule 17g-5 in order to clarify
that the proposed language ``all information the issuer, sponsor, or
underwriter provides to the nationally recognized statistical rating
organization for the purpose of determining the initial credit rating
for the security or money market instrument'' and ``all information the
issuer, sponsor, or underwriter provides to the nationally recognized
statistical rating organization for the purpose of undertaking credit
rating surveillance on the security or money market instrument''
includes all information the issuer, sponsor or underwriter provides to
the hired NRSRO either directly or by contracting with a third party.
---------------------------------------------------------------------------

    \162\ See Realpoint Letter.
---------------------------------------------------------------------------

    The same commenter suggested that the Commission clarify that
information made available to the arranger-paid NRSRO must be made
available to the other NRSROs not only at the same time but also in the
same manner, and with same search, access and other capabilities, as it
is made available to the arranger-paid NRSRO.\163\ The Commission notes
that the nature of the relationship between the arranger and the hired
NRSRO makes it inappropriate to mandate that all arranger information
is made available in the same manner to non-hired NRSROs. For example,
the rule as amended does not prohibit arrangers from continuing to
deliver written materials directly to the hired NRSROs while posting
that material on their password-protected Internet Web site for other
NRSROs to access. Nevertheless, a hired NRSRO's reliance on an
arranger's representations would not be reasonable if the arranger
provided the information to non-hired NRSROs in an impaired manner such
that it impeded the ability of the non-hired NRSROs to develop and
maintain a credit rating.
---------------------------------------------------------------------------

    \163\ See Realpoint Letter.
---------------------------------------------------------------------------

    The Commission is making one additional change to the text of new
paragraph (a)(3)(iii)(B) of Rule 17g-5 as proposed. As discussed above,
that paragraph requires a hired NRSRO to obtain from the arranger a
representation that it will provide access to its password-protected
Internet Web site during the applicable calendar year to any NRSRO that
provides it with a copy of the certification described in new paragraph
(e) of Rule 17g-5 (discussed below) that covers that calendar year. The
Commission is revising the text of the amendment as proposed to clarify
that the arranger, in the written representation it provides in the
hired NRSRO, need only represent that it will provide access to its
password-protected Internet Web site to a non-hired NRSROs whose
certification indicates that it has either: (1) Determined and
maintained credit ratings for at least 10% of the issued securities and
money market instruments for which it accessed information pursuant to
Rule 17g-5(a)(3) as amended in the calendar year prior to the year
covered by the certification, if it accessed such information for 10 or
more issued securities or money market instruments; or (2) has not
accessed information pursuant to Rule 17g-5(a)(3) as amended 10 or more
times in the most recently ended calendar year. This revision ensures
that the representations that a hired NRSRO will be required to obtain
from an arranger in order to rate a structured finance product will
limit access to the arranger's password-protected Internet Web sites to
non-hired NRSROs that have met the requirements set forth in the
certification to be provided to the Commission pursuant to new
paragraph (e) of Rule 17g-5 as amended.
    The Commission is adopting new paragraph (a)(3)(iii) of Rule 17g-5
substantially as proposed, with the revisions to the text as proposed
as discussed above.

D. Paragraph (e) of Rule 17g-5

    The Commission also is adopting new paragraph (e) of Rule 17g-5
substantially as proposed. This provision requires that in order to
access the Internet Web sites maintained by NRSROs and arrangers
pursuant to the requirements of Rule 17g-5(a)(3), an NRSRO must
annually execute and furnish to the Commission a certification stating
the following:

    The undersigned hereby certifies that it will access the
Internet Web sites described in 17 CFR Sec.  240.17g-5(a)(3) solely
for the purpose of determining or monitoring credit ratings.
Further, the undersigned certifies that it will keep the information
it accesses pursuant to 17 CFR Sec.  240.17g-5(a)(3) confidential
and treat it as material nonpublic information subject to its
written policies and procedures established, maintained, and
enforced pursuant to section 15E(g)(1) of the Act (15 U.S.C. 78o-
7(g)(1)) and 17 CFR Sec.  240.17g-4. Further, the undersigned
certifies that it will determine and maintain credit ratings for at
least 10% of the issued securities and money market instruments for
which it accesses information pursuant to 17 CFR Sec.  240.17g-
5(a)(3)(iii), if it accesses such information for 10 or more issued
securities or money market instruments in the calendar year covered
by

the certification. Further, the undersigned certifies one of the
following as applicable: (1) In the most recent calendar year during
which it accessed information pursuant to 17 CFR Sec.  240.17g-
5(a)(3), the undersigned accessed information for [Insert Number]
issued securities and money market instruments through Internet Web
sites described in 17 CFR Sec.  240.17g-5(a)(3) and determined and
maintained credit ratings for [Insert Number] of such securities and
money market instruments; or (2) The undersigned previously has not
accessed information pursuant to 17 CFR Sec.  240.17g-5(a)(3) 10 or
more times during the recently ended calendar year.\164\
---------------------------------------------------------------------------

    \164\ See February 2009 Proposing Release, 74 FR at 6496. The
use of the term ``issued securities and money market instruments''
is intended to address potential deals that are posted on the
Internet Web sites but that ultimately do not result in the
publication of an initial rating because the arranger decides not to
issue the securities or money market instruments. An NRSRO that
accessed such information would not need to count it among the final
deals that would be used to determine whether it met the 10%
threshold. See id.*

    The 10% threshold set forth in paragraph (e) of Rule 17g-5, as
amended, is designed to require the NRSRO accessing arranger Internet
Web sites to determine a meaningful amount of credit ratings without
forcing it to undertake work that it may not have the capacity or
resources to perform. The Commission expressed its belief in the
February 2009 Proposing Release that there should be some minimum level
of credit ratings issued to demonstrate that the NRSRO is accessing the
information for the purpose of determining credit ratings. On the other
hand, if an NRSRO accesses information about a proposed deal that
involves a structure or a type of assets that are new and that the
NRSRO has not developed a methodology to incorporate into its ratings,
it would not be appropriate or prudent to require the NRSRO to
determine a credit rating. The requirement that the NRSRO list the
number of times it accessed the information for issued securities and
money market instruments and the number of credit ratings determined
using that information on its next annual certification pursuant to
paragraph (e) is designed to provide a level of verification that the
NRSRO is, in fact, accessing the information for purposes of
determining credit ratings.
    The Commission received five comments on proposed paragraph (e) of
Rule 17g-5.\165\ Two commenters argued that NRSROs accessing arranger
information pursuant to the rule should be required to provide
confidentiality agreements to the arranger.\166\ The Commission is not
requiring NRSROs accessing this information to enter into a
confidentiality agreement with the arrangers. However, the Commission
is sensitive to the concerns of commenters advocating such a
requirement, namely that an arranger has a confidentiality agreement it
could enforce directly itself. Accordingly, the representations an
NRSRO must obtain from an arranger will not prevent the arranger from
employing a simple process requiring non-hired NRSROs to agree to keep
the information they obtain from the arranger confidential, provided
that such a process does not operate to preclude, discourage, or
significantly impede non-hired NRSROs' access to the information, or
their ability to issue a credit rating based on the information. For
example, an arranger could interpose a confidentiality agreement in a
window (click-through screen) on the Internet Web site that appears
after the NRSRO successfully enters its password to access the
information and which requires the NRSRO to hit an ``Agree'' button
before being directed to the information to be used to determine the
credit rating. Presumably, this confidentiality agreement would contain
the same terms as the confidentiality agreement between the arranger
and the hired NRSRO. A process that effectively operates to preclude,
discourage, or significantly impede non-hired NRSROs' access to the
arranger's information or ability to issue unsolicited ratings,
however, would be contrary to the Commission's purpose in adopting the
rule as amended and, depending on the facts, may affect whether a hired
NRSRO may reasonably rely on the arranger's representations.
---------------------------------------------------------------------------

    \165\ See DBRS Letter; Fitch Letter; ASF/SIFMA Letter; Realpoint
Letter; ABA Committee Letter.
    \166\ See ASF/SIFMA Letter; ABA Committee Letter.
---------------------------------------------------------------------------

    The Commission also specifically requested comment as to whether
the 10% threshold should be adjusted higher or lower.\167\ Two
commenters argued against the requirement,\168\ with one stating that
the 10% threshold could cause a chilling effect on NRSROs seeking to
determine credit ratings using the arrangers' Internet Web sites and
recommended that the Commission eliminate the provision and instead add
a new provision to Rule 17g-2(a) requiring a non-hired NRSRO to make
and retain records showing each deal it accessed pursuant to proposed
rule 17g-5(a)(3).\169\ The Commission continues to believe that a 10%
threshold strikes an appropriate balance between ensuring that the
NRSRO is accessing the information for the purpose of determining
credit ratings and not requiring the NRSRO to determine credit ratings
for proposed deals that, upon review of the information provided, is
beyond the current capabilities of the NRSRO. NRSROs that choose to
access arrangers' Internet Web sites should do so with the intent to
generate credit ratings, in which case a 10% threshold should not have
a chilling effect. Eliminating the threshold requirement could have the
undesirable effect of encouraging NRSROs to access the arranger
Internet Web sites for reasons other than determining ratings, which
would run contrary to the Commission's purposes for amending the rule.
However, the Commission intends to closely monitor the effect of the
10% threshold requirement.
---------------------------------------------------------------------------

    \167\ See February 2009 Proposing Release, 74 FR at 6497.
    \168\ See DBRS Letter, Realpoint Letter.
    \169\ See DBRS Letter.
---------------------------------------------------------------------------

    The Commission also specifically requested comment on whether an
NRSRO should be prohibited from accessing the arranger information in
the future if it accesses information 10 or more times in a calendar
year and does not determine credit ratings for 10% or more of the
deals.\170\ One commenter directly addressed this question and stated
that the NRSRO should not be barred from accessing the information in
the future.\171\ The Commission believes that an NRSRO should be
required to meet the 10% threshold to continue to access the
information as this provides some evidence that the NRSRO is using the
information for purposes of determining credit ratings and not for
other reasons. At the same time, the Commission recognizes that there
may be legitimate reasons why an NRSRO does not meet the 10% threshold
in a given year, and NRSROs may request appropriate relief in such
cases. For example, an NRSRO may access the information for a new type
of financial instrument which it believed it was capable of rating but,
upon reviewing the information posted by the arranger, determined that
it did not have the resources or capacity to do so. In such a case, it
would not be in the public interest for the non-hired NRSRO to produce
a rating; nor, however, would it be desirable to penalize that NRSRO
for its good-faith re-evaluation of its ability to produce the rating.
---------------------------------------------------------------------------

    \170\ See February 2009 Proposing Release, 74 FR at 6497.
    \171\ See Realpoint Letter.
---------------------------------------------------------------------------

    The Commission is revising the text of paragraph (e) to correct a
typographical error contained in the February 2009 Proposing Release by
removing the word ``the'' prior to the phrase ``such securities and
money market instruments'' in the final sentence of the

certification. Additionally, the Commission is revising the text of
paragraph (e) to clarify that the limit on accessing information 10 or
more times occurred during the most recently ended calendar year.
    Accordingly, the Commission is adopting paragraph (e) of Rule 17g-5
substantially as proposed.

E. Regulation FD

    The Commission is adopting, substantially as proposed, the
amendments to Regulation FD.\172\ The amendments to Regulation FD will
accommodate the information disclosure program that the Commission is
establishing under paragraphs (a) and (b) of Rule 17g-5, and permit the
disclosure of material, non-public information to an NRSRO, solely for
the purpose of allowing the NRSRO to determine or monitor a credit
rating, irrespective of whether the NRSRO makes its ratings publicly
available. As noted in the February 2009 Proposing Release, the
amendments accommodate subscriber-based NRSROs that do not make their
ratings publicly available for free, as well as NRSROs that access the
information under Rule 17g-5 but ultimately do not issue a credit
rating using the information.
---------------------------------------------------------------------------

    \172\ 17 CFR 243.100-243.103.
---------------------------------------------------------------------------

    Currently, Rule 100(b)(2)(iii) of Regulation FD \173\ provides that
the requirements of Regulation FD do not apply to disclosures of
material non-public information made to an entity whose primary
business is the issuance of credit ratings, provided the information is
disclosed solely for the purpose of developing a credit rating and the
entity's ratings are publicly available. As amended, Rule
100(b)(2)(iii) will contain two exceptions related to the issuance of
credit ratings. Rule 100(b)(2)(iii)(A) of Regulation FD \174\ will
permit the disclosure of material, non-public information to an NRSRO,
solely for the purpose of allowing the NRSRO to determine or monitor a
credit rating pursuant to Rule 17g-5(a)(3), irrespective of whether the
NRSRO makes its ratings publicly available. Rule 100(b)(2)(iii)(A) will
apply only when the disclosures to NRSROs are made pursuant to Rule
17g-5(a)(3). Rule 100(b)(2)(iii)(B) of Regulation FD \175\ will
continue to permit issuers to disclose material, non-public
information, solely for the purpose of determining or monitoring a
credit rating, to any credit rating agency (including, but not limited
to, NRSROs), as that term is defined in Section 3(a)(61) of the
Exchange Act,\176\ that makes its credit ratings publicly available.
---------------------------------------------------------------------------

    \173\ 17 CFR 243.100(b)(2)(iii).
    \174\ 17 CFR 243.100(b)(2)(iii)(A).
    \175\ 17 CFR 243.100(b)(2)(iii)(B).
    \176\ 15 U.S.C. 78c(a)(61).
---------------------------------------------------------------------------

    The proposed amendment to Regulation FD elicited few comments. One
commenter supported the proposed amendment, but suggested expanding it
to expressly permit unsolicited NRSROs to contact an arranger with
questions regarding the information provided, or to be provided, on its
password-protected Internet Web site for purposes of determining or
monitoring a credit rating, and to require arrangers to post on such
Internet Web site any additional material information provided in
response to such questions.\177\ The Commission expects that arrangers
will have an incentive to post any additional information provided to
an NRSRO on its password-protected Internet Web site because if they do
not do so, other NRSROs developing credit ratings by accessing the
Internet Web site would be determining their credit ratings without the
benefit of the additional information. A lack of access to this
additional information could adversely impact the ratings and lead to
more frequent rating actions during the surveillance process. The
purpose of the amendment to Regulation FD is to assure arrangers that
providing information in compliance with Rule 17g-5(a)(3) will not
violate Regulation FD. The Commission believes that the amendment, as
adopted, will permit arrangers to post such additional information
without causing a violation of Regulation FD, and that no expansion of
the amendment is necessary.
---------------------------------------------------------------------------

    \177\ See Realpoint Letter.
---------------------------------------------------------------------------

    Another commenter agreed that the disclosure regime proposed under
Rule 17g-5 cannot operate effectively without the proposed amendment to
Regulation FD, but suggested that such an expansion of the credit
rating agency exemption presents a risk that none of the ratings
determined for a structured finance product would be publicly
available.\178\ To address this potential risk, this commenter
suggested that the exception be revised to allow information provided
under Rule 17g-5(a)(3) to be disclosed to all NRSROs, provided that the
ratings of at least one of those NRSROs are publicly available. The
Commission does not believe this revision is necessary. Because the
disclosure regime in Rule 17g-5(a)(3) will be triggered only when
credit ratings for structured finance products are paid for by the
issuer, sponsor, or underwriter, the Commission believes it is already
very likely that such ratings will be made publicly available.
---------------------------------------------------------------------------

    \178\ See DBRS Letter.
---------------------------------------------------------------------------

    Some NRSROs expressed concern that the proposed amendments would
lead to a greater risk of selective disclosure of material, non-public
information.\179\ These commenters suggested that the proposed
amendment to Regulation FD would hurt investor confidence in the
fairness of U.S. markets,\180\ encourage market abuse and undermine the
integrity of the U.S. market.\181\ In particular, these commenters
noted that the proposed amendment to the credit rating agency exemption
in Regulation FD would permit NRSROs to obtain material non-public
information from issuers and then selectively disclose it, or
selectively disclose rating actions based upon it.\182\
---------------------------------------------------------------------------

    \179\ See S&P Letter, Moody's Letter.
    \180\ See S&P Letter.
    \181\ See Moody's Letter.
    \182\ See Moody's Letter, S&P Letter.
---------------------------------------------------------------------------

    One commenter argued that the proposed amendment to Regulation FD
would undercut the policy justification for including a credit rating
agency exception in Regulation FD.\183\ This commenter highlighted that
the Commission's rationale for exempting disclosure to credit rating
agencies from Regulation FD was the widely available publication of the
resulting credit rating.\184\
---------------------------------------------------------------------------

    \183\ See S&P Letter.
    \184\ See Selective Disclosure and Insider Trading, Securities
Act Release No. 7881 (August 15, 2000), 65 FR 51716 (August 24,
2000) (``Regulation FD Adopting Release''). In the Regulation FD
Adopting Release the Commission explained that while it was aware
that ``ratings organizations often obtain nonpublic information in
the course of their ratings work'' it was not aware of any incidents
of selective disclosure involving ratings organizations.
---------------------------------------------------------------------------

    The Commission is sensitive to commenters' concerns and will
monitor the operation of the rule.\185\ To aid the monitoring, the
Commission encourages NRSROs and other market participants to notify
the Commission if they believe the selective availability of non-public
information is being abused. However, the Commission believes that the
proposed amendments will not lead to misuse of material, non-public
information by NRSROs. As noted above, the Commission believes that in
order to promote competition in the credit rating industry NRSROs
should

have access to material, non-public information from arrangers for the
purpose of determining or monitoring unsolicited credit ratings for
structured finance products. Because the Regulation FD exclusion added
today is limited to NRSROs accessing the information in the context of
Rule 17g-5(a)(3), entities receiving the material, non-public
information will be subject to Section 15E(g) of the Exchange Act \186\
and Rule 17g-4 \187\ thereunder. These statutory and regulatory
provisions require NRSROs to establish, maintain and enforce policies
and procedures reasonably designed to prevent the misuse of material,
non-public information.
---------------------------------------------------------------------------

    \185\ Separately, the Commission reminds issuers and persons
acting on their behalf of the need to consider whether information
selectively disclosed under 17 CFR 243.100(b)(2)(iii)(A) or (B) also
is required to be publicly disclosed in a registration statement, or
periodic or current report, because disclosure of that information
is necessary to make other statements made not misleading. In some
circumstances, the fact that information is important to an NRSRO's
analysis may be relevant to an issuer's evaluation of its other
disclosure obligations.
    \186\ 15 U.S.C. 78o-7(g).
    \187\ 17 CFR 240.17g-4.
---------------------------------------------------------------------------

    Moreover, an NRSRO will be required to furnish to the Commission
prior to accessing a password-protected Internet Web site a
certification under Rule 17g-5(e) that the NRSRO will keep the
information it accesses pursuant to Rule 17g-5(a)(3) confidential and
treat it as material, non-public information subject to its Section
15E(g) and Rule 17g-4 obligations. In addition, the disclosure regime
in Rule 17g-5 will only be triggered when an issuer pays an NRSRO to
issue or maintain a credit rating for a structured finance product. As
a result, the Commission expects that a credit rating for such
structured finance product will be issued publicly along with any
unsolicited ratings from subscriber-based NRSROs.
    In addition, the Commission is amending Rule 100(b)(2)(iii) to
replace ``developing'' with ``determining or monitoring[.]'' This
amendment to Rule 100(b)(2)(iii) is intended to mirror the use of
``determining'' in the Rating Agency Act \188\ and other Commission
rules regarding NRSROs.\189\ The Commission also notes that this
amendment will be consistent with the Rule 17g-5(e) certification that
NRSROs will be required to furnish to the Commission and to arrangers
in order to access an arranger's password-protected Internet Web site
described in Rule 17g-5(a)(3). New Rule 17g-5(e) requires NRSROs to
certify that the NRSRO will access the arranger's password-protected
Internet Web site described in Rule 17g-5(a)(3) solely for the purpose
of ``determining or monitoring'' credit ratings.
---------------------------------------------------------------------------

    \188\ See, e.g., 15 U.S.C. 78o-7(a)(1)(B)(ii).
    \189\ See, e.g., 17 CFR 240.17g-2.
---------------------------------------------------------------------------

    The Commission is also adopting, as proposed, the amendment to the
text in Rule 100(b)(2)(iii)(B) of Regulation FD \190\ to use the
statutory definition of ``credit rating agency'' as defined in Section
3(a)(61) of the Exchange Act.\191\ The Commission received one comment
on this proposed amendment, which supported it.\192\
---------------------------------------------------------------------------

    \190\ 17 CFR 243.100(b)(2)(iii)(B).
    \191\ 15 U.S.C. 78c(a)(61).
    \192\ See ABA Letter.
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F. Conclusion

    The Commission is adopting these amendments to Rule 17g-5, in part,
pursuant to the authority in Section 15E(h)(2) of the Exchange
Act.\193\ 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.\194\ The Commission believes
that the amendments are necessary and appropriate in the public
interest and for the protection of investors because they are designed
to address conflicts of interest and improve the quality of credit
ratings for structured finance products by making it possible for more
NRSROs to rate these instruments.
---------------------------------------------------------------------------

    \193\ 15 U.S.C. 78o-7(h)(2).
    \194\ Id.
---------------------------------------------------------------------------

    The Commission believes that these amendments will advance the
Rating Agency Act's goal of promoting competition in the credit rating
industry by facilitating the issuance of credit ratings by NRSROs that
are not hired by the arranger. The Commission further believes that the
resulting increase in the number of ratings extant for a given
structured finance security or money market instrument will provide
users of credit ratings with more views on the creditworthiness of the
security or money market instrument. The amendments also are designed
to make it more difficult for arrangers to exert influence over the
NRSROs they hire to determine ratings for structured finance products.
By facilitating the issuance of unsolicited ratings by non-hired
NRSROs, the amendments will increase the likelihood that if a hired
NRSRO issues a ratings that is higher than warranted, that fact will be
revealed to the market through the lower ratings issued by other
NRSROs.
    For the reasons discussed above, the Commission is adopting the
amendments to Rule 17g-5 and Regulation FD substantially as proposed.

IV. Paperwork Reduction Act

    Certain provisions of the rule amendments contain a ``collection of
information'' within the meaning of the Paperwork Reduction Act of 1995
(``PRA''). The Commission published a notice requesting comment on the
collection of information requirements in the February 2009 Proposing
Release and submitted the proposed collection to the Office of
Management and Budget (``OMB'') for review in accordance with the
PRA.\195\ 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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    \195\ See February 2009 Proposing Release, 74 FR 6498-6501.
---------------------------------------------------------------------------

    (1) Rule 17g-2, Records to be made and retained by nationally
recognized statistical rating organizations (OMB Control Number 3235-
0628); and
    (2) Rule 17g-5, Conflicts of interest (OMB Control Number 3235-
0649).
    The amendment to Regulation FD does not contain a collection of
information within the meaning of the PRA.

A. Collections of Information Under the Proposed Rule Amendments

    The Commission is adopting rule amendments to impose additional
disclosure and conflict of interest requirements on NRSROs. These
amendments are designed to address concerns about the integrity of the
credit rating procedures and methodologies at NRSROs and to promote
transparency and objectivity in the NRSRO credit rating process by,
among other things, increasing competition and making it easier for
investors and other market participants and observers to assess the
credit ratings performance of NRSROs. These amendments modify the
Commission's rules, adopted in June 2007 and modified in February 2009,
implementing registration, recordkeeping, financial reporting, and
oversight rules under the Rating Agency Act. The amendments contain
recordkeeping and disclosure requirements that are subject to the PRA.
    In summary, the rule amendments require: (1) An NRSRO to make
publicly available on its Internet Web site in an interactive data file
that uses any machine-readable computer format (until 60 days after the
date on which the Commission publishes a List of XBRL Tags for NRSROs
on its Internet Web site, at which point the NRSRO will be required to
make the information available in XBRL format using the Commission's
List of XBRL Tags for NRSROs) ratings action histories for all credit
ratings initially determined on or after June 26, 2007, with each new
ratings action that is related to issuer-

paid credit ratings to be reflected in such publicly disclosed
histories no later than twelve months after it was taken, and each new
ratings action that is related to credit ratings that are not issuer-
paid to be reflected in such publicly disclosed histories no later than
twenty-four months after it was taken; \196\ (2) an NRSRO that is hired
by arrangers to issue credit ratings for structured finance products to
disclose the deals for which they are in the process of determining
such credit ratings to non-hired NRSROs that have furnished the
Commission with the certification as described below; (3) an NRSRO that
is hired by arrangers to perform credit ratings for structured finance
products to obtain written representations from arrangers, on which the
NRSRO can reasonably rely, that the arrangers will provide all the
information given to the hired NRSRO to non-hired NRSROs that have
furnished the Commission with the certification described below; \197\
and (4) an NRSRO seeking to access the information maintained by the
NRSROs and the arrangers pursuant to the amended rules to furnish the
Commission an annual certification that it is accessing the information
solely to determine credit ratings and will determine a minimum number
of credit ratings using that information.\198\
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    \196\ See 17 CFR 240.17g-2(d)
    \197\ See 17 CFR 240.17g-5(a)(3) and (b)(9).
    \198\ See 17 CFR 240.17g-5(e).
---------------------------------------------------------------------------

B. Proposed Use of Information

    The amendments enhance the framework for Commission oversight of
NRSROs. As the Commission noted in the February 2009 Proposing
Release,\199\ the collections of information in the amendments are
designed to provide users of credit ratings with information upon which
to evaluate the performance of NRSROs and to enhance the accuracy of
credit ratings for structured finance products by increasing
competition among NRSROs who rate these products.
---------------------------------------------------------------------------

    \199\ See February 2009 Proposing Release, 74 FR at 6498.
---------------------------------------------------------------------------

C. Respondents

    In the June 2007 Adopting Release, the Commission estimated that
approximately 30 credit rating agencies would be registered as
NRSROs.\200\ Since the initial set of rules under the Rating Agency Act
became effective in June 2007, ten credit rating agencies have
registered with the Commission as NRSROs.\201\ The Commission, however,
expects additional entities will register. The Commission received no
comments on this estimate. The Commission believes that this estimate
continues to be appropriate for identifying the number of respondents
for purposes of the amendments.
---------------------------------------------------------------------------

    \200\ See June 2007 Adopting Release, 72 FR at 33607.
    \201\ A.M. Best Company, Inc.; DBRS Ltd.; Fitch, Inc.; Japan
Credit Rating Agency, Ltd.; Moody's Investors Service, Inc.; Rating
and Investment Information, Inc.; Standard & Poor's Ratings Service;
LACE Financial Corp.; Egan-Jones Rating Company; and Realpoint LLC.
---------------------------------------------------------------------------

    In addition, under the amendments to paragraphs (a) and (b) of Rule
17g-5, NRSROs that are hired to rate structured finance products will
be required to obtain representations from arrangers that the arrangers
will provide information given to the hired NRSRO to other NRSROs. In
the June 2008 Proposing Release and again in the February 2009
Proposing Release, based on staff information gained from the NRSRO
examination process, the Commission estimated that approximately 200
arrangers would be respondents for the purpose of the PRA
estimate.\202\ The Commission received no comments on this estimate
when originally proposed or re-proposed. The Commission continues to
estimate, for purposes of this PRA, that approximately 200 arrangers
will be affected.
---------------------------------------------------------------------------

    \202\ See June 2008 Proposing Release, 73 FR at 36237; February
2009 Proposing Release, 74 FR at 6498.
---------------------------------------------------------------------------

D. Total Annual Recordkeeping and Reporting Burden

    As discussed in further detail below, the Commission estimates the
total recordkeeping burden resulting from the amendments will be
approximately 71,550 hours on a one-time basis \203\ and 169,390 hours
on an annual basis.\204\ This represents an increase from the estimates
of 69,315 hours on a one-time basis and 169,045 hours on an annual
basis set forth in the February 2009 Proposing Release.\205\ This
increase is attributable in part to the fact that the amendments to
Rule 17g-2(d) as adopted apply to all NRSROs, rather than only to
NRSROs operating under the issuer-paid business model as proposed. The
increase also reflects additional burdens, as described in detail
below.
---------------------------------------------------------------------------

    \203\ This total is derived from the total one-time hours set
forth, in the order in which they are set forth, in the text below:
2,550 + 9,000 + 60,000 = 71,550.
    \204\ This total is derived from the total annual hours set
forth, in the order in which they are set forth, in the text below:
450 + 14,880 + 4,000 + 150,000 + 60 = 169,390.
    \205\ February 2009 Proposing Release, 74 FR at 6498-6499.
---------------------------------------------------------------------------

    The total annual and one-time hour burden estimates for NRSROs
described below are averages across all types of NRSROs expected to be
affected by the amendments. The size and complexity of NRSROs range
from small entities to entities that are part of complex global
organizations employing thousands of credit analysts. The Commission
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 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.\206\ The
amendments to paragraph (d) of Rule 17g-2 require an NRSRO to make
publicly available on its Internet Web site in an interactive data file
that uses a machine-readable computer format ratings action histories
for all credit ratings initially determined on or after June 26, 2007,
with each new ratings action to be reflected in such publicly disclosed
histories no later than twelve months after it was taken for ratings
actions related to issuer-paid credit ratings and twenty-four months
after it was taken for ratings actions related to credit ratings that
are not issuer-paid. An NRSRO will be allowed to use any machine-
readable format to make this data publicly available until 60 days
after the date on which the Commission publishes a List of XBRL Tags
for NRSROs on its Internet Web site, at which point the NRSRO will be
required to make the information available in XBRL format using the
Commission's List of XBRL Tags for NRSROs.\207\
---------------------------------------------------------------------------

    \206\ 17 CFR 240.17g-2.
    \207\ 17 CFR 240.17g-2(d)(iii).
---------------------------------------------------------------------------

    The Commission requested comment in the February 2009 Proposing
Release on all aspects of the burden estimates for the proposed
amendments to Rule 17g-2(d) and received none.
    In the February 2009 Adopting Release, the Commission determined
that, in order to implement the Rule 17g-2(d) requirement that an NRSRO
make public, in XBRL format and with a six-month grace period, the
ratings action histories required under paragraph (a)(8) for a random
sample of 10% of the credit ratings for each ratings class for which it
has issued 500 or

more issuer-paid credit ratings, an NRSRO subject to the requirements
will spend, on average, approximately 30 hours to publicly disclose the
rating action histories in XBRL format and, thereafter, 10 hours per
year to update this information.\208\ In the February 2009 Proposing
Release, the Commission estimated, based on staff experience, that the
proposed amendments to Rule 17g-2(d) requiring NRSROs to publicly
disclose ratings action histories of all issuer-paid credit ratings
would increase by 50% the estimated hour burdens for the disclosure
requirements of paragraph (d) of Rule 17g-2 as adopted at that
time.\209\ Therefore, the Commission estimated that the one time annual
hour burden for each NRSRO affected by the rule would increase from 30
hours to 45 hours \210\ and the annual hour burden would increase from
10 hours to 15 hours.\211\ Although the Commission based its estimates
for individual NRSROs' hour burdens of Rule 17g-2(d) as proposed on the
assumption that the requirements of the rule would apply only to
issuer-paid credit ratings, the Commission believes that the estimates
are valid for NRSROs operating under the subscriber-paid business
model, all of which already have an Internet Web site, as well.\212\
---------------------------------------------------------------------------

    \208\ The Commission also based 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 and the Commission adopted these hour
burdens. See February 2009 Adopting Release, 74 FR at 6472.
    \209\ See February 2009 Proposing Release, 74 FR at 6499.
    \210\ 50% of 30 hours = 15 hours + 30 hours = 45 hours.
    \211\ 50% of 10 hours = 5 hours + 10 hours = 15 hours.
    \212\ See February 2009 Proposing Release, 74 FR at 6499.
---------------------------------------------------------------------------

    The Commission notes the February 2009 Proposing Release
contemplated that NRSROs would provide the information in XBRL when it
determined its estimates. The Commission does not believe that
requiring the information to be disclosed initially in any machine
readable format alters those burden estimates because we believe the
steps to be taken are quite similar. The Commission also notes that
currently seven NRSROs are providing the disclosure required pursuant
to Rule 17g-2(d) (or the 10% requirement) in machine-readable format.
The Commission does believe that there will be an hour burden
associated with transitioning from disclosing the information in a
machine-readable format into an XBRL format. Specifically, the
Commission estimates that this hour burden will be approximately 40
hours per NRSRO. This estimate is based on Commission's staff
experience regarding cost associated with XBRL programming. The 40
hours estimate includes time for the appropriate staff of the NRSRO
\213\ to research and become familiar with the List of XBRL Tags, map
the information disclosed in the machine-readable format to the XBRL
taxonomy and conduct initial testing.
---------------------------------------------------------------------------

    \213\ The Commission believes a Senior Programmer would be
tasked to perform the transition of disclosing the information in
machine-readable format to XBRL.
---------------------------------------------------------------------------

    Accordingly, the Commission estimates that the total aggregate one-
time burden for NRSROs to make their ratings histories publicly
available initially in machine-readable interactive format, and the
one-time burden to transition the disclosure of information from
machine-readable to XBRL will be approximately 2,550 hours,\214\ and
the total aggregate annual burden hours will be approximately 450
hours.\215\ This represents an increase from the estimates of 210 hours
on a one-time basis and 70 hours on an annual basis set forth in the
February 2009 Proposing Release.\216\ This increase is attributable to
the fact that the amendments to Rule 17g-2(d) as adopted apply to all
NRSROs, rather than only to NRSROs operating under the issuer-paid
business model as originally proposed.
---------------------------------------------------------------------------

    \214\ 45 hours x 30 NRSROs = 1,350 hours, plus the one time
burden to change from machine readable format to XBRL of 40 hours x
30 NRSROs = 1,200 hours; for a total one-time burden of 1,350 +
1,200 = 2,550.
    \215\ 15 hours x 30 NRSROs = 450 hours.
    \216\ February 2009 Proposing Release, 74 FR at 6499.
---------------------------------------------------------------------------

2. Amendments to Rule 17g-5
    Rule 17g-5 requires an NRSRO to manage and disclose certain
conflicts of interest \217\ and prohibits certain other types of
conflicts of interest outright.\218\ The amendments to Rule 17g-5 add
an additional conflict to paragraph (b) of Rule 17g-5 for NRSROs to
manage: 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.\219\ The amendments to paragraph (a) of the rule further
specify that an NRSRO subject to this conflict is 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 or arranged to be disclosed by
the NRSRO. Specifically, the amendments require an NRSRO that is hired
by arrangers to perform credit ratings for structured finance products
to disclose to other NRSROs the deals for which it is in the process of
determining such credit ratings and to obtain written representations
from arrangers that the arrangers will provide the same information
given to the hired NRSRO to other NRSROs. An NRSRO rating such products
will need to disclose to other NRSROs the following information on a
password protected Internet Web site: A list of each such security or
money market instrument for which it is currently in the process of
determining an initial credit rating in chronological order and
identifying the type of security or money market instrument, the name
of the issuer, the date the rating process was initiated, and the
Internet Web site address where the issuer, sponsor, or underwriter of
the security or money market instrument represents that the information
described in paragraphs (a)(3)(iii)(C) and (D) of Rule 17g-5 as amended
can be accessed.\220\
---------------------------------------------------------------------------

    \217\ 17 CFR 240.17g-5(a) and (b).
    \218\ 17 CFR 240.17g-5(c).
    \219\ 17 CFR 240.17g-5(b)(9).
    \220\ Paragraph (a)(3)(i) of Rule 17g-5.
---------------------------------------------------------------------------

    The Commission estimated in the February 2009 Proposing Release
that it would take an NRSRO approximately 300 hours to develop a
system, as well as policies and procedures, for the disclosures
required.\221\ This estimate was based on the Commission's experience
with, and burden estimates for, the recordkeeping requirements for
NRSROs.\222\ In addition to the estimated one-time hour burden, the
amendments will result in an annual hour burden to the NRSRO arising
from the requirement to make disclosures for each deal being rated.
Based on staff experience, the Commission estimated that it would take
approximately 1 hour per transaction for an NRSRO to update the lists
maintained on its password protected Internet Web sites.\223\
---------------------------------------------------------------------------

    \221\ See February 2009 Proposing Release, 74 FR at 6500.
    \222\ See June 2007 Adopting Release, 72 FR at 33609.
    \223\ See February 2009 Proposing Release, 74 FR at 6500.
---------------------------------------------------------------------------

    In the February 2009 Proposing Release, the Commission repeated its
estimate, originally set forth in the June 2008 Proposing Release,\224\
that a large NRSRO would have rated approximately 2,000 new RMBS and
CDO transactions in a given year. The

Commission based 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 4,000
transactions in order to account for other types of structured finance
products, including commercial real estate MBS and other consumer
assets.\225\ As noted in the February 2009 Proposing Release, the
Commission recognizes that the number of new structured finance
transactions has dropped precipitously since 2006 because of the credit
market turmoil. Nonetheless, to account for future market developments,
which is a more conservative approach, the Commission retained the
estimate that a large NRSRO will rate 4,000 new deals per year.\226\
The Commission received no comments on the estimate.
---------------------------------------------------------------------------

    \224\ See June 2008 Proposing Release, 73 FR at 36240.
    \225\ See February 2009 Proposing Release, 74 FR at 6500.
    \226\ Id.
---------------------------------------------------------------------------

    Based on the number of outstanding structured finance ratings
submitted by the ten registered NRSROs on their Form NRSROs, the
Commission estimated that the three largest NRSROs account for 97% of
the market for structured finance ratings. As explained in greater
detail in the February 2009 Proposing Release, the Commission used that
estimate of market share to estimate that the total structured finance
ratings issued by all NRSROs in a given year would be 14,880.\227\
---------------------------------------------------------------------------

    \227\ Id.
---------------------------------------------------------------------------

    The Commission requested comment on its burden estimates for the
proposed amendments to Rule 17g-5(a) and (b) and received one comment
from a large NRSRO arguing that the Commission significantly
underestimated the initial and recurring burdens associated with the
proposed amendments.\228\ Specifically, the commenter argued that
developing the software and password-protected Internet Web page could
require a thousand, if not thousands, of hours of work and that the
development of policies and procedures and controls to implement the
requirement could take at least a thousand hours, and that developing a
training module and training affected staff could take at least 500
hours. The commenter further stated that it may take one to two hours
per transaction to update the NRSRO Web site, depending on the
frequency with which key data change during the rating process.\229\
---------------------------------------------------------------------------

    \228\ See Moody's Letter.
    \229\ See Moody's Letter.
---------------------------------------------------------------------------

    The Commission is sensitive to the potential burdens imposed on
NRSRO by these new disclosure requirements. However, based on staff
experience, the Commission does not believe the cost will result in the
burdens estimated by the sole commenter expressing disagreement with
the Commission's original estimates. As previously noted, all of the
NRSROs currently maintain Internet Web sites, in most cases with
password-protected portals that their subscribers and registered users
can access to obtain information posted by the NRSRO. The Commission
believes that adding a portal for other NRSROs to access pending deal
information should not require significant additional Internet Web site
design and maintenance.
    Consistent with the estimates set forth in the February 2009
Proposing Release,\230\ the Commission believes, based on staff
experience, that an NRSRO will take approximately 300 hours on a one-
time basis to implement a disclosure system to comply with the new
requirements of Rule 17g-5(a)(3)(i) and (ii), resulting in a total one-
time hour burden of 9,000 hours for 30 NRSROs.\231\ The Commission
further believes that based on its estimates that the total structured
finance ratings issued by all NRSROs in a given year would be 14,880
and that it will take each NRSRO affected by the rule approximately 1
hour per transaction for the NRSRO to update the lists maintained on
the NRSROs' password protected Internet Web sites, the total annual
hour burden for the industry will be 14,880 hours.\232\
---------------------------------------------------------------------------

    \230\ See February 2009 Proposing Release, 74 FR at 6500.
    \231\ 300 hours x 30 NRSROs = 9,000 hours.
    \232\ 14,880 ratings x 1 hour = 14,880 hours.
---------------------------------------------------------------------------

    New paragraph (a)(3)(iii) of Rule 17g-5 requires that an NRSRO
hired to rate a structured finance product obtain from the arranger a
written representation on which it can reasonably rely that it will
disclose the following information on a password-protected Internet Web
site at the same time the information is provided to the NRSRO:
     All information the arranger provides to the NRSRO for the
purpose of determining the initial credit rating for the security or
money market instrument, including information about characteristics of
the assets underlying or referenced by the security or money market
instrument, and the legal structure of the security or money market
instrument; and
     All information the arranger provides to the NRSRO for the
purpose of undertaking credit rating surveillance on the security or
money market instrument, including information about the
characteristics and performance of the assets underlying or referenced
by the security or money market instrument.\233\
---------------------------------------------------------------------------

    \233\ Paragraph (a)(3)(iii) of Rule 17g-5.
---------------------------------------------------------------------------

    In the February 2009 Proposing Release, the Commission estimated
that there would be approximately 200 arrangers affected by the
proposed new paragraph (a)(iii) of Rule 17g-5 and that it would take
each arranger approximately 300 hours to develop a system, including
policies and procedures, for the disclosures.\234\ These estimates were
based on the Commission's experience with, and burden estimates for,
the recordkeeping requirements for NRSROs.\235\ The Commission further
noted that in addition to this one-time hour burden, the proposed
amendments would result in an annual hour burden for arrangers arising
from the disclosure of information on a transaction-by-transaction
basis each time an initial rating process is commenced. The Commission
estimated, based on staff experience and the estimate of 4,000 new
structured finance deals per year as discussed above, that each
respondent would disclose information for approximately 20 new
transactions per year \236\ and that it would take approximately 1 hour
per transaction to post the information to its password-protected
Internet Web sites. The Commission noted that the number of new
transactions per year would vary by the size of issuer, with larger
respondents perhaps arranging in excess of 20 new deals per year and
smaller arrangers perhaps initiating less. The estimate of 20 new deals
per year is therefore an average across all respondents.\237\ Based on
this analysis, the Commission estimated that it would take a respondent
approximately 20 hours \238\ to disclose this information, on an annual
basis, for a total aggregate annual hour burden of 4,000 hours.\239\
The Commission received no comments on this estimate, nor did the
Commission receive any comments on an identical burden estimate in the
original proposing release.
---------------------------------------------------------------------------

    \234\ See February 2009 Proposing Release, 74 FR at 6500.
    \235\ See June 2007 Adopting Release, 72 FR at 33609.
    \236\ 4,000 new transactions/200 issuers = 20 new transactions
per issuer.
    \237\ See February 2009 Proposing Release, 74 FR at 6501.
    \238\ 20 transactions x 1 hour = 20 hours.
    \239\ 20 hours x 200 respondents = 4,000 hours.
---------------------------------------------------------------------------

    In addition, Rule 17g-5(a)(3)(iii)(D) requires that an NRSRO hired
to rate a structured finance product obtain from the arranger a written
representation on which it can reasonably rely that the

arranger will disclose the information it provides to the hired NRSRO
to be used for credit rating surveillance on a security or money market
instrument on a password-protected Internet Web site at the same time
the information is provided to the hired NRSRO. Because surveillance
covers more than just initial ratings, the Commission estimated, in the
June 2008 Proposing Release and the February 2009 Proposing Release,
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.\240\ Also based on staff
information gained from the NRSRO examination process, the Commission
estimated that it would take a respondent approximately 0.5 hours per
transaction to disclose the information.\241\
---------------------------------------------------------------------------

    \240\ See infra note 286 and accompanying text.
    \241\ See June 2008 Proposing Release, 73 FR at 36240; February
2009 Proposing Release, 74 FR at 6500.
---------------------------------------------------------------------------

    The Commission requested comment in the February 2009 Proposing
Release on all aspects of its estimates for the amount of time
arrangers would spend complying with the requirements of proposed
paragraph (a)(3)(iii) of Rule 17g-5. The Commission did not receive any
comments in response to this request.
    Accordingly, the Commission believes, based on its estimate that an
arranger will take approximately 300 hours on a one-time basis to
implement a disclosure system consistent with the representations to be
made pursuant to new paragraph (a)(3)(iii) of Rule 17g-5, that the
total one-time hour burden for arrangers will be 60,000 hours.\242\ The
Commission further believes, based on its estimate of an average of 125
ongoing transactions each month and 30 minutes spent on the monthly
disclosure for each transaction, that each respondent will spend
approximately 750 hours \243\ on an annual basis disclosing information
consistent with the representations to be made pursuant to new
paragraph (a)(3)(iii) of Rule 17g-5, for a total aggregate annual
burden of 150,000 hours.\244\
---------------------------------------------------------------------------

    \242\ 300 hours x 200 respondents = 60,000 hours.
    \243\ 125 transactions x 30 minutes x 12 months = 45,000
minutes/60 minutes = 750 hours.
    \244\ 750 hours x 200 respondents = 150,000 hours.
---------------------------------------------------------------------------

    An NRSRO that wishes to access information on another NRSRO's
Internet Web site or on an arranger's Internet Web site pursuant to
Rule 17g-5(a)(3) as amended is required to provide the Commission with
an annual certification described in proposed new paragraph (e) to Rule
17g-5. In the February 2009 Proposing Release, the Commission estimated
that this annual certification would become a matter of routine over
time and should take less time than it takes an NRSRO to submit its
annual certification under Rule 17g-1(f).\245\ The annual certification
required under Rule 17g-1(f) involves the disclosure of substantially
more information than the certification in proposed paragraph (e) of
Rule 17g-5. The Commission estimated that it will take an NRSRO
approximately 10 hours to complete the Rule 17g-1(f) annual
certification.\246\ Given that the paragraph (e) certification requires
much less information, the Commission estimated, based on staff
experience, that it would take an NRSRO approximately 20% of the time
it takes to do the Rule 17g-5 annual certification, or 2 hours.\247\
The Commission assumed that all 30 NRSROs ultimately registered with
the Commission would complete the certification. The Commission
requested comment on this estimate but did not receive any.
Accordingly, the Commission estimates it will take an NRSRO
approximately 2 hours to complete the proposed paragraph (e)
certification for an aggregate annual hour burden to the industry of 60
hours.\248\
---------------------------------------------------------------------------

    \245\ 17 CFR 240.17g-1(f). See February 2009 Proposing Release,
74 FR at 6501.
    \246\ See June 2007 Adopting Release, 72 FR at 33609.
    \247\ 20% of 10 hours = 2 hours.
    \248\ 2 hours x 30 NRSROs = 60 hours.
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    To comply with the requirement under Rule 17g-5(a)(3)(iii) that it
obtain from the issuer, sponsor or underwriter a written representation
that reasonably can be relied upon, an NRSRO likely will include such a
representation in the standardized contract it uses in each transaction
the NRSRO contracts to rate. The Commission notes that the Rule 17g-
5(a)(3)(iii) includes representations an NRSRO is required to obtain
from an arranger. The Commission expects an NRSRO's in-house attorney
to draft the representations based on this text, which will be inserted
into the NRSRO's existing standardized contracts. Based on staff
experience, the Commission estimates that there will be a one-time
burden of five hours for this language to be drafted, negotiated and
added to the NRSRO's standardized contract. This estimate is based in
part on the two hour burden estimate that the Commission believes would
result from an NRSRO completing the certification required under
paragraph (e) of Rule 17g-5. However, the added hours reflect the
additional time needed to draft the representations because the
specific language is not included in the rule. Therefore, there will be
a total one-time aggregate hour burden of 150 hours.\249\
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    \249\ 5 hours x 30 NRSROs = 150 hours.
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E. Collection of Information Is Mandatory

    The recordkeeping and notice requirements for the amendments are
mandatory for credit rating agencies that choose to register as NRSROs
with the Commission.\250\
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    \250\ See Section 15E of the Exchange Act (15 U.S.C. 78o-7).
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F. Confidentiality

    The disclosures required under the amendments to Rule 17g-2(d) will
be public. Pursuant to the representations an NRSRO hired to rate a
structured finance product is required to obtain under the amendments
to Rule 17g-5, arrangers will make the information they provide to the
hired NRSRO available to other NRSROs. Pursuant to Rule 17g-5(e), the
NRSROs are required to provide certifications to the Commission
agreeing to keep the information they access under Rule 17g-5(a)(3)
confidential.
    The information an NRSRO posts on its Internet Web site pursuant to
Rule 17g-5(a)(3)(i) and (ii) will be available only to NRSROs that have
provided to the NRSRO that posts the information a certification that
was furnished to the Commission pursuant to subparagraph (e). The
representations made by the arranger and provided to the NRSRO will not
be made public, unless the NRSRO or arranger chooses to make them
public. All documents maintained by an NRSRO are subject to inspection
by representatives of the Commission. The Commission will not make
public the certifications provided by NRSROs pursuant to subparagraph
(e). NRSROs will also provide copies of their certifications to
arrangers when accessing arranger Web sites. Arrangers are not expected
to make these certifications public.

V. Costs and Benefits of the Amended Rules

    The Commission is sensitive to the costs and benefits that result
from its rules. In the February 2009 Proposing Release, the Commission
identified certain costs and benefits of the amendments and requested
comment on all aspects of this cost-benefit analysis, including
identification and assessment of any costs and benefits not discussed
in the analysis.\251\ The Commission

sought comment and data on the value of the benefits identified. The
Commission also solicited comments on the accuracy of its cost
estimates in each section of this cost-benefit analysis, and requested
commenters to provide data so the Commission could improve the cost
estimates, including identification of statistics relied on by
commenters to reach conclusions on cost estimates. Finally, the
Commission requested 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 the rule
amendments.
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    \251\ For the purposes of the cost/benefit analysis set forth in
the February 2009 Proposing Release, the Commission used 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. The
salary costs derived from the report and referenced in this costs
and benefits section, are modified to account for an 1,800-hour work
year and multiplied by 5.35 to account for bonuses, firm size,
employee benefits and overhead. Hereinafter, references to data
derived from this SIFMA report as modified in the manner described
above will be cited as SIFMA 2007 Report as Modified. For the
purposes of this costs and benefits section, the Commission is using
updated salary data from SIFMA's Management and Professional
Earnings in the Securities Industry 2008 with similar modifications.
Hereinafter, references to data derived from the most recent SIFMA
report as modified in the manner described above will be cited as
SIFMA 2008 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.\252\ As the Senate Report states, the Rating Agency Act
establishes ``fundamental reform and improvement of the designation
process'' with the goal that ``eliminating the artificial barrier to
entry will enhance competition and provide investors with more choices,
higher quality ratings, and lower costs.'' \253\
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    \252\ Senate Report, p. 2.
    \253\ Id. p. 7.
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    The amendments are designed to improve the transparency of credit
ratings performance and promote competition by making histories of
credit ratings actions publicly available and creating a mechanism for
NRSROs to determine unsolicited credit ratings for structured finance
products.
    The amendments to Rule 17g-2(d) require NRSROs to publicly disclose
all of their ratings actions histories for credit ratings in an
interactive data file that uses a machine-readable computer format
either with a twelve month or twenty-four month grace period, depending
on whether the credit rating was issuer-paid or not. An NRSRO will be
allowed to use any machine-readable format to make this data publicly
available until 60 days after the date on which the Commission
publishes a List of XBRL Tags for NRSROs on its Internet Web site, at
which point the NRSRO will be required to make the information
available in XBRL format using the Commission's List of XBRL Tags for
NRSROs. This disclosure will allow the marketplace to better compare
the performance of NRSROs determining credit ratings. The Commission
believes that making this information publicly available will benefit
users of credit ratings by providing them with useful metrics with
which to compare NRSROs. The Commission also notes that the 100%
requirement will be useful to market participants and observers within
a short period of the rule being effective as the vast majority will be
available at twelve months.
    Analyzing ratings history information for outstanding credit
ratings is the most direct means of comparing the performance of two or
more NRSROs. The access to ratings history data provided by the rule as
amended will facilitate the ability of users of credit ratings to
compare how each NRSRO that maintains a credit rating for a particular
obligor or debt instrument initially rated the instrument and,
thereafter, how and when it adjusted its credit rating over time. This
will provide the benefit of allowing the person reviewing the credit
rating histories of the NRSROs to reach conclusions about which NRSROs
did the best job in determining an initial rating and, thereafter,
making appropriate and timely adjustments to the credit rating.
Increased disclosure of ratings history for credit ratings will make
the performance of the NRSROs more transparent to the marketplace and,
thereby, highlight those firms that do a better job assessing
creditworthiness. This may cause users of credit ratings to give
greater weight to credit ratings of NRSROs that distinguish themselves
by a better history of credit rating performance than their peers.
Moreover, to the extent this improves the quality of the credit
ratings, persons that use credit ratings, for example, to make
investment or lending decisions will have better information upon which
to base their decisions.
    In addition to facilitating the ability of individual comparisons
of NRSRO ratings performance, the Commission believes the ratings
history disclosures will enable market observers and participants to
generate statistics about NRSRO performance by compiling and processing
the information in the aggregate. The ratings history disclosure
requirements adopted today will facilitate the ability of market
observers and participants and other users of credit ratings to
complement the standardized performance metrics disclosure required
under Commission rules by designing their own performance metrics in
order to generate the performance statistics most meaningful to them.
Specifically, the raw data to be provided by NRSROs will allow market
participants to develop performance measurement statistics that would
supplement those required to be published by the NRSROs themselves in
Exhibit 1 to Form NRSRO, tapping into the expertise of credit market
observers and participants in order to create better and more useful
means to compare the performance of NRSROs. In addition, the Commission
believes that the new disclosure requirements will provide the benefit
of fostering greater accountability for NRSROs as well as promoting
competition among NRSROs by making it easier for users of credit
ratings to analyze the actual performance of credit ratings in terms of
accuracy (as defined by each individual user of credit ratings) in
assessing creditworthiness, regardless of the business model under
which an NRSRO operates. These disclosures may also enhance competition
by making it easier for smaller and less established NRSROs to develop
proven track records of determining accurate credit ratings.
    As discussed above and below in the cost discussion, the Commission
recognizes that the amended rule may negatively affect the revenues of
NRSROs. Nevertheless, as explained in greater detail above, the
Commission believes that the amended rule, as adopted, strikes an
appropriate balance between providing users of credit ratings,
investors, and other market participants and observers with a
sufficient volume of raw data with which to gauge the performance of
different NRSROs' ratings over time while at the same time addressing
concerns raised by NRSROs regarding their ability to derive revenue
from granting market participants access to their credit ratings and
downloads of their credit ratings. In particular, by providing 100% of
credit ratings

histories for ratings initially determined after June 26, 2007, the
rule as amended will over time provide a robust data set for users of
credit ratings, investors, and other market participants and observers.
    At the same time, the Commission believes that the twenty-four
month grace period before a credit rating action that is not issuer-
paid is required to be disclosed, as well as requiring only the
disclosure of the credit ratings and not any analysis or report
accompanying the publication of a rating, will not lead to significant
or undue lost revenues to NRSROs operating under the subscriber-paid
business model. Additionally, the Commission believes that the
disclosure of a credit rating action that is issuer-paid on a twelve
month delayed basis also will not lead to undue lost revenue. As noted
previously, the Commission understands that the revenue derived from
payments for downloads of their ratings represents a relatively small
percentage of their total net revenue. The rule does not require an
NRSRO to disclose any analysis or report along with the rating history.
Therefore, the Commission does not believe the fees that NRSROs derive
from selling their analysis along with their ratings will be
significantly impacted. Further, the ability to receive data on a
ratings action twenty-four months after it takes place would not appear
to be an adequate substitute for subscribing to an NRSRO's current
credit ratings, nor would the ability to download credit ratings that
are twelve months old be a substitute for downloading current credit
ratings.
    The amendments to paragraphs (a) and (b) of Rule 17g-5 require
NRSROs that are paid by arrangers to determine credit ratings for
structured finance products to maintain a password-protected Internet
Web site that lists each deal they have been hired to rate. They also
will be required to obtain written representations from the arranger
hiring the NRSRO, on which the NRSRO can reasonably rely, that the
arranger will post all information provided to the NRSRO to determine
the rating and, thereafter, to monitor the rating on a password
protected Internet Web site. NRSROs not hired to determine and monitor
the ratings will then be able to access the NRSRO Internet Web sites to
learn of new deals being rated and access the arranger Internet Web
sites to obtain the information being provided by the arranger to the
hired NRSRO during the initial rating process and, thereafter, for the
purpose of surveillance. However, the ability of NRSROs to access these
NRSRO and arranger Internet Web sites will be limited to NRSROs that
certify to the Commission on an annual basis, among other things, that
they are accessing the information solely for the purpose of
determining or monitoring credit ratings, that they will keep the
information confidential and treat it as material non-public
information, and that they will determine credit ratings for at least
10% of the deals for which they obtain information if they access such
information for ten or more structured finance products in the calendar
year covered by the certification. They are also required to disclose
in the certification the number of deals for which they obtained
information through accessing the Internet Web sites and the number of
ratings they issued using that information during the year covered by
their most recent certification, or, alternatively that they previously
had not accessed such information ten or more times in the most
recently ended calendar year.
    The Commission is adopting these amendments to Rule 17g-5, in part,
pursuant to the authority in Section 15E(h)(2) of the Exchange
Act.\254\ These provisions 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.\255\ The amendments are designed to address conflicts of
interest and improve competition and the quality of credit ratings for
structured finance products by making it possible for more NRSROs to
rate structured finance products. Generally, the information relied on
by the hired NRSROs to rate structured finance products is non-public.
This makes it difficult for other NRSROs to rate these securities and
money market instruments. As a result, the products frequently are
issued with ratings from only one or two NRSROs and only by NRSROs that
are hired by the issuer, sponsor, or underwriter (i.e., NRSROs that are
subject to the conflict of being repeatedly paid by certain arrangers
to rate these securities and money market instruments).
---------------------------------------------------------------------------

    \254\ 15 U.S.C. 78o-7(h)(2).
    \255\ Id.
---------------------------------------------------------------------------

    The Commission's goal is to increase the number of ratings extant
for a given structured finance security or money market instrument and,
in particular, promote the issuance of ratings by NRSROs that are not
hired by the arranger. This will provide users of credit ratings with a
broader range of views on the creditworthiness of the security or money
market instrument than is currently available. The amendments are also
designed to make it more difficult for arrangers to exert influence
over the NRSROs they hire to determine ratings for structured finance
products. Specifically, by opening up the rating process to more
NRSROs, the amendments may make it easier for the hired NRSRO to resist
such pressure by increasing the likelihood that any steps taken to
inappropriately favor the arranger could be exposed to the market
through the ratings issued by other NRSROs.
    As discussed in detail above, the Commission recognizes that the
amendments to Rule 17g-5 will increase the number of credit ratings
available to investors by increasing the number of NRSROs issuing those
ratings, thereby potentially giving arrangers a broader pool of NRSROs
among which to ``shop'' for a rating. The Commission also recognizes
the concern that NRSROs not hired by the arranger might have the
incentive to use information accessed pursuant to Rule 17g-5 as amended
to issue an unduly favorable rating in an attempt to procure future
business from a particular arranger. The Commission believes that there
are several factors counteracting this incentive. First, the 100%
disclosure requirement set forth in Rule 17g-2(d), as amended, will
facilitate users of credit ratings to compare the credit rating
performance of all NRSROs issuing a credit rating for a given
structured finance product, whether the NRSROs are hired by the
arranger to do so or instead are issuing unsolicited ratings based on
information obtained under the provisions of Rule 17g-5 as amended.
This will likely enhance both hired and non-hired NRSRO's
accountability for the ratings they issue. Second, the information
disclosed pursuant Rule 17g-5 will be available to all NRSROs,
including NRSROs operating under the subscriber-paid model. Since the
latter are not compensated by the structured products' arrangers, they
can issue unsolicited ratings without the pressure of worrying about
the effect that the unsolicited ratings might have on their future
revenue stream from arrangers of structured finance. Finally, by
facilitating the issuance of unsolicited ratings, the amendments to
Rule 17g-5 may serve to mitigate the potential for ratings shopping,
since an arranger that ``shopped'' in order to obtain a higher rating
would still face the possibility of non-hired NRSROs issuing lower
ratings.
    The Commission generally requested comment on all aspects of the
benefits

of the amendments as proposed.\256\ In addition, the Commission
requested specific comment on the available metrics to quantify these
benefits and any other benefits the commenter may identify, including
the identification of sources of empirical data that could be used for
such metrics. The Commission did not receive any specific comments in
response.
---------------------------------------------------------------------------

    \256\ See February 2009 Proposing Release, 74 FR at 6473.
---------------------------------------------------------------------------

    The amendment to Regulation FD will accommodate the information
disclosure program that the Commission is establishing under paragraphs
(a) and (b) of Rule 17g-5. Specifically, it will permit issuers to rely
on Regulation FD in providing information to NRSROs that require
subscriptions to access their ratings. In this way, the amendment will
not favor a particular NRSRO business model. Furthermore, to the extent
that it increases the number of NRSRO credit ratings for structured
finance products, users of credit ratings will have more choices.
Finally, the amendment to Regulation FD will provide legal certainty to
arrangers who provide access to the information to NRSROs consistent
with the mechanisms established by Rule 17g-5.

B. Costs

    As discussed below, the amendments will result in costs to NRSROs,
arrangers, and others. The costs to a given NRSRO arising from the
amendments adopted today will depend on its size and the complexity of
its business activities. The size and complexity of NRSROs vary
significantly. Therefore, the cost to implement these rule amendments
will vary significantly across NRSROs. The cost to NRSROs will also
vary depending on which classes of credit ratings an NRSRO issues and
how many outstanding ratings it has in each class. NRSROs which issue
credit ratings for structured finance products may incur higher
compliance costs than those NRSROs which do not issue such credit
ratings or issue very few credit ratings in that class. For these
reasons, the cost estimates represent the average cost across all
NRSROs.
1. Amendment to Rule 17g-2
    The amendments to paragraph (d) of Rule 17g-2 require NRSROs to
make 100% of their ratings action histories for any credit rating
initially determined on or after June 26, 2007 publicly available in an
interactive data file that uses a machine-readable format, with either
a twelve month or twenty-four month grace period, depending on whether
the rating action relates to an issuer-paid credit rating or not.\257\
An NRSRO will be allowed to use any machine-readable format to make
this data publicly available until 60 days after the date on which the
Commission publishes a List of XBRL Tags for NRSROs on its Internet Web
site, at which point the NRSRO will be required to make the information
available in XBRL format using the Commission's List of XBRL Tags for
NRSROs. As discussed with respect to the PRA, the Commission estimates
that the total aggregate one-time burden to the industry to make the
history of its rating actions publicly available initially in a
machine-readable format, and subsequently in XBRL, will be 2,550 hours
\258\ and the total aggregate annual burden hours will be 450
hours.\259\ For cost purposes, the Commission believes that a senior
programmer will perform the functions required to comply with these
requirements. Accordingly, the Commission estimates that an NRSRO will
incur an average one-time cost of $24,820 and an average annual cost of
$4,380, as a result of the proposed amendment.\260\ The Commission does
not believe the NRSRO will incur any additional software cost from
initially providing the information in machine-readable format prior to
transitioning to XBRL. Based on staff experience, the Commission
believes that NRSROs already have the necessary software to provide
this disclosure in machine-readable format. Moreover, the Commission
notes that currently seven NRSROs are providing the disclosure required
pursuant to Rule 17g-2(d) (or the 10% requirement) in machine-readable
format. Therefore, the Commission estimates the total aggregate one-
time paperwork cost to the industry will be $744,600 \261\ and the
total aggregate paperwork costs annual cost to the industry will be
$131,400.\262\
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    \257\ See 17 CFR 240.17g-2(d).
    \258\ 45 hours x 30 NRSROs = 1,350 hours + 5 hours x 30 NRSROs
for the one time burden of switching the disclosure to XBRL for a
total of 1,500; see also supra note 209 at accompanying text.
    \259\ 15 hours x 30 NRSROs = 450 hours; see also supra note 210
at accompanying text.
    \260\ The SIFMA 2008 Report as Modified indicates that the
average hourly cost for a Senior Programmer is $292. Therefore, the
average one-time cost would be $24,820 [(45 hours x $292 per hour) +
(40 hours x $292 per hour for the transition to disclose the
information in XBRL)] and the average annual cost would be $4,380
(15 hours per year x $292 per hour). In the February 2009 Proposing
Release, the Commission based its estimate on an average hourly cost
of $289 for a Senior Programmer as set forth in the SIFMA 2007
Report as Modified, which resulted in estimates of a one-time cost
of $13,005 (45 hours x $289 per hour) and an average annual cost of
$4,335 (15 hours per year x $289 per hour).
    \261\ $24,820 x 30 NRSROs = $744,600. The estimate set forth in
the February 2009 Proposing Release was $390,050 ($13,005 x 30
NRSROs).
    \262\ $4,380 x 30 NRSROs = $131,400. The estimate set forth in
the February 2009 Proposing Release was $130,150 ($4,335 x 30
NRSROs).
---------------------------------------------------------------------------

    In the February 2009 Proposing Release, the Commission noted that
the amendments may impose other costs. For example, making some
information about ratings action histories available to the public for
free may have some impact on the business models of NRSROs, although
the amendment is designed to minimize any such impact. Further, the
rule may affect NRSROs with different revenue sources and business
models differently.
    The Commission generally requested comment on all aspects of these
cost estimates for the proposed amendments to paragraph (d) of Rule
17g-2. In addition, the Commission requested specific comment on the
costs, for example, costs that will result from lost revenues incurred
because NRSROs subject to the rule may not be able to sell ratings
action histories if they are required to be publicly disclosed.\263\
The Commission received seven letters that addressed the costs
associated with complying with the proposed amendments to paragraph (d)
of Rule 17g-2.\264\ Several commenters argued that the proposed
amendments entailed a higher likelihood of substantial financial harm
to subscriber-paid NRSROs,\265\ potentially resulting in fatal harm to
the viability of the subscriber-paid business model.\266\ Three
commenters stated that without a longer grace period, the subscriber-
based NRSROs would suffer a negative impact on sales of their
products.\267\ Two commenters stated that the proposed amendment would
reduce the diversification of their revenue sources.\268\ None of these
commenters, however, provided any figures quantifying these costs.
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    \263\ See February 2009 Proposing Release 74, FR at 6503.
    \264\ See JCR Letter, ASF/SIFMA Letter, R&I Letter, Realpoint
Letter, Moody's Letter, and S&P Letter.
    \265\ See e.g., Hunt Letter; Realpoint Letter; Rapid Ratings
Statement.
    \266\ See e.g., Rapid Ratings Statement.
    \267\ See JCR Letter, R&I Letter, and Realpoint Statement.
    \268\ See Moody's Letter, S&P Letter.
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    As discussed in detail above,\269\ the Commission believes that the
grace periods in the rule will significantly mitigate the negative
impact on NRSRO revenues that are derived from selling access to
current ratings and downloads

of current ratings. The Commission believes that the parties that pay
subscription fees for access to NRSRO credit ratings and who pay for
access to downloadable packages of issuer-paid and unsolicited credit
ratings are unlikely to reconsider their purchase of those products due
to the public availability of twelve to twenty-four month-old ratings
action information. The Commission believes that most of the persons
who pay for these services want access to the NRSRO's current views on
the creditworthiness of obligors and debt instruments; as such, it is
not likely that they will view credit ratings that may be as much as
twenty-four months old as an adequate substitute for access to the
NRSRO's current credit ratings. Furthermore, the amended rule, as
adopted, does not require the disclosure of the analysis and report
that typically accompany the publication of a credit rating. NRSROs
will continue to be able to distribute such information as they see
fit, including selling information to subscribers, which should serve
to mitigate any such potential loss. As explained in detail above, the
Commission's goals in adopting the amendments 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, and the Commission has balanced carefully its goals
with the potential costs. While the Commission believes that NRSRO
revenues derived from selling access to current ratings and downloads
of current ratings will not be affected significantly by these new
disclosure requirements, as previously stated, the Commission intends
to closely monitor the impact, if any, they have on those revenues.
---------------------------------------------------------------------------

    \269\ See supra discussion in Section II.D.
---------------------------------------------------------------------------

    To the extent NRSROs derive revenues from selling access to their
ratings histories, the Commission acknowledges that the new rule may
well have a negative impact on this revenue stream. As noted above, the
amended rule does not require NRSROs to disclose the analysis or report
that typically accompany a credit rating, which is expected to mitigate
any potential loss of revenue. Also, as noted above, information
gathered by Commission staff over the course of discussions with NRSROs
indicates that the amount of revenues they derived from selling access
to ratings histories is not significant when compared to the revenues
derived from other credit rating services. Nonetheless, the Commission
will monitor this issue and, as part of that monitoring, the Commission
encourages an NRSRO to notify the Commission if the rule causes a loss
of this revenue source that is significant when compared to its total
revenues.
    While the Commission intends to closely monitor the impact, if any,
of the rule amendments being adopted today on the revenue derived from
selling access to current and historical ratings as discussed above,
the Commission notes that a decrease in revenues could be the result of
a number of factors. External factors, such as a reduction in
regulatory emphasis on credit ratings, an increase in the level of
independent analysis performed by investors, and a loss of confidence
in the quality of ratings generally could result in an industry-wide
loss of revenues unrelated to the rule amendments being adopted today.
In addition, the increased transparency provided by the rule may cause
users of credit ratings to shift their business to an NRSRO that the
marketplace views as providing better credit ratings.
    One commenter raised an issue regarding the costs associated with
supplying the disclosure with the required CUSIP, stating that it
anticipates an increase in transaction costs to amend its CUSIP license
as well as a potentially higher annual licensing fee.\270\ The
Commission notes that it addressed the potential increased costs
associated with CUSIP licensing security in the February 2009 Adopting
Release and that it believes that the estimates and evaluations of the
costs set forth at that time continue to be valid.\271\
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    \270\ See Moody's Letter.
    \271\ See February 2009 Adopting Release, 74 FR at 6477.
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2. Amendment to Rule 17g-5
    Rule 17g-5 requires an NRSRO to manage and disclose certain
conflicts of interest \272\ and prohibits certain other types of
conflicts of interest outright.\273\ The amendments to Rule 17g-5 add
an additional conflict to paragraph (b) of Rule 17g-5 for NRSROs to
manage: 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.\274\ The amendments further specify that an NRSRO subject
to this conflict is 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: The amendments require an NRSRO that is hired by
arrangers to perform credit ratings for structured finance products to
disclose to other NRSROs the deals for which it is in the process of
determining such credit ratings and to obtain representations from
arrangers that the arrangers will provide the same information given to
the hired NRSRO to other NRSROs. Specifically, an NRSRO rating such
products will need to disclose to other NRSROs the following
information on a password protected Internet Web site: A list of each
such security or money market instrument for which it is currently in
the process of determining an initial credit rating in chronological
order and identifying the type of security or money market instrument,
the name of the issuer, the date the rating process was initiated, and
the Internet Web site address where the issuer, sponsor, or underwriter
of the security or money market instrument represents that the
information described in paragraphs (a)(3)(iii)(C) and (D) of Rule 17g-
5 as amended can be accessed.\275\
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    \272\ 17 CFR 240.17g-5(a) and (b).
    \273\ 17 CFR 240.17g-5(c).
    \274\ Paragraph (b)(9) of Rule 17g-5.
    \275\ Paragraph (a)(3)(i) of Rule 17g-5.
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    The Commission estimates that the average one-time cost to each
NRSRO to establish the Internet Web site required under the rule as
amended would be $66,900,\276\ resulting in a total aggregate one-time
cost to all NRSROs of $2,007,000.\277\ As discussed with respect to the
PRA, the Commission estimates a total aggregate annual hour burden of
14,880 hours.\278\ The Commission estimates that the average annual
cost to a large NRSRO would be $799,280, the average annual cost to an
NRSRO not in that category would be

$24,720,\279\ and the total aggregate annual cost to NRSROs will be
$3,065,280.\280\
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    \276\ The Commission believes that an NRSRO would have a
Compliance Manager and a Programmer Analyst perform these
responsibilities, and that each would spend 50% of the estimated
hours performing these responsibilities. The SIFMA 2008 Report as
Modified indicates that the average hourly cost for a Compliance
Manager is $258 and the average hourly cost for a Programmer Analyst
is $193. Therefore, the average one-time cost to an NRSRO would be
(150 hours x $253) + (150 hours x $193) = $66,900. In the February
2009 Proposing Release, the Commission based its estimate on an
average hourly cost of $245 for a Compliance Manager and $194 for a
Programmer Analyst as set forth in the SIFMA 2007 Report as
Modified, which resulted in an estimate of an average one-time cost
to an NRSRO of (150 hours x $245) + (150 hours x $194) = $65,850.
    \277\ $66,900 x 30 NRSROs = $2,007,000. The estimate set forth
in the February 2009 Proposing Release was $1,975,500 ($65,850 x 30
NRSROs).
    \278\ (3,880 hours per large NRSRO x 3) + (120 hours per NRSRO
not in that category x 27) = 14,880 hours.
    \279\ The Commission believes that an NRSRO would have a
Webmaster perform these responsibilities. The SIFMA 2008 Report as
Modified indicates that the average hourly cost for a Webmaster is
$206. Therefore, the average annual cost for a large NRSRO averaging
3,880 structured finance ratings would be $799,280 (3,880 hours x
$206) and the average annual cost for an NRSRO not in that category
averaging 120 structured finance ratings would be $24,720 (120 hours
x $206). In the February 2009 Proposing Release, the Commission
based its estimate on an average hourly cost of $205 for a Webmaster
as set forth in the SIFMA 2007 Report as Modified, which resulted in
an estimate of an average annual cost to a large NRSRO of $795,400
(3,880 hours x $205) and an average annual cost to NRSROs not in
that category of $24,600 (120 hours x $205 = $24,600.)
    \280\ ($799,280 x 3) + ($24,720 x 27) = $3,065,280.
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    The amendments also require the hired NRSRO to obtain
representations from the arranger that the arranger will disclose the
following information:
     All information the issuer, sponsor, or underwriter
provides to the nationally recognized statistical rating organization
for the purpose of determining the initial credit rating for the
security or money market instrument, including information about the
characteristics of the assets underlying or referenced by the security
or money market instrument, and the legal structure of the security or
money market instrument, at the same time such information is provided
to the nationally recognized statistical rating organization; and
     All information the issuer, sponsor, or underwriter
provides to the nationally recognized statistical rating organization
for the purpose of undertaking credit rating surveillance on the
security or money market instrument, including information about the
characteristics and performance of the assets underlying or referenced
by the security or money market instrument at the same time such
information is provided to the nationally recognized statistical rating
organization.\281\
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    \281\ See 17 CFR 240.17g-5(a)(3)(iii).
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    For purposes of the PRA, as discussed above, the Commission
estimates that it will take an NRSRO approximately 5 hours to develop
the written representation that the NRSRO is required to obtain from
the issuer, sponsor or underwriter. The Commission estimates that the
average one-time cost to an NRSRO would be $1,525 and the total
aggregate one-time cost to NRSROs will be $45,750.\282\
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    \282\ The Commission believes that the NRSRO would have an in-
house Attorney perform these responsibilities. The SIFMA 2008 Report
as Modified indicates that the average hourly cost for an Attorney
is $305. Therefore, the average one-time cost to an NRSRO would be
(5 hours x $305) = $1,525, and the aggregate one-time cost to an
NRSRO would be 30 NRSROs x $1,525 = $45,750.
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    For purposes of the PRA, as discussed above, the Commission
estimates that it will take an arranger approximately 300 hours to
develop a system, as well as policies and procedures to disclose the
information. This results in a total one-time hour burden of 60,000
hours for 200 arrangers.\283\ For these reasons, the Commission
estimates that the average one-time cost to each arranger will be
$66,900 \284\ and the total aggregate one-time cost to the industry
would be $13,380,000.\285\
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    \283\ 300 hours x 200 respondents = 60,000 hours.
    \284\ The Commission believes that an arranger would have a
Compliance Manager and a Programmer Analyst perform these
responsibilities, and that each would spend 50% of the estimated
hours performing these responsibilities. The SIFMA 2008 Report as
Modified indicates that the average hourly cost for a Compliance
Manager is $258 and the average hourly cost for a Programmer Analyst
is $193. Therefore, the average one-time cost to an arranger would
be (150 hours x $253) + (150 hours x $193) = $66,900. In the
February 2009 Proposing Release, the Commission based its estimate
on an average hourly cost of $245 for a Compliance Manager and $194
for a Programmer Analyst as set forth in the SIFMA 2007 Report as
Modified, which resulted in an estimate of an average one-time cost
to an arranger of (150 hours x $245) + (150 hours x $194) = $65,850.
    \285\ $66,900 x 200 arrangers = $13,380,000. The estimate set
forth in the February 2009 Proposing Release was $13,117,000
($65,850 x 200 arrangers = $13,117,000).
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    As discussed with respect to the PRA, in addition to the one-time
hour burden, arrangers also will disclose the information on a
transaction by transaction basis. Based on staff experience and the
estimate of 4,000 new structured finance deals per year, as discussed
above, the Commission estimates that the amendments will result in each
arranger disclosing information with respect to approximately 20 new
transactions per year and that it will take approximately 1 hour per
transaction to make the information publicly available.\286\ Therefore,
as discussed with respect to the PRA, the Commission estimates that the
total aggregate annual hour burden for arrangers will be 4,000
hours.\287\ The Commission estimates that the average annual cost to a
respondent to be $4,120 \288\ and the total annual cost to the industry
to be $824,000.\289\
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    \286\ This estimate is based on the arranger already
implementing the system and policies and procedures for disclosure.
The Commission cannot estimate the number of initial transactions
per year with certainty. The Commission believes that the number of
deals on which each arranger will disclose information will vary
widely based on the size of the arranger. In addition, the
Commission believes that the number of asset-backed or mortgaged-
backed issuances being rated by NRSROs in the next few years is
difficult to predict given the recent credit market turmoil. The
estimates, however, reflect the Commission's best assessment of the
number of transactions based on experience and the available data.
    \287\ 20 hours x 200 respondents = 4,000 hours.
    \288\ The Commission believes that an arranger would have a
Webmaster perform these responsibilities. The SIFMA 2008 Report as
Modified indicates that the average hourly cost for a Webmaster is
$206. Therefore, the average one-time cost to a respondent would be
20 hours x $206 = $4,120. In the February 2009 Proposing Release,
the Commission based its estimate on an average hourly cost of $205
for a Webmaster as set forth in the SIFMA 2007 Report as Modified,
which resulted in an estimate of an average one-time cost to an
arranger of $4,100 (20 hours x $205 = $4,100.)
    \289\ $4,120 x 200 respondents = $824,000. The estimate set
forth in the February 2009 Proposing Release was $820,000 ($4,100 x
200 respondents = $820,000.)
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    Rule 17g-5(a)(3)(iii)(D) requires hired NRSROs to obtain
representations from the arranger that the arranger will disclose
information provided to the hired NRSRO to undertake credit rating
surveillance on a structured product. Because surveillance covers more
than just initial ratings, the Commission estimates that an arranger
will disclose information with respect to approximately 125
transactions on an ongoing basis and that the information will be
provided to the hired NRSRO on a monthly basis. As discussed with
respect to the PRA, the Commission estimates a total aggregate annual
burden hours of 150,000 hours.\290\ The Commission estimates that the
average annual cost to a respondent will be $154,500 \291\ and the
total annual cost to the industry will be $30,900,000.\292\
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    \290\ 750 hours x 200 respondents = 150,000 hours.
    \291\ The Commission believes that an arranger would have a
Webmaster perform these responsibilities. The SIFMA 2008 Report as
Modified indicates that the average hourly cost for a Webmaster is
$206. Therefore, the average annual cost to a respondent would be
750 hours x $206 = $154,500. In the February 2009 Proposing Release,
the Commission based its estimate on an average hourly cost of $205
for a Webmaster as set forth in the SIFMA 2007 Report as Modified,
which resulted in an estimate of an average annual cost to an
arranger of $153,750 (750 hours x $205 = $153,750.)
    \292\ $154,500 x 200 respondents = $30,900,000. The estimate set
forth in the February 2009 Proposing Release was $30,750,000
($153,750 x 200 respondents = $30,750,000).
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    An NRSRO that wishes to access information on another NRSRO's Web
site or on an arranger's Web site will need to provide the Commission
with an annual certification described in proposed new paragraph (e) to
Rule 17g-5. In the PRA, the Commission estimates an aggregate annual
hour burden to the industry of 60 hours.\293\ For these reasons, the
Commission estimates it will cost an NRSRO approximately $516 dollars
per year \294\

and the industry $15,480 per year to comply with the certification
requirement.\295\
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    \293\ 2 hours x 30 NRSROs = 60 hours.
    \294\ The Commission believes that an NRSRO would have a
Compliance Manager prepare the annual certification. The SIFMA 2008
Report as Modified indicates that the average hourly cost for a
Compliance Manager is $258. Therefore, the average annual cost to an
arranger would be $516 (2 hours x $258 = $516). In the February 2009
Proposing Release, the Commission based its estimate on an average
hourly cost of $245 for a Compliance Manager which resulted in an
estimate of an average annual cost to an arranger of $490 (2 hours x
$245 = $490.)
    \295\ $516 x 30 NRSROs = $15,480. The estimate set forth in the
February 2009 Proposing Release was $14,700 ($490 x 30 NRSROs =
$14,700).
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    The Commission requested comment on all aspects of these cost
estimates for the amendments to Rule 17g-5. In addition, the Commission
requested specific comment on whether the proposals impose costs on
other market participants, including persons who use credit ratings to
make investment decisions or for regulatory purposes, and persons who
purchase services and products from NRSROs; and whether there would be
additional costs not identified.\296\ The Commission received three
comment letters that addressed the costs associated with the amendments
to Rule 17g-5.\297\ One commenter stated that the consideration of
financial impact should be based on the economic value a given entity
contributes to the economy and not the company's financial health.\298\
Another stated that the proposal would create the need for additional
technology and staff, especially in consideration of the strong
controls needed to protect the proprietary data published on the Web
site.\299\ The third commenter raised the concern that the formulations
of the disclosures and information-sharing proposals could create costs
that outweigh any burden.\300\ As discussed above, the Commission
believes the benefits of the enhanced disclosure requirements pursuant
to Rule 17g-5 justify the costs.
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    \296\ See February 2009 Proposing Release, 74 FR at 6505.
    \297\ See Marchywka Letter, FSR Letter, ASF Statement.
    \298\ See Marchywka Letter.
    \299\ See FSR Letter.
    \300\ See ASF Statement.
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    Lastly, the Commission notes that the conforming amendment to
Regulation FD needed to facilitate the disclosure requirements under
Rule 17g-5 will not result in any additional costs.

VI. Consideration of Burden on Competition and Promotion of Efficiency,
Competition, and Capital Formation

    Section 23(a)(2) of the Exchange Act \301\ requires the Commission,
when making rules and regulations under the Exchange Act, to consider
the impact a new rule would have on competition. In addition, Section
23(a)(2) of the Exchange Act prohibits the Commission from adopting any
rule that would impose a burden on competition not necessary or
appropriate in furtherance of the purposes of the Exchange Act. Section
3(f) of the Exchange Act \302\ requires the Commission, when engaging
in rulemaking that requires it to consider or determine whether an
action is necessary or appropriate in the public interest, to consider
whether the action would promote efficiency, competition, and capital
formation.
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    \301\ 15 U.S.C. 78w(a).
    \302\ 15 U.S.C. 78c(f).
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    As discussed in detail above, the amendments to paragraph (d) of
Rule 17g-2 are designed to provide the marketplace with additional
information for comparing the ratings performance of NRSROs and,
therefore, provide users of credit ratings with more useful metrics
with which to compare these NRSROs. Increased disclosure of ratings
history for credit ratings will make the performance of the NRSROs more
transparent to the marketplace and, thereby, highlight those firms that
do a better job analyzing credit risk. This may cause users of credit
ratings to give greater weight to credit ratings of NRSROs that
distinguish themselves by creating a track record of better credit
rating performance than their peers. Moreover, to the extent this
improves the quality of the credit ratings, persons that use credit
ratings to make investment or lending decisions would have better
information upon which to base their decisions. As a consequence, the
rule may result in a more efficient allocation of capital and loans to
issuers and obligors based on the risk appetites of the investors and
lenders. The Commission believes that this enhanced disclosure will
benefit smaller NRSROs that determine issuer-paid credit ratings to the
extent they do a better job of assessing creditworthiness because these
smaller NRSROs will be better able to compete with the larger NRSROs
for new business; users of credit ratings will be able to compare
credit rating performance, allowing smaller NRSROs more easily to
compete based on quality and creditability of their ratings.
    Also as discussed in detail above, the amendments to paragraphs (a)
and (b) of Rule 17g-5 are designed to enhance competition among NRSROs.
The goal of these amendments is to provide a mechanism to enhance the
ability of NRSROs to prepare unsolicited credit ratings, which would
provide users of credit ratings with more assessments of the
creditworthiness of a structured finance product. This mechanism may
expose NRSROs whose procedures and methodologies for determining credit
ratings are less conservative in order to gain business. In the same
way, by creating a mechanism for a range of NRSROs to issue ratings, it
also may mitigate the impact of rating shopping if ratings issued by
NRSROs not hired to rate a deal differ from those of hired NRSROs.
These potential impacts of the amendments may help to restore
confidence in credit ratings and, thereby, promote capital formation.
The Commission further believes that these amendments could promote the
more efficient allocation of capital by investors to the extent the
quality of credit ratings is improved. In addition, these amendments
could increase competition by creating a mechanism for smaller NRSROs
to obtain the information necessary to rate structured products and to
market themselves based on a demonstrated proficiency in rating these
structured products.
    The Commission generally requested comment on all aspects of this
analysis of its consideration of the effect on competition and
promotion of efficiency, competition, and capital formation. Several
commenters argued that the proposed amendments entailed a higher
likelihood of substantial financial harm to subscriber-paid
NRSROs,\303\ potentially resulting in fatal harm to the viability of
the subscriber-paid business model.\304\ Three commenters stated that
without a longer grace period, the subscriber-based NRSROs would suffer
a negative impact on sales of their products.\305\
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    \303\ See e.g., Hunt Letter; Realpoint Letter; Rapid Ratings
Statement.
    \304\ See e.g., Rapid Ratings Statement.
    \305\ See JCR Letter, R&I Letter, and Realpoint Statement.
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    As discussed in detail above, the Commission acknowledges the
different grace periods provided for ratings disclose with respect to
credit ratings that are issuer-paid or not.\306\ The Commission
believes that any competitive effects are limited because of the
tailored time periods. The Commission believes that the twenty-four
month grace period will significantly mitigate the negative impact on
NRSRO revenues that are derived from selling subscriptions to their
credit ratings and that the twelve month grace period will mitigate the
impact on NRSRO revenues that are derived from selling downloadable
access to their current credit ratings. Furthermore, the Commission
believes that the parties that pay subscription fees for access to
NRSRO credit ratings

are unlikely to reconsider their purchase of those products due to the
public availability of twenty-four month-old ratings action
information. Likewise, the Commission believes that persons who pay for
downloadable access to their current credit ratings are unlikely to re-
consider their purchase of those products due to the public
availability for databases containing twelve-month-old ratings action
information.\307\ The Commission believes that most of the persons who
pay for these services want access to the NRSRO's current views on the
creditworthiness of obligors and debt instruments; as such, it is not
likely that they will view credit ratings that are twelve to twenty-
four months old as an adequate substitute for access to the NRSRO's
current credit ratings. As noted previously, the amended rule, as
adopted, does not require the disclosure of the analysis and report
that typically accompany the publication of a credit rating. NRSROs
will continue to be able to distribute such information as they see