\488\ See proposed new paragraph (a)(1)(ii)(L) of Rule 17g-7.
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    Paragraph (a)(1)(ii)(M). The thirteenth item of information would
be identified in proposed new paragraph (a)(1)(ii)(M) of Rule 17g-
7.\489\ This paragraph would implement Section 15E(s)(3)(B)(iii) of the
Exchange Act, which provides that the Commission's rule shall require
the NRSRO to disclose in the form information on the sensitivity of the
credit rating to assumptions made by the NRSRO, including: (1) Five
assumptions made in the ratings process that, without accounting for
any other factor, would have the greatest impact on a rating if the
assumptions were proven false or inaccurate; and (2) an analysis, using
specific examples, of how each of the 5 assumptions identified impacts
a credit rating.\490\ The Commission preliminarily believes that the
statutory text is explicit with respect to the information to be
disclosed and, consequently proposed new paragraph (a)(1)(ii)(M) of
Rule 17g-7 would mirror

the statutory text.\491\ In particular, proposed new paragraph
(a)(1)(ii)(M) of Rule 17g-7 would require the NRSRO to disclose in the
form information on the sensitivity of the rating to assumptions made
by the NRSRO, including: (1) 5 assumptions made in the ratings process
that, without accounting for any other factor, would have the greatest
impact on a rating if the assumptions were proven false or inaccurate;
and (2) an analysis, using specific examples, of how each of the 5
assumptions identified in the form impacts a rating.\492\
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    \489\ See proposed new paragraph (a)(1)(ii)(M) of Rule 17g-7.
    \490\ See 15 U.S.C. 78o-7(s)(3)(B)(iii).
    \491\ Compare 15 U.S.C. 78o-7(s)(3)(B)(iii), with proposed new
paragraph (a)(1)(ii)(M) of Rule 17g-7.
    \492\ See proposed new paragraph (a)(1)(ii)(M) of Rule 17g-7.
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    Paragraph (a)(1)(ii)(N). Finally, the fourteenth item of
information would be identified in proposed new paragraph (a)(1)(ii)(N)
of Rule 17g-7.\493\ This paragraph would contain the current disclosure
requirement in Rule 17g-7.\494\ In particular, the current requirements
in paragraphs (a) and (b) of Rule 17g-7 would be contained in proposed
new paragraph (a)(1)(ii)(N).\495\ Specifically, this paragraph would
provide that if the credit rating is issued with respect to an asset-
backed security, as that term is defined in Section 3(a)(77) of the
Exchange Act, the NRSRO must include in the form a description of: (1)
The representations, warranties, and enforcement mechanisms available
to investors; and (2) how they differ from the representations,
warranties, and enforcement mechanisms in issuances of similar
securities.
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    \493\ See proposed new paragraph (a)(1)(ii)(N) of Rule 17g-7.
    \494\ See 17 CFR 240.17g-7. As discussed above Section II.G.1 of
this release, the definition of ``credit rating'' in the third
sentence of the prefatory text to proposed new paragraph (a) of Rule
17g-7 would contain the provisions in the current Note to 17 CFR
240.17g-7, which provides that for the purposes of the rule's
current requirements, a ``credit rating'' includes any expected or
preliminary credit rating issued by an NRSRO.
    \495\ Compare 17 CFR 240.17g-7(a) and (b), with proposed new
paragraph (a)(1)(ii)(N) of Rule 17g-7.
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Request for Comment
    The Commission generally requests comment on all aspects of
proposed paragraph (a)(1)(ii) of proposed Rule 17g-7. The Commission
also seeks comment on the following:
    1. With respect to proposed paragraph (a)(1)(ii)(A), should the
Commission consider requiring the disclosure of information in addition
to the identity of the obligor's legal name and any other name that the
obligor uses in its business? Are there additional or alternative ways
to identify the obligor? Also, provide examples of how this disclosure
might appear on the form.
    2. With respect to proposed paragraph (a)(1)(ii)(A), should the
Commission consider requiring the disclosure of information in addition
to the name of the security or money market instrument, if applicable,
and a description of the security or money market instrument? Are there
additional or alternative ways to identify the security or money market
instrument? Would disclosing the CUSIP alone be sufficient to identify
the security or money market instrument? If so, should the Commission
consider requiring that the CUSIP be disclosed? Also, provide examples
of how this disclosure might appear on the form.
    3. With respect to proposed paragraph (a)(1)(ii)(B), would the
disclosure of the version of the procedure or methodology used to
determine the credit rating in conjunction with proposed paragraph
(a)(5) of Rule 17g-8 achieve the goals of Section 15E(r)(3)(A) of the
Exchange Act? If not, what alternative or additional requirements
should the Commission consider? Also, provide examples of how this
disclosure might appear on the form.
    4. Proposed paragraph (a)(1)(ii)(C) of Rule 17g-7 would require an
NRSRO to disclose in the form the main assumptions and principles used
in constructing the procedures and methodologies used to determine the
credit rating, including qualitative methodologies and quantitative
inputs and, if the credit rating is for a structured finance product,
assumptions about the correlation of defaults across the underlying
assets. Is this proposed requirement sufficiently explicit with respect
to the information that would need to be disclosed? If not, what
additional detail should the Commission provide in terms of the
information that would need to be disclosed? Also, provide examples of
how this disclosure might appear on the form. In addition, would the
proposal require the disclosure of proprietary information? If so, what
type or types of proprietary information would be disclosed? How could
this issue be addressed?
    5. Proposed paragraph (a)(1)(ii)(D) of Rule 17g-7 would require the
NRSRO to disclose in the form the potential limitations of the credit
rating, including the types of risks excluded from the credit rating
that the NRSRO does not comment on, including, as applicable,
liquidity, market, and other risks. Is this proposed requirement
sufficiently explicit with respect to the information that would need
to be disclosed? If not, what additional detail should the Commission
provide in terms of the information that would need to be disclosed?
Also, provide examples of how this disclosure might appear on the form.
    6. Proposed paragraph (a)(1)(ii)(E) of Rule 17g-7 require the NRSRO
to disclose in the form information on the uncertainty of the credit
rating, including: (1) Information on the reliability, accuracy, and
quality of the data relied on in determining the credit rating; and (2)
a statement relating to the extent to which data essential to the
determination of the credit rating were reliable or limited, including:
Any limits on the scope of historical data; and any limits in
accessibility to certain documents or other types of information that
would have better informed the credit rating. Is this proposed
requirement sufficiently explicit with respect to the information that
would need to be disclosed? If not, what additional detail should the
Commission provide in terms of the information that would need to be
disclosed? Also, provide examples of how this disclosure might appear
on the form. In addition, would the proposal require the disclosure of
proprietary information? If so, what type or types of proprietary
information would be disclosed? How could this issue be addressed?
    7. Proposed paragraph (a)(1)(ii)(F) of Rule 17g-7 would require the
NRSRO to disclose in the form whether and to what extent third-party
due diligence services were used by NRSRO organization, a description
of the information that such third-party reviewed in conducting due
diligence services, and a description of the findings or conclusions of
such third-party? Is this proposed requirement sufficiently explicit
with respect to the information that would need to be disclosed? If
not, what additional detail should the Commission provide in terms of
the information that would need to be disclosed? Also, provide examples
of how this disclosure might appear on the form.
    8. With respect to proposed paragraph (a)(1)(ii)(F) of Rule 17g-7,
how should the findings and conclusions of any third-party due
diligence report made publicly available by the issuer or underwriter
pursuant to Section 15E(s)(4)(A) of the Exchange Act be incorporated
into the disclosure if used by the NRSRO? Similarly, how should any
certifications the NRSRO receives from providers of third-party due
diligence services pursuant to Section 15E(s)(4)(B) of the Exchange Act
be

incorporated into the disclosure if used by the NRSRO? Also, provide
examples of how this disclosure might appear on the form.
    9. Proposed paragraph (a)(1)(ii)(G) of Rule 17g-7 would require the
NRSRO to disclose in the form, if applicable, how servicer or
remittance reports were used, and with what frequency, to conduct
surveillance of the credit rating? Is this proposed requirement
sufficiently explicit with respect to the information that would need
to be disclosed? If not, what additional detail should the Commission
provide in terms of the information that would need to be disclosed?
Also, provide examples of how this disclosure might appear on the form.
    10. Proposed paragraph (a)(1)(ii)(H) of Rule 17g-7 would require
the NRSRO to disclose in the form a description of the data about any
obligor, issuer, security, or money market instrument that was relied
upon for the purpose of determining the credit rating? Is this proposed
requirement sufficiently explicit with respect to the information that
would need to be disclosed? If not, what additional detail should the
Commission provide in terms of the information that would need to be
disclosed? Also, provide examples of how this disclosure might appear
on the form.
    11. Proposed paragraph (a)(1)(ii)(I) of Rule 17g-7 would require
the NRSRO to disclose in the form a statement containing an overall
assessment of the quality of information available and considered in
producing a rating for an obligor, security, or money market
instrument, in relation to the quality of information available to the
NRSRO in rating similar obligors, securities, or money market
instruments. Is this proposed requirement sufficiently explicit with
respect to the information that would need to be disclosed? If not,
what additional detail should the Commission provide in terms of the
information that would need to be disclosed? Also, provide examples of
how this disclosure might appear on the form.
    12. With respect to proposed paragraph (a)(1)(ii)(J)(1) of Rule
17g-7, are the proposed definitions of ``solicited sell-side'',
``solicited buy-side'', and ``unsolicited'' credit ratings sufficiently
clear? If not, how should the definitions be augmented or altered?
Also, provide examples of how this disclosure might appear on the form.
    13. With respect to proposed paragraph (a)(1)(ii)(J)(1) of Rule
17g-7, would distinguishing between ``solicited sell-side'' and
``solicited buy-side'' credit ratings provide useful disclosure of
potentially different conflicts of interest? Alternatively, should the
disclosure more simply require classification of whether the credit
rating was ``solicited'' or ``unsolicited''? Also, provide examples of
how this disclosure might appear on the form.
    14. With respect to proposed paragraph (a)(1)(ii)(J)(2) of Rule
17g-7, would the proposed disclosure of whether the NRSRO provided
other services to the person that paid for the credit rating during the
most recently ended fiscal year provide useful disclosure of potential
conflicts of interest? Also, provide examples of how this disclosure
might appear on the form.
    15. With respect to proposed paragraph (a)(1)(ii)(J) of Rule 17g-7,
is there other information about conflicts of interest that the
Commission should consider requiring to be disclosed in the form?
Commenters should provide specific examples of such information and
explain how it would provide useful information. Also, provide examples
of how this disclosure might appear on the form.
    16. Proposed paragraph (a)(1)(ii)(K) of Rule 17g-7 would require
the NRSRO to disclose in the form an explanation or measure of the
potential volatility of the credit rating, including: (1) Any factors
that might lead to a change in the credit rating; and (2) the magnitude
of the change that could occur under different market conditions. Is
this proposed requirement sufficiently explicit with respect to the
information that would need to be disclosed? If not, what additional
detail should the Commission provide in terms of the information that
would need to be disclosed? Also, provide examples of how this
disclosure might appear on the form. Should the Commission provide
guidance on the types of factors that should be disclosed to establish
a materiality threshold? If so, describe the factors and the
corresponding materiality threshold. Furthermore, should the Commission
define the term ``might lead to a change in the credit rating'' to
establish the level of probability necessary to trigger the disclosure?
If so, how should the term be defined?
    17. Proposed paragraph (a)(1)(ii)(L) of Rule 17g-7 would require
the NRSRO to disclose in the form information on the content of the
rating, including: (1) If applicable, the historical performance of the
rating; and (2) the expected probability of default and the expected
loss in the event of default. Is this proposed requirement sufficiently
explicit with respect to the information that would need to be
disclosed? If not, what additional detail should the Commission provide
in terms of the information that would need to be disclosed? Also,
provide examples of how this disclosure might appear on the form.
    18. With respect to proposed paragraph (a)(1)(ii)(M) of Rule 17g-7
would require the NRSRO to disclose in the form information on the
sensitivity of the rating to assumptions made by the NRSRO, including:
(1) 5 assumptions made in the ratings process that, without accounting
for any other factor, would have the greatest impact on a rating if the
assumptions were proven false or inaccurate; and (2) an analysis, using
specific examples, of how each of the 5 assumptions identified in the
form impacts a rating? Is this proposed requirement sufficiently
explicit with respect to the information that would need to be
disclosed? If not, what additional detail should the Commission provide
in terms of the information that would need to be disclosed? Also,
provide examples of how this disclosure might appear on the form. In
addition, would the proposal require the disclosure of proprietary
information? If so, what type or types of proprietary information would
be affected? How could this issue be addressed?
    19. Is the proposal to codify the current requirements in
paragraphs (a) and (b) of Rule 17g-7 in proposed paragraph
(a)(1)(ii)(N) of Rule 17g-7 appropriate? For example, would this re-
designation change those requirements in some manner?
4. Paragraph (a)(1)(iii)--Attestation Requirement
    Section 15E(q)(2)(F) of the Exchange Act provides that the
Commission's rules must require an NRSRO to include an attestation with
any credit rating it issues affirming that no part of the rating was
influenced by any other business activities, that the rating was based
solely on the merits of the instruments being rated, and that such
rating was an independent evaluation of the risks and merits of the
instrument.\496\ While Section 15E(q) relates to disclosure of
information about the performance of credit ratings, the Commission
preliminarily believes this attestation provision would more
appropriately be implemented with respect to disclosures that must be
made when a specific rating action is published. Consequently, the
Commission proposes that it be part of the form that would be required
to accompany a credit rating pursuant to

rulemaking under Section 15E(s) of the Exchange Act as opposed to a
part of the proposed disclosures of Transition/Default Matrices in
Exhibit 1 to Form NRSRO or credit rating histories that would implement
Section 15E(q).\497\
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    \496\ See 15 U.S.C. 78o-7(q)(2)(F).
    \497\ See 15 U.S.C. 78o-7(s) and 15 U.S.C. 78o-7(q).
---------------------------------------------------------------------------

    Consequently, the Commission proposes to implement this attestation
requirement as part of the rule requirement for an NRSRO to generate a
form to accompany the publication of a credit rating.\498\ In
particular, under the proposal, the NRSRO would be required to attach
to the form a signed statement by a person within the NRSRO stating
that the person has responsibility for the credit rating and, to the
best knowledge of the person: (1) No part of the credit rating was
influenced by any other business activities; (2) the credit rating was
based solely upon the merits of the obligor, security, or money market
instrument being rated; and (3) the credit rating was an independent
evaluation of the risks and merits of the obligor, security, or money
market instrument.\499\ Thus, the proposed requirement would mirror the
statutory text in terms of the representations that would need to be
made in the attestation.\500\
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    \498\ See 15 U.S.C. 78o-7(s).
    \499\ See proposed new paragraphs (a)(1)(iii)(A)-(C) of Rule
17g-7.
    \500\ Compare proposed new paragraphs (a)(1)(iii)(A)-(C) of Rule
17g-7, with 15 U.S.C. 78o-7(q)(2)(F).
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Request for Comment
    The Commission generally requests comment on all aspects of
proposed paragraph (a)(1)(iii) of proposed Rule 17g-7. The Commission
also seeks comment on the following:
    1. Are there alternative means of implementing Section 15E(q)(2)(F)
with respect to the attestation requirement? For example, should
Section 15E(q)(2)(F) be implemented in proposed provisions requiring
NRSROs to disclose information about the performance of credit ratings
(i.e., the proposed Form NRSRO Exhibit 1 Transition/Default Matrices
and/or the proposed ratings histories disclosure requirement)? If so,
how would the attestation requirement be made a part of either of these
other proposals?
    2. What person within the NRSRO has responsibility for the credit
rating and the other information that would be required to be disclosed
in the form and, consequently, could make the attestation? For example,
could the lead analyst, the chair of the rating committee, a senior
manager, or some other person make the proposed attestation?
5. Paragraph (a)(2)--Certification of Third-Party Due Diligence
Provider
    Section 15E(s)(4)(B) of the Exchange Act requires a third-party
providing due diligence services to an NRSRO, issuer, or underwriter
with respect to an Exchange Act-ABS \501\ to provide a written
certification to any NRSRO that produces a credit rating to which the
due diligence services relate.\502\ Section 15E(s)(4)(D) of the
Exchange Act provides that the Commission shall adopt a rule requiring
an NRSRO that receives a certification from a provider of third-party
due diligence services to disclose the certification to the public in a
manner that allows the public to determine the adequacy and level of
the due diligence services provided by the third-party.\503\ The
Commission preliminarily believes that this goal could best be achieved
by requiring the NRSRO to disclose any such certifications with the
publication of the NRSRO's credit rating to which the certification
relates. Therefore, the Commission is proposing to add a new paragraph
(a)(2) to Rule 17g-7 that, in conjunction with the proposed prefatory
text of paragraph (a), would provide that the NRSRO must include with
the publication of a credit rating any written certification related to
the credit rating received from a provider of third-party due diligence
services pursuant to Section 15E(s)(4)(B) of the Exchange Act.\504\
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    \501\ See 15 U.S.C. 78o-7(s)(4)(A)-(D). As noted earlier, the
term ``structured finance product'' as used throughout this release
refers broadly to any security or money market instrument issued by
an asset pool or as part of any asset-backed or mortgage-backed
securities transaction. This broad category of financial instrument
includes an ``asset-backed security'' as defined in Section 3(a)(77)
of the Exchange Act (15 U.S.C. 78c(a)(77)) and other types of
structured debt instruments such as CDOs, including synthetic and
hybrid CDOs. The term ``Exchange Act-ABS'' as used throughout this
release refers more narrowly to an ``asset-backed security'' as
defined in Section 3(a)(77) of the Exchange Act. 15 U.S.C.
78c(a)(77).
    \502\ See 15 U.S.C. 78o-7(s)(4)(B).
    \503\ See 15 U.S.C. 78o-7(s)(4)(D).
    \504\ See proposed paragraph (a)(2) of Rule 17g-7.
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Request for Comment
    The Commission generally requests comment on all aspects of
proposed new paragraph (a)(2) of Rule 17g-7. The Commission also seeks
comment on the following:
    1. Would it be appropriate to require the inclusion of the
certification of the provider of third-party due diligence services
with the publication of the credit rating and the form containing
information about the credit rating? Is there an alternative means of
disclosing the certifications that would be reasonably designed to
ensure they are disseminated to users of the NRSRO's credit ratings? If
so, describe the method of disclosure.

H. Third-Party Due Diligence for Asset-Backed Securities

    Section 932(a)(8) of the Dodd-Frank Act amended Section 15E of the
Exchange Act to add new paragraph (s), which, as discussed above in
Section II.G of this release, has four subparagraphs: (1), (2), (3) and
(4).\505\ Section 15E(s)(4), ``Due diligence services for asset-backed
securities,'' contains four provisions regarding due diligence services
relating to an Exchange Act-ABS. Section 15E(s)(4)(A) requires the
issuer or underwriter to make publicly available the findings and
conclusions of any third-party due diligence report obtained by the
issuer or underwriter.\506\ Section 15E(s)(4)(B) requires that in any
case in which third-party due diligence services are employed by an
NRSRO, an issuer, or an underwriter, the person providing the due
diligence services shall provide to any NRSRO that produces a rating to
which such services relate, written certification in a format as
provided in Section 15E(s)(4)(C).\507\ Section 15E(s)(4)(C) of the
Exchange Act provides that the Commission shall establish the
appropriate format and content for the written certifications required
under Section 15E(s)(4)(B), to ensure that providers of due diligence
services have conducted a thorough review of data, documentation, and
other relevant information necessary for an NRSRO to provide an
accurate rating.\508\ Finally, Section 15E(s)(4)(D) of the Exchange Act
provides that the Commission shall adopt rules requiring an NRSRO, at
the time at which the NRSRO produces a rating, to disclose the
certification described in Section 15E(s)(4)(B) to the public in a
manner that allows the public to determine the adequacy and level of
due diligence services provided by a third party.\509\
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    \505\ See Public Law 111-203 Sec.  932(a)(8) and 15 U.S.C. 78o-
7(s)(1)-(4).
    \506\ See 15 U.S.C. 78o-7(s)(4)(A).
    \507\ See 15 U.S.C. 78o-7(s)(4)(B).
    \508\ See 15 U.S.C. 78o-7(s)(4)(C).
    \509\ See 15 U.S.C. 78o-7(s)(4)(D).
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    As discussed below in Section II.H.1 of this release, the
Commission is proposing to implement Section 15E(s)(4)(A) of the
Exchange Act by proposing amendments to Rule 314 of Regulation S-T and
Form ABS-15G, and proposing new Rule 15Ga-2.\510\ In

addition, as discussed below in Sections II.H.2 and II.H.3 of this
release, the Commission is proposing to implement Sections 15E(s)(4)(B)
and (C) of the Exchange Act by proposing new Rule 17g-10 and a related
form--Form ABS Due Diligence-15E.\511\ As discussed above in Section
II.G.5 of this release, the Commission is proposing to implement
Section 15E(s)(4)(D) by proposing new paragraph (a)(2) to Rule 17g-
7.\512\
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    \510\ See proposed amendments to Rule 314 of Regulation S-T and
Form ABS-15G and proposed new Rule 15Ga-2. New Rule 15Ga-2 would be
codified at 17 CFR 240.15Ga-2.
    \511\ See proposed new Rule 17g-10 and Form ABS Due Diligence-
15E. New Rule 17g-10 would be codified at 17 CFR 240.17g-10 and Form
ABS Due Diligence 15E would be identified in the Code of Federal
Regulation at 17 CFR 249b.400.
    \512\ See proposed new paragraph (a)(2) of Rule 17g-7.
---------------------------------------------------------------------------

    Before discussing the proposals to implement Sections 15E(s)(4)(A)
through (C), the Commission notes the provisions of Section 15E(s)(4)
raise two fundamental questions: (1) How will a provider of third-party
due diligence services know the identities of the NRSROs producing
credit ratings to which its services relate (particularly NRSROs
producing unsolicited credit ratings); and (2) when must the
certification be provided to the NRSROs? Accordingly, the Commission is
requesting comment on these questions in order to consider further
guidance or rulemaking to better determine how a provider of third-
party due diligence services can comply with the requirement in Section
15E(s)(4)(B) of the Exchange Act.\513\
---------------------------------------------------------------------------

    \513\ 15 U.S.C. 78o-7(s)(4)(B).
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of Section
15E(s)(4)(B) of the Exchange Act. The Commission also seeks comment on
the following:
    1. How would a provider of third-party due diligence services
identify the NRSROs producing credit ratings to which the due diligence
services relate? For example, would it be sufficient for the provider
of third-party due diligence services to contractually require issuers
and underwriters that employ it to provide these services to identify
the NRSROs engaged by the issuer or underwriter to produce credit
ratings for the Exchange Act-ABS and to identify any other NRSROs the
issuers and underwriters have notice are producing unsolicited credit
ratings for the Exchange Act-ABS? Would issuers and underwriters agree
to such contractual terms or would they use a provider of third-party
due diligence services that does not demand such terms? Even if issuers
and underwriters agree to such contractual terms, would they know the
identity of every NRSRO producing a credit rating for the Exchange Act-
ABS, particularly NRSROs producing unsolicited credit ratings? Would an
appropriate mechanism for providing the certifications to all NRSROs
producing a credit rating for the Exchange Act-ABS be to disclose it
with the information required by paragraph (a)(3) of Rule 17g-5 (which
requires, among other things, the issuer or underwriter to make the
information provided to an NRSRO hired to produce a credit rating for a
structured finance product such as an Exchange Act-ABS available to any
other NRSRO)? \514\
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    \514\ 17 CFR 240.17g-5(a)(3).
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    2. In the case where an NRSRO (as opposed to the issuer or
underwriter) employs the provider of third-party due diligence
services, how would the NRSRO know of any other NRSROs that are
producing credit ratings to which the due diligence services relate and
provide the identities of such NRSROs to the provider of the third-
party due diligence services? If paragraph (a)(3) of Rule 17g-5 would
be an appropriate mechanism for providing the certifications to all
NRSROs producing a credit rating for the Exchange Act-ABS, could the
hired NRSRO obtain a representation from the issuer or underwriter that
it would make any certifications received by the NRSRO available to
other NRSROs through the process by which the issuer or underwriter
makes the information required by paragraph (a)(3) of Rule 17g-5
available to other NRSROs?
    3. Should there be some type of centralized database where NRSROs
producing credit ratings for an Exchange Act-ABS identify themselves
and which would be deemed constructive notice to any provider of third-
party due diligence services that is providing services related to the
Exchange Act-ABS? If so, should the Commission administer this
centralized database or should the issuers and underwriters, providers
of third-party due diligence services, NRSROs, or users of credit
ratings administer this database?
    4. Should there be a centralized database where a provider of
third-party due diligence services submits its certification for
publication, and should submitting the certification to such a database
be deemed constructive receipt by an NRSRO producing a credit rating
for an Exchange Act-ABS to which the due diligence services described
in the certification relate? Should this database also be the mechanism
by which issuers and underwriters make publicly available, pursuant to
the requirement in Section 15E(s)(4)(A) of the Exchange Act, the
findings and conclusions of any third-party due diligence report
obtained by the issuer or underwriter? If so, should the Commission
administer this centralized database or should the issuers and
underwriters, providers of third-party due diligence services, NRSROs,
or users of credit ratings administer this database? For example,
should the certification be furnished or filed on the Commission's
EDGAR system?
    5. Should there be a reasonableness test in terms of assessing
whether the provider of third-party due diligence services submitted
the certification to all NRSROs required to receive the certification?
For example, should the provider of third-party due diligence services
be required to provide the certification to all NRSROs it knows or
reasonably should know are producing a credit rating for which its
services relate?
    6. How soon after the provider of third-party due diligence
services completes its review should the certifications be provided to
all NRSROs required to receive it? For example, should the
certification be provided ``promptly'' or within 24 hours, 2 business
days, 10 business days, or some other period of time?
    7. Should the provider of third-party due diligence services be
required to provide the certification to all required NRSROs at the
same time so that no single NRSRO has the benefit of using the
certification before the other NRSROs that are required to receive it?
How would such a requirement be implemented and enforced in practice?
    8. Should the requirement to provide the certification to all
NRSROs required to receive it sunset after some period of time after
the due diligence services are completed such as 30, 60, 90, 120, 150,
180 days or some longer period? For example, should the provider of
third-party due diligence services be required to provide the
certification to any NRSRO that produces a credit rating to which its
services relate until the security matures, is called, is pre-paid, or
goes into default?
    9. If the provider of third-party due diligence services is hired
to provide due diligence services with respect to an initial issuance
of securities, would it need to provide the certification at some later
time to an NRSRO that does not rate the securities initially but
produces a credit rating after the securities have been outstanding for
a period of time?
1. Proposed Rule 15Ga-2 and Amendments to Form ABS-15G
    The Commission is re-proposing rules, with some revisions, to

implement Section 15E(s)(4)(A) of the Exchange Act, which requires that
an issuer or underwriter of any Exchange Act-ABS make publicly
available the findings and conclusions of any third-party due diligence
report obtained by the issuer or underwriter.\515\ The Commission
previously proposed to implement Section 15E(s)(4)(A) of the Exchange
Act as part of a set of rules proposed to implement Section 945 of the
Dodd-Frank Act.\516\ Under those proposals, an issuer of a registered
Exchange Act-ABS offering would have been required to disclose the
findings and conclusions of any third party engaged to perform a review
obtained by the issuer, as required by Section 15E(s)(4)(A), in the
prospectus.\517\ In the case of unregistered Exchange Act-ABS
offerings, the Commission proposed new Rule 15Ga-2.\518\ This rule
would have required an issuer of Exchange Act-ABS to file a new Form
ABS-15G to disclose the findings and conclusions of any third-party
engaged to perform a review obtained by an issuer with respect to
unregistered transactions.\519\ Proposed Rule 15Ga-2 also would have
required an underwriter of Exchange Act-ABS to file Form ABS-15G with
the same information for reports obtained by an underwriter in
registered and unregistered transactions.\520\ Finally, proposed Form
ABS-15G would have been required to be filed with the Commission on
EDGAR five business days prior to the first sale of the offering.\521\
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    \515\ See 15 U.S.C. 78o-7(s)(4)(A).
    \516\ See Issuer Review of Assets in Offerings of Asset-Backed
Securities, Securities Act Release No. 9150 (Oct. 13, 2010), 75 FR
64182 (Oct. 19, 2010). In the same release in which the Commission
proposed to implement Section 15E(s)(4)(A), the Commission also
proposed to implement Section 7(d) of the Securities Act (15 U.S.C.
77g(d)), as added by Public Law 111-203 Sec.  945. Section 7(d) of
the Securities Act requires the Commission to adopt rules that, with
respect to a registration statement for an asset-backed security,
will require the issuer of the security to: (1) Perform a review of
the assets underlying the asset-backed security; and (2) disclose
the nature of the review. See 15 U.S.C. 77g(d)(1) and (2). The
Commission implemented this provision by adopting new rule 17 CFR
230.193 (``Rule 193'') and amendments to 17 CFR 229.1111 (``Item
1111 of Regulation AB''). See Issuer Review of Assets in Offerings
of Asset-Backed Securities, Securities Act Release No. 9176 (Jan.
20, 2011), 76 FR 4231 (Jan. 25, 2011).
    \517\ See Issuer Review of Assets in Offerings of Asset-Backed
Securities, 75 FR at 64188-64190 (Oct. 19, 2010).
    \518\ Id.
    \519\ Id.
    \520\ Id.
    \521\ Id.
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    With respect to these proposals, the Commission requested comment
on, among other things, whether rules implementing Section 15E(s)(4)(A)
of the Exchange Act should be part of a later rulemaking under Section
15E.\522\ Some commenters stated that Section 15E(s)(4) should be read
as a whole, and that it would be inappropriate to consider subsection
(A) alone.\523\ These commenters suggested postponing implementation of
Section 15E(s)(4)(A) until the Commission implements Section
15E(s)(4)(B), (C) and (D).\524\ These commenters argued that Rule 15Ga-
2, as proposed, would have ``construe[d] Section 15E(s)(4)(A) in a
vacuum, divorced from Congress' intent to regulate NRSROs and the
credit ratings process.'' \525\ These commenters also argued that
proposed Rule 15Ga-2 was inappropriately broad. One such commenter
suggested that Rule 15Ga-2 be modified to apply only to any third-party
due diligence report prepared for an issuer or underwriter of Exchange
Act-ABS specifically for the purpose of having the issuer or
underwriter share the report with an NRSRO issuing a credit rating for
the securities.\526\
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    \522\ Id.
    \523\ See comment letters from American Bar Association
(``ABA''); National Association of Bond Lawyers (``NABL'')
(responding to Issuer Review of Asset in Offerings of Asset-Backed
Securities, 75 FR 64182 (Oct. 19, 2010)). The comment letters are
available at http://sec.gov/comments/s7-26-10/s72610.shtml.
    \524\ See comment letters from ABA and NABL.
    \525\ See comment letters from ABA and NABL.
    \526\ See comment letter from ABA.
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    In January 2011, the Commission adopted rules implementing Section
7(d) of the Securities Act and, at the same time, deferred action on
implementing Section 15E(s)(4)(A).\527\ After considering the comment
letters relating to Section 15E(s)(4)(A), the Commission is re-
proposing Rule 15Ga-2 with revisions.\528\ As proposed in October 2010,
Rule 15Ga-2 would have required issuers and underwriters of Exchange
Act-ABS to file Form ABS-15G containing, or provide prospectus
disclosure with respect to, the findings and conclusions of any report
of a third-party engaged for purposes of performing a review of the
pool assets obtained by the issuer or underwriter.\529\ As noted above,
the Commission included this proposal in the context of rulemaking with
respect to issuer review of assets required by Section 7(d) of the
Securities Act.\530\
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    \527\ See Issuer Review of Assets in Offerings of Asset-Backed
Securities, 76 FR 4231 (Jan. 25, 2011). Although the Commission
deferred action on implementing Section 15E(s)(4)(A), the Commission
adopted, in a separate release, new Form ABS-15G to implement
Section 943 of the Dodd-Frank Act. See Disclosure for Asset-Backed
Securities Required by Section 943 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act, 76 FR 4489 (Jan. 26, 2011).
    \528\ See proposed new Rule 15Ga-2. The Commission also is
proposing conforming amendments to Form ABS-15G.
    \529\ See Issuer Review of Assets in Offerings of Asset-Backed
Securities, 75 FR at 64188-64190 (Oct. 19, 2010).
    \530\ See Issuer Review of Assets in Offerings of Asset-Backed
Securities, 76 FR 4231 (Jan. 25, 2011).
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    After reviewing the comments, the Commission now believes that
Section 15E(s)(4)(A) of the Exchange Act, when considered in the
context of Sections 15E(s)(4)(B), (C) and (D), should be interpreted
more narrowly to relate to those provisions.\531\ Therefore, as re-
proposed, Rule 15Ga-2 would require an issuer or underwriter of any
Exchange Act-ABS that is to be rated by an NRSRO to furnish a Form ABS-
15G on the EDGAR system containing the findings and conclusions of any
third-party ``due diligence report'' obtained by the issuer or
underwriter.\532\ The rule would define ``due diligence report'' as any
report containing findings and conclusions relating to ``due diligence
services'' as defined in proposed new Rule 17g-10 discussed below in
Section II.H.2 of this release. Under the re-proposal, the disclosure
would be furnished using Form ABS-15G for both registered and
unregistered offerings of Exchange Act-ABS.\533\ Thus, unlike the
October 2010 proposal, discussed above, issuers in registered Exchange
Act-ABS offerings would not be required to include the disclosure in
their prospectuses.
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    \531\ See 15 U.S.C 78o-7(s)(4)(A) through (D), which relate to
due diligence performed by third-parties with respect to Exchange
Act-ABS.
    \532\ See proposed new Rule 15Ga-2 and conforming changes to
Form ABS-15G. For purposes of this rule, consistent with the
definition of ``issuer'' in proposed new Rule 17g-10, the issuer is
the depositor or sponsor that participates in the issuance of
Exchange Act-ABS. See discussion below in Section II.H.2 of this
release.
    \533\ The Commission is proposing that the form be deemed
``furnished'' rather than ``filed'' for purposes of Section 18 of
the Exchange Act (15 U.S.C. 78r) and the liabilities of that
section, unless the issuer specifically states that the form be
considered ``filed'' under the Exchange Act or incorporates it by
reference into a filing under the Securities Act or the Exchange
Act.
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    In addition, under the Commission's re-proposal, an issuer or
underwriter would not need to furnish Form ABS-15G if the issuer or
underwriter obtains a representation from each NRSRO engaged to produce
a credit rating for the Exchange Act-ABS that can be reasonably relied
on that the NRSRO will publicly disclose the findings and conclusions
of any third-party due diligence report obtained by the issuer or
underwriter with the publication of the credit rating five business
days prior to the first sale in the offering in an information
disclosure form generated pursuant to proposed new paragraph

(a)(1) of Rule 17g-7.\534\ As discussed above in Section II.G.3 of this
release, proposed new paragraph (a)(1)(ii)(F) of Rule 17g-7 would
implement Section 15E(s)(3)(A)(v) of the Exchange Act by requiring an
NRSRO to disclose in the form whether and to what extent third-party
due diligence services were used by the NRSRO, a description of the
information that such third party reviewed in conducting due diligence
services, and a description of the findings or conclusions of such
third-party. In addition, as discussed below in Section II.H.3 of this
release, the Commission is proposing that the certification a provider
of third-party due diligence services would need to provide to an NRSRO
producing a credit rating for an Exchange Act-ABS pursuant to Section
15E(s)(4)(B) and (C) include a summary of the findings and conclusions
of the provider of third-party due diligence services.\535\ And, as
discussed above in Section II.G.5 of this release, an NRSRO would be
required to include the certification with the publication of the
credit rating.\536\
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    \534\ See 15 U.S.C. 78o-7(s)(3)(A)(v). In this context, the
Commission preliminarily believes that the term ``publicly
disclose'' means make the findings and conclusions readily available
to any users of credit ratings. Consequently, an NRSRO that agreed
to make the findings and conclusions available only to its
subscribers or prospective investors in the Exchange Act-ABS would
not satisfy this proposed requirement.
    \535\ See Item 5 of proposed new Form ABS Due Diligence-15E.
    \536\ See proposed new paragraph (a)(2) of Rule 17g-7.
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    For these reasons, having the issuer and underwriter publicly
disclose the same information an NRSRO must, when applicable, disclose
pursuant to proposed new paragraphs (a)(1)(ii)(F) and (a)(2) of Rule
17g-7 with the publication of a credit rating would be redundant.
Moreover, as discussed earlier, potential investors in Exchange Act-ABS
may be accustomed to receiving and reviewing expected or preliminary
credit ratings issued by NRSROs prior to making an investment decision
and proposed new paragraph (a) of Rule 17g-7 would require the form and
any certifications to be included with the issuance of such credit
ratings. Therefore, the Commission believes that an effective means of
disseminating this information to investors and other users of credit
ratings would be to include it with the publication of the credit
rating. Also, because the form would contain substantial additional
information, consolidating the information in one disclosure would
benefit investors and other users of credit ratings.
    As noted above, the issuer or underwriter would not need to furnish
Form ABS-15G if it obtained a representation from each NRSRO engaged to
produce a credit rating upon which the issuer or underwriter could
reasonably rely.\537\ The Commission preliminarily recognizes, however,
that there may be instances where, notwithstanding an issuer's or
underwriter's reasonable reliance on a representation by an NRSRO
engaged to produce a credit rating to publicly disclose the required
information, the NRSRO fails to make such information publicly
available in its information disclosure form pursuant to proposed Rule
17g-7(a)(1) five business days prior to the first sale in the
offering.\538\ Therefore, the Commission proposes to require that an
issuer or underwriter furnish, two business days prior to the first
sale in the offering, Form ABS-15G with the information required by
proposed Rule 15Ga-2 if the NRSRO fails to comply with its
representation to make such information publicly available in an
information disclosure form generated pursuant to proposed paragraph
(a)(1) of Rule 17g-7 five business days prior to the first sale in the
offering. Under the proposal, issuers or underwriters would be
permitted to reasonably rely on a representation by an NRSRO to meet
their obligation to publicly disclose the information required to be
provided in Form ABS-15G. However, they would continue to be
responsible for furnishing Form ABS-15G two business days prior to the
first sale in the offering if the NRSRO does not publicly disclose the
information five business days prior to the first sale in the offering.
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    \537\ The issuer or underwriter would be required to provide to
the Commission, upon request, information regarding the manner in
which it obtained the representation. The Commission notes that in
most cases the NRSROs likely would have an independent obligation to
disclose the information pursuant to the proposed amendments to Rule
17g-7 and proposed new Rule 17g-10 and Form ABS Due Diligence-15E.
    \538\ The NRSRO's failure to disclose the certification would be
a violation of proposed paragraph (a) of Rule 17g-7.
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    This ``reasonable reliance'' provision would parallel requirements
in paragraph (a)(3) of Rule 17g-5 that require an NRSRO to obtain
certain representations from arrangers of structured finance products
that hire the NRSRO to determine a credit rating for the structured
finance product.\539\ When adopting this requirement the Commission
stated, ``The question of whether reliance was reasonable will depend
on the facts and circumstances of a given situation.'' \540\ The
Commission further stated, ``The factors relevant to this analysis
would include, but not be limited to: (1) Ongoing or prior failures by
the arranger to adhere to the representations; or (2) a pattern of
conduct by the arranger where it fails to promptly correct breaches of
its representations.'' \541\ The Commission preliminarily believes that
the same would hold true with respect to relying on the representations
from NRSROs obtained for the purposes of proposed Rule 15Ga-2.
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    \539\ See 17 CFR 17g-5(a)(3); see also Amendments to Rules for
Nationally Recognized Statistical Rating Organizations, 74 FR at
63844-63850 (Dec. 4, 2009).
    \540\ See Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR at 63847 (Dec. 4, 2009).
    \541\ Id.
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    The Commission notes that Rule 193, adopted to implement Section
7(d) of the Securities Act, requires issuers of registered Exchange
Act-ABS to perform a review of the pool assets underlying the asset-
backed security.\542\ This review must be designed and effected to
provide reasonable assurance that the prospectus disclosure regarding
the pool assets is accurate in all material respects.\543\ Although
third-party due diligence reports may be relevant to the review,
neither Section 7(d) of the Securities Act nor Rule 193 ties the review
to third-party due diligence reports.\544\ Rule 193 permits, though
does not require, an issuer to rely on one or more third parties to
fulfill its obligation to perform the required review.\545\
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    \542\ See 17 CFR 230.193.
    \543\ Id.
    \544\ See 15 U.S.C. 77g(d) and 17 CFR 230.193.
    \545\ Id.
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    The Commission recognizes Exchange Act-ABS issuers may routinely
hire third-parties to conduct various types of reviews and believes
that issuers may employ third parties to assist in satisfying their
obligations to perform a review under Rule 193.\546\ The Commission
also recognizes that an issuer of Exchange Act-ABS may obtain a third-
party due diligence report from a third party the issuer has engaged to
assist in performing its Rule 193 review. Nonetheless, the Commission
believes that the third-party due diligence reports referenced in
Section 15E(s)(4) of the Exchange Act are not the same as the review
required by Section 7(d) of the Securities Act and Rule 193.\547\
Instead, Section 15E(s)(4) of the Exchange Act and, consequently,
proposed Rule 15Ga-2 relate to a

particular type of report that is relevant to the determination of a
credit rating by an NRSRO. By contrast, Section 7(d) of the Securities
Act and Rule 193 relate to a more general concept of an issuer review
of the assets underlying an Exchange Act-ABS, one aspect of which may
(or may not) include a third-party due diligence report. As a result,
the treatment of due diligence reports under proposed Rule 15Ga-2 is
not predicated on the use of third-party due diligence services to
assist with reviews under Rule 193.\548\ For these reasons, the
Commission also is proposing that Rule 15Ga-2 apply only with respect
to Exchange-Act ABS that are to be rated by an NRSRO.\549\
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    \546\ The Commission also notes that an issuer may rely on
multiple third-parties to fulfill its Rule 193 review obligation,
provided the issuer complies with the requirements of Rule 193 for
each third party.
    \547\ Compare 15 U.S.C. 77g(d) and 17 CFR 230.193, with 15
U.S.C. 78o-7(s)(4).
    \548\ The Commission does not intend for all third-parties from
whom the issuer obtains a third-party due diligence report, as
defined in proposed Rule 15Ga-2, to be named in the registration
statement and consent to being named as an expert, in accordance
with the requirements in Rule 193, solely because an issuer files
Form ABS-15G. If the issuer's prospectus disclosure attributes the
findings and conclusions of the Rule 193 review to the third-party
from whom it obtains a third-party due diligence report, however,
the third-party would be required to be named in the registration
statement and consent to being named as an expert in accordance with
Rule 436 under the Securities Act.
    \549\ See proposed new Rule 15Ga-2.
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    As noted above, the disclosure required by proposed Rule 15Ga-2
would be required to be provided in Form ABS-15G. Unlike the first
proposal, the Commission now proposes to require issuers in registered
Exchange Act-ABS transactions to include the disclosure required by
proposed Rule 15Ga-2 in Form ABS-15G, rather than in the prospectus.
Whether the findings and conclusions of a third-party are part of the
Rule 193 review and, therefore, included in the prospectus disclosure
is dictated by the requirements of Rule 193 and Item 1111 of Regulation
AB.\550\ The Commission is not proposing to separately require that
disclosure provided in connection with Rule 15Ga-2 regarding any third-
party due diligence report be provided in the prospectus for a
registered offering, because the information required by proposed Rule
15Ga-2 only pertains to the findings and conclusions of a third-party
due diligence report relevant to the determination of a credit rating.
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    \550\ See 17 CFR 230.193 and 17 CFR 229.1111.
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    As stated above, Section 15E(s)(4)(A) applies to issuers and
underwriters of both registered and unregistered offerings of Exchange
Act-ABS. Thus, proposed Rule 15Ga-2 would apply to a municipal entity
that sponsors or issues Exchange Act-ABS (``municipal Exchange Act-
ABS'') or an underwriter of municipal Exchange Act-ABS, if the
municipal entity or underwriter of the offering obtains a third-party
due-diligence report, as defined by the proposed rule, and the
municipal Exchange Act-ABS is to be rated by an NRSRO. Since Section
15E(s)(4) relates to oversight of NRSROs, commenters to the first
proposal noted that a significant difference between municipal Exchange
Act-ABS and more typical Exchange Act-ABS is that the Municipal
Securities Rulemaking Board \551\ collects and publicly disseminates
market information and information about municipal securities issuers
and offerings on its centralized public database, the Electronic
Municipal Market Access system (``EMMA'').\552\ Consistent with
suggestions from commenters and the Commission's approach in
implementing Section 943 of the Dodd-Frank Act,\553\ the Commission
proposes to permit municipal securitizers of Exchange Act-ABS, or
underwriters in the offering, to provide the information required by
Form ABS-15G on EMMA.\554\ The Commission believes this would limit the
cost and burden on issuers and underwriters of municipal Exchange Act-
ABS subject to the new rule, as well as provide the disclosure for
investors in the same location as other disclosures regarding municipal
ABS. Since Section 15E(s)(4) relates to oversight of NRSROs and the
ratings process, the Commission preliminarily believes it is not
appropriate to exempt any particular issuers if they receive a rating
for the securities.\555\
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    \551\ The MSRB, a self-regulatory organization subject to
oversight by the Commission, regulates securities firms and banks
that underwrite, trade and sell municipal securities.
    \552\ See comment letters from Minnesota Housing Finance Agency,
NABL, and the National Council of State Housing Agencies (responding
to proposals in Issuer Review of Assets in Offerings of Asset-Backed
Securities, 75 FR 64182 (Oct. 19, 2010)).
    \553\ See Disclosure for Asset-Backed Securities Required by
Section 943 of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, 76 FR 4489 (Jan. 26, 2011).
    \554\ See proposed amendments to Rule 314 of Regulation S-T. 17
CFR 232.314. A municipal securitizer is defined as a securitizer (as
that term in defined in Section 15(G)(a) of the Exchange Act (----
U.S.C. ------)) that is any State or Territory of the United States,
the District of Columbia, any political subdivision of any State,
Territory, or the District of Columbia, or any public
instrumentality of one or more States, Territories, or the District
of Columbia.
    \555\ As noted earlier, the Commission is soliciting comment in
Section II.M.4.a of this release with respect Items 6 and 7 of Form
NRSRO about how certain types of obligors, securities, and money
market instruments should be classified for purposes of providing
the approximate number of credit ratings outstanding in each class
of credit rating for which an applicant is seeking registration
(Item 6) or an NRSRO is registered (Item 7). In this regard, the
Commission solicits comment on whether municipal structured finance
issuers should be classified as (1) issuers of asset-backed
securities identified in Section 15E(a)(62)(A)(iv) of the Exchange
Act as broadened to include any rated security or money market
instrument issued by an asset pool or as part of any asset-backed
securities transaction; or (2) issuers of government securities,
municipal securities, or securities issued by a foreign government
identified in Section 15E(a)(62)(A)(v) of the Exchange Act. The
Commission is requesting comment on this matter with respect to
disclosing the number of credit ratings outstanding in a particular
class of credit ratings in Form NRSRO (and potentially for purposes
of the proposed amendments to Exhibit 1 to Form NRSRO and the
disclosure of information about the histories of credit ratings
under proposed new paragraph (b) of Rule 17g-7). The Commission, in
seeking comment on these matters, is not suggesting an issuer of
municipal Exchange Act-ABS should be exempt from requirements in the
securities laws that apply to Exchange Act-ABS because it might
appropriately be classified as an issuer of government securities,
municipal securities, or securities issued by a foreign government
identified in Section 15E(a)(62)(A)(v) of the Exchange Act for
purposes of Items 6 and 7 of Form NRSRO.
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    The Commission recognizes that public disclosure of information
relating to an unregistered Exchange Act-ABS offering could raise
concerns regarding the reliance by an issuer or underwriter on the
private offering exemptions and safe harbors under the Securities
Act.\556\ As noted above, the Commission intends for Form ABS-15G to be
used for both registered and unregistered ABS offerings. The Commission
is of the view that issuers and underwriters can disclose information
required by Rule 15Ga-2 without jeopardizing reliance on those
exemptions and safe harbors, provided the only information made
publicly available on the form is that which is required by the
proposed rule, and the issuer does not otherwise use Form ABS-15G to
offer or sell securities in a manner that conditions the market for
offers or sales of its securities.\557\
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    \556\ See 15 U.S.C. 77d(2), 17 CFR 230.144A, and 17 CFR 230.501-
508.
    \557\ Furnishing proposed Form ABS-15G would not foreclose the
reliance of an issuer on the private offering exemption in the
Securities Act and the safe harbor for offshore transactions from
the registration provisions in Section 5. 15 U.S.C. 77e.
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    The Commission is proposing that the disclosures--whether made by
the engaged NRSROs or the issuer or underwriter--be made five business
days prior to the first sale of the offering. Since the form an NRSRO
would be required to include with a credit rating pursuant to proposed
new paragraph (a) of Rule 17g-7 would not be required to be filed with
the Commission, the Commission believes it would be consistent to
permit issuers and underwriters to furnish, rather than file, Form ABS-
15G. The Commission proposes that Form ABS-15G be signed by the senior
officer of the depositor in charge of securitization, if the form were
provided to include the findings and conclusions of a third-party hired
by the

issuer. The Commission believes that requiring the senior officer of
the depositor in charge of securitization to sign the form is
consistent with other signature requirements for filings relating to
Exchange Act-ABS.\558\ If the form included the findings and
conclusions of a third-party engaged by the underwriter, then the form
would be signed by a duly authorized officer of the underwriter. The
Commission believes that requiring Form ABS-15G be signed by a duly
authorized officer of the underwriter would provide an incentive for
the person who signs the form to review it for accuracy.
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    \558\ See, e.g., signature requirement for Form 10-K (17 CFR
249.312). It is also consistent with the Commission's proposed
signature requirements for the registration statements for offerings
of asset-backed securities. See Asset-Backed Securities, 75 FR 23328
(May 3, 2010).
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Request for Comment
    The Commission generally requests comment on all aspects of
proposed new Rule 15Ga-2 and the proposed amendments to Form ABS-15G.
The Commission also seeks comment on the following:
    1. Is proposed Rule 15Ga-2 appropriate? Is the proposed definition
of ``third-party due diligence report'' appropriate? Is there an
alternative definition that would be consistent with the requirements
of Section 15E(s)(4)?
    2. The Commission is proposing to require disclosure regarding the
findings and conclusions of third-party due diligence reports for both
registered and unregistered transactions. Is there any reason Section
15E(s)(4)(A) of the Exchange Act should not apply to both registered
and unregistered Exchange Act-ABS transactions? If the requirement
applies to both registered and unregistered transactions, should the
universe of Exchange Act-ABS offerings that would be subject to the
requirement be defined, as proposed, as an offering of Exchange Act-
ABS, as that term is defined in Section 3(a)(77) of the Exchange Act?
    3. Proposed Rule 15Ga-2 would apply only if the Exchange Act-ABS is
to be rated by a NRSRO. Is that appropriate? \559\ Why or why not?
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    \559\ For example, Fannie Mae and Freddie Mac are government
sponsored enterprises (``GSEs'') that purchase mortgage loans and
issue or guarantee mortgage-backed securities. Mortgage-backed
securities issued or guaranteed by these GSEs have been, and
continue to be, exempt from registration under the Securities Act
and reporting requirements under Sections 13 or 15 of the Exchange
Act. These securities have not been, and are not currently, rated by
credit rating agencies.
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    4. Should the Commission exempt any issuers, underwriters or other
parties from this requirement? As proposed, Rule 15Ga-2 would apply to
issuers and underwriters of Exchange Act-ABS that are exempted
securities as defined in Section 3(a)(12) of the Exchange Act,
including government securities and municipal securities. Should
issuers or underwriters of such exempted securities be exempt from this
provision? \560\ Is the proposed accommodation for municipal Exchange
Act-ABS appropriate?
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    \560\ Exchange Act ``exempted securities'' include government
securities and municipal securities, as defined under the Exchange
Act. For example, mortgage-backed securities issued by the
Government National Mortgage Association are fully modified pass-
through securities guaranteed by the full faith and credit of the
United States government. See http://www.ginniemae.gov/.
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    5. Is the proposal to not require the issuer or underwriter to
furnish Form ABS-15G if it obtains the necessary representations from
the NRSROs engaged to produce credit ratings for the Exchange Act-ABS
appropriate? For example, would investors and other users of credit
ratings benefit from having issuers and underwriters and NRSROs
disclose the findings and conclusions of the provider of third-party
due diligence services? In addition, would NRSROs engaged to determine
a credit rating for an Exchange Act-ABS agree to make the disclosure?
Could potential concerns among NRSROs about making the disclosure be
addressed by permitting them to rely on the disclosure the provider of
third-party due diligence services would need to make about the
findings and conclusions of the review in Item 5 of proposed new Form
Due Diligence-15E discussed below in Section II.H.3 of this release?
    Under proposed Rule 15Ga-2, an issuer or underwriter would not be
required to furnish Form ABS-15G if it receives a representation from
an NRSRO that can be reasonably relied upon that the NRSRO will
publicly disclose the required information five business days prior to
the first sale in the offering in an information disclosure form
generated pursuant to Rule 17g-7(a)(1). Should the Commission, as
proposed, also require an issuer or underwriter to furnish Form ABS-15G
if the NRSRO fails to publicly disclose in an information disclosure
form the required disclosure five business days prior to the first sale
in the offering? If so, should the issuer or underwriter be required,
as proposed, to furnish Form ABS-15G two business days prior to the
first sale in the offering? Should the requirement instead be three
days before? Alternatively, should the Commission require that the
issuer or underwriter wait another five business days after furnishing
Form ABS-15G before the first sale? If not, how long in advance of the
first sale should issuers or underwriters be required to furnish Form
ABS-15G? Should an issuer or underwriter not be required to furnish
Form ABS-15G two business days prior to the first sale in the offering
if the NRSRO fails to publicly disclose the required information five
business days prior to the first sale, but does publicly disclose the
information on the fourth or third business day prior to the first sale
since an issuer's or underwriter's furnishing in that case would result
in duplicative disclosure? If so, how could an NRSRO be properly
incentivized to publicly disclose the required information five
business days prior to the first sale in the offering?
    6. Does the proposal to require an issuer or underwriter to furnish
Form ABS-15G in the event that the NRSRO fails to fulfill its
representation offset the effectiveness or benefit of the proposal to
permit issuers and underwriters to reasonably rely on a representation
from an NRSRO?
    7. Under the proposal, the issuer or underwriter would be required
to provide to the Commission, upon request, information regarding the
manner in which it obtained the representation of the NRSRO engaged to
produce credit ratings. Are there any other provisions that should be
added to ensure compliance with the proposal not to require the issuer
or underwriter to furnish Form ABS-15G if it obtains the necessary
representations from the NRSRO?
    8. Are there other appropriate means of making the findings and
conclusions of third-party due diligence reports ``publicly available''
as required by Section 15E(s)(4)(A) of the Exchange Act? Is furnishing
information regarding the findings and conclusions of the report of the
provider of third-party due diligence services on proposed Form ABS-15G
on EDGAR (except with respect to offerings of municipal Exchange Act-
ABS) an appropriate way for issuers in unregistered offerings and for
underwriters in registered and unregistered offerings to make this
information publicly available? Should the Form ABS-15G be required to
be filed instead?
    9. Would the proposed requirement that Form ABS-15G be furnished
five business days prior to first sale provide investors with
sufficient time to review the findings and conclusions contained
therein? Would it provide NRSROs with sufficient time to take the
included information into account in determining a rating? If not, what
would be a more appropriate deadline and why? Are five business days
also appropriate in

unregistered offerings? Is there reason to require a different number
of days in unregistered offerings?
    10. Is the proposed signature requirement for Form ABS-15G
appropriate? Is it necessary? Conversely, are there other appropriate
individuals that are better suited to sign the form?
    11. Should issuers of registered Exchange Act-ABS offerings be
required to furnish the information required by proposed Rule 15Ga-2 on
Form ABS-15G and not be required to provide the information in a
prospectus that is filed with the Commission, as proposed? Why or why
not?
2. Proposed New Rule 17g-10
    As noted above, Section 15E(s)(4)(C) of the Exchange Act provides
that the Commission shall establish the appropriate format and content
for the written certifications required under Section 15E(s)(4)(B), to
ensure that providers of due diligence services have conducted a
thorough review of data, documentation, and other relevant information
necessary for an NRSRO to provide an accurate rating for an Exchange
Act-ABS.\561\ The Commission preliminarily believes providers of third-
party due diligence services most commonly are hired by issuers and
underwriters to perform reviews of pools of mortgages that will be
securitized into an RMBS; accordingly, the following discussion of
proposed Rule 17g-10 and Form ABS Due Diligence-15E centers on
RMBS.\562\ The proposed rule and form, however, would apply to all
Exchange Act-ABS. Generally, in the RMBS context, the provider of
third-party due diligence services is hired by the entity (e.g., the
underwriter, sponsor, or depositor) purchasing the pool of mortgage
loans for the purpose of securitizing them.\563\ In conducting a
review, the provider of third-party due diligence services analyzes a
sample (for example, 25%) of the loans in the pool for one or more of
the following purposes: (1) To assess the quality of the loan-by-loan
data in the electronic file (``loan-tape'') that aggregates the
information for the pool by comparing the information on the loan tape
for each loan in the sample with the information contained on the hard-
copy documents in the loan file; (2) to determine whether each loan in
the sample adheres to the underwriting guidelines of the loan
originator; (3) to assess the validity of the appraised value of the
property indicated on the loan tape that collateralizes each loan in
the sample; and (4) to determine whether the originator complied with
Federal, state, and local laws in making each loan in the sample. The
NRSROs most active in rating RMBS have incorporated requirements for
the engagement of providers of third-party due diligence services by
the entities requesting such ratings (for example, the underwriter or
sponsor of the RMBS) into their procedures and methodologies for
determining RMBS credit ratings.\564\ Moreover, the procedures and
methodologies of these NRSROs prescribe the minimum scope and manner of
the review of the provider of third-party due diligence services
necessary to obtain a credit rating for the RMBS, including the minimum
sample size of the loans to be selected from the pool.\565\
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    \561\ See 15 U.S.C. 78o-7(s)(4)(C).
    \562\ See, e.g., Testimony of Vicki Beal, Senior Vice President,
Clayton Holdings, before the Financial Crisis Inquiry Commission
(Sept. 23, 2010).
    \563\ Id.
    \564\ See, e.g., US RMBS Ratings Criteria, Fitch, Inc.
(``Fitch'') (Dec. 3, 2009) (``In addition to Fitch's originator/
issuer review and ResiLogic loan-level asset analysis of the
mortgage pool, Fitch will require third-party loan-level reviews on
all residential mortgage pools that Fitch is asked to rate. The
reviews will be conducted by a ``due diligence'' company (review
company) prior to Fitch providing a rating on the transaction.'');
Criteria for Evaluating Independent Third-Party Loan Level Reviews
for US RMBS, Moody's Investors Service, Inc. (``Moody's'') (Nov. 24,
2008) (``Moody's will not rate a transaction unless it has received
a report from the third-party review firm as to the TPR scope,
procedure and findings. The report must include a narrative summary
of the review and an initial TPR findings report.''); Incorporating
Third-Party Due Diligence Results Into The U.S. RMBS Rating Process,
Standard & Poor's Ratings Services (``S&P'') (Nov. 25, 2008)
(``Standard & Poor's believes that using third-party due diligence
results in our rating analysis will increase transparency and
strengthen the rating process. Our due diligence review ratings
criteria will be effective Dec. 1, 2008, and are intended to
increase our insight into the quality and validity of the
information used to originate the mortgage loans pooled into
securities.'').
    \565\ For example, for established originators and loan
programs, Fitch requires the randomly selected minimum sample size
to be the larger of 200 loans or 10% of the pool for prime loans and
the larger of 400 loans or 20% of the pool for Alt-A/subprime and
all other product types. Moreover, if originators or their loan
programs have had less than two years of performance history, Fitch
requires that the sample size should be doubled. Moody's defines its
minimum sample size through statistical techniques. Specifically,
Moody's requires that the sample size must not be less than that
computed using a 95% confidence level, a 5% precision level, and an
assumed error rate equal to the higher of the historic error rate
for the originator or a Minimum Assumed Error Rate. S&P requires a
sample that is the greater of either the number of loans needed for
a statistically valid sample, or a 10% random sample for subprime
and 5% sample for prime. At a minimum, S&P states that the number of
loans in the sample should be 200 for subprime, and 100 for prime.
S&P defines a statistically valid sample as the number of loans
based on a 5% one-tailed level of significance with a 2% level of
precision. S&P also expects that the number of loans in the sample
also will be a function of an estimate of an error rate.
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    To implement the rulemaking mandated by Section 15E(s)(4)(C) of the
Exchange Act, the Commission is proposing new Rule 17g-10 and related
Form ABS Due Diligence-15E.\566\ Proposed new Rule 17g-10 would contain
three paragraphs: (a), (b) and (c).\567\ Proposed paragraph (a) would
provide that the written certification required pursuant to Section
15E(s)(4)(B) of the Exchange Act must be on Form ABS Due Diligence-
15E.\568\ In other words, a provider of third-party due diligence
services would need to use Form ABS Due Diligence-15E to meet the
requirement in Section 15E(s)(4)(B) of the Exchange Act.\569\
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    \566\ See proposed new Rule 17g-10 and new Form ABS Due
Diligence-15E.
    \567\ See proposed paragraphs (a), (b) and (c) of Rule 17g-10.
    \568\ See proposed paragraph (a) of new Rule 17g-10.
    \569\ See 15 U.S.C. 78o-7(s)(4)(B) and proposed paragraph (a) of
new Rule 17g-10.
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    Proposed paragraph (b) of new Rule 17g-10 would provide that the
written certification must be signed by an individual who is duly
authorized by the person providing the third-party due diligence
services to make such a certification.\570\ This proposal is designed
to ensure that the person executing the certification on behalf of the
provider of third-party due diligence services has responsibilities
that will make the person aware of the basis for the information being
provided in the form. This proposed requirement parallels paragraph (b)
of Rule 17g-3, which requires an NRSRO to attach to the financial
reports required by that rule a signed statement by a duly authorized
person associated with the NRSRO stating, among other things, that the
person has responsibility for the financial reports.\571\
---------------------------------------------------------------------------

    \570\ See proposed paragraph (b) of Rule 17g-10.
    \571\ See 17 CFR 240.17g-3(b).
---------------------------------------------------------------------------

    Proposed paragraph (c) of new Rule 17g-10 would contain four
definitions to be used for the purposes of Section 15E(s)(4)(B) and
Rule 17g-10.\572\ Proposed paragraph (c)(1) would define the meaning of
``due diligence services.'' \573\ The Commission preliminarily believes
such a definition is necessary because, while the requirements of
Section 15E(s)(4)(B) are triggered, among other things, by providing
due diligence services, the Dodd-Frank Act does not define the type of
activities that constitute ``due diligence services'' in the Exchange
Act-

ABS context.\574\ Consequently, the Commission preliminarily believes a
definition would provide guidance to those entities providing due
diligence services as to when the requirements of the statute and
proposed new Rule 17g-10 would apply. In addition, a definition could
help avoid overly broad interpretations of the meaning of ``due
diligence services'' that cause entities not providing due diligence
services to needlessly provide certifications to NRSROs.
---------------------------------------------------------------------------

    \572\ See proposed paragraph (c) of new Rule 17g-10 and 15
U.S.C. 78o-7(s)(4)(B).
    \573\ See proposed paragraph (c)(1) of new Rule 17g-10.
    \574\ See 15 U.S.C. 78o-7(s)(4)(B).
---------------------------------------------------------------------------

    The Commission intends the definition of ``due diligence services''
in the Exchange Act-ABS context to cover services provided by entities
typically considered to be providers of third-party due diligence
services in the securitization market and does not intend it to cover
every type of person that might perform some type of diligence in the
offering process. As discussed below, the Commission believes that the
scope of Section 15E(s)(4)(A) is intended to address third-party due
diligence reports obtained by issuers or underwriters from these
specialized providers of due diligence services that are relevant to
the determination of a credit rating for an Exchange Act-ABS by an
NRSRO.
    The Commission preliminarily believes, as discussed above, there
are four categories of reviews undertaken by entities commonly
understood as providers of third-party due diligence services for
issuances of RMBS that NRSROs have deemed relevant for determining
credit ratings for such Exchange Act-ABS.\575\ Consequently, the
proposed definition would identify each of the four categories. In
addition, because the Commission's understanding of due diligence
services largely is based on such services as applied to pools of
mortgage loans, the Commission is proposing a catchall component to the
proposed definition.\576\ The proposed catchall would be designed to
apply to due diligence services used for pools of other asset classes
(e.g., commercial loans, corporate loans, student loans, or credit card
receivables) to the extent that providers of third-party due diligence
services currently provide or in the future begin providing due
diligence services with respect to other asset classes and those
services, because of the different nature of the assets, do not fall
into one of the four other categories.
---------------------------------------------------------------------------

    \575\ See, e.g., US RMBS Ratings Criteria, Fitch (Dec. 3, 2009),
Criteria for Evaluating Independent Third-Party Loan Level Reviews
for US RMBS, Moody's (Nov. 24, 2008), Incorporating Third-Party Due
Diligence Results Into The U.S. RMBS Rating Process, S&P (Nov. 25,
2008).
    \576\ See proposed paragraph (c)(1)(v) of new Rule 17g-10.
---------------------------------------------------------------------------

    Under the Commission's proposed definition of ``due diligence
services,'' an entity would be deemed to have provided ``due diligence
services'' if it engaged in a review of the assets underlying an
Exchange Act-ABS for the purpose of making findings with respect to any
one of the five types of activities identified in proposed paragraphs
(c)(1)(i) through (v) of new Rule 17g-10 (i.e., the components of the
proposed definition would be disjunctive).\577\ The first category of
``due diligence service'' would be identified in proposed paragraph
(c)(1)(i) of new Rule 17g-10 as a review of the assets underlying an
Exchange Act-ABS for the purpose of making findings with respect to the
quality or integrity of the information or data about the assets
provided, directly or indirectly, by the securitizer or originator of
the assets.\578\ This type of review could entail comparing the data on
loan-tape with the data on the hard-copy documentation in an underlying
sampled loan file to verify that the loan-tape data matches and
correctly represents the content of the loan file under review.\579\
The provider of due diligence services would need to note any
differences (exceptions) between the loan-tape data and the information
in the loan file. This type of review also could entail verifying that
the loan-tape contains all the information about the underlying assets
the NRSRO requires for the purpose of determining a credit rating and
whether that information is presented in the format required by the
NRSRO.\580\ For example, some NRSROs may specify items of data (``data
fields'') about a mortgage loan that must be included on the loan tape
for an RMBS such as occupancy status, property type, loan purpose,
documentation type, current FICO score of the borrower, combined
original loan to value ratio, total debt-to-income ratio, and zip code
of the residence.\581\
---------------------------------------------------------------------------

    \577\ See proposed paragraphs (c)(1)(i)-(v) of new Rule 17g-10.
    \578\ See proposed paragraphs (c)(1)(i) of new Rule 17g-10.
    \579\ See, e.g., US RMBS Ratings Criteria, Fitch (Dec. 3, 2009).
    \580\ Id.
    \581\ See, e.g., Incorporating Third-Party Due Diligence Results
Into The U.S. RMBS Rating Process, S&P (Nov. 25, 2008).
---------------------------------------------------------------------------

    The second category of ``due diligence service'' would be
identified in proposed paragraph (c)(1)(ii) of new Rule 17g-10 as a
review of the assets underlying an Exchange Act-ABS for the purpose of
making findings with respect to whether the origination of the assets
conformed to stated underwriting or credit extension guidelines,
standards, criteria, or other requirements.\582\ This type of review
could entail reviewing whether a sampled loan meets the originator's
underwriting guidelines or, if not, that the originator provided a
reasonable and documented exception to support the decision to make the
loan.\583\ This type of review also could entail how the originator
verified information in a sampled loan underlying an RMBS such as the
borrower's occupancy status with respect to the residence (e.g.,
primary residence, second home, or rental property), the borrower's
income, the borrower's assets, and the borrower's employment
status.\584\
---------------------------------------------------------------------------

    \582\ See proposed paragraphs (c)(1)(ii) of new Rule 17g-10.
    \583\ See, e.g., Criteria for Evaluating Independent Third-Party
Loan Level Reviews for US RMBS, Moody's (Nov. 24, 2008).
    \584\ See, e.g., Incorporating Third-Party Due Diligence Results
Into The U.S. RMBS Rating Process, S&P (Nov. 25, 2008).
---------------------------------------------------------------------------

    The third category of ``due diligence service'' would be identified
in proposed paragraph (c)(1)(iii) of new Rule 17g-10 as a review of the
assets underlying an Exchange Act-ABS for the purpose of making
findings with respect to the value of collateral securing such
assets.\585\ This type of review could entail analyzing how the
originator verified the value of the asset. For example, for an RMBS,
an NRSRO might require that the review consider the quality of the
appraiser of the property and the quality of the appraisal.\586\ This
could include reviewing whether the appraiser used a valuation
model.\587\ It also could require the provider of third-party due
diligence services to separately use a valuation model if the reviewer
believes that the original appraised value of the property is less than
the value presented by the originator.\588\
---------------------------------------------------------------------------

    \585\ See proposed paragraphs (c)(1)(iii) of new Rule 17g-10.
    \586\ See, e.g., Criteria for Evaluating Independent Third-Party
Loan Level Reviews for US RMBS, Moody's (Nov. 24, 2008).
    \587\ Id.
    \588\ Id.
---------------------------------------------------------------------------

    The fourth category of ``due diligence service'' would be
identified in proposed paragraph (c)(1)(iv) of new Rule 17g-10 as a
review of the assets underlying an Exchange Act-ABS for the purpose of
making findings with respect to whether the originator of the assets
complied with Federal, state, or local laws or regulations.\589\ This
type of review could entail--with respect to an RMBS--analyzing legal
documentation

in a sampled loan file to verify the loan was made in conformance with,
for example, with ``truth-in-lending'' regulations such as Regulation
Z.\590\
---------------------------------------------------------------------------

    \589\ See proposed paragraphs (c)(1)(iv) of new Rule 17g-10.
    \590\ See 12 CFR 226.1 et seq.
---------------------------------------------------------------------------

    The fifth category of ``due diligence services''--the catchall--
would be identified in proposed paragraph (c)(1)(v) of new Rule 17g-10
as a review of the assets underlying an Exchange Act-ABS for the
purpose of making findings with respect to any other factor or
characteristic of such assets that would be material to the likelihood
that the issuer of the Exchange Act-ABS will pay interest and principal
according to its terms and conditions.\591\ The Commission
preliminarily believes that findings relevant to whether the issuer of
the Exchange Act-ABS will pay interest and principal according to its
terms and conditions (i.e., not default) would be relevant to
determining a credit rating given that the statutory definition of
``credit rating'' is ``an assessment of the creditworthiness of an
obligor as an entity or with respect to specific securities or money
market instruments.'' \592\ The Commission also preliminarily believes
that reviews of the assets underlying an Exchange Act-ABS that are
designed to generate findings that would not be relevant to determining
a credit rating would be outside the scope of proposed catchall
definition and, therefore, outside the scope of Section 15E(s)(4)(B) of
the Exchange Act and Rule 17g-10.\593\
---------------------------------------------------------------------------

    \591\ See proposed paragraphs (c)(1)(v) of new Rule 17g-10.
    \592\ See 15 U.S.C. 78c(60).
    \593\ See 15 U.S.C. 78o-7(s)(4)(B) and proposed new Rule 17g-10.
---------------------------------------------------------------------------

    Proposed paragraph (c)(2) of new Rule 17g-10 would define the term
``issuer'' as including a sponsor, as defined in 17 CFR 229.1011, or
depositor, as defined in 17 CFR 229.1011, that participates in the
issuance of an Exchange Act-ABS.\594\ The Commission preliminarily
believes this definition is necessary because the requirements of
Section 15E(s)(4)(B) of the Exchange Act are triggered, among other
things, when third-party due diligence services are employed by an
``issuer.'' \595\ The term ``issuer'' could be interpreted by entities
subject to Section 15E(s)(4)(B) of the Exchange Act and new Rule 17g-10
as meaning the legal entity issuing the Exchange Act-ABS. However, the
issuer of an Exchange Act-ABS typically is a passive entity such as a
statutory trust. Consequently, a sponsor initiates an Exchange Act-ABS
transaction by selling or pledging to a specially created issuing
entity a group of financial assets that the sponsor either has
originated itself or has purchased in the secondary market. In some
instances, the transfer of assets is a two-step process: the financial
assets are transferred by the sponsor first to an intermediate entity,
the depositor, and then the depositor transfers the assets to the
issuing entity for the particular transaction. Because the issuer is
passive, the sponsor, depositor, or underwriter would be more likely to
employ a provider of third-party due diligence services. Consequently,
if the term ``issuer'' were narrowly interpreted to mean the passive
entity, the objectives of Section 15E(s)(4)(B) of the Exchange Act
potentially could be undermined in that the requirement to make the
disclosure would not be triggered.
---------------------------------------------------------------------------

    \594\ See proposed paragraph (c)(2) of new Rule 17g-10. The
Commission interprets the term ``issuer'' in Section 15G(a)(3)(A) of
the Exchange Act to refer to the depositor of an asset-backed
security. This treatment is consistent with the Commission's
historical regulatory approach to that term, including the
Securities Act and the rules promulgated under the Securities Act
and the Exchange Act. See, e.g., 17 CFR 230.191 and 17 CFR 240.3b-
19.
    \595\ See 15 U.S.C. 78o-7(s)(4)(B).
---------------------------------------------------------------------------

    The Commission is proposing to define the terms ``originator'' and
``securitizer'' in proposed paragraphs (c)(3) and (c)(4), respectively,
of new Rule 17g-10 because the proposed definition of ``due diligence
services'' in proposed paragraph (c)(1) would use those terms.\596\ The
Commission preliminarily believes defining these terms would provide
greater clarity as to the proposed meaning of ``due diligence
services.'' Moreover, Section 941 of the Dodd-Frank Act added new
Section 15G of the Exchange Act.\597\ Section 15G(a) contains
definitions of ``originator'' and ``securitizer'' to be used for the
purposes of that section.\598\ Consequently, there are existing
definitions the Commission can utilize for the purposes of new Rule
17g-10. For these reasons, proposed paragraph (c)(3) of new Rule 17g-10
would provide that the term ``originator'' has the same meaning as in
Section 15G of the Exchange Act (15 U.S.C. 78o-9).\599\ Similarly,
proposed paragraph (c)(4) of new Rule 17g-10 would provide that the
term ``securitizer'' has the same meaning as in Section 15G of the
Exchange Act (15 U.S.C. 78o-9).\600\
---------------------------------------------------------------------------

    \596\ See proposed paragraphs (c)(3) and (c)(4) of new Rule 17g-
10; see also proposed paragraphs (c)(1)(i) and (iv) using the term
``originator'' and proposed paragraph (c)(1)(i) using the term
``securitizer.''
    \597\ See Public Law 111-203 Sec.  941 and 15 U.S.C. 78o-9.
    \598\ See 15 U.S.C. 78o-9(a)(3) and (4).
    \599\ See proposed paragraph (c)(3) of new Rule 17g-10. Section
15G(a)(4) of the Exchange Act defines the term ``originator'' to
mean ``a person who--(A) through the extension of credit or
otherwise, creates a financial asset that collateralizes and asset-
backed security; and (B) sells an asset directly or indirectly to a
securitizer.'' See 15 U.S.C. 78o-9(a)(4).
    \600\ See proposed paragraph (c)(4) of new Rule 17g-10. Section
15G(a)(3) of the Exchange Act defines the term ``securitizer'' to
mean: ``(A) an issuer of an asset-backed security; or (B) a person
who organizes and initiates an asset-backed securities transaction
by selling or transferring assets, either directly or indirectly,
including through an affiliate, to the issuer.'' See 15 U.S.C. 78o-
9(a)(3).
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of
proposed new Rule 17g-10. The Commission also seeks comment on the
following:
    1. The Commission understands that ``provider of third-party due
diligence services'' is a phrase used as a term of art in the
securitization market, and the proposed rules are intended to apply to
those entities that are commonly identified by that term. Would the
proposed definition of ``due diligence services'' provide sufficient
guidance to those entities providing due diligence services as to when
the requirements of the self-executing provision in Section
15E(s)(4)(B) and proposed new Rule 17g-10 would apply? How could the
proposal be modified to provide clearer guidance?
    2. Should, as proposed, the definition of ``due diligence
services'' apply to Exchange Act-ABS only or should it apply more
broadly to structured finance products? If it should apply more
broadly, what types of structured finance products that are not
Exchange Act-ABS should the definition include within its scope? In
addition, are providers of third-party due diligence services used with
respect to these types of structured finance products? If so, explain
how the results of those services are relevant to the determination of
a credit rating?
    3. Does the first category of ``due diligence service'' identified
in proposed paragraph (c)(1)(i) of new Rule 17g-10 (i.e., a review of
the assets underlying an Exchange Act-ABS for the purpose of making
findings with respect to the quality or integrity of the information or
data about the assets provided, directly or indirectly, by the
securitizer or originator of the assets) appropriately describe a form
of due diligence service for Exchange Act-ABS that is provided to
issuers or underwriters by a provider of third-party due diligence
services? For example, is this component of the definition too broad or
narrow? If so, how should this component of the definition be refined?
Alternatively, should it be omitted from the definition as reflecting
activity that is not a third-party due diligence service?

    4. Does the second category of ``due diligence service'' identified
in proposed paragraph (c)(1)(ii) of new Rule 17g-10 (i.e., a review of
the assets underlying Exchange Act-ABS for the purpose of making
findings with respect to whether the origination of the assets
conformed to underwriting or credit extension guidelines, standards,
criteria or other requirements) appropriately describe a form of due
diligence service for Exchange Act-ABS that is provided to issuers or
underwriters by a provider of third-party due diligence services? For
example, is this component of the definition too broad or narrow? If
so, how should this component of the definition be refined?
Alternatively, should it be omitted from the definition as reflecting
activity that is not a third-party due diligence service?
    5. Does the third category of ``due diligence service'' identified
in paragraph (c)(1)(iii) of new Rule 17g-10 (i.e., a review of the
assets underlying an Exchange Act-ABS for the purpose of making
findings with respect to the value of collateral securing such assets)
appropriately describe a form of due diligence service for Exchange
Act-ABS that is provided to issuers or underwriters by a provider of
third-party due diligence services? For example, is this component of
the definition too broad or narrow? If so, how should this component of
the definition be refined? Alternatively, should it be omitted from the
definition as reflecting activity that is not a third-party due
diligence service?
    6. Does the fourth category of ``due diligence service'' identified
in paragraph (c)(1)(iv) of new Rule 17g-10 (i.e., a review of the
assets underlying an Exchange Act-ABS for the purpose of making
findings with respect to whether the originator of the assets complied
with Federal, state or local laws or regulations) appropriately
describe a form of due diligence service for Exchange Act-ABS that is
provided to issuers or underwriters by a provider of third-party due
diligence services? For example, is this component of the definition
too broad or narrow? If so, how should this component of the definition
be refined? Alternatively, should it be omitted from the definition as
reflecting activity that is not a third-party due diligence service?
    7. Would the catchall component of the definition of ``due
diligence services'' identified in proposed paragraph (c)(1)(v) of new
Rule 17g-10 (i.e., a review of the assets underlying an Exchange Act-
ABS for the purpose of making findings with respect to any other factor
or characteristic of such assets that would be material to the
likelihood that the Exchange Act-ABS will pay interest and principal
according to its terms and conditions) adequately capture existing or
future third-party due diligence services not identified in proposed
paragraphs (c)(1)(i) through (iv) of new Rule 17g-10? For example, is
this component of the definition too broad or narrow? If so, how should
this component of the definition be refined? Alternatively, should it
be omitted from the definition?
    8. Are there other types of due diligence services for Exchange
Act-ABS provided to issuers or underwriters by a provider of third-
party due diligence services that are not identified in the
Commission's proposed definition that should be included? For example,
would the proposed definitions capture third-party due diligence
services provided with respect to an Exchange Act-ABS after it has been
issued? If proposed definitions would not capture due diligence
services provided post-issuance or any other services commonly
understood as third-party due diligence services, describe such
services and provide suggested rule text for how they could be
incorporated into the definition. Also, provide an explanation as to
how such services would be relevant to the determination of a credit
rating.
    9. Would the inclusion of the proposed definition of ``issuer'' in
new Rule 17g-10 identify the types of entities that should trigger the
requirements of the proposed rule? For example, is the proposed
definition too broad or narrow? If so, how should the proposed
definition be refined?
    10. Would the inclusion of the proposed definition of
``originator'' in new Rule 17g-10 identify the types of entities that
should trigger the requirements of the proposed rule? For example, is
the proposed definition too broad or narrow? If so, how should the
proposed definition be refined?
    11. Would the inclusion of the proposed definition of
``securitizer'' in new Rule 17g-10 identify the types of entities that
should trigger the requirements of the proposed rule? For example, is
the proposed definition too broad or narrow? If so, how should the
proposed definition be refined?
3. Proposed Form ABS Due Diligence-15E
    Section 15E(s)(4)(C) of the Exchange Act specifies that the
Commission shall establish the appropriate format and content for the
written certifications required under Section 15E(s)(4)(B), to ensure
that providers of due diligence services have conducted a thorough
review of data, documentation, and other relevant information necessary
for an NRSRO to provide an accurate rating.\601\ The Commission is
proposing to prescribe the format of the certification in Form ABS Due
Diligence-15E.\602\ The proposed form would contain five line items
identifying information the provider of third-party due diligence
services would need to set forth in the form. It also would contain a
signature line with a corresponding representation.\603\
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    \601\ See 15 U.S.C. 78o-7(s)(4)(C).
    \602\ See proposed new Rule 17 CFR 249b.400 and proposed Form
ABS Due Diligence-15E.
    \603\ Id.
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    Item 1 of proposed Form ABS Due Diligence-15E would elicit the
identity and address of the provider of third-party due diligence
services.\604\ This would notify users of the certification as to which
third party conducted the review described in the certification. Item 2
of proposed Form ABS Due Diligence-15E would elicit the identity and
address of the issuer, underwriter, or NRSRO that employed the provider
of third party due diligence services.\605\ This would notify users of
the certification as to the person that employed the third-party to
conduct the review described in the certification.
---------------------------------------------------------------------------

    \604\ See Item 1 to proposed Form ABS Due Diligence-15E.
    \605\ See Item 2 to proposed Form ABS Due Diligence-15E.
---------------------------------------------------------------------------

    Item 3 of proposed Form ABS Due Diligence-15E would instruct the
provider of third-party due diligence services to identify each NRSRO
whose published criteria for performing due diligence the third party
satisfied in performing the due diligence review.\606\ As noted above,
the NRSROs most active in rating RMBS have incorporated into their
procedures and methodologies for determining RMBS credit ratings
minimum steps a provider of third party due diligence services must
take in conducting due diligence.\607\ Consequently, the instructions
for Item 3 would provide that if the manner and scope of the due
diligence provided by the third party satisfied the criteria for due
diligence published by an NRSRO, the third party should identify the
NRSRO and the title and date of the published criteria in a table
provided on the form.\608\ The table and instructions would permit the
identification of more

than one NRSRO.\609\ This would allow the third party to reflect in a
single form that it conducted due diligence services in a manner that
satisfied the due diligence requirements of multiple NRSROs. As such,
Item 3 would be designed to elicit a representation from the provider
of the third-party due diligence services that it satisfied a given
NRSRO's published due diligence standards.
---------------------------------------------------------------------------

    \606\ See Item 3 to proposed Form ABS Due Diligence 15E.
    \607\ See, e.g., US RMBS Ratings Criteria, Fitch (Dec. 3, 2009)
Criteria for Evaluating Independent Third-Party Loan Level Reviews
for US RMBS, Moody's (Nov. 24, 2008) Incorporating Third-Party Due
Diligence Results Into the U.S. RMBS Rating Process, S&P (Nov. 25,
2008).
    \608\ Id.
    \609\ Id.
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    Items 4 and 5 of proposed Form ABS Due Diligence-15E would require
the provider of the third-party due diligence services to describe,
respectively: (1) The scope and manner of the due diligence performed;
and (2) the findings and conclusions resulting from the review. The
instructions for Items 4 and 5 would require the summaries to be
provided in attachments to the form, which would be considered part of
the form.
    As discussed above in Section II.H.1 of this release, the
Commission is proposing to implement Section 15E(s)(4)(A) of the
Exchange Act by requiring the issuer or underwriter of an Exchange Act-
ABS to disclose the findings and conclusions of a provider of third-
party due diligence services by furnishing Form ABS-15G on EDGAR
pursuant to proposed Rule 15Ga-2.\610\ Alternatively, the issuer or
underwriter would be permitted to obtain a representation from each
NRSRO engaged to determine a credit rating for the Exchange Act-ABS
that the NRSRO will publicly disclose the findings and conclusions of
the provider of third-party due diligence services in the form that
would need to be published pursuant to proposed new paragraph (a)(1) of
Rule 17g-7. In addition, as discussed above in Section II.G.3 of this
release, proposed new paragraph (a)(1)(ii)(F) of Rule 17g-7 would
implement Section 15E(s)(3)(A)(v) of the Exchange Act by requiring an
NRSRO to disclose in the form whether and to what extent third-party
due diligence services were used by the NRSRO, a description of the
information that such third party reviewed in conducting due diligence
services, and a description of the findings or conclusions of such
third party.\611\ The Commission preliminarily believes that requiring
a provider of third-party due diligence services to summarize in Items
4 and 5 of Form ABS Due Diligence-15E the manner and scope of the due
diligence performed and the findings and conclusions resulting from the
due diligence would facilitate these other requirements.\612\ For
example, the NRSRO could use the summaries to make the disclosures in
the form generated pursuant to proposed new paragraph (a) of Rule 17g-
7. In addition, the Commission preliminarily believes that the
disclosures would be useful to investors and other users of credit
ratings (as noted above in Section II.G.5, an NRSRO would be required
to disclose the certification with the publication of a credit rating
pursuant to proposed new paragraph (a)(2) of Rule 17g-7).
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    \610\ 15 U.S.C. 78o-7(s)(4)(A), proposed new Rule 15Ga-2, and
proposed amendments to Form ABS-15G.
    \611\ See 15 U.S.C. 78o-7(s)(3)(A)(v) and proposed new paragraph
(a)(1)(ii)(F) of Rule 17g-7.
    \612\ See Items 4 and 5 of proposed Form ABS Due Diligence-15E.
---------------------------------------------------------------------------

    To this end, the Commission proposes that Item 4 require the
provider of third-party due diligence services to describe the steps
taken in performing the due diligence.\613\ The instructions would
require the third party to provide this description regardless of
whether the third party represented in Item 3 of the form that its
review satisfied published criteria of an NRSRO. In other words, the
third party would not be able to simply rely on a cross-reference to
the NRSRO's published criteria to explain the work completed in
performing the due diligence. Consequently, the instructions to Item 4
would require the third party to describe the scope and manner of the
due diligence services provided in connection with the review of assets
that is sufficiently detailed to provide an understanding of the steps
taken in performing the review. The instructions further would require
that the third party include in the description: (1) The type of assets
that were reviewed; (2) the sample size of the assets reviewed; (3) how
the sample size was determined and, if applicable, computed; (4)
whether the quality or integrity of information or data about the
assets provided, directly or indirectly, by the securitizer or
originator of the assets was reviewed and, if so, how the review was
conducted; (5) whether the origination of the assets conformed to, or
deviated from, stated underwriting or credit extension guidelines; (6)
whether the value of collateral securing such assets was reviewed and,
if so, how the review was conducted; (7) whether the compliance of the
originator of the assets with Federal, state and local laws and
regulations was reviewed and, if so, how the review was conducted; and
(8) any other type of review conducted with respect to the assets. In
other words, the proposed instructions would parallel the Commission's
proposed definition of ``due diligence services'' in paragraph (c)(1)
of proposed new Rule 17g-10.\614\
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    \613\ See Item 4 of proposed Form ABS Due Diligence-15E.
    \614\ Compare Item 4 of proposed Form ABS Due Diligence 15E,
with paragraph (c)(1) of proposed new Rule 17g-10.
---------------------------------------------------------------------------

    As discussed above, the information required by the instructions
would provide the NRSRO and investors and users of credit ratings of
the NRSRO with a description of the nature of the due diligence
performed along with the publication of the credit rating and the form
that would be required under proposed new paragraph (a)(1) of Rule 17g-
7.\615\ The information also would allow the NRSRO and users of credit
ratings to compare whether the provider of third-party due diligence
services, based on its description, appeared to satisfy published
criteria of the NRSRO if such a claim was made in Item 3. Finally, if
no criteria had been published for the type of Exchange Act-ABS or no
claim to satisfying criteria was made in Item 3, the description would
be the sole basis of understanding the due diligence performed.
---------------------------------------------------------------------------

    \615\ See proposed new paragraph (a) of Rule 17g-7.
---------------------------------------------------------------------------

    Item 5 of proposed Form ABS Due Diligence-15E would require the
provider of third-party due diligence services to summarize the
findings and conclusions resulting from the due diligence review.\616\
Specifically, the instructions to Item 5 would require the third party
to provide a summary of the findings and conclusions that resulted from
the due diligence services that is sufficiently detailed to provide an
understanding of the findings and conclusions that were conveyed to the
person identified in Item 2 (i.e., conveyed to the issuer, underwriter,
or NRSRO that employed the third party to perform due diligence
services). As discussed above, the reasons for proposing the
requirement to provide such a summary are the same as for Item 4 of
Form ABS Due Diligence-15E.
---------------------------------------------------------------------------

    \616\ See Item 5 of proposed Form ABS Due Diligence 15E.
---------------------------------------------------------------------------

    Finally, the individual executing Form ABS Due Diligence-15E on
behalf of a provider of third-party due diligence services would need
to make two representations.\617\ First, the individual would need to
represent that he or she has executed the Form on behalf of, and on the
authority of, the third-party. Second, the individual would need to
represent that the third-party conducted a thorough review in
performing the due diligence described in Item 4 attached to the Form
and that the information and statements

contained in the Form, including Items 4 and 5 attached to the Form,
which are part of the Form, are accurate in all significant respects.
The Commission is proposing that this representation be made to
implement the provision of Section 15E(s)(4)(C) of the Exchange Act,
which provides that the Commission shall establish the appropriate
format and content of the written certifications ``to ensure that
providers of due diligence services have conducted a thorough review of
data, documentation, and other relevant information necessary for [an
NRSRO] to provide an accurate rating (emphasis added).'' \618\
---------------------------------------------------------------------------

    \617\ See ``Certification'' of proposed Form ABS Due Diligence-
15E.
    \618\ See 15 U.S.C. 78o-7(s)(4)(C).
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of
proposed new Form ABS Due Diligence-15E. The Commission also seeks
comment on the following:
    1. Would the proposed format of proposed Form ABS Due Diligence-15E
appropriately achieve the objectives of Section 15E(s)(4)(C) of the
Exchange Act? How could the format be modified to better achieve these
objectives?
    2. Should proposed Form ABS Due Diligence-15E be more prescriptive
in terms of the steps a provider of third-party due diligence services
would need to take in performing the review? For example, should the
form specify the minimum sample size a provider of third-party due
diligence services must perform on the assets underlying the Exchange
Act-ABS? If so, should the sample size be the same across all asset
classes and within asset classes? For example, with respect to RMBS,
the scope of due diligence could be based on the type of mortgage loans
(prime, Alt-A, or sub-prime), the quality of the originator of the
loans, the level of documentation provided with the loans or other
characteristics. Moreover, the scope of due diligence required for a
CMBS could involve reviewing every pool asset (rather than a sample),
since the number of underlying loans is much less than in an RMBS and,
therefore, the default of one loan would have a greater impact than the
default of a loan underlying an RMBS. Moreover, the scope of due
diligence required by an NRSRO for an Exchange Act-ABS where the asset
pool composition turns over rapidly because it contains revolving
assets, such as credit card receivables or dealer floor-plan
receivables, could involve different sampling techniques. How would the
Commission account for these variables in prescribing minimum sample
sizes or other procedures that would need to be undertaken by a
provider of third-party due diligence services? What benefits and costs
could result from being more prescriptive? Are there practical issues
to imposing a more prescriptive approach? If so, describe these issues.
    3. Would the information disclosed in Item 3 of proposed new Form
ABS Due Diligence-15E identifying each NRSRO whose published criteria
were satisfied by the provider of third-party due diligence services be
useful to the NRSRO producing a credit rating for the Exchange Act-ABS?
If not, how could the proposed instructions for Item 3 be modified to
make it more useful to NRSROs? Are there practical issues to imposing a
more prescriptive approach? If so, describe these issues.
    4. Would the summary provided in proposed Item 4 of new Form ABS
Due Diligence-15E about the scope and manner of the due diligence
services provided in connection with the review of assets be useful to
investors, other users of credit ratings, and NRSROs producing a credit
rating for the asset-backed security? If not, how could the proposed
instructions for Item 4 be modified to make it more useful? Are there
practical issues to imposing a more prescriptive approach? If so,
describe these issues.
    5. Would the summary provided in proposed Item 5 of new Form ABS
Due Diligence-15E about the findings and conclusions that resulted from
the due diligence services be useful to investors, other users of
credit ratings, and NRSROs producing a credit rating for the asset-
backed security? If not, how could the proposed instructions for Item 5
be modified to make it more useful? Are there practical issues to
imposing a more prescriptive approach? If so, describe these issues.

I. Standards of Training, Experience, and Competence

    Section 936 of the Dodd-Frank Act provides that the Commission
shall issue rules that are reasonably designed to ensure that any
person employed by an NRSRO to perform credit ratings: (1) Meets
standards of training, experience, and competence necessary to produce
accurate ratings for the categories of issuers whose securities the
person rates \619\ and (2) is tested for knowledge of the credit rating
process.\620\ The Commission proposes to implement Section 936 by
proposing new Rule 17g-9 and amending Rule 17g-2.\621\
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    \619\ See Public Law 111-203 Sec.  936(1).
    \620\ See Public Law 111-203 Sec.  936(2).
    \621\ See proposed new Rule 17g-9 and proposed new paragraph
(b)(15) of Rule 17g-2.
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1. Proposed New Rule 17g-9
    The Commission proposes to implement Section 936 of the Dodd-Frank
through new Rule 17g-9.\622\ As proposed, new Rule 17g-9 would have
three paragraphs: (a), (b) and (c).\623\ Proposed paragraph (a) would
contain a requirement that an NRSRO design and administer standards of
training, experience, and competence.\624\ Proposed paragraph (b) would
identify factors an NRSRO would need to consider in designing the
standards.\625\ Proposed paragraph (c) would prescribe two specific
requirements that would need to be incorporated into an NRSRO's
standards.\626\
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    \622\ See proposed new Rule 17g-9. This rule, if adopted, would
be codified at 17 CFR 240.17g-9.
    \623\ See proposed paragraphs (a), (b), and (c) of new Rule 17g-
9.
    \624\ See proposed paragraph (a) of new Rule 17g-9.
    \625\ See proposed paragraph (b) of new Rule 17g-9.
    \626\ See proposed paragraph (c) of new Rule 17g-9.
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a. Proposed Paragraph (a)
    Proposed paragraph (a) of new Rule 17g-9 would require an NRSRO to
establish, maintain, enforce, and document standards of training,
experience, and competence for the individuals it employs to determine
credit ratings that are reasonably designed to achieve the objective
that such individuals produce accurate credit ratings in the classes
and subclasses of credit ratings for which the NRSRO is
registered.\627\ Consequently, the provision, as proposed, would
require the NRSRO to design its own standards.\628\ The Commission
preliminarily believes this approach would be appropriate because of
the varying procedures and methodologies used by NRSROs to determine
credit ratings. The proposed requirement would provide flexibility to
allow each NRSRO to customize the standards according to its unique
procedures and methodologies for determining credit ratings and size.
For example, the standards established by an NRSRO with hundreds or
thousands of credit analysts that produce tens of thousands of credit
ratings across a wide range of asset classes may need to be different
than the standards of a small NRSRO with only a handful of credit
analysts that focus on a particular class of credit ratings.
---------------------------------------------------------------------------

    \627\ See proposed paragraph (a) of new Rule 17g-9.
    \628\ Id.
---------------------------------------------------------------------------

    At the same time, Section 936(1) provides that the Commission's
rules must be reasonably designed to ensure

that any person employed by an NRRSRO to perform credit ratings meets
standards of training, experience, and competence necessary to produce
accurate ratings for the categories of issuers whose securities the
person rates.\629\ Accordingly, while the Commission preliminarily
believes that the rule should allow flexibility in terms of the design
of the standards, the Commission also preliminarily believes that to
appropriately implement Section 936(1) the rule should require that the
standards have a common objective. Therefore, proposed paragraph (a) of
new Rule 17g-9 would require that the standards, as established, must
be reasonably designed to achieve the objective that individuals
employed by the NRSRO to determine credit ratings produce accurate
credit ratings in the classes of credit ratings for which the NRSRO is
registered.
---------------------------------------------------------------------------

    \629\ See Public Law 111-203 Sec.  936(1).
---------------------------------------------------------------------------

    This approach of identifying an objective--the production of
accurate ratings--and imposing a requirement that the standards be
reasonably designed to achieve the objective parallels Sections 15E(g)
and (h) of the Exchange Act, among other provisions in the securities
laws.\630\ For example, Section 15E(g) of the Exchange Act contains a
self-executing requirement that each NRSRO shall establish, maintain,
and enforce written policies and procedures reasonably designed, taking
into consideration the nature of the business of such NRSRO, to prevent
the misuse in violation of the Exchange Act, or the rules or
regulations thereunder, of material, nonpublic information by such
NRSRO or any person associated with such NRSRO.\631\ Similarly, Section
15E(h) contains a self-executing requirement that each NRSRO shall
establish, maintain, and enforce written policies and procedures
reasonably designed, taking into consideration the nature of the
business of such NRSRO and affiliated persons and affiliated companies
thereof, to address and manage any conflicts of interest that can arise
from such business.\632\
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    \630\ See 15 U.S.C. 78o-7(g) and (h).
    \631\ See 15 U.S.C. 78o-7(g).
    \632\ See 15 U.S.C. 78o-7(h).
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of
proposed paragraph (a) of new Rule 17g-9. The Commission also seeks
comment on the following:
    1. Would the approach in paragraph (a) of new Rule 17g-9 (i.e.,
identifying an objective for the standards and requiring the NRSRO to
design its own standards to achieve that objective) appropriately
implement Section 936 of the Dodd-Frank Act, particularly when taken
together with the provisions of proposed paragraphs (b) and (c) of new
Rule 17g-9 discussed below? If not, should the Commission specifically
prescribe the requirements of the standards to establish consistent
industry-wide standards? If so, would it be practical to prescribe
consistent industry-wide standards applicable to each NRSRO? Commenters
who believe such an approach would be feasible and appropriate should
identify such a standard and provide suggested rule text.
    2. Would the objective identified in proposed paragraph (a) of new
Rule 17g-9 (i.e., standards of training, experience, and competence
that are reasonably designed to achieve the objective that such credit
analysts produce accurate credit ratings) be appropriate? Would it
establish an objective that could be achieved? Would it implement the
goal of Section 936 of the Dodd-Frank Act? Commenters who believe that
the proposed objective is not appropriate should explain why and
provide suggested rule text to modify the objective.
    3. Is the objective--the production of ``accurate credit
ratings''--assessable? For example, how should the accuracy of credit
ratings be measured?
    4. Would it be feasible to establish a testing program that has
standardized components to review the adequacy of the standards of
training, experience, and competence that an NRSRO maintains, enforces,
and documents pursuant to proposed paragraph (a) of new Rule 17g-9? If
so, what should the components of that testing program be? What would
be the advantages and disadvantages of such a program? Are there
comparable testing programs used in other contexts that would be
relevant in developing such a program?
b. Proposed Paragraph (b)
    While proposed paragraph (a) of new Rule 17g-9 would provide that
the NRSRO must design the standards, proposed paragraph (b) would
identify factors the NRSRO must consider when designing the
standards.\633\ The Commission intends the identified factors to
provide guidance to NRSROs about the Commission's expectations for the
design of the standards of training, experience, and competence. It
also is intended to provide benchmarks that Commission examiners could
use to evaluate whether a given NRSRO's standards are reasonably
designed to meet the objective set forth in proposed paragraph (a).
---------------------------------------------------------------------------

    \633\ See proposed paragraph (b) of new Rule 17g-9.
---------------------------------------------------------------------------

    Proposed paragraph (b) of new Rule 17g-9 would require the NRSRO to
consider each factor in the context of the potentially varying roles of
the individuals employed by the NRSRO to determine credit ratings. More
specifically, the Commission preliminarily believes that the design of
the standards must account for different functions and responsibilities
of such individuals as well as the different procedures and
methodologies they use to determine credit ratings. The Commission is
not proposing that the NRSRO design a standard for each individual.
Rather, the Commission preliminarily believes that the standards,
particularly of a large NRSRO with hundreds or thousands of credit
analysts, should account for groups of individuals who are not
similarly situated, for example, in terms of years of experience,
education level, responsibility, and complexity of the procedures and
methodologies they use to determine credit ratings.
    The first factor--identified in proposed paragraph (b)(1) of Rule
17g-9--would require the NRSRO, when establishing the standards of
training, experience, and competence, to consider if the credit rating
procedures and methodologies used by the individual involve qualitative
analysis, the knowledge necessary to effectively evaluate and process
the data relevant to the creditworthiness of the obligor being rated or
the issuer of the securities or money market instruments being
rated.\634\ The Commission intends proposed paragraph (b)(1) to require
the NRSRO to consider the fact that qualitative analysis relies, in
large part, on identifying and assimilating relevant information about
an obligor or issuer and making judgments on how that information
impacts the creditworthiness of the obligor or the issuer.
---------------------------------------------------------------------------

    \634\ See proposed paragraph (b)(1) of new Rule 17g-9.
---------------------------------------------------------------------------

    The second factor--identified in proposed paragraph (b)(2) of Rule