17g-1. See Form NRSRO and 17 CFR 240.17g-1(f); see also Oversight of
Credit Rating Agencies Registered as Nationally Recognized
Statistical Rating Organizations, 72 FR at 33567, 33569-33582 (June
18, 2007).
---------------------------------------------------------------------------

    The instructions for Exhibit 1 require an applicant and NRSRO to
provide performance measurement statistics of the credit ratings of the
applicant or NRSRO, including performance measurement statistics of the
credit ratings separately for each class of credit rating for which the
applicant is seeking registration or the NRSRO is registered.\127\ The
classes of credit ratings for which an NRSRO can be registered are
enumerated in the definition of ``nationally recognized statistical
rating organization'' in Section 3(a)(62) of the Exchange Act: (1)
Financial institutions, brokers, or dealers; \128\ (2) insurance
companies; \129\ (3) corporate issuers; \130\ (4) issuers of asset-
backed securities (as that term is defined in Section 1101(c) of part
229 of Title 17, Code of Federal Regulations, ``as in effect on the
date of enactment of this paragraph''); \131\ and (5) issuers of
government securities, municipal securities, or securities issued by a
foreign government.\132\ With respect to the fifth class of credit
ratings, the instructions for Exhibit 1 require the NRSRO to provide
performance measurement statistics for the following three subclasses
(as opposed to the class

as a whole): sovereigns, United States public finance, and
international public finance.\133\
---------------------------------------------------------------------------

    \127\ See instructions for Exhibit 1.
    \128\ See 15 U.S.C. 78c(a)(62)(A)(i).
    \129\ See 15 U.S.C. 78c(a)(62)(A)(ii).
    \130\ See 15 U.S.C. 78c(a)(62)(A)(iii).
    \131\ See 15 U.S.C. 78c(a)(62)(A)(iv). The instructions for
Exhibit 1 broaden this class of credit rating to include a credit
rating of any security or money market instrument issued by an asset
pool or as part of any asset-backed or mortgage-backed securities
transaction. The intent of the instruction is to include in the
class (and, therefore, in the performance statistics for the class)
credit ratings for structured finance products that are outside the
scope of the definition referenced in Section 3(a)(62)(A)(iv) of the
Exchange Act. See 15 U.S.C. 78c(a)(62)(A)(iv) and Amendments to
Rules for Nationally Recognized Statistical Rating Organizations, 74
FR at 6458 (Feb. 9, 2009). As discussed below, the Commission is
proposing to continue to use a broadened definition in the proposed
new instructions for Exhibit 1. Moreover, 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. Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR at 63832, footnote 3 (Dec.
4, 2009). 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 collateralized debt obligations CDOs,
including synthetic and hybrid CDOs. Id. 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).
    \132\ See 15 U.S.C. 78c(a)(62)(A)(v).
    \133\ See instructions for Exhibit 1.
---------------------------------------------------------------------------

    In addition, the instructions require that the performance
measurement statistics ``must at a minimum show the performance of
credit ratings in each class over 1-year, 3-year, and 10-year periods
(as applicable) through the most recent calendar year-end, including,
as applicable: historical ratings transition and default rates within
each of the credit rating categories,\134\ notches, grades, or rankings
used by the Applicant/NRSRO as an indicator of the assessment of the
creditworthiness of an obligor, security, or money market instrument in
each class of credit rating.''\135\ Paragraph (i) of Rule 17g-1
provides, among other things, that the NRSRO must make the annual
certification publicly available within 10 business days of furnishing
the annual certification to the Commission.\136\
---------------------------------------------------------------------------

    \134\ The transition rate is the percentage of ratings at a
given rating notch that transition to another specified rating notch
over a given time period. Only ratings that were outstanding at the
beginning of the time period are used in the calculation of the
transition rate. Transition rates are generally used to measure the
stability of the ratings. The default rate is the percentage of
ratings at a given rating notch that have defaulted over a given
time period. Only the ratings that were outstanding at the beginning
of the time period are used in the calculation.
    \135\ See instructions for Exhibit 1.
    \136\ See 17 CFR.240.17g-1(i).
---------------------------------------------------------------------------

    Currently, the instructions for Exhibit 1 do not prescribe the
methodology an NRSRO must use to calculate and present the performance
measurement statistics; nor do the instructions limit the type of
information that can be disclosed in the Exhibit.\137\ Consequently,
NRSROs have used different techniques to produce performance
measurement statistics, which has limited the ability of investors and
other users of credit ratings to compare the performance of credit
ratings across NRSROs.\138\ In addition, several NRSROs have included
substantial amounts of information in Exhibit 1 about performance
measurement statistics, in addition to transition and default rates.
These practices make the presentation of information in the Exhibits
widely inconsistent across NRSROs.
---------------------------------------------------------------------------

    \137\ When adopting Form NRSRO, the Commission explained that
the instructions would not prescribe how NRSROs must calculate
transition rates and default rates, noting that commenters had
opposed a standard approach because NRSROs use different
methodologies to determine credit ratings. See Oversight of Credit
Rating Agencies Registered as Nationally Recognized Statistical
Rating Organizations, 72 FR at 33574 (June 18, 2007). The Commission
stated that it intended to continue to consider the issue ``to
determine the feasibility, as well as the potential benefits and
limitations, of devising measurements that would allow reliable
comparisons of performance between NRSROs.'' Id. The Commission
incrementally standardized the disclosure requirements in Exhibit 1
by amending the Form in 2009 to require an NRSRO to disclose
transition and default rates for each class of credit rating for
which it was registered and for 1-, 3-, and 10-year periods. See
Amendments to Rules for Nationally Recognized Statistical Rating
Organizations 74 FR at 6457-6459 (Feb. 9, 2009).
    \138\ See, e.g., Securities and Exchange Commission: Action
Needed to Improve Rating Agency Registration Program and Performance
Related Disclosures, GAO Report 10-782 (Sept. 2010) (``GAO Report
10-782'').
---------------------------------------------------------------------------

    For the foregoing reasons and to implement Section 15E(q) of the
Exchange Act, the Commission is proposing significant enhancements to
the requirements to disclose performance measurement statistics in
Exhibit 1.\139\ The enhancements would confine the disclosures in the
Exhibit to transition and default rates and certain limited
supplemental information. Moreover, the enhancements would standardize
the production and presentation of the transition and default
rates.\140\ Specifically, the Commission preliminarily believes that
the transition and default rates in Exhibit 1 should be produced using
a ``single cohort approach.'' \141\ As explained below, under this
approach, an applicant and NRSRO, on an annual basis, would be required
to compute how the credit ratings assigned to obligors, securities, and
money market instruments in a particular class or subclass of credit
rating that were outstanding on the date 1, 3, and 10 years prior to
the most recent calendar year-end performed during the respective 1-,
3-, and 10-year time period. The Commission's intent in proposing these
enhancements is to make the Exhibit 1 disclosures simply presented,
easy to understand, uniform in appearance, and comparable across
NRSROs.\142\
---------------------------------------------------------------------------

    \139\ See 15 U.S.C. 78o-7(q) and proposed amendments to
instructions for Exhibit 1.
    \140\ See 15 U.S.C. 78o-7(q)(2)(B).
    \141\ See GAO Report 10-782, pp. 27-37 (comparing, among other
things, a single cohort approach--the model for the Commission's
proposal--with an average cohort approach). See also GAO Report 10-
782, p. 25, note 38 (identifying more complex techniques for
calculating credit rating performance measurement statistics).
    \142\ See Section 15E(q)(2)(A) of the Exchange Act, which
provides that the disclosure of information about the performance of
credit ratings should be comparable among NRSROs, to allow users of
credit ratings to compare the performance of credit ratings across
NRSROs. 15 U.S.C. 78o-7(q)(2)(A). See also Section 15E(q)(2)(B) of
the Exchange Act, which provides that the disclosure of information
about the performance of credit ratings should be clear and
informative for investors having a wide range of sophistication who
use or might use credit ratings. 15 U.S.C. 78o-7(q)(2)(B).
---------------------------------------------------------------------------

    To implement this proposal, the Commission is proposing to
substantially revise the instructions for Exhibit 1.\143\ The proposed
new instructions would be divided into paragraphs (1), (2), (3), and
(4), some of which would have subparagraphs.\144\ The proposed new
paragraphs would contain specific instructions with respect to, among
other things, how required information must be presented in the Exhibit
(including the order of presentation) and how transition and default
rates must be produced using a single cohort approach. As with all
information that must be submitted in Form NRSRO and its Exhibits,
applicants and NRSROs would be subject to these requirements.\145\
---------------------------------------------------------------------------

    \143\ See proposed amendments to instructions for Exhibit 1.
    \144\ See proposed new paragraphs (1), (2), (3), and (4) of the
instructions for Exhibit 1.
    \145\ Form NRSRO must be used by a credit rating agency to apply
for registration as an NRSRO and, once registered, an NRSRO must
publicly disclose the information required in Form NRSRO and
Exhibits 1 though 9. See 17 CFR 240.17g-1 and Instructions A.1, B,
C, D, E, and F to Form NRSRO.
---------------------------------------------------------------------------

    Proposed Paragraph (1) of the Instructions for Exhibit 1. Proposed
new paragraph (1) of the instructions for Exhibit 1 would require an
applicant and NRSRO to provide performance measurement statistics for
each class and subclass of credit ratings for which the applicant is
seeking registration as an NRSRO or the NRSRO is registered.\146\
Consistent with the current instructions, proposed new paragraph (1)
would require an applicant and NRSRO to provide transition and default
rates for 1-, 3-, and 10-year periods for each applicable class or
subclass of credit rating.\147\ Also consistent with the current
instructions, proposed new paragraph (1) would require an applicant and
NRSRO to produce and present three separate transition and default
statistics for each applicable class or subclass of credit rating;
namely, for 1-, 3-, and 10-year time periods through the most recently
ended calendar year. In addition, as part of the enhancements, an
applicant and NRSRO would need to present the transition and default
rates for each time period together in tabular form using a standard
format (a ``Transition/Default Matrix'').\148\
---------------------------------------------------------------------------

    \146\ See proposed new paragraph (1) of the instructions for
Exhibit 1.
    \147\ Compare current instructions for Exhibit 1 with proposed
new paragraph (1) of the instructions for Exhibit 1.
    \148\ See proposed new paragraph (1) of the instructions for
Exhibit 1.
---------------------------------------------------------------------------

    Proposed new paragraph (1) would identify the classes and
subclasses of credit ratings for which an applicant and NRSRO would
need to produce Transition/Default Matrices, as

applicable. The identified classes would reference the classes of
credit ratings for which an NRSRO can be registered as enumerated in
the definition of NRSRO in Section 3(a)(62)(A) of the Exchange
Act.\149\ This would be consistent with the current instructions for
Exhibit 1.\150\ Moreover, also consistent with the current
instructions, the class of credit ratings enumerated in Section
3(a)(62)(A)(iv) of the Exchange Act (issuers of certain asset-backed
securities) would be expanded by the instructions in proposed new
paragraph (1) to include a broader range of structured finance products
than are within the scope of the definition of Section
3(a)(62)(A)(iv).\151\
---------------------------------------------------------------------------

    \149\ Compare 15 U.S.C. 78c(a)(62)(A)(i)-(v) with proposed new
paragraphs (1)(A)-(E) of the instructions for Exhibit 1.
    \150\ Compare current instructions for Exhibit 1 with proposed
new paragraph (1).
    \151\ See 15 U.S.C. 78c(a)(62)(A)(iv); compare current
Instructions for Exhibit 1 with proposed new paragraph (1)(D).
---------------------------------------------------------------------------

    However, to enhance the disclosure of transition and default rates
in this class, the Commission is proposing to divide it into the
following subclasses: RMBS;\152\ commercial mortgage backed securities
(``CMBS'');\153\ collateralized loan obligations (``CLOs'');\154\
CDOs;\155\ issuances of asset-backed commercial paper conduits
(``ABCP'');\156\ other asset-backed securities;\157\ and other
structured finance products.\158\ The Commission preliminarily believes
dividing the broad class of structured finance products into these
subclasses would provide investors and other users of credit ratings
with more useful information about the performance of an NRSRO's
structured finance ratings.\159\ For example, during the recent crisis,
NRSROs assigned credit ratings to RMBS and CDOs that performed far
differently than credit ratings of some other types of
securitizations.\160\ Consequently, if an applicant or NRSRO computed
transition and default rates for structured finance products as a
single class, the underperformance of certain subclasses could be muted
by the better performance of other subclasses.
---------------------------------------------------------------------------

    \152\ The Commission preliminarily intends that an ``RMBS'' for
the purposes of this disclosure requirement would mean a
securitization of primarily residential mortgages. See proposed new
paragraph (1)(D)(i) of the instructions for Exhibit 1.
    \153\ The Commission preliminarily intends that a ``CMBS'' for
the purposes of this disclosure requirement would mean a
securitization of primarily commercial mortgages. See proposed new
paragraph (1)(D)(ii) of the instructions for Exhibit 1.
    \154\ The Commission preliminarily intends that a ``CLO'' for
the purposes of this disclosure requirement would mean a
securitization of primarily commercial loans. See proposed new
paragraph (1)(D)(iii) of the Instructions for Exhibit 1.
    \155\ The Commission preliminary intends that a ``CDO'' for the
purposes of this disclosure requirement would mean a securitization
primarily of other debt instruments such as RMBS, CMBS, CLOs, CDOs,
other asset-backed securities, and corporate bonds. See proposed new
paragraph (1)(D)(iv) of the instructions for Exhibit 1.
    \156\ The Commission preliminarily intends that ``ABCP'' for the
purposes of this disclosure requirement would mean short term notes
issued by a structure that securitizes a variety of financial assets
(e.g., trade receivables, credit card receivables), which secure the
notes. See proposed new paragraph (1)(D)(v) of the instructions for
Exhibit 1.
    \157\ The Commission preliminarily intends that the term ``other
asset-backed security'' for the purposes of this disclosure
requirement would mean a securitization primarily of auto loans,
auto leases, floor plan financings, credit card receivables, student
loans, consumer loans, equipment loans, or equipment leases. See
proposed new paragraph (1)(D)(vi) of the instructions for Exhibit 1.
    \158\ The Commission preliminarily intends that ``other
structured finance product'' for the purposes of this disclosure
requirement would mean a structured finance product that does not
fit into any of the other subclasses of structured products. See
proposed new paragraph (1)(D)(vii) of the instructions for Exhibit
1.
    \159\ See, e.g., GAO Report 10-782, p. 36 (noting that NRSROs
active in rating structured finance generally present performance
statistics for this class by sectors (e.g., RMBS, CMBS and ABS) in
their voluntary disclosures). See also, GAO Report 10-782, p. 36
(observing that the various structured finance sectors have risk
characteristics that vary significantly and, therefore, that
presenting performance statistics for the class as a whole ``may not
be useful.'').
    \160\ See, e.g., A Global Cross-Asset Report Card of Ratings
Performance in Times of Stress, Standard & Poor's (June 8, 2010).
---------------------------------------------------------------------------

    Consistent with the current instructions, proposed new paragraph
(1) would divide the class of credit ratings enumerated in Section
3(a)(62)(A)(v) of the Exchange Act (issuers of government securities,
municipal securities or securities issued by a foreign government) into
three subclasses.\161\ The subclasses would continue to be: sovereign
issuers; United States public finance; and international public
finance.\162\
---------------------------------------------------------------------------

    \161\ See 15 U.S.C. 78c(a)(62)(A)(v); compare current
instructions for Exhibit 1, with proposed new paragraph (1)(E).
    \162\ See proposed new paragraph (1)(E) of the instructions for
Exhibit 1.
---------------------------------------------------------------------------

    In addition, consistent with the current instructions for an annual
certification, proposed new paragraph (1) would provide that the
performance measurement statistics must be updated yearly in the
NRSRO's annual certification in accordance with Section 15E(b)(1)(A)
and paragraph (f) of Rule 17g-1 (i.e., a Form NRSRO with updated
performance measurement statistics must be filed with the Commission no
later than 90 days after the end of the calendar year).\163\ Proposed
new paragraph (1) also would remind an NRSRO that, pursuant to
paragraph (i) of Rule 17g-1, the annual certification with the updated
performance measurement statistics must be made publicly and freely
available on an easily accessible portion of the NRSRO's corporate
Internet Web site within 10 business days after the filing and that the
NRSRO must make its up-to-date Exhibit 1 freely available in writing to
any individual who requests a copy of the Exhibit.\164\
---------------------------------------------------------------------------

    \163\ See Instruction F to Form NRSRO and proposed new paragraph
(1); see also 15 U.S.C. 78o-7(b)(1)(A) and 17 CFR 240.17g-1(f).
While paragraph (f) of Rule 17g-1 currently requires the annual
certification to be ``furnished,'' the Commission is proposing, as
discussed below in Section II.M.1 of the release, to replace the
term ``furnished'' with the term ``filed'' in a number of the NRSRO
rules, including Rule 17g-1.
    \164\ See proposed new paragraph (1) of the instructions for
Exhibit 1. As discussed below in Section II.E.1.b of this release,
the Commission is proposing to amend paragraph (i) of Rule 17g-1 (17
CFR 240.17g-1(i)) to implement Section 15E(q)(2)(D) of the Exchange
Act, which provides that the Commission's rules must require that
the information about the performance of credit ratings be published
and made freely available on an easily accessible portion of an
NRSRO's Web site, and in writing when requested. See 15 U.S.C. 78o-
7(q)(2)(D). As discussed below, the proposed amendment to paragraph
(i) of Rule 17g-1 (17 CFR 240.17g-1(i)) would require an NRSRO to
publish and make freely available on an easily accessible portion of
its Web site all of Form NRSRO (i.e., not just Exhibit 1). However,
only Exhibit 1 would need to be made freely available in writing
when requested.
---------------------------------------------------------------------------

    Proposed Paragraph (2) of the Instructions for Exhibit 1. Proposed
new paragraph (2) of the instructions for Exhibit 1 would prescribe how
an applicant and NRSRO must present the performance measurement
statistics and other required information in the Exhibit.\165\
Specifically, it would require that the Transition/Default Matrices for
each applicable class and subclass of credit ratings be presented in
the order that the classes and subclasses are identified in proposed
paragraphs (1)(A) through (E) of Exhibit 1. In addition, the order of
the Transition/Default Matrices for a given class or subclass would
need to be: The 1-year matrix, the 3-year matrix, and then the 10-year
matrix.

Proposed new paragraph (2) also would provide that if the applicant or
NRSRO did not issue credit ratings in a particular class or subclass
for the length of time necessary to produce a Transition/Default Matrix
for a 1-, 3-, or 10-year period, it would need to explain that fact in
the location where the Transition/Default Matrix would have been
presented in the Exhibit.\166\
---------------------------------------------------------------------------

    \165\ See proposed new paragraph (2) of the instructions for
Exhibit 1.
    \166\ For example, if an NRSRO is registered in the corporate
issuer class but has been issuing credit ratings for only 7 years in
that class, it could not produce a 10-year Transition/Default Matrix
for the class. Instead, the NRSRO would need to provide an
explanation in the location where a 10-year Transition/Default
Matrix would have been located (i.e., after the 3-year matrix) that
it had not been issuing credit ratings in that class for a
sufficient amount of time to produce a 10-year Transition/Default
Matrix.
---------------------------------------------------------------------------

    Similar to the current Instructions, proposed paragraph (2) would
require an applicant and NRSRO to clearly define in Exhibit 1, after
the presentation of all applicable Transition/Default Matrices, each
symbol, number, or score in the rating scale used by the applicant or
NRSRO to denote a credit rating category and notches within a category
for each class and subclass of credit ratings in any Transition/Default
Matrix presented in the Exhibit.\167\ The instructions also would
require the applicant or NRSRO to clearly explain the conditions under
which it classifies obligors, securities, or money market instruments
as being in default. As discussed below, the Commission preliminarily
believes that obligors, securities, and money market instruments that
the applicant or NRSRO has classified as being in default as of the
period start date for a Transition/Default Matrix should be excluded
from the statistics in the matrix. Also, as discussed below, the
Commission is proposing a standard definition of ``default'' for the
purpose of calculating default rates. In addition, also as discussed
below, where an applicant or NRSRO has a definition of ``default'' that
is broader than this standard definition, the instructions would
require the applicant or NRSRO to supplement the standard definition
with its internal definition. For these reasons, the Commission
believes it would be useful for investors and other users of credit
ratings to know how an NRSRO defines default.
---------------------------------------------------------------------------

    \167\ Compare current instructions for Exhibit 1, with proposed
new paragraph (2). As discussed in Section II.J.2 of this release,
the Commission is proposing to implement Section 938(a)(2) of the
Dodd-Frank Act through paragraph (b)(2) of new Rule 17g-8, which
would require an NRSRO to have policies and procedures reasonably
designed to clearly define the meaning of any symbol used by the
NRSRO to denote a credit rating, including in Exhibit 1 to Form
NRSRO. See Public Law 111-203 Sec.  938(a)(2) and proposed paragraph
(b)(2) of new Rule 17g-8.
---------------------------------------------------------------------------

    Similar to the current instructions, proposed paragraph (2) would
require that an applicant and NRSRO provide in Exhibit 1 the uniform
resource locator (URL) of its corporate Internet Web site where the
credit rating histories required to be disclosed pursuant to paragraph
(b) of Rule 17g-7 would be located (in the case of an applicant) or are
located (in the case of an NRSRO).\168\
---------------------------------------------------------------------------

    \168\ Compare current instructions for Exhibit 1, with proposed
new paragraph (2). As discussed below in Section II.E.2 of this
release, the Commission is proposing to amend Rule 17g-2 (17 CFR
240.17g-2) and Rule 17g-7 (17 CFR 240.17g-7) to enhance the credit
rating history disclosure requirements currently located in Rule
17g-2. Among other things, the Commission proposes relocating the
credit rating history disclosure requirements from Rule 17g-2 to
proposed new paragraph (b) of Rule 17g-7. See proposed amendments to
paragraph (d) of Rule 17g-2 and proposed new paragraph (b) of Rule
17g-7.
---------------------------------------------------------------------------

    Finally, proposed paragraph (2) would provide that Exhibit 1 must
contain no performance measurement statistics or information other than
as described in, and required by, the instructions for Exhibit 1;
except the applicant or NRSRO would be permitted to provide, after the
presentation of all required Transition/Default Matrices and other
required disclosures, Internet Web site URLs where other information
relating to performance measurement statistics of the applicant or
NRSRO is located.\169\ As noted above, some NRSROs include substantial
amounts of information in Exhibit 1 about the performance of their
credit ratings. The Commission preliminarily believes information in
addition to the disclosures that would be required under the
enhancements to Exhibit 1 may be useful to investors and other users of
credit ratings. However, the Commission also preliminarily believes
disclosing this related information in Exhibit 1 would make the Exhibit
less easy to use in terms of locating a particular Transition/Default
Matrix and comparing it with the matrices of other NRSROs.
Consequently, the Commission preliminarily believes an appropriate
balance would be to exclude related information from the Exhibit but
permit an NRSRO to cross-reference such information by providing
Internet Web site URLs at the end of the Exhibit.
---------------------------------------------------------------------------

    \169\ See proposed new paragraph (2) of the instructions for
Exhibit 1.
---------------------------------------------------------------------------

    Proposed Paragraph (3) of the Instructions for Exhibit 1. Proposed
paragraph (3) of the Instructions for Exhibit 1 would prescribe how an
applicant and NRSRO must design a Transition/Default Matrix.\170\ The
instructions would require an applicant and NRSRO to produce a 1-, 3-,
and 10-year Transition/Default Matrix for each applicable class and
subclass of credit rating that resembles, in design, the Transition/
Default Matrix in Figure 1 below.\171\
---------------------------------------------------------------------------

    \170\ See proposed new paragraph (3) of the instructions for
Exhibit 1.
    \171\ However, as explained below, the top row and first column
would be based on the rating scale used by the applicant or NRSRO
for the applicable class or subclass of credit ratings. For example,
in the Sample Transition/Default Matrix, there are nine categories
denoted by the symbols: AAA, AA, A, BBB, BB, B, CCC, CC, and C but
no notches within those categories. An NRSRO that uses notches in
its ratings scale (e.g., AA+, AA, and AA-) would need to include the
symbol for each notch in the individual cells of the first column
and top row. However, as discussed below, the applicant or NRSRO
would exclude a ``default'' category even if it uses such a category
in its rating scale (though, as explained below, there would be a
column with the heading ``Default'' in the matrix that would depict
the percent of rated obligors, securities, and money market
instruments that went into default during the relevant time period
based on a standard definition of ``default'' in the instructions
for Exhibit 1 (i.e., not on the definition of the applicant or
NRSRO).

                                                                Figure 1--Corporate Issuers--10-Year Transition and Default Rates
                                                                          [December 31, 2000 through December 31, 2010]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     Number of
                                                                      ratings                                                                                Paid    Withdrawn
                       Credit rating scale                        outstanding as    AAA       AA       A       BBB       BB       B       CCC       CC       C     Default    off      (other)
                                                                   of 12/31/2000
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
AAA.............................................................              10      50%      10%  .......  .......  .......  .......  .......  .......  .......  .......      40%  ...........
AA..............................................................            2000       1%      39%      12%      10%       8%       5%       4%  .......  .......       1%      19%           1%
A...............................................................            4000  .......       6%      34%      15%      10%       6%       4%       3%  .......       2%      18%           2%
BBB.............................................................            3600  .......       2%       9%      28%      15%      10%       6%       5%       1%       4%      17%           3%
BB..............................................................            1000  .......  .......       2%       4%      20%      14%       5%  .......  .......       2%      16%          37%
B...............................................................             500  .......  .......       1%       3%       6%      20%      20%      15%  .......      15%      15%           5%
CCC.............................................................             300  .......  .......  .......  .......       4%       6%      15%      25%      20%      20%       4%           6%

CC..............................................................             200  .......  .......  .......  .......  .......       2%       8%      10%      38%      30%       2%          10%
C...............................................................             160  .......  .......  .......  .......  .......  .......       2%       8%      10%      67%       1%          12%
    Total.......................................................          11,770  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  .......  ...........
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

    A sample Transition/Default Matrix similar to Figure 1 would be
depicted in proposed new paragraph (3) to provide a visual
representation of how to design and present a matrix.\172\ In addition
to the visual depiction, proposed new paragraph (3) would contain
narrative instructions on how to design a matrix. First, the narrative
instructions would prescribe the headings for each required column in a
Transition/Default Matrix by referring to the cells in the top row of
the table (the ``header row'').\173\ The narrative instructions would
require that the first and second cells in the header row contain the
headings, respectively, ``Credit Rating Scale'' and ``Number of Ratings
Outstanding as of [insert the applicable date].'' \174\ The applicable
date would be the date 1, 3, or 10 years prior to the most recent
calendar year-end depending on whether the Transition/Default Matrix
was being produced for a 1-, 3-, or 10-year period. The next sequence
of cells in the header row would need to contain, in order from left to
right, each credit rating symbol, number, or score used to denote a
category and a notch within a category in the rating scale used by the
applicant or NRSRO for the applicable class or subclass of credit
ratings in descending order from the highest to the lowest notch.\175\
The narrative instructions would require that the applicant or NRSRO
not include a ``default'' category in the header row even if such a
category is used in the rating scale.\176\ The narrative instructions
would require that the cells in the last three columns in the
Transition/Default Matrix contain the headings, in order from left to
right, ``Default'', ``Paid Off'', and ``Withdrawn (other).'' \177\
---------------------------------------------------------------------------

    \172\ See proposed new paragraph (3) of the instructions for
Exhibit 1.
    \173\ See proposed new paragraph (3) of the instructions for
Exhibit 1.
    \174\ See, e.g., the 1st and 2nd columns of the Sample
Transition/Default Matrix in Figure 1.
    \175\ See proposed new paragraph (3) of the instructions for
Exhibit 1; see also the 3rd through 11th columns of the Sample
Transition/Default Matrix in Figure 1.
    \176\ The Commission's reasoning for proposing to exclude a
category of ``default'' from the first column is explained below.
    \177\ See proposed new paragraph (3) of the instructions for
Exhibit 1; see also the 12th through 14th columns of the Sample
Transition/Default Matrix in Figure 1.
---------------------------------------------------------------------------

    Next, the narrative instructions would require that the first
column have a separate cell containing each credit rating symbol,
number, or score in the rating scale used by the applicant or NRSRO to
denote a category and a notch within a category for the applicable
class or subclass of credit ratings in descending order from the
highest to the lowest notch.\178\ The applicant or NRSRO would be
required to populate the column with the credit rating symbols,
numbers, or scores in descending order from the highest to the lowest
notch. Consistent with the header row, the narrative instructions also
would require that the first column not include a ``default'' category
if the applicant or NRSRO uses such a category in its rating scale. The
last cell in the first column would need to contain the term ``Total.''
\179\
---------------------------------------------------------------------------

    \178\ See, e.g., the first column of the Sample Transition/
Default Matrix in Figure 1.
    \179\ See proposed new paragraph (3) of the instructions for
Exhibit 1; see also the first column of the Sample Transition/
Default Matrix in Figure 1.
---------------------------------------------------------------------------

    Finally, the narrative instructions would require that the
Transition/Default Matrix have a title identifying the applicable class
or subclass of credit ratings, the period covered (1, 3, or 10 years),
and start date and end date for the period.
    Proposed Paragraph (4) of the Instructions for Exhibit 1. Proposed
new paragraph (4) of the instructions for Exhibit 1 would prescribe how
an applicant or NRSRO would need to populate a Transition/Default
Matrix with data and statistical information.\180\ First, proposed new
paragraph (4)(A) would prescribe how to populate the cells of the
second column headed ``Number of Ratings Outstanding [as the Start
Date].'' \181\ First, the applicant or NRSRO would be required to
determine a start-date cohort consisting of the obligors, securities,
and money market instruments in the applicable class or subclass of
credit ratings that were assigned a credit rating (other than an
expected or preliminary credit rating)\182\ that was outstanding as of
the start date for the applicable period (i.e., the date 1, 3, or 10
years prior to the most recently ended calendar year).\183\
Consequently, the start-date cohort would exclude any obligor,
security, or money market instrument that received an initial credit
rating in the class or subclass after the start date.\184\
---------------------------------------------------------------------------

    \180\ See proposed paragraph (4) of the instructions for Exhibit
1.
    \181\ See proposed paragraph (4)(A) of the instructions for
Exhibit 1; see also the 2nd column of the Sample Transition/Default
Matrix in Figure 1.
    \182\ ``Expected'' or ``preliminary'' credit ratings most
commonly are issued by an NRSRO with respect to a structured finance
product at the time the issuer commences the offering and typically
are included in pre-sale reports. Expected or preliminary credit
ratings may include a range of ratings, or any other indications of
a credit rating used prior to the assignment of an initial credit
rating for a new issuance. As such, the Commission preliminarily
believes they should be excluded from the Transition/Default
Matrices since the issuance of the ``initial'' credit rating is the
first formal expression of the NRSRO's view of the relative
creditworthiness of the obligor, security, or money market
instrument.
    \183\ For example, if the most recent year end was December 31,
2010, the NRSRO would need to determine all the obligors,
securities, and money market instruments with credit ratings
outstanding in the relevant class as of December 31, 2009 (for the
1-year Transition/Default Matrix), December 31, 2007 (for the 3-year
Transition/Default Matrix), and December 31, 2000 (for the 10-year
Transition/Default Matrix). Because some obligors, securities, and
money market instruments have characteristics that could cause them
to be assigned more than one class of credit rating, the Commission
is seeking comment below in Section II.M.4.a of this release on
which class would be the most appropriate for certain types of
obligors, securities, and money market instruments. Based on the
comments received in response to those questions, the Commission may
decide to prescribe by rule or identify through guidance how certain
types of obligors, securities, and money market instruments should
be classified for the purpose of determining start-date cohorts.
    \184\ For example, a Transition/Default Matrix covering a 10-
year period would not include obligors, securities, and money market
instruments that had been rated by the NRSRO for less than 10 years.
However, these obligors, securities, and money instruments may be
included in the start-date cohorts for the 1- and 3-year matrices
for the class or subclass.
---------------------------------------------------------------------------

    In addition, the proposed instructions would provide that the
applicant or NRSRO must exclude from the start-date cohort any
obligors, securities, or money

market instruments that were classified by the applicant or NRSRO as
being in default as of the period start date.\185\ The Commission
preliminarily believes that the Transition/Default Matrices should not
include obligors, securities, and money market instruments the
applicant or NRSRO has classified as in default.\186\ The reason is
that, if an applicant or NRSRO classifies an obligor, security, or
money market instrument as in default, the applicant or NRSRO is no
longer assessing the relative likelihood that the obligor, security, or
money market will continue to meet its obligations to make timely
payments of principal and interest as they come due (i.e., not default
on its obligations). Consequently, as long as the obligor, security, or
money market instrument continues to be classified as in default there
is no credit rating performance to measure. However, if an obligor,
security, or money market instrument is upgraded from the default
category because, for example, the obligor emerges from a bankruptcy
proceeding, the obligor would need to be included in a Transition/
Default Matrix that has a start date after the upgrade.\187\
---------------------------------------------------------------------------

    \185\ See proposed paragraph (4)(A) of the instructions for
Exhibit 1. As indicated, the determination of whether an obligor,
security, or money market instrument should be excluded from the
start date cohort would be based on the definition of ``default''
used by the applicant or NRSRO. As discussed below, in determining
the outcome of a credit rating assigned to an obligor, security, and
money market instrument during the applicable time period covered by
a Transition/Default Matrix, the applicant or NRSRO would need to
use a standard definition of ``default'' in proposed new paragraph
(4)(B)(iii) as opposed to its own definition. The Commission
recognizes that the use of a standard definition of ``default'' to
determine the outcome of a credit rating during the applicable time
period could result in an obligor, security, or money market
instrument being included in the start-date cohort that, as of the
start date, would be classified as in ``default'' under the proposed
definition of ``default'' in paragraph (4)(B)(iii). In other words,
the applicant or NRSRO may not have classified the obligor,
security, or money market instrument as in default as of the start
date using its own narrower definition. In this case, the Commission
preliminarily believes such an obligor, security, or money market
instrument should be included in the start-date cohort since the
applicant or NRSRO had assigned it a credit rating representing a
relative assessment of the likelihood of default (rather than a
classification of default) on the start date. Therefore, the
performance of the applicant or NRSRO in rating that obligor,
security, or money market instrument should be incorporated into the
default rate.
    \186\ This does not mean that the obligor, security or money
market instrument would never be reflected in default rates. For
example, assume that as of the date 10 years prior to the most
recently ended calendar year-end an obligor in the corporate issuer
class was assigned a credit rating of BBB. This obligor would be
included in the start-date cohort for the 10-year Transition/Default
Matrix and grouped with the other obligors, securities, and/or money
market instruments assigned BBB ratings. Further, assume that during
the first seven years of the 10-year period, the credit rating of
the obligor was downgraded from BBB to BB (in year 2), from BB to B
(in year 5) and from B to CCC (in year 7). Having an outstanding
credit rating of CCC in year 7, the obligor would be included in the
start-date cohort for the 3-year Transition/Default Matrix and
grouped with obligors, securities, and money market instruments
assigned CCC ratings. Finally assume the obligor defaults in year 8.
For the purposes of the 10- and 3-year Transition/Default Matrices,
the obligor would need to be classified as having defaulted and
included in the default rates calculated for those matrices.
However, because the obligor would be in default as of the period
start date for the 1-year Transition/Default Matrix, it would not be
included in the start-date cohort for that matrix.
    \187\ See proposed paragraph (4)(A) of the instructions for
Exhibit 1. For example, assume an obligor was classified as in
default by the NRSRO as of the start date for the 10-year
Transition/Default Matrix. The obligor would be excluded from the
start-date cohort for the matrix. Assume further that two years
later the obligor emerged from a bankruptcy proceeding after a re-
structuring. At that point in time, the NRSRO upgraded the obligor
from the default category by assigning it a credit rating of BBB.
Assume that three years later the NRSRO upgraded the obligor's
credit rating from BBB to A- and that it retained that rating for
the next five years. In this case, the obligor would be included in
the start-date cohorts for the 1- and 3-year Transition/Default
Matrices and grouped with the obligors, securities, and money market
instruments assigned A- credit ratings.
---------------------------------------------------------------------------

    The next step, after determining the start-date cohort, would be to
determine the number of obligors, securities, and money market
instruments in the start-date cohort that, as of the start date, were
assigned a credit rating at each notch in the rating scale used for the
class or subclass.\188\ The final step would be to populate the
appropriate column cells with these amounts and in the bottom cell
provide the total number of obligors, securities, and money market
instruments in the start-date cohort. As discussed next, determining
these totals would be necessary to compute the percentages used to
populate the rows of the Transition/Default Matrix. Moreover, the
Commission preliminarily believes it would be useful to investors and
other users of credit ratings to include these amounts in the matrix.
This would inform them of the sample sizes of the obligors, securities,
and money market instruments used to generate the transition and
default rates for the notches entered in the matrix.\189\
---------------------------------------------------------------------------

    \188\ See proposed paragraph (4)(A) of the instructions for
Exhibit 1. For the class of credit ratings in the Sample Transition/
Default Matrix in Figure 1, this would mean determining how many of
the obligors, securities, and money market instruments in the start-
date cohort were assigned a credit rating of AAA, AA, A, BBB, BB, B,
CCC, CC, and C as of the start date. For example, the Sample
Transition/Default Matrix in Figure 1 shows a total start-date
cohort of 11,770 obligors, securities, and/or money market
instruments. Within this cohort and as of the 12/31/2000 start date,
10 were rated AAA, 2000 were rated AA, 4000 were rated A, 3600 were
rated BBB, 1000 were rated BB, 500 were rated B, 300 were rated CCC,
200 were rated CC, and 16 were rated C.
    \189\ For example, if the outcome for a notch with 10 obligors
is that 5 defaulted, the default rate reflected on the Transition/
Default Matrix for that notch would be 50%. Similarly, if the
outcome of a notch with 5,000 obligors is that 2,500 defaulted, the
default rate for that notch would be 50% as well. Investors and
other users of credit ratings might conclude that 2,500 obligors
going into default reflects significantly worse performance than 5
obligors. Consequently, if the sample sizes were not reflected on
the matrix, investors and other users of credit ratings could draw
conclusions about the comparative performance of NRSROs that are
distorted by varying sample sizes.
---------------------------------------------------------------------------

    Proposed new paragraph (4)(B) would focus on the horizontal axis of
the Transition/Default Matrix by prescribing how an applicant and NRSRO
would need to populate the rows representing sequentially in descending
order the notches in the credit rating scale used for the applicable
class or subclass of credit ratings.\190\ The instructions would
provide that each row must contain percents indicating the cumulative
credit rating outcomes of the obligors, securities, and money market
instruments assigned a credit rating at that notch.\191\ The
instructions also would provide that the percents in a row must add up
to 100%.\192\
---------------------------------------------------------------------------

    \190\ See proposed new paragraph (4)(B) of the instructions for
Exhibit 1; see also the 2nd through the 10th rows of the Sample
Transition/Default Matrix in Figure 1 (AAA through C).
    \191\ For example, in the Sample Transition/Default Matrix in
Figure 1, cumulative outcomes would need to determined for: the 10
obligors, securities, and/or money market instruments in the 2nd row
(AAA); the 2000 obligors, securities, and/or money market
instruments in the 3rd row (AA); the 4000 obligors, securities, and/
or money market instruments in the 4th row (A); the 3600 obligors,
securities, and/or money market instruments in the 5th row (BBB);
the 1000 obligors, securities, and/or money market instruments in
the 6th row (BB); the 300 obligors, securities, and/or money market
instruments in the 8th row (CCC); the 200 obligors, securities, and/
or money market instruments in the 9th row (CC); and the 160
obligors, securities, and/or money market instruments in the 10th
row (C).
    \192\ See proposed new paragraph (4)(B) of the instructions for
Exhibit 1. For example, in the Sample Transition/Default Matrix in
Figure 1, the percents in the row representing the AAA category are
(from left to right): 50%, 10%, and 40%, which when added together
equal 100%.
---------------------------------------------------------------------------

    As discussed in detail below, proposed new paragraph (4)(B) would
identify five potential credit rating outcomes: (1) The obligor,
security, or money market instrument was assigned the same credit
rating as of the period end date; (2) the obligor, security, or money
market instrument was assigned a different credit rating as of the
period end date; (3) the obligor, security, or money market instrument
defaulted at any time during the period; (4) the obligor, security, or
money market instrument paid off during the period; or (5) the
applicant or NRSRO withdrew a credit rating of the obligor, security,
or

money market instrument at any time during the period for a reason
other than that the obligor, security, or money market instrument
defaulted or ``paid off.''\193\ Because the percents in a row would
need to add up to 100%, each obligor, security, and money market
instrument reflected in the numbers contained in the 2nd column of a
Transition/Default Matrix could be assigned only one credit rating
outcome.\194\ Proposed paragraphs (4)(B)(i) through (v) would instruct
applicants and NRSROs how to compute the percents used to populate each
row representing a notch in the rating scale in the Transition/Default
Matrix.\195\
---------------------------------------------------------------------------

    \193\ See proposed new paragraphs (4)(B)(i)-(v) of the
Instructions for Exhibit 1.
    \194\ See proposed new paragraph (4)(B) of the instructions for
Exhibit 1; see also the 2nd column in the Sample Transition/Default
Table in Figure 1.
    \195\ See proposed new paragraphs (4)(B)(i)-(v) of the
instructions for Exhibit 1.
---------------------------------------------------------------------------

    Proposed new paragraph (4)(B)(i) would require the applicant or
NRSRO to determine the number of obligors, securities, and money market
instruments assigned a credit rating at the notch represented by the
row as of the period start date that were assigned a credit rating at
the same notch as of the period end date.\196\ The instructions would
require that: (1) this number be expressed as a percent of the total
number of obligors, securities, and/or money market instruments
assigned a credit rating at that notch as of the period start date; and
(2) the percent be entered in the column representing the same
notch.\197\
---------------------------------------------------------------------------

    \196\ See proposed new paragraph (4)(B)(i) of the instructions
for Exhibit 1.
    \197\ For example, the 2nd row of the Sample Transition/Default
Matrix in Figure 1 represents the AAA notch in the applicable rating
scale. As reflected in the matrix, 10 obligors, securities, and/or
money market instruments were assigned a credit rating of AAA as of
the 12/31/2000 start date. Of these 10, 5 (or 50%) were assigned a
credit rating of AAA as of the 12/31/2010 end date. Accordingly, 50%
is input in the AAA column.
---------------------------------------------------------------------------

    An obligor, security, or money market instrument could have the
same credit rating as of the period end-date because the credit rating
did not change between the start date and the end date or the credit
rating transitioned to one or more other notches during the relevant
period but transitioned back to the start-date notch where it remained
as of the period end date. Consequently, proposed new paragraph
(4)(B)(i) would clarify that, to determine this amount, the applicant
or NRSRO would need to use the credit rating at the notch assigned to
the obligor, security, or money market instrument as of the period end
date and not a credit rating at any other notch assigned to the
obligor, security, or money market instrument between the period start
date and the period end date.\198\
---------------------------------------------------------------------------

    \198\ See proposed new paragraph (4)(B)(i) of the instructions
for Exhibit 1. For example, assume an obligor was assigned a credit
rating of BBB as of the start date of a 10-year Transition/Default
Matrix. Assume further that three years after the start date, the
credit rating was upgraded to AA but then eight years after the
start date the credit rating was downgraded to A, and nine years
after the start date the credit rating was downgraded to BBB where
it remained as of the period end date. For the purpose of the 10-
year Transition/Default Matrix, the outcome assigned this obligor
would be that it had the same credit rating as of the period end
date. However, the transitions that occurred in years eight and nine
would be reflected, respectively, in the 3- and 1-year Transitions/
Default Matrices for the class or subclass of credit ratings. In
other words, the credit rating history for this obligor would
reflect volatility over the short term but stability over the long
term.
---------------------------------------------------------------------------

    Proposed new paragraph (4)(B)(ii) would require the applicant or
NRSRO to determine the number of obligors, securities, and money market
instruments assigned a credit rating at the notch represented by the
row as of the period start date that were assigned a credit rating at
each other notch as of the period end date.\199\ The instructions would
require that: (1) these numbers be expressed as percents of the total
number of obligors, securities, and/or money market instruments
assigned a credit rating at that notch as of the period start date; and
(2) the percents be entered in the columns representing each
notch.\200\ The instructions in the paragraph would clarify that, to
determine these numbers, the applicant or NRSRO would need to use the
credit rating at the notch assigned to the obligor, security, or money
market instrument as of the period end-date and not a credit rating at
any other notch assigned to the obligor, security, or money market
instrument between the period start date and the period end date.\201\
---------------------------------------------------------------------------

    \199\ See proposed new paragraph (4)(B)(ii) of the instructions
for Exhibit 1.
    \200\ See proposed new paragraph (4)(B)(ii) of the instructions
for Exhibit 1. For example, the 3rd row of the Sample Transition/
Default Matrix in Figure 1 represents the AA notch in the applicable
rating scale. As reflected in the matrix, 2000 obligors, securities,
and/or money market instruments were assigned a credit rating of AA
as of the 12/31/2000 start date. Of these 2000, as of the period end
date: 2 (or 1%) were assigned a credit rating of AAA; 240 (or 12%)
were assigned a credit rating of A; 200 (or 10%) were assigned a
credit rating of BBB; 160 (or 8%) were assigned a credit rating of
BB; 100 (or 5%) were assigned a credit rating of B; and 80 (or 4%)
were assigned a credit rating of CCC. Accordingly, 1% is input in
the AAA column, 12% in the A column, 10% in the BBB column, 8% in
the BB column, 5% in the B column, and 4% in the CCC column.
    \201\ See proposed new paragraph (4)(B)(ii) of the instructions
for Exhibit 1. This instruction would mirror the instruction in
proposed new paragraph (4)(B)(i). As explained above, the applicant
or NRSRO would need to reflect in the transition rate for a given
notch the credit ratings assigned to the obligors, securities, and
money market instruments at that notch as of the period end-date
(rather than transitional credit ratings assigned during the
period). For example, in the Sample Transition/Default Matrix in
Figure 1, there were 2000 obligors, securities and/or money market
instruments assigned AA ratings as of 12/31/2000. As of 12/31/2010,
4% (or 80) of the obligors, securities, and/or money market
instruments were assigned a credit rating of CCC. The path by which
these obligors, securities, or money market instruments arrived at a
CCC credit rating as of the period end date could have been through
a series of rating actions that occurred during the 10 year period
(e.g., being downgraded to A, then BBB, then BB, then B, and then
CCC). The transitional credit ratings of these 80 obligors,
securities, and money market instruments between the AA credit
rating as of 12/31/2000 and the CCC credit rating as of 12/31/2010
would not be reflected in the transition rate for the AA notch.
---------------------------------------------------------------------------

    Proposed new paragraph (4)(B)(iii) would require an applicant and
NRSRO to determine the total number of obligors, securities, and money
market instruments assigned a credit rating at the notch represented by
the row as of the period start date that went into Default at any time
during the applicable time period.\202\ The instructions would require
that: (1) This number be expressed as a percent of the total number of
obligors, securities, and/or money market instruments assigned a credit
rating at that notch as of the period start date; and (2) the percent
to be entered in the Default column.\203\
---------------------------------------------------------------------------

    \202\ See proposed new paragraph (4)(B)(iii) of the instructions
for Exhibit 1. This release denotes the proposed standardized
definition of the term ``default'' as ``Default'' to distinguish the
definition and its meaning from other uses of the term ``default''
herein.
    \203\ See proposed new paragraph (4)(B)(iii) of the instructions
for Exhibit 1. For example, the 7th row of the Sample Transition/
Default Matrix in Figure 1 represents the B notch in the applicable
rating scale. As reflected in the matrix, 500 obligors, securities,
and/or money market instruments were assigned a credit rating of B
as of the 12/31/2000 start date. Of these 500, 75 (or 15%) were
classified as having gone into Default during period (12/31/2000-12/
31/2010). Accordingly, 15% is input in the Default column.
---------------------------------------------------------------------------

    As indicated, the classification of Default would be triggered if
the obligor, security, or money market instrument went into Default at
any time during the period.\204\ This is different than the
classifications in proposed paragraphs (4)(B)(i) and (ii), which are
based solely on the end-date status of the obligor, security or money
market instrument.\205\ This period-long approach is designed to
address concerns that an applicant or NRSRO might withdraw a credit
rating of an obligor, security, or money market instrument that went
into Default during the period in order to omit the obligor, security,
or money market instrument from the Transition/Default

Matrix and, therefore, improve the default rates presented in the
matrix.\206\
---------------------------------------------------------------------------

    \204\ See proposed new paragraph (4)(B)(iii) of the instructions
for Exhibit 1.
    \205\ See proposed new paragraphs (4)(B)(i) and (ii) of the
instructions for Exhibit 1.
    \206\ See 15 U.S.C. 78o-7(q)(2)(C) (providing that the
disclosures include performance information over a range of years
and for a variety of types of credit ratings, including for credit
ratings withdrawn by the NRSRO). The following provides an example
of how withdrawals can be used to impact a default rate. In the
Sample Transition/Default Matrix in Figure 1, the Default rate over
the 10-year period for the 3600 obligors, securities, and money
market instruments assigned a BBB rating as of the period start date
is 4%. This means that 144 obligors, securities, or money market
instruments assigned a credit rating at this notch as of the start
date went into Default during the period (144/3600 = 4%). If the
default rate was determined by the credit assigned to these 144
obligors as of the period end date, the NRSRO could withdraw, for
example, 100 of these credit ratings after default. Consequently,
only 44 of the obligors, securities, and/or money market instruments
would be in the default category as of the period end-date and,
therefore, the default rate for the BBB notch would be 1.2% instead
of 4% (44/3600 = 1.2%).
---------------------------------------------------------------------------

    The Commission preliminarily believes it would be appropriate to
prescribe a standard definition of Default in proposed new paragraph
(4)(B)(iii).\207\ This standard definition would need to be used by all
applicants and NRSROs to determine whether an obligor, security, or
money market instrument in the start-date cohort defaulted. The
Commission's goal in proposing a standard definition is to make the
default rates calculated and disclosed by the NRSROs more readily
comparable.\208\ The Commission is concerned that if applicants or
NRSROs use their own definitions of ``default,'' differences in those
definitions may result in the applicants and NRSROs inconsistently
classifying obligors, securities, and money market instruments as in
default.\209\ For example, an NRSRO that uses a narrow definition may
show better (i.e., lower) default rates than an NRSRO using a broader
definition even though the former's credit ratings would perform no
better under the broader definition. The Commission preliminarily
believes that potential variances in how applicants and NRSROs may
define ``default'' could make comparing performance across NRSROs
difficult and could be a way to manipulate the data to produce more
favorable results.
---------------------------------------------------------------------------

    \207\ See proposed new paragraph (4)(B)(iii) of the Instructions
for Exhibit 1.
    \208\ See 15 U.S.C. 78o-7(q)(2)(A) (providing that the
Commission's rules shall require disclosures that are comparable
among NRSROs, to allow users of credit ratings to compare the
performance of credit ratings across NRSROs).
    \209\ See, e.g., GAO Report 10-782, p. 38 (``NRSROs can differ
in how they define default. Therefore, some agencies may have higher
default rates than others as a result of a broader set of criteria
for determining that a default has occurred.'').
---------------------------------------------------------------------------

    The Commission recognizes that a proposal to use a standard
definition of default may raise concerns among the NRSROs. For example,
in the past, NRSROs have argued against prescribing a standardized
approach for calculating transition and default rates given the
different meanings of their credit ratings and definitions of
default.\210\ Nonetheless, as explained above, the Commission
preliminarily believes a standard definition is the preferred approach
to make disclosures of default rates comparable and, therefore, useful
to investors and other users of credit ratings. However, the Commission
is requesting comment below on the proposed use of a standard
definition, including whether there are alternatives that could achieve
the Commission's goal of comparability.
---------------------------------------------------------------------------

    \210\ See, e.g., letter dated March 12, 2007 from Jeanne M.
Dering, Executive Vice President, Moody's Investors Services and
letter dated March 12, 2007 from Vickie A. Tillman, Executive Vice
President, Standard & Poor's (commenting on proposals in Oversight
of Credit Rating Agencies Registered as Nationally Recognized
Statistical Rating Organizations, 72 FR at 33574 (Feb. 9, 2007).
---------------------------------------------------------------------------

    Proposed new paragraph (4)(B)(iii) would prescribe two disjunctive
definitions of Default.\211\ An applicant and NRSRO would need to
classify an obligor, security, or money market instrument as having
gone into Default if the conditions in either or both of the
definitions were met. The first definition would apply if the obligor
failed to timely pay principal or interest due according to the terms
of an obligation, or the issuer of the security or money market
instrument failed to timely pay principal or interest due according to
the terms of the security or money market instrument.\212\ This would
be the standard definition of Default used by the applicant or NRSRO.
The goal of this proposed definition is to establish a minimum baseline
for classifying an obligor, security, or money market instrument as
having gone into Default. The Commission's intent is to avoid a
situation in which applicants and NRSROs use varying definitions of
default, which, as noted above, could result in some NRSROs using
materially narrower definitions in order to produce more favorable
default rates.\213\
---------------------------------------------------------------------------

    \211\ See proposed new paragraphs (4)(B)(iii)(a) and (b) of the
instructions for Exhibit 1.
    \212\ See proposed new paragraphs (4)(B)(iii)(a) of the
instructions for Exhibit 1.
    \213\ Because this would be a standard definition, the applicant
or NRSRO would need to classify the obligor, security, or money
market instrument as having gone into Default even if the applicant
or NRSRO assigned a credit rating other than default to the obligor,
security, or money market instrument at the time of the event of
Default because, for example, the applicant or NRSRO uses a narrower
definition of ``default.''
---------------------------------------------------------------------------

    The second definition would apply if the applicant or NRSRO
classified the obligor, security, or money market instrument as having
gone into default using its own definition of ``default.'' \214\ This
proposal is designed to supplement the standard definition to address a
situation where the NRSRO's definition of ``default'' is broader than
the standard definition and, as a consequence, the NRSRO has classified
an obligor, security, or money market instrument as having gone into
default during the time period even though, under the standard
definition, the applicant or NRSRO would not need to make a Default
classification. The Commission preliminarily believes that the standard
definition of Default, as proposed, is broad and would apply to most
cases commonly understood as a default. Consequently, the Commission
preliminarily believes a classification of default under the second
definition would be rare.\215\
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    \214\ See proposed new paragraph (4)(B)(iii) of the instructions
for Exhibit 1.
    \215\ The Commission recognizes that supplementing the standard
definition in proposed paragraph (4)(B)(iii) with the definition
used by the applicant or NRSRO could potentially import an
idiosyncratic element to a given NRSRO's Default classifications.
However, any such impact only could increase the number of obligors,
securities, and money market instruments classified as having gone
into Default (i.e., an internal definition only could expand the
standard definition). The Commission is not concerned if an
applicant or NRSRO over-classifies (relative to other applicants or
NRSROs) the number of obligors, securities, or money market
instruments that went into Default, provided all NRSROs are using
the standard definition as a baseline. Moreover, the Commission
believes any such over-classifications would be de minimis given the
broad scope of the standard definition. Furthermore, each obligor,
security, and money market instrument in the start-date cohort must
be assigned 1 of 5 potential outcomes. Consequently, if an applicant
or NRSRO has classified an obligor, security, or money market
instrument as having gone into default based on its own definition a
classification of Default would be the most appropriate outcome
among the 5 possible outcomes identified in proposed new paragraph
(4)(B) of the instructions for Exhibit 1.
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    Finally, proposed new paragraph (4)(B)(iii) also would clarify that
an obligor, security, or money market instrument that goes into in
Default must be classified as in Default even if the applicant or NRSRO
assigned a credit rating to the obligor, security, or money market
instrument at a notch above default in its rating scale on or after the
event of Default or withdrew the credit rating on or after the event of
Default.\216\ This proposed clarification is designed to affirm the
requirement that an obligor, security, or money market instrument that
goes into Default at any time during the period covered by the
Transition/Default Matrix must be included in the default rate for the
applicable category of credit rating

irrespective of the post-Default status of the obligor, security, or
money market instrument.
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    \216\ See proposed new paragraph (4)(B)(iii) of the instructions
for Exhibit 1.
---------------------------------------------------------------------------

    Proposed new paragraph (4)(B)(iv) would require an applicant and
NRSRO to determine the number of obligors, securities, and money market
instruments assigned a credit rating at the notch represented by the
row as of the period start date that Paid Off at any time during the
applicable time period.\217\ The instructions would require that: (1)
This amount be expressed as a percent of the total number of obligors,
securities, and/or money market instruments assigned a credit rating at
that notch as of the period start date; and (2) the percent be entered
in the Paid Off column.\218\ As with the Default classification, this
classification would be made if the obligor, security, or money market
instrument Paid Off at any time during the period.\219\
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    \217\ See proposed new paragraph (4)(B)(iv) of the instructions
for Exhibit 1.
    \218\ Id. For example, the 9th row of the Sample Transition/
Default Matrix in Figure 1 represents the CC notch in the applicable
rating scale. As reflected in the matrix, 200 obligors, securities,
and/or money market instruments were assigned a credit rating of CC
as of the 12/31/2000 start date. Of these 200, 4 (or 2%) were
classified as having Paid Off during period (12/31/2000-12/31/2010).
Accordingly, 2% is input in the Paid Off column.
    \219\ See proposed new paragraph (4)(B)(iv) of the instructions
for Exhibit 1.
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    Proposed new paragraph (4)(B)(iv) would define Paid Off using two
different sets of conditions: (1) One set applicable to obligors; and
(2) one set applicable to securities and money market instruments.\220\
The reason is that a credit rating of an ``obligor'' typically means a
credit rating of the entity with respect to all obligations of the
entity; whereas a credit rating of a ``security'' or ``money market
instrument'' means a credit rating of a specific debt instrument such
as a bond, note, or issuance of commercial paper.\221\ Consequently, as
used generally, a credit rating of an obligor does not relate to a
single obligation with a term of maturity but rather to the obligor's
overall ability to meet any obligations as they come due. Therefore, an
obligor credit rating normally would not be classified as Paid Off
since it does not reference a specific obligation that will mature.
However, the Commission preliminarily believes it is possible that an
applicant or NRSRO could determine a credit rating relating directly to
an obligor's ability to meet a specific obligation with a definite term
to maturity.\222\ In this case, the obligor could be classified as
having Paid Off given that the obligation to which the credit rating
relates is identifiable and was extinguished during the period. At the
same time, the Commission's objective is to avoid inadvertently
proposing a definition that would permit an NRSRO to classify an
obligor assigned a typical obligor credit rating as having Paid Off
because it extinguished one of its obligations during the time
period.\223\
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    \220\ See proposed new paragraphs (4)(B)(iv)(a) and (b) of the
instructions for Exhibit 1.
    \221\ As discussed earlier, this understanding of the meaning of
an ``obligor'' credit rating is based, in part, on the definition of
``credit rating'' in Section 3(a)(60) of the Exchange Act (``The
term `credit rating' means an assessment of the creditworthiness of
an obligor as an entity or with respect to specific securities or
money market instruments.''). See 15 U.S.C. 78o-7(a)(60).
    \222\ For example, an NRSRO could issue a credit rating that
relates solely to the likelihood that the obligor would meet an
obligation to pay principal and interest on a specific term loan.
    \223\ For example, an applicant or NRSRO could seek to improve
its default rates by classifying obligors as having paid off because
they extinguished one obligation during the relevant period before
defaulting on other obligations.
---------------------------------------------------------------------------

    For these reasons, the Commission proposes that paragraph
(4)(B)(iv)(a) provide that an applicant and NRSRO may classify an
obligor as having Paid Off only if the applicant or NRSRO assigned the
obligor a credit rating with respect to a single specifically
identified obligation; the obligor extinguished the obligation during
the applicable time period by paying in full all outstanding principal
and interest due on the obligation according to the terms of the
obligation (e.g., because the obligation matured, was called, or was
prepaid); and the applicant or NRSRO withdrew the credit rating because
the obligation was extinguished.\224\ The third clause of the proposed
definition (that the NRSRO withdrew the credit rating) would be
designed to ensure that the credit rating, in fact, did relate to the
single specifically identified obligation. If the applicant or NRSRO
continued to assign a credit rating to the obligor after the obligation
was extinguished, it would suggest that the credit rating related to
the obligor's creditworthiness in a broader sense (i.e., not with
respect to the single obligation).
---------------------------------------------------------------------------

    \224\ See proposed new paragraph (4)(B)(iv)(a) of the
instructions for Exhibit 1.
---------------------------------------------------------------------------

    As for securities and money market instruments, proposed paragraph
(4)(B)(iv)(b) would provide that the applicant or NRSRO may classify a
security or money market instrument as having Paid Off only if the
issuer of the security or money market instrument extinguished its
obligation with respect to the security or money market instrument
during the applicable time period by paying in full all outstanding
principal and interest due according to the terms of the security or
money market instrument (e.g., because the security or money market
instrument matured, was called, or was prepaid); and the applicant or
NRSRO withdrew the credit rating for the security or money market
instrument because the obligation was extinguished.\225\ Consequently,
the proposed definition would mirror the second and third elements of
the definition of Paid Off as it relates to the credit rating of an
obligor.\226\
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    \225\ See proposed new paragraph (4)(B)(iv)(b) of the
instructions for Exhibit 1.
    \226\ Compare proposed new paragraphs (4)(B)(iv)(a) and (b) of
the instructions for Exhibit 1.
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    Proposed new paragraph (4)(B)(v) would require the applicant or
NRSRO to determine the number of obligors, securities, and money market
instruments assigned a credit rating at the notch represented by the
row as of the period start date for which the applicant or NRSRO
withdrew a credit rating assigned to the obligor, security, or money
market instrument at any time during the applicable time period for a
reason other than Default or Paid-Off.\227\ The instructions would
require that: (1) This amount be expressed as a percent of the total
number of obligors, securities, and/or money market instruments
assigned a credit rating at that notch as of the period start date; and
(2) the percent be entered in the Withdrawn (other) column.\228\ The
instructions would provide that the applicant or NRSRO must classify
the obligor, security, or money market instrument as Withdrawn (other)
even if the applicant or NRSRO assigned a credit rating to the obligor,
security, or money market instrument after withdrawing the credit
rating.\229\
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    \227\ See proposed new paragraph (4)(B)(v) of the instructions
for Exhibit 1.
    \228\ Id. For example, the 4th row of the Sample Transition/
Default Matrix in Figure 1 represents the A notch in the applicable
rating scale. As reflected in the matrix, 4000 obligors, securities,
and/or money market instruments were assigned a credit rating of A
as of the 12/31/2000 start date. Of these 4000, 80 (or 2%) were
classified as having been Withdrawn (other) during the period (12/
31/2000-12/31/2010). Accordingly, 2% is input in the Withdrawn
(other) column.
    \229\ See proposed new paragraph (4)(B)(v) of the instructions
for Exhibit 1.
---------------------------------------------------------------------------

    There are legitimate reasons to withdraw a credit rating assigned
to an obligor, security, or money market instrument. For example, an
NRSRO might withdraw a credit rating because the rated obligor or
issuer of the rated security or money market instrument stopped paying
for the surveillance of the credit rating or because the NRSRO issued
and was monitoring the credit rating on an unsolicited basis and no
longer wanted to devote resources to

monitoring it. However, the Commission also is concerned that an
applicant or NRSRO could withdraw a credit rating assigned to an
obligor, security, or money market instrument to make its transition or
default rates appear more favorable.\230\ Therefore, the Commission
proposes requiring an applicant and NRSRO to disclose the percent of
obligors, securities, and money market instruments for which the
applicant or NRSRO withdrew the credit rating for reasons other than
Default or Paid Off during the period covered by the Transition/Default
Matrix.\231\ Investors and other users of credit ratings could use the
percents of withdrawn credit ratings to assess whether the number of
withdrawals impacted the transition and default rates entered in the
Transition/Default Matrix.\232\ They also would be able to compare
historical withdrawal percents of an NRSRO and across all NRSROs. If an
NRSRO has a disproportionate number of withdrawals for one period as
compared to prior periods or as compared to those of other NRSROs,
investors and other users of credit ratings could consider that factor
in assessing the veracity of the transition and default rates entered
in the NRSRO's Transition/Default Matrix.
---------------------------------------------------------------------------

    \230\ For example, the 5th row of the Sample Transition/Default
Matrix in Figure 1 represents the BBB notch in the applicable rating
scale. 3600 obligors, securities, and/or money market instruments
were assigned a credit rating at this notch as of the start date.
The transition rates from this notch to a lower notch are: 15% (BB),
10% (B), 6% (CCC), 5% (CC), and 1% (C). Taken together, this means
that 37% (or 1332) of the obligors, securities, and money market
instruments were assigned a credit rating as of the end-date that
was below BBB (i.e., in categories commonly referred to as ``non-
investment grade'' or ``speculative''). To lower the transition
rates to ``non-investment grade'' categories, the credit ratings for
400 obligors, securities, or money market instruments assigned a BBB
credit rating as of the start date could be withdrawn. This would
reduce the transition rate to notches below BBB from 37% (1332/3600)
to 26% (932/3600).
    \231\ See proposed new paragraph (4)(B)(v) of the instructions
for Exhibit 1.
    \232\ For example, the 6th row of the Sample Transition/Default
Matrix in Figure 1 represents the BB notch in the applicable rating
scale. 1000 obligors, securities, and/or money market instruments
were assigned a credit rating at this notch as of the start date. Of
these 1000, 370 (or 37%) had their credit ratings withdrawn during
the period (12/31/2000-12/31/2010). This amount is much larger than
the withdrawal rates for the other notches, which range from 0% (AAA
notch) to 12% (C notch). Moreover, the default rate for the BB notch
(2%) is an anomaly in that it is lower than the default rate for the
next highest notch BBB (4%). Normally, lower notches would be
expected to have higher default rates. In addition, the AAA, AA, A,
and BBB notches all have single digit default rates (ranging from 0%
to 4%); whereas the notches below BBB all have double digit default
rates (ranging from 15% to 67%), except for the BB notch (which, as
noted, has a default rate of 2%). Furthermore, the two-notch
downgrade transition rate for the BB notch is 5% (BB to CCC). This
appears to be an anomaly given that the two-notch downgrade rates
for the other notches are: 10% for the AA notch (AA to BBB); 10% for
the A notch (A to BB); 10% for the BBB notch (BBB to B); 15% for the
B notch (B to CC); 20% for the CCC notch (CCC to C); and 30% for the
CC notch (CC to Default). An investor or other user of credit
ratings reviewing this matrix could conclude that the withdrawal of
credit ratings at the BB notch for reasons other than Default or
Paid Off materially impacted the transition and default rates for
the BB notch. The high rate of withdrawals in this instance also
could be the focus of examination by the Commission staff.
---------------------------------------------------------------------------

Request for Comment
    The Commission generally requests comment on all aspects of the
proposed new instructions for Exhibit 1 to Form NRSRO. The Commission
also seeks comment on the following:
    1. With respect to prescribing a standard method of calculating
transition and default rates, would a single cohort approach (rather
than an average cohort approach or some other approach) \233\ be the
most appropriate way to make the transition and default rates clear and
informative for investors having a wide range of sophistication who use
or might use credit ratings? Commenters should identify and explain any
other approach they believe could be used to prescribe a standard
process for calculating and presenting transition and default rates
that would better achieve this goal.
---------------------------------------------------------------------------

    \233\ An average cohort approach for calculating rating
transitions or default statistics consists of taking the average of
several cohorts over a longer time period. For example, the one-year
average transition rate would be calculated by taking the average
transition rate from several one-year cohorts over a given time
period.
---------------------------------------------------------------------------

    2. What practical issues should the Commission consider in
implementing a standard process for calculating and presenting
transition and default rates? For example, would the variances in the
procedures and methodologies NRSROs use to determine credit ratings
raise practical issues in terms of adhering to a standard process for
calculating and presenting transition and default rates? In addition,
would the variances in the meanings and definitions NRSROs ascribe to
the notches of credit ratings in their rating scales raise practical
issues in terms of adhering to a standard process for calculating and
presenting transition and default rates? How could the proposal be
modified to address any practical issues identified without undermining
the goal of comparability?
    3. With respect to any practical issues identified in response to
the solicitation of comment in question 2, would the proposed
single cohort approach for calculating and presenting transition and
default rates heighten or lessen the issues relative to other possible
approaches such as the average cohort approach? Commenters should
identify and explain any other approach they believe could be used to
prescribe a standard process for calculating and presenting transition
and default rates that would raise the least practical issues.
    4. Would the proposals require an NRSRO to disclose proprietary
information? If so, describe the type or types of proprietary
information. Also, describe potential ways to address this issue.
    5. Would the proposals have an impact on competition? For example,
would they advantage or disadvantage a certain type of NRSRO? Could
they potentially alter the behavior of NRSROs? For example, could the
proposals cause certain NRSROs to stop determining a particular type of
credit rating? If so, describe whether there would be any costs or
negative impacts as a result and, if so, how such costs or negative
impacts could be addressed.
    6. How would the proposals differ from the way NRSROs currently
calculate and present transition and default rates? For example, would
they be more or less sophisticated than current methods? Would they be
more or less burdensome than current methods? Describe the differences.
Furthermore, describe the benefits of a standardized approach in terms
of making the disclosure more useful to investors and other users of
credit ratings.
    7. Would dividing the class of credit ratings for structured
finance products into the subclasses identified in proposed paragraphs
(1)(D)(i) through (vii) of the instructions for Exhibit 1 provide
investors and other users of credit ratings with more useful
information about the performance of an NRSRO's structured finance
ratings? For example, should the Commission continue to require
transition and default rates for this class only as a whole? If so,
explain how this would provide more useful information about the
performance of an NRSRO's structured finance ratings.
    8. Are the subclasses of credit ratings for structured finance
products identified in proposed paragraphs (1)(D)(i) through (vii) of
the instructions for Exhibit 1 the most appropriate way to stratify
this class of credit ratings? For example, should the ``other-ABS''
subclass be divided up into subclasses based on the assets underlying
the ABS (i.e., auto loans, auto leases, floor plan financings, credit
card receivables, student loans, consumer loans, equipment loans or
equipment leases)?

In addition, are there other classes of structured finance products
that should be identified in proposed paragraph (1)(D) of the
instructions for Exhibit 1?
    9. Are the descriptions of the subclasses of credit ratings for
structured finance products identified in proposed paragraphs (1)(D)(i)
through (vii) of the instructions for Exhibit 1 sufficiently clear to
provide an applicant and NRSRO with guidance as to which credit ratings
should be included in the production of the Transition/Default Matrices
for each subclass? How could the descriptions be modified to make them
clearer and provide better guidance?
    10. Would the design and presentation of a Transition/Default
Matrix prescribed in proposed paragraph (3) of the instructions for
Exhibit 1 be clear and informative for investors having a wide range of
sophistication who use or might use credit ratings? How could the
design and presentation of the Transition/Default Matrix be modified to
better achieve this goal?
    11. Would the design and presentation of a Transition/Default
Matrix prescribed in proposed paragraph (3) of the instructions for
Exhibit 1 be an appropriate way to present transition and default
rates? How could the design and presentation of the Transition/Default
Matrix be modified to better accommodate these statistics?
    12. Are the instructions in proposed paragraphs (1), (2), (3), and
(4) of Exhibit 1 sufficiently clear in terms of requirements for
producing the required Transition/Default Matrices and presenting
necessary information in the Exhibit? For example, are instructions in
the paragraphs sufficiently clear in terms of the requirements for
populating the columns and rows of a Transition/Default Matrix? How
could the instructions be modified to make them clearer and provide
better guidance?
    13. Should obligors, securities, and money market instruments that
an applicant or NRSRO has classified as being in default as of the
start date of a period covered by a Transition/Default Matrix be
excluded from the start-date cohort for that matrix? If not, explain
the rationale for including them.
    14. Should the start-date cohorts for the Transition/Default
Matrices be comprised of obligors only (i.e., not include securities or
money market instruments assigned credit ratings in the class or
subclass)? For example, if the credit ratings of securities or money
instruments issued by an obligor are simply a function of the credit
rating of the obligor, would it be sufficient to include only the
obligor in the start-date cohort? If so, should this be the case for
all classes and subclasses of credit ratings or for certain classes and
subclasses? For example, the credit ratings assigned to securities and
money market instruments in the structured finance class often are
based on differing levels of credit enhancement specific to each
tranche of a security issued by the obligor. Consequently, in such a
case, the credit rating of the security or money market instrument
issued would not be a function solely or primarily of the credit rating
of the obligor.
    15. Commenters are referred to the questions in Section II.M.4.a of
this release with respect Items 6 and 7 of Form NRSRO and how certain
types of obligors, securities, and money market instruments should be
classified for purposes of providing approximate amounts of credit
ratings outstanding in each class of credit rating for which an
applicant is seeking registration (Item 6) or an NRSRO is registered
(Item 7)? In responding to those questions, commenters should consider
how proposed classifications could be applied to determining the
composition of start-date cohorts for the purposes of the proposed
enhancements to Exhibit 1.
    16. Should the default rates in the Transition/Default Matrices be
determined using the proposed standard definition of Default? For
example, would the use of a standard definition raise practical issues
in light of the different meanings that NRSROs ascribe to the notches
in their credit rating scales or the different definitions of
``default'' they utilize? How could the proposal be modified to address
any practical issues identified without undermining the goal of
comparability?
    17. Is the proposed standard definition of Default sufficiently
broad to apply to most, if not all, events commonly understood as
constituting a default? For example, should the definition explicitly
include that the obligor or issuer of the security or money market
instrument is in a bankruptcy proceeding or would this be redundant in
that the definition already provides that the obligor or issuer of the
security has failed to timely pay interest or principal due? In
addition, should the definition explicitly include events that would
constitute a default due to a breach of a covenant unrelated to the
failure to timely pay interest or principal due on a security or money
market instrument (e.g., a covenant might provide that a default by the
issuer on a bank loan to a third party or a default by an affiliate of
the issuer would constitute a default with respect to a rated security
of the issuer)? Would it be appropriate to include such cross-default
provisions as part of the definition of the Default in the instructions
for Exhibit 1? For example, if the issuer continued to make timely
payments of interest and principal to the holders of the security
notwithstanding the cross-defaults, would it nonetheless be appropriate
to classify the security as in Default? If so, how could the proposed
definition be modified to make it broad enough to apply to all
instances of default? Should the requirement provide for an NRSRO to be
able to use its own definition if the standard definition would not be
feasible given the NRSRO's procedures and methodologies for determining
credit ratings? If so, should the NRSRO be required to make disclosures
about why it is using its own definition? Describe the nature of such
disclosures.
    18. Should the proposed standard definition of Default be refined
to distinguish between degrees of default severity? For example, should
the definition distinguish between a situation where an obligor or the
issuer of a security or money market instrument has failed to make a
timely payment of interest or principal that potentially could be cured
and the situation where the obligor or issuer of the security or money
market instrument is no longer able to cure a failed payment of
interest or principal or is in a bankruptcy proceeding? How could the
proposed definition be modified to account for relative degrees of
default severity and how should such modifications be incorporated into
the proposed instructions for calculating default statistics?
    19. Is the proposed standard definition of Paid Off sufficiently
broad to apply to most, if not all, events commonly understood as
constituting the extinguishment of an obligation upon which a credit
rating is based? If not, how could the proposed definition be modified
to make it broad enough to apply to all instances that should, for the
purposes of transition and default rates, be classified as having Paid
Off? Should the requirement provide for an NRSRO to be able to use its
own definition if the standard definition would not be feasible given
the NRSRO's procedures and methodologies for determining credit
ratings? If so, should the NRSRO be required to make disclosures about
why it is using its own definition? Describe the nature of such
disclosures.
    20. Would the proposed treatment for Withdrawn (other) credit
ratings in the Transition/Default Matrices sufficiently

address the concern that an applicant or NRSRO might use withdrawals to
make its transition and default rates appear more favorable? For
example, should the Commission, by rule, require an NRSRO to monitor an
obligor, security, or money market instrument after withdrawal in order
to classify whether the obligor, security, or money market instrument
went into Default or Paid Off? If so, how long should the applicant or
NRSRO be required to monitor the obligor, security, or money market
instrument? Alternatively, should the applicant or NRSRO be required to
explain and disclose in Exhibit 1 the reason why it withdrew the credit
ratings in the given class or subclass of credit ratings? If so, how
much detail should the applicant or NRSRO provide in the description?
Should the requirement provide for an NRSRO to be able to use its own
definition if the standard definition would not be feasible given the
NRSRO's procedures and methodologies for determining credit ratings? If
so, should the NRSRO be required to make disclosures about why it is
using its own definition? Describe the nature of such disclosures.
b. Proposed Amendments to Rule 17g-1
    Section 15E(q)(2)(D) of the Exchange Act provides that the
Commission's rules must require an NRSRO to make the information about
the performance of credit ratings freely available and disclose it on
an easily accessible portion of its Web site, and in writing when
requested.\234\ The Commission proposes to implement Section
15E(q)(2)(D) by amending paragraph (i) of Rule 17g-1.\235\ Paragraph
(i) requires an NRSRO to make its current Form NRSRO and information
and documents submitted in Exhibits 1 through 9 publicly available on
its Web site or through another comparable, readily accessible means
within 10 business days of being granted an initial registration or a
registration in an additional class of credit ratings, and within 10
business days of furnishing a Form NRSRO to update information on the
Form, to provide the annual certification, and to withdraw a
registration.\236\ These requirements implemented Section 15E(a)(3) of
the Exchange Act,\237\ which provides, among other things, that the
Commission shall, by rule, require an NRSRO, upon the granting of a
registration, to make the information and documents submitted to the
Commission in its completed application for registration, or in any
amendment, publicly available on its Internet Web site, or through
another comparable, readily accessible means.\238\
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    \234\ See 15 U.S.C. 78o-7(q)(2)(D).
    \235\ See proposed amendments to paragraph (i) of Rule 17g-1.
    \236\ See 17 CFR 240.17g-1(i).
    \237\ 15 U.S.C. 78o-7(a)(3).
    \238\ See 15 U.S.C. 78o-7(a)(3).
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    Although Section 15E(q)(2)(D) only addresses disclosures of
information about the performance of credit ratings, the Commission is
proposing to amend paragraph (i) of Rule 17g-1 to require an NRSRO to
make Form NRSRO and Exhibits 1 through 9 freely available on an easily
accessible portion of its corporate Internet Web site. This would avoid
having separate requirements for the Exhibit 1 performance statistics
and the rest of Form NRSRO and the other public Exhibits. The
Commission preliminarily believes users of credit ratings would benefit
if Form NRSRO and all the public Exhibits were disclosed together in
the same manner. In addition, the Commission preliminarily believes
applying the requirement to disclose the information on an ``easily
accessible'' portion of the NRSRO's corporate Internet Web site would
assist investors and other users of credit ratings by making it easier
to locate a Form NRSRO. For example, some corporate Internet Web sites
contain large amounts of information, some of which must be accessed by
navigating through multiple Web pages. The Commission believes Form
NRSRO and the public Exhibits should be easy for investors and other
users of credit ratings to locate when they access an NRSRO's corporate
Internet Web site. In this regard, the Commission preliminarily
believes that a Form NRSRO would be on an ``easily accessible'' portion
of a Web site if it could be accessed through a clearly and prominently
labeled hyperlink to the Form on the home-page of the NRSRO's corporate
Internet Web site.
    The proposed amendment to paragraph (i) also would remove the
option for an NRSRO to make its Form NRSRO publicly available ``through
another comparable, readily accessible means'' as an alternative to
Internet disclosure. The Commission preliminarily believes there is no
alternative means of disclosure that makes information as ``readily
accessible'' as (and, therefore, is comparable to) an Internet Web
site. This view is supported by the fact that all NRSROs currently
comply with paragraph (i) of Rule 17g-1 by making their Form NRSROs
available on their corporate Internet Web sites.\239\ The Commission,
therefore, is proposing amending paragraph (i) to require that the
disclosure of Form NRSRO and its public Exhibits be made on an NRSRO's
corporate Internet Web site without exception.\240\ In addition, to
implement Section 15E(q)(2)(D) of the Exchange Act, the Commission is
proposing to amend paragraph (i) to provide that Exhibit 1 must be made
freely available in writing, when requested.
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    \239\ See Annual Report on Nationally Recognized Statistical
Rating Organizations. Commission (Jan. 2011), pp. 18-19.
    \240\ See proposed amendments to paragraph (i) of Rule 17g-1.
---------------------------------------------------------------------------

    Finally, the Commission notes that throughout Form NRSRO and the
Instructions to Form NRSRO there are references to the current
requirement in paragraph (i) to make Form NRSRO and information and
documents submitted in Exhibits 1 through 9 ``publicly available on
[the NRSRO's] Web site or through another comparable, readily
accessible means.\241\ The Commission proposes amending all these
references so that they would mirror the text of the proposed amendment
to paragraph (i).
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    \241\ See, e.g., references in Item 5, in the Note to Item 6.C,
Item 8, and Item 9 of Form NRSRO and Instruction A.3 and Instruction
H to Form NRSRO.
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Request for Comment
    The Commission generally requests comment on all aspects of the
proposed amendments to paragraph (i) of Rule 17g-1. The Commission also
seeks comment on the following:
    1. Is there any reason why the Commission should not apply the
requirement to make an NRSRO's performance statistics ``freely
available on an easily accessible portion of its Web site'' to Form
NRSRO and the public Exhibits as a whole? For example, should the
requirement apply only to Exhibit 1?
    2. Is the Commission correct in its preliminary belief that a Form
NRSRO would be on an ``easily accessible'' portion of a Web site if it
could be accessed through a clearly and prominently labeled hyperlink
to the Form on the home-page of the NRSRO's corporate Internet Web
site? Are there other portions of an NRSRO's corporate Internet Web
site that, provided the NRSRO placed a hyperlink to Form NRSRO on such
portion of the Web site, should be deemed ``easily accessible''?
    3. Is there another means of making Form NRSRO publicly available
besides the Internet that should be deemed ``another comparable,
readily accessible means''? If so, identify the means and explain the
potential advantages of permitting it as a means of disclosure.

    4. With respect to the proposed requirement that Exhibit 1 be made
freely available in writing, when requested, how should an NRSRO meet
such a request? For example, should an NRSRO be required to mail a
written copy of Exhibit 1 to a party requesting the Exhibit? If so,
would it be appropriate to permit the NRSRO to charge reasonable
handling and postage fees? For example, would allowing an NRSRO to
charge a reasonable handling and postage fee discourage requests that
are not based on a legitimate need to obtain Exhibit 1 in paper form?
In this regard, the Commission notes that Exhibit 1 currently can be
immediately accessed through an NRSRO's corporate Internet Web site
and, under the proposed amendments to paragraph (i) of Rule 17g-1,
would need to be posted on an easily accessible portion of the NRSRO's
corporate Internet Web site. Consequently, why would a person have a
legitimate need to request that an NRSRO provide Exhibit 1 in paper
form (which would take time to process the request and send out the
Exhibit) when it could be obtained immediately through the Internet?
2. Proposed Enhancements to Rating Histories Disclosures
    Paragraph (a)(8) of Rule 17g-2 requires an NRSRO to make and retain
a record that, ``for each outstanding credit rating, shows all rating
actions and the date of such actions from the initial credit rating to
the current credit rating identified by the name of the rated security
or obligor and, if applicable, the CUSIP of the rated security or the
Central Index Key (``CIK'') number of the rated obligor.'' \242\ An
NRSRO is required to retain this record for three years pursuant to
paragraph (c) of Rule 17g-2.\243\
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    \242\ 17 CFR 240.17-2(a)(8). A CIK number has ten-digits and is
assigned to uniquely identify a filer using the Commission's EDGAR
system.
    \243\ See 17 CFR 240.17g-2(c).
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    In addition, paragraph (d) of Rule 17g-2 requires the NRSRO to
publicly disclose certain of this information as well. Specifically,
paragraph (d)(2) of Rule 17g-2 requires an NRSRO to ``make and keep
publicly available on its corporate Internet Web site in an eXtensible
Business Reporting Language (``XBRL'') format'' the information
required to be documented pursuant to paragraph (a)(8) of Rule 17g-2
for 10% of the outstanding credit ratings, selected on a random basis,
in each class of credit rating for which the NRSRO is registered if the
credit rating was paid for by the obligor being rated or by the issuer,
underwriter, or sponsor of the security being rated (``issuer-paid''
credit ratings) and the NRSRO has 500 or more such issuer-paid credit
ratings outstanding in that class (the ``10% Rule'').\244\ Paragraph
(d)(2) further provides that any ratings action required to be
disclosed need not be made public less than six months from the date
the action is taken.\245\ This six-month grace period is designed to
preserve the ability of NRSROs to sell data feeds to the portfolios of
their current credit ratings by making the information disclosed in the
10% Rule out-of-date.\246\ Paragraph (d)(2) also requires that, if a
credit rating made public pursuant to the rule is withdrawn or the
rated instrument matures, the NRSRO must randomly select a new
outstanding credit rating from that class of credit ratings in order to
maintain the 10% disclosure threshold.\247\ Finally, paragraph (d)(2)
provides that in making the information available on its corporate
Internet Web site, the NRSRO must use the List of XBRL Tags for NRSROs
as specified on the Commission's Internet Web site.\248\
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    \244\ 17 CFR 240.17-2(d)(2).
    \245\ Id.
    \246\ The fact that the disclosure involves only a random sample
of 10% of the outstanding credit ratings also limits the utility of
the information disclosed in terms of serving as a substitute to
purchasing a data feed to the NRSRO's current portfolio of
outstanding credit ratings.
    \247\ 17 CFR 240.17-2(d)(2).
    \248\ Id.
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    Paragraph (d)(3) of Rule 17g-2 requires an NRSRO to make publicly
available on its corporate Internet Web site information required to be
documented pursuant to paragraph (a)(8) of the rule for any credit
rating initially determined by the NRSRO on or after June 26, 2007, the
effective date of the Rating Agency Act of 2006 (the ``100%
Rule'').\249\ The 100% Rule applies to all types of credit ratings, as
opposed to the 10% Rule, which is limited to issuer-paid credit
ratings. However, paragraphs (d)(3)(i)(B) and (C) prescribe different
grace periods for when an NRSRO must disclose a rating action depending
on whether or not it was issuer-paid.\250\ Specifically, paragraph
(d)(3)(i)(B) provides that if the credit rating is issuer-paid, then
the grace period is 12 months after the date the action is taken.\251\
Similar to the 6-month grace period in the 10% Rule, this 12-month
grace is designed to preserve the ability of NRSROs to sell data feeds
to their portfolios of current outstanding credit ratings by making the
information disclosed in the 100% Rule out-of-date.\252\ For all non-
issuer paid credit ratings, paragraph (d)(3)(i)(C) provides a grace
period of 24 months after the date the rating action is taken. This
longer grace period is designed to address the ``subscriber-paid''
business model in which the NRSRO makes its credit ratings available
for a fee rather than for free.\253\ Paragraph (d)(3)(ii) of Rule 17g-2
requires the NRSRO to disclose the ratings history information on its
corporate Internet Web site in an XBRL format using the List of XBRL
Tags for NRSROs as published by the Commission on its Internet Web
site.\254\
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    \249\ 17 CFR 240.17-2(d)(3).
    \250\ 17 CFR 240.17-2(d)(3)(i)(B) and (C).
    \251\ 17 CFR 240.17-2(d)(3)(i)(B).
    \252\ See Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, 74 FR at 63837-63842 (Dec. 4,
2009) (discussing the grace periods in the rule).
    \253\ Id.
    \254\ At the time the 10% Rule became effective (which preceded
the 100% Rule), the Commission had not published the List of XBRL
Tags. Consequently, the Commission issued a notice that NRSROs could
use any machine readable format to publish the ratings history
information required by the 10% Rule. See Notice Regarding the
Requirement to Use eXtensible Business Reporting Language Format to
Make Publicly Available the Information Required Pursuant to Rule
17g-2(d) of the Exchange Act, Exchange Act Release No. 60451 (Aug.
5, 2009). On August 27, 2010, the Commission provided notice that
the List of XBRL tags required to be used for purposes of the 10%
Rule and, the subsequently adopted 100% Rule, was available on the
Commission's Internet Web site. See Notice Regarding the Requirement
to Use eXtensible Business Reporting Language Format to Make
Publicly Available the Information Required Pursuant to Rule 17g-
2(d) of the Exchange Act, Exchange Act Release No. 62784 (Aug. 27,
2010), 75 FR 53988 (Sept. 2, 2010). Information about the List of
XBRL Tags is located at the following page on the Commission's Web
site: http://www.sec.gov/spotlight/xbrl/nrsro-implementation-guide.shtml. The publication of this notice in the Federal Register
triggered the 60-day period after which NRSROs were required to
begin using an XBRL format for purposes of the two rules. The 60-day
period ended on November 1, 2010. The XBRL Tags identified by the
Commission include mandatory tags with respect to the information
specifically identified in paragraph (a)(8) of Rule 17g-2 (17 CFR
240.17g-2(a)(8)) (i.e., the date of the rating action, the credit
rating identified by the name of the rated security or obligor and,
if applicable, the CUSIP of the rated security or the CIK number of
the rated obligor). The XBRL Tags also identify additional
information that could be tagged by the NRSRO to enhance the
disclosure.
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    The Commission is proposing amendments designed to enhance the
utility of the 100% Rule.\255\ Moreover, in light of the proposed
amendments to the 100% Rule (discussed below) and Exhibit 1 (discussed
above), the Commission is proposing to repeal the 10% Rule. The 10%
Rule does not permit comparability across NRSROs

because it captures only issuer-paid credit ratings in a class of
credit ratings where there are 500 or more such ratings and only if two
or more NRSROs randomly select the same rated obligor, issuer, or money
instrument to be included in the sample.\256\ Moreover, the Commission
understands that the 10% Rule may not produce sufficient ``raw data''
to allow third parties to generate independent performance
statistics.\257\ The goal of the rule was to provide some information
about how an NRSRO's credit ratings performed, particularly ratings
assigned to obligors, securities and money market instruments that had
been rated for 10 or 20 years. The Commission now preliminarily
believes that, in light of the proposed enhancements to Exhibit 1 and
the 100% Rule, the 10% Rule would provide minimal incremental benefit
to investors and other users of credit ratings in terms of providing
information about the performance of a given NRSRO's credit ratings.
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    \255\ See, e.g., GAO Report 10-782, p. 40 (``However, we found
that the data disclosed under the 10 percent sample disclosure
requirement do not contain enough information to construct
comparable performance statistics and are not representative of the
population of credit ratings at each NRSRO and that the data
disclosed under the 100 percent disclosure requirement likely
present similar issues.'').
    \256\ See, e.g., GAO Report 10-782, pp. 40-47.
    \257\ Id.
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    With respect to the 100% Rule, the Commission is proposing its
provisions be moved from Rule 17g-2 (the NRSRO recordkeeping rule) to
Rule 17g-7.\258\ Currently, Rule 17g-7 requires an NRSRO to disclose
certain information in any report accompanying an asset-backed
security.\259\ In other words, the rule requires an NRSRO to publicly
disclose information outside of Form NRSRO (the predominant NRSRO
disclosure rule). Similarly, the 100% Rule in its current form (and as
proposed) also requires (and would require) an NRSRO to disclose
information outside of Form NRSRO. Finally, as discussed below in
Section II.G of this release, Section 15E(s) of the Exchange Act
provides that the Commission shall adopt rules to require an NRSRO to
disclose further information outside of Form NRSRO.\260\ The Commission
is proposing to consolidate non-Form NRSRO disclosure rules by
codifying them in Rule 17g-7.\261\
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    \258\ 17 CFR 240.17g-7.
    \259\ See 17 CFR 240.17g-7, which requires an NRSRO to include
in any report accompanying a credit rating with respect to an asset-
backed security, as that term is defined in Section 3(a)(77) of the
Exchange Act (15 U.S.C. 78c(a)(77)) a description of: the
representations, warranties and enforcement mechanisms available to
investors; and how they differ from the representations, warranties
and enforcement mechanisms in issuances of similar securities. Id.
    \260\ See 15 U.S.C. 78o-7(s).
    \261\ See 15 U.S.C. 78o-7 and 15 U.S.C. 78q. The current
provisions of Rule 17g-7 would be incorporated into new paragraph
(a) of Rule 17g-7 as discussed below in Section II.G of this
release. The Commission notes that some NRSROs may (or could in the
future) have additional disclosure requirements based on their
status as another type of registrant or because they are part of a
company that has filing obligations under other provisions of the
securities laws. The Commission does not intend to consolidate such
other disclosure requirements in Rule 17g-7.
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    The proposed enhancements to the 100% Rule would be codified in new
paragraph (b) of Rule 17g-7.\262\ Proposed paragraph (b)(1) would
require, among other things, that the NRSRO publicly disclose the
ratings history information for free on an easily accessible portion of
its corporate Internet Web site.\263\ This would implement Section
15E(q)(2)(D) of the Exchange Act and, by using the ``easily accessible
portion'' language, enhance the current requirement of the 100% Rule
that the ratings history information be disclosed on the NRSRO's
corporate Internet Web site.\264\ As discussed above in Section
II.E.1.b of this release, some Internet Web sites contain large amounts
of information, some of which must be accessed by navigating through
multiple web pages.\265\ Consequently, as discussed, the Commission
preliminary believes that Form NRSRO would be on an ``easily
accessible'' portion of an Internet Web site if it could be accessed
through a clearly and prominently labeled hyperlink to the Form on the
homepage of the NRSRO's corporate Internet Web site. The Commission
preliminarily believes that the same holds true for the disclosure of
the data file or files containing the information that would be
required by the enhanced 100% Rule.\266\
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    \262\ See proposed new paragraph (b) of Rule 17g-7.
    \263\ See proposed new paragraph (b)(1) of Rule 17g-7.
    \264\ See 15 U.S.C. 78o-7(q)(2)(D); compare 17 CFR 240.17g-
7(d)(3)(i)(A), with proposed new paragraph (b) of Rule 17g-7. As
discussed above, Section 15E(q)(2)(D) of the Exchange Act provides
that the Commission's rules shall require the information about the
performance of credit ratings be published and made freely available
by the NRSRO, on an easily accessible portion of its Web site, and
in writing, when requested. Id. The Commission, however,
preliminarily believes that the ``in writing'' requirement would not
be feasible if applied to the disclosures of rating histories.
First, the data file containing the disclosures would need to be
constantly updated by the NRSRO as new rating actions are added.
Thus, it would not remain static like the Exhibit 1 performance
measurement statistics which are updated annually. Consequently, by
the time a party received a written copy of the disclosure, it
likely would not be up-to-date. Second, the amount of information in
the data file would be substantial (particularly for NRSROs that
have issued hundreds of thousands of credit ratings) and increase
over time. For these reasons, the Commission preliminarily believes
that converting the information in the electronic disclosure to
written form and mailing it to the party making the request would be
impractical and not particularly useful. In terms of utility, as
discussed below, the electronic disclosure of the data would need to
be made using an XBRL format. The Commission preliminarily believes
this would be a much more efficient and practical medium for
accessing and analyzing the information rather than obtaining it in
paper form. Consequently, the Commission preliminarily believes that
the benefits, if any, to requiring a written disclosure would be
limited. However, the Commission is requesting comment below on this
issue.
    \265\ See Section II.E.1.b of this release proposing amendments
to paragraph (i) of Rule 17g-1 to implement Section 15E(q)(2)(D) of
the Exchange Act. 15 U.S.C. 78o-7(q)(2)(D). Under the proposals, an
NRSRO would need to make Form NRSRO and Exhibits 1 through 9
``freely available on an easily accessible portion of its website.''
See proposed amendments to paragraph (i) of Rule 17g-1.
    \266\ See 15 U.S.C. 78o-7(q)(2)(D).
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    The next enhancement to the 100% Rule proposed by the Commission is
to substantially broaden the scope of credit ratings that would be
subject to the disclosure requirements. The Commission's intent is to
require disclosure of information about all outstanding credit ratings
in each class and subclass of credit ratings for which the NRSRO is
registered but within certain prescribed time frames. As noted above,
the 100% Rule currently only captures credit ratings where the NRSRO
initially determined a credit rating for the obligor, security, or
money market instrument on or after June 26, 2007.\267\ This means that
obligors, securities, and money market instruments assigned a credit
rating by the NRSRO before that date are excluded entirely from the
disclosure even if a rating action is taken with respect to the
obligor, security, or money market instrument after that date.
Consequently, if a user of the disclosures wanted to calculate a
transition or default rate for a given NRSRO's credit ratings, the user
could not compile a start-date cohort that included all obligors,
securities, or money market instruments assigned a credit as of the
start date.\268\ The Commission's proposal would be designed to address
this issue.\269\
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    \267\ See 17 CFR 240.17g-2(d)(3)(i)(A).
    \268\ See, e.g., GAO Report 10-782, p. 45. This issue is
particularly acute when the NRSRO determines credit ratings for
obligors in only one class of credit ratings. As discussed earlier,
obligor credit ratings typically provide an assessment of the
relative creditworthiness of the obligor as an entity for all its
obligations. Thus, it is different from a credit rating for a
security or money instrument that typically has a single finite
obligation that will mature, be called, or be prepaid (if it does
not default). An NRSRO that primarily issued obligor credit ratings
in a class and initially rated them prior to June 26, 2007 would
never have to include the rating histories of these obligors in the
disclosure. For example, the NRSRO could be monitoring credit
ratings for the same group of obligors that were initially rated 10
to 20 years ago. In this case, the NRSRO would have no ratings
histories to disclose.
    \269\ See, e.g., GAO Report 10-782, pp. 45-46.
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    In particular, the Commission is proposing that the rule no longer
be limited to the disclosure of histories for credit ratings where the
NRSRO initially

determined a credit rating for the obligor, security, or money market
instrument on or after June 26, 2007.\270\ Instead, the rule, as
proposed, would apply to any credit rating that was outstanding as of
June 26, 2007, but the rating histories disclosed for these credit
ratings would not need to include information about actions taken
before June 26, 2007.\271\ Moreover, in order to immediately include
these credit ratings in the disclosure, the proposed rule would require
the NRSRO to disclose the credit rating assigned to the obligor,
security, or money market instrument and associated information as of
June 26, 2007. Specifically, proposed paragraph (b)(1)(i) of Rule 17g-7
would require an NRSRO to disclose each credit rating assigned to an
obligor, security, and money market instrument in every class of credit
ratings for which the NRSRO is registered that was outstanding as of
June 26, 2007 and any subsequent upgrades or downgrades of a credit
rating assigned to the obligor, security, or money market instrument
(including a downgrade to, or assignment of, default), any placements
of a credit rating assigned to the obligor, security, or money market
instrument on watch or review, any affirmation of a credit rating
assigned to the obligor, security, or money market instrument, and a
withdrawal of a credit rating assigned to the obligor, security, or
money market instrument.\272\ Consequently, an NRSRO would need to
include in the XBRL file through which it makes the rating history
disclosures all outstanding credit ratings as of June 26, 2007 (i.e.,
not wait until a new rating action was taken with respect to the credit
rating) and then disclose subsequent actions taken with respect to
those credit ratings. In other words, the histories for this class of
credit ratings would begin on June 26, 2007. This would mean that the
disclosures would not contain complete histories for many credit
ratings.\273\ However, the disclosures would capture all outstanding
credit ratings in each class of credit ratings for which the NRSRO is
registered and, therefore, market participants could immediately begin
computing short-term transition and default rates using start-date
cohorts that include all the obligors, securities, and money market
instruments assigned a credit rating in a given class.\274\