[Federal Register: December 4, 2009 (Volume 74, Number 232)]
[Proposed Rules]
[Page 63866-63904]
[DOCID:fr04de09-43]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240 and 249b

[Release No. 34-61051; File No. S7-28-09]
RIN 3235-AK14

Proposed Rules for Nationally Recognized Statistical Rating
Organizations

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

ACTION: Proposed rules.

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SUMMARY: The Commission is proposing rule amendments and a new rule
that would impose additional requirements on nationally recognized
statistical rating organizations (``NRSROs''). The proposed amendments
and rule would require an NRSRO: to furnish a new annual report
describing the steps taken by the firm's designated compliance officer
during the fiscal year with respect to compliance reviews,
identifications of material compliance matters, remediation measures
taken to address those matters, and identification of the persons
within the NRSRO advised of the results of the reviews; to disclose
additional information about sources of revenues on Form NRSRO; and to
make publicly available a consolidated report containing information
about revenues of the NRSRO attributable to persons paying the NRSRO
for the issuance or maintenance of a credit rating. The Commission is
proposing these rules, in conjunction with a separate release being
issued today adopting certain rule amendments, to further address
concerns about the integrity of the credit rating procedures and
methodologies at NRSROs. Finally, at this time, the Commission is
announcing that it is deferring consideration of action with respect to
a proposed rule that would have required an NRSRO to include, each time
it published a credit rating for a structured finance product, a report
describing how the credit ratings procedures and methodologies and
credit risk characteristics for structured finance products differ from
those of other types of rated instruments, or, alternatively, to use
distinct ratings symbols for structured finance products that
differentiated them from the credit ratings for other types of
financial instruments. The Commission is also soliciting comments
regarding alternative measures that could be taken to differentiate
NRSROs' structured finance credit ratings from the credit ratings they
issue for other types of financial instruments through, for example,
enhanced disclosures of information. The Commission also is soliciting
comment on whether the rule amendments being adopted today in a
separate release designed to remove impediments to determining and
monitoring non-issuer-paid credit ratings for structured finance
products should be extended to create a mechanism for determining non-
issuer-paid credit ratings for structured finance products that were
issued prior to the rule becoming effective (e.g., to allow for non-
issuer-paid credit ratings for structured finance products of the 2004-
2007 vintage). The Commission strongly encourages market participants
and all others to provide their views.

DATES: Comments should be received on or before February 2, 2010.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/proposed.shtml); or
     Send an e-mail to<EMAIL_ADDRESS>Please include
File Number S7-28-09 on the subject line; or
     Use the Federal eRulemaking Portal (http://
www.regulations.gov). Follow the instructions for submitting comments.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number S7-28-09. This file number
should be included on the subject line if e-mail is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments
are also available for public inspection and copying in the
Commission's Public Reference Room, 100 F Street, NE., Washington, DC
20549, on official business days between the hours of 10 a.m. and 3
p.m. All comments received will be posted without change; we do not
edit personal identifying information from submissions. You should
submit only information that you wish to make publicly available.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate
Director, at<PHONE_NUMBER>; Thomas K. McGowan, Deputy Associate
Director, at<PHONE_NUMBER>; Randall W. Roy, Assistant Director, at
(202) 551-5522; Joseph I. Levinson, Special Counsel, at<PHONE_NUMBER>;
Sheila Dombal Swartz, Special Counsel, at<PHONE_NUMBER>; Rose Russo
Wells, Special Counsel, at<PHONE_NUMBER>; Rebekah E. Goshorn,
Attorney, at<PHONE_NUMBER>; Marlon Q. Paz, Senior Counsel to the
Director, at<PHONE_NUMBER>; Division of Trading and Markets,
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549-7010.

SUPPLEMENTARY INFORMATION:

I. Background

    On February 2, 2009, the Commission adopted amendments to its
existing rules governing the conduct of NRSROs under the Securities
Exchange Act of 1934 (``Exchange Act'').\1\ The Commission proposed
these rule amendments in June 2008 to further the purposes of the
Credit Rating Agency Reform Act of 2006 (``Rating Agency Act'') to
improve ratings quality for the protection of investors and in the
public interest by fostering accountability, transparency, and
competition in the credit rating industry.\2\ The amendments also were
designed to further address concerns about the integrity of the process
by which NRSROs rate structured finance products, particularly mortgage
related securities.\3\ Concurrent with the

adoption of those final rule amendments, the Commission proposed, in a
separate release, additional amendments to Rule 17g-2(d) and re-
proposed amendments to paragraphs (a) and (b) of Rule 17g-5 as well as
a new paragraph (e) to Rule 17g-5 and a conforming amendment to
Regulation FD.\4\ In separate releases, the Commission is adopting,
with revisions, the rule amendments proposed in the February 2009
Proposing Release,\5\ and proposing amendments to Regulation S-K, and
rules and forms under the Securities Act, the Exchange Act and the
Investment Company Act to require disclosure regarding credit ratings
that a registrant uses in connection with a registered offering.\6\ The
Commission also is adopting amendments to remove references to NRSROs
in certain Commission rules and forms and re-opening the comment period
to extend the time to comment on proposals to remove references to
NRSROs in other Commission rules.\7\
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    \1\ See Amendments to Rules for Nationally Recognized
Statistical Rating Organizations, Exchange Act Release No. 59342
(February 2, 2009), 74 FR 6485 (February 9, 2009) (``February 2009
Adopting Release'').
    \2\ Exchange Act Release No. 57967 (June 16, 2008), 73 FR 36212
(June 25, 2008) (``June 2008 Proposing Release''). The Commission
adopted the initial set of NRSRO rules in June 2007. See Oversight
of Credit Rating Agencies Registered as Nationally Recognized
Statistical Rating Organizations, Exchange Act Release No. 55857
(June 5, 2007), 72 FR 33564 (June 18, 2007) (``June 2007 Adopting
Release''). In July 2008, the Commission also proposed a series of
amendments to rules under the Exchange Act, Securities Act of 1933
(``Securities Act''), and Investment Company Act of 1940
(``Investment Company Act'') that would eliminate references to
ratings issued by NRSROs in certain rules and forms. See References
to Ratings of Nationally Recognized Statistical Rating
Organizations, Exchange Act Release No. 58070 (July 1, 2008), 73 FR
40088 (July 11, 2008); Securities Ratings, Securities Act Release
No. 8940 (July 1, 2008), 73 FR40106 (July 11, 2008); References to
Ratings of Nationally Recognized Statistical Rating Organizations,
Investment Company Act Release No. 28327 (July 1, 2008), 73 FR 40124
(July 11, 2008).
    \3\ The term ``structured finance product'' as used throughout
this release refers broadly to any security or money market
instrument issued by an asset pool or as part of any asset-backed or
mortgage-backed securities transaction. This broad category of
financial instrument includes, but is not limited to, asset-backed
securities such as residential mortgage-backed securities (``RMBS'')
and to other types of structured debt instruments such as
collateralized debt obligations (``CDOs''), including synthetic and
hybrid CDOs, or collateralized loan obligations (``CLOs'').
    \4\ See Re-proposed Rules for Nationally Recognized Statistical
Rating Organizations, Exchange Act Release No. 59343 (February 2,
2009), 74 FR 6456 (February 9, 2009) (``February 2009 Proposing
Release'').
    \5\ Exchange Act Release No. 61050 (``Companion Release'').
    \6\ Securities Act No. 9070 (October 7, 2009) 74 FR 53086
(October 15, 2009).
    \7\ See Exchange Act Release No. 60789 (October 5, 2009), 74 FR
53258 (October 9, 2009) (adopting release to remove references to
NRSROs); see also Securities Act Release No. 9069 (October 5, 2009)
74 FR 53274 (October 9, 2009) (release to re-open for comment
proposals to remove references to NRSROs).
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    In this release, the Commission is proposing amendments to Rule
17g-3 to require an NRSRO to furnish a new unaudited annual report to
the Commission describing the steps taken by the NRSRO's designated
compliance officer \8\ during the fiscal year to fulfill the compliance
officer's responsibilities as set forth in Section 15E(j) of the
Exchange Act.\9\ That statutory provision requires an NRSRO to
designate an individual responsible for (1) administering the policies
and procedures that are required to be established pursuant to Sections
15E(g) and (h) of the Exchange Act; and (2) ensuring compliance with
securities laws and rules and regulations, including those promulgated
by the Commission pursuant to Section 15E of the Exchange Act.\10\
Pursuant to the proposed amendment to Rule 17g-3, an NRSRO would be
required to furnish a report to the Commission describing compliance
reviews undertaken by the compliance officer during the fiscal year,
material compliance matters identified during the reviews, measures
implemented to remediate the material compliance issues identified, and
persons within the NRSRO who were advised of the results of the
reviews.
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    \8\ See 15 U.S.C. 78o-7(j). Section 15E(j) of the Exchange Act
requires an NRSRO to ``designate an individual responsible for
administering the policies and procedures that are required to be
established pursuant to [Section 15E(g) and Section 15E(h) of the
Exchange Act], and for ensuring compliance with the securities laws
and rules and regulations thereunder, including those promulgated by
the Commission pursuant to [Section 15E of the Exchange Act].'' 15
U.S.C. 78o-7(j).
    \9\ See 15 U.S.C. 78o-7(j).
    \10\ Id.
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    In addition, the Commission is proposing in this release to amend
the Instructions to Exhibit 6 to Form NRSRO to require a credit rating
agency applying to be registered as an NRSRO or an NRSRO providing its
annual update to Form NRSRO to publicly disclose: (1) The percentage of
the net revenue of the applicant/NRSRO attributable to the 20 largest
users of credit rating services of the applicant/NRSRO; and (2) the
percentage of the revenue of the applicant/NRSRO attributable to
services and products other than credit rating services. The Commission
notes that the first proposed disclosure would be an aggregate in that
it would be the sum of the amount of net revenue attributed to the 20
largest users of credit rating services (i.e. not 20 separate net
revenue amounts). In conjunction with this proposed amendment to the
Instructions to Exhibit 6, the Commission is proposing to move the
definitions of certain terms currently included in the Instructions to
Exhibit 10 to the Explanation of Terms section of the Form NRSRO
Instructions in order to make those definitions applicable to Form
NRSRO as a whole.
    Finally, the Commission is proposing a new rule--Rule 17g-7--that
would require an NRSRO, on an annual basis, to make publicly available
on its Internet Web site a consolidated report that shows three items
of information with respect to each person that paid the NRSRO to issue
or maintain a credit rating. First, the NRSRO would be required to
disclose the percent of the net revenue attributable to the person that
were earned by the NRSRO for that fiscal year from providing services
and products other than credit rating services. Second, the NRSRO would
have to indicate the relative standing of the person in terms of the
person's contribution to the revenue of the NRSRO for the fiscal year
as compared with other persons who provided the NRSRO with revenue.
Third, the NRSRO would be required to identify all outstanding credit
ratings paid for by the person.
    As discussed in detail below, the proposed amendments seek to
further advance the goals of the Commission's current oversight program
for NRSROs, including increasing transparency and disclosure, and
diminishing conflicts, as well as continuing to further the goals of
the Rating Agency Act ``to improve ratings quality for the protection
of investors and in the public interest by fostering accountability,
transparency, and competition in the credit rating agency industry.''
\11\
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    \11\ See Report of the Senate Committee on Banking, Housing, and
Urban Affairs to Accompany S. 3850, Credit Rating Agency Reform Act
of 2006, S. Report No. 109-326, 109th Cong., 2d Sess. (Sept. 6,
2006) (``Senate Report''), p. 2.
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    The Commission believes that the proposed amendment to Rule 17g-3
to require NRSROs to furnish the Commission with an additional
unaudited annual report would further improve the integrity of the
ratings process and enhance accountability by requiring the designated
compliance officer to annually report on actions taken to fulfill the
officer's statutory responsibilities. While each NRSRO has a designated
compliance officer under Section 15E(j) of the Exchange Act, the
requirement to provide the Commission with such a report would, the
Commission believes, help establish or further reinforce a discipline
and rigor in the compliance officer's performance of his or her
duties.\12\ It also is designed to strengthen the Commission's existing
oversight of NRSROs by highlighting possible problem areas in an
NRSRO's rating processes and by providing an additional tool for the
Commission to determine whether the NRSRO's designated compliance
officer is fulfilling the responsibilities prescribed in Section 15E of
the Exchange Act.\13\ In addition, this information is designed to
assist the Commission staff in its examination of NRSROs. The proposed
amendments to the Exhibit 6 Instructions to Form NRSRO that would
require additional disclosures are designed to further increase
transparency by allowing users of credit ratings to more effectively
evaluate the integrity of an NRSRO's credit ratings and analyze whether
the NRSRO is effectively managing its conflicts of interests. Finally,
the Commission believes that proposed new Rule 17g-7

also would further increase transparency as well as enhance disclosures
with respect to an NRSRO's management of its conflicts of interest by
providing users of credit ratings with information about the potential
risk of undue influence that arises when an NRSRO is paid to determine
a credit rating for a specific obligor, security, or money market
instrument.
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    \12\ The Commission also notes that other areas of the
Commission's rules and regulations also require an annual report by
a chief compliance officer with respect to investment companies and
investment advisers. See generally, Rule 38a-1, 17 CFR 270.38a-1,
and Rule 206(4)-7, 17 CFR 275.206(4)-7.
    \13\ 15 U.S.C. 78o-7(j).
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    In addition to the proposed rule amendments, the Commission is
announcing today that it is deferring the consideration of action with
regard to the rule proposed in the June 2008 Proposing Release that
would have required an NRSRO to include, each time it published a
credit rating for a structured finance product, a report describing how
the credit ratings procedures and methodologies and credit risk
characteristics for structured finance products differ from those of
other types of rated instruments, or, alternatively, to use distinct
ratings symbols for structured finance products that differentiated
them from the credit ratings for other types of financial instruments.
Instead, the Commission is soliciting comment regarding alternative
measures that could be taken to differentiate NRSROs' structured
finance credit ratings from the credit ratings they issue for other
types of financial instruments through, for example, enhanced
disclosures of information. The Commission also is soliciting comment
on whether the rule amendments being adopted today in the Companion
Release designed to remove impediments to determining and monitoring
non-issuer-paid credit ratings for structured finance products should
be extended to create a mechanism for determining non-issuer-paid
credit ratings for structured finance products that were issued prior
to the rule becoming effective (e.g., to allow for non-issuer-paid
credit ratings for structured finance products of the 2004-2007
vintage). Specifically, the Commission is soliciting comment on whether
the rule's goal could be furthered by applying its requirements or
similar requirements to structured finance products that were issued
prior to the compliance date of the rule as amended.

II. Proposed Amendment to Rule 17g-3

    The Commission adopted Rule 17g-3 pursuant to authority in Section
15E(k) \14\ of the Exchange Act, which requires an NRSRO to furnish to
the Commission, on a confidential basis \15\ and at intervals
determined by the Commission, such financial statements and information
concerning its financial condition as the Commission, by rule, may
prescribe as necessary or appropriate in the public interest or for the
protection of investors. The statute also provides that the Commission
may, by rule, require that the financial statements be certified by an
independent public accountant.\16\ In addition, Section 17(a)(1) of the
Exchange Act \17\ requires an NRSRO to make and keep such records, and
make and disseminate such reports, as the Commission prescribes by rule
as necessary or appropriate in the public interest, for the protection
of investors, or otherwise in furtherance of the Exchange Act.\18\
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    \14\ 15 U.S.C. 78o-7(k).
    \15\ An NRSRO can request that the Commission keep this
information confidential. See Section 24 of the Exchange Act (15
U.S.C. 78x), 17 CFR 240.24b-2, 17 CFR 200.80 and 17 CFR 200.83.
    \16\ Id.
    \17\ 15 U.S.C. 78q(a)(1).
    \18\ See Section 5 of the Rating Agency Act and 15 U.S.C.
78q(a)(1).
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    Rule 17g-3 currently requires an NRSRO to furnish to the Commission
on an annual basis the following reports: audited financial statements;
unaudited consolidating financial statements of the parent of the
NRSRO, if applicable; an unaudited report concerning revenues by
category of revenue; an unaudited report concerning compensation of the
NRSRO's credit analysts; an unaudited report listing the largest
customers of the NRSRO; and an unaudited report on the number of credit
rating actions taken during the fiscal year in each class of credit
ratings for which the NRSRO is registered with the Commission.\19\ The
rule further requires an NRSRO to furnish the Commission these reports
within 90 days of the end of its fiscal year.\20\
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    \19\ 17 CFR 240.17g-3(a)(1)-(6).
    \20\ 17 CFR 240.17g-3(a).
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    The Commission's staff understands that the designated compliance
officer of some NRSROs may, in some cases, not be fulfilling the
compliances officer's statutorily mandated duties, as prescribed by
Section 15E(j) of the Exchange Act.\21\ Further, during examinations in
2008 of three of the largest NRSRO's, Commission staff also identified
issues with respect to each NRSROs policies and procedures and
improvements that could be made.\22\ In light of these concerns and the
importance of an effective NRSRO compliance program, the Commission is
proposing to amend Rule 17g-3 by adding paragraph (a)(7), which would
require an NRSRO to furnish to the Commission an additional unaudited
annual report. This report would be furnished to the Commission, on a
confidential basis, consistent with the other reports required under
Rule 17g-3.\23\
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    \21\ 15 U.S.C. 78o-7(j).
    \22\ See generally, Summary Report of Issues Identified in the
Commission Staff's Examinations of Select Credit Rating Agencies
(July 8, 2008). The report is available on the Commission's Internet
Web site, located at http://www.sec.gov/news/studies/2008/
craexamination070808.pdf.
    \23\ See supra notes 14 and 15; see also June 2007 Adopting
Release, 72 FR at 33590, footnote 300 and June 2008 Proposing
Release, 73 FR 36234, footnote 143.
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    Proposed new paragraph (a)(7)(i) of Rule 17g-3 would provide that
the new report must describe the steps taken by the NRSRO's designated
compliance officer during the fiscal year to: (1) Administer the
policies and procedures that are required to be established pursuant to
Sections 15E(g) and (h) of the Exchange Act; and (2) ensure compliance
with securities laws and rules and regulations, including those
promulgated by the Commission pursuant to Section 15E of the Exchange
Act.\24\ Proposed new paragraph (a)(7)(ii) of Rule 17g-3 would provide
that the new report must include: (1) A description of any compliance
reviews of the activities of the NRSRO; (2) the number of material
compliance matters identified during each review of the activities of
the NRSRO and a brief description of each such matter; (3) a
description of any remediation measures implemented to address material
compliance matters identified during the reviews of the activities of
the NRSRO; and (4) a description of the persons within the NRSRO who
were advised of the results of the reviews.\25\ Finally, the Commission
is proposing to amend paragraph (b) to Rule 17g-3 to require that the
proposed new report required under paragraph (a)(7) be accompanied by a
statement signed by the NRSRO's designated compliance officer stating
that the person has responsibility for the report and, to the best of
the knowledge of the designated compliance officer, the report fairly

presents, in all material respects, steps taken by the designated
compliance officer for the period presented.
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    \24\ Section 15E(g) of the Exchange Act provides, in pertinent
part, that an NRSRO must establish, maintain, and enforce written
policies and procedures reasonably designed, taking into
consideration the nature of the business of such NRSRO, to prevent
the misuse of material, nonpublic information. 15 U.S.C. 78o-7(g).
Section 15E(h) of the Exchange Act, provides, in pertinent part,
that an NRSRO must establish, maintain, and enforce written policies
and procedures reasonably designed, taking into consideration the
nature of the business of such NRSRO and affiliated persons and
affiliated companies thereof, to address and manage any conflicts of
interest that can arise from such business. 15 U.S.C. 78o-7(h).
    \25\ See proposed Rule 17g-3(a)(7)(ii).
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    The proposed new report would be unaudited, consistent with the
other unaudited reports currently required under Rule 17g-3.\26\ As
discussed below, the Commission preliminarily believes that the
proposed amendment would improve the integrity of the credit ratings
process by establishing a more structured discipline under which the
NRSRO's designated compliance officer would need to report to the
Commission the steps taken to fulfill the officer's statutory
responsibilities. The act of reporting these steps is designed to
promote the active engagement of the designated compliance officer in
reviewing an NRSRO's compliance with the securities laws and its own
internal policies and procedures. The Commission preliminarily believes
that because the compliance officer would be required to report these
steps, the act of reporting should, in turn, foster improved
compliance. Furthermore, the requirement in the report to identify the
persons within the NRSRO advised of the results of the review could
also promote the appropriate escalation of compliance issues to the
management of the NRSRO.
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    \26\ 17 CFR 240.17g-3(a)(2)-(6). Under Rule 17g-3, the only
required audited report is the NRSRO's financial statements as of
its most recent fiscal year. 17 CFR 240.17g-3(a)(1).
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    The report also is designed to further strengthen the Commission's
oversight of NRSROs by highlighting possible problem areas in an
NRSRO's rating processes and providing an additional tool for the
Commission to determine whether the NRSRO's designated compliance
officer is fulfilling the responsibilities prescribed in Section 15E of
the Exchange Act.\27\ For example, if an NRSRO reports a large number
of material compliance matters in a particular area, the Commission
examination staff could focus on that particular area as part of their
next review of the NRSRO. Alternatively, if a report indicates no
problems, but a subsequent Commission staff examination reveals
material compliance matters, this could be brought to the attention of
the NRSRO's management for appropriate action.
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    \27\ 15 U.S.C. 78o-7(j).
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    The report is also designed to assist the Commission in its
oversight of NRSROs to the extent they reveal trends across NRSROs or
material compliance matters that could migrate from one NRSRO to other
NRSROs because, for example, they arise from rating similar products or
debt issued by a particular issuer that engages more than one NRSRO.
    Finally, the Commission preliminarily believes that the proposed
report would also help facilitate the Commission's examination staff
efforts to conduct each exam of an NRSRO in an organized and efficient
manner and thus to allocate resources to maximize investor
protection.\28\ The Commission notes that the proposed report would not
be the sole factor the Commission's exam staff would use to determine
the particular focus of an exam, but would be one of many factors used
to make that determination.
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    \28\ The Commission also notes that other areas of the
Commission's rules and regulations also require an annual report by
a chief compliance officer with respect to investment companies and
investment advisers. See generally, Rule 38a-1, 17 CFR 270.38a-1,
and Rule 206(4)-7, 17 CFR 275.206(4)-7.
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A. Proposed New Paragraph 17g-3(a)(7)(i)

    As stated above, the proposed amendments to Rule 17g-3 would
require an NRSRO to provide the Commission with an unaudited annual
report describing the steps taken by the NRSRO's designated compliance
officer during the fiscal year.\29\ Specifically, the amendments would
add a new paragraph (a)(7)(i) to Rule 17g-3, which would require an
NRSRO to provide the Commission with a report describing the steps
taken by the NRSRO's designated compliance officer during the fiscal
year to:
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    \29\ See 15 U.S.C. 78o-7(j).
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     Administer the policies and procedures that are required
to be established pursuant to paragraphs (g) and (h) of Section 15E of
the Exchange Act (15 U.S.C. 78o-7(g) and (h)); \30\ and
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    \30\ See proposed Rule 17g-3(a)(7)(i)(A).
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     Ensure compliance with the securities laws and rules and
regulations thereunder, including those promulgated by the Commission
pursuant to Section 15E of the Exchange Act.\31\
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    \31\ See proposed Rule 17g-3(a)(7)(i)(B).
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    These are the areas of responsibility for the designated compliance
officer prescribed in Section 15E(j) of the Exchange Act.\32\ The
report would require a description of the steps taken by the compliance
officer during the most recently ended fiscal year to fulfill these
responsibilities. As noted above, the purpose of the report is to
impose a yearly discipline under which the compliance officer must
describe the steps taken to fulfill the officer's statutory
responsibilities. The Commission's goal in proposing this amendment is
to further enhance the compliance function within the NRSRO by
prescribing a process that promotes the active engagement of the
compliance officer in reviewing the NRSRO's compliance with internal
policies and procedures and with the securities laws and rules and
regulations.
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    \32\ 15 U.S.C. 78o-7(j).
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    The first area of responsibility of the compliance officer under
Section 15E(j) of the Exchange Act--to administer the policies and
procedures that are required pursuant to Sections 15E(g) and (h) of the
Exchange Act--is identified in proposed new paragraph (a)(7)(i)(A) of
Rule 17g-3. Sections 15E(g) and (h) of the Exchange Act require an
NRSRO to establish, maintain, and enforce written policies and
procedures reasonably designed, taking into consideration the nature of
the business of the NRSRO, to prevent the misuse of material nonpublic
information and to address and manage any conflicts of interest,
respectively.\33\ The Commission preliminarily believes that requiring
the designated compliance officer to describe the steps taken during
the fiscal year in this area of responsibility could, to the extent it
encourages the compliance officer to undertake more rigorous compliance
reviews, uncover compliance weaknesses with respect to the treatment of
material nonpublic information and the management of conflicts of
interest by the NRSRO. This would afford the NRSRO the opportunity to
consider whether corrective action is necessary to remediate such
weaknesses.
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    \33\ Id.
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    The second area of responsibility of the compliance officer under
Section 15E(j) of the Exchange Act--to ensure compliance with the
securities laws and rules and regulations thereunder, including those
promulgated by the Commission pursuant to Section 15E of the Exchange
Act--is identified in proposed new paragraph (a)(7)(i)(B) of Rule 17g-
3. The Commission preliminarily believes that requiring the designated
compliance officer to describe the steps taken during the fiscal year
to meet this responsibility could, to the extent it encourages the
compliance officer to undertake more rigorous compliance reviews,
assist the NRSRO in identifying areas where its activities may be in
contravention of securities laws and regulations and, therefore, allow
it to take appropriate action. The goal of the proposed compliance
report is to enhance the compliance function and potentially mitigate
compliance failures when they occur. The Commission preliminarily

believes that the proposed report the designated compliance officer
would be required to furnish may serve as an incentive to further
strengthen the NRSRO's existing compliance program.
    The Commission notes that the size and scope of an NRSRO's existing
compliance program would vary depending on the size and complexity of
the NRSRO. Larger NRSROs with comprehensive compliance programs may
already periodically review portions of their compliance programs. In
contrast, smaller NRSROs may have less extensive compliance programs
because they have simpler organizational structures, fewer employees
and fewer sources of revenue than larger NRSROs, which may be part of a
complex global organization with thousands of employees. Therefore,
while the Commission believes that the proposed report would serve as
incentive to further strengthen each NRSRO's existing compliance
program, the extent of the effect of the proposed report on improving
an NRSRO's existing compliance program may vary from one NRSRO to
another.

B. Proposed New Paragraph 17g-3(a)(7)(ii)

    The proposed amendment to Rule 17g-3 also would set forth specific
items to be included in the proposed new report under Rule 17g-3(a)(7).
In requiring the inclusion of certain information, the Commission does
not intend to dictate how a designated compliance officer should
fulfill the officer's responsibilities as set forth in the Rating
Agency Act. The Commission expects the designated compliance officer to
design and execute a compliance program taking into account: The
business of the NRSRO; the procedures and methodologies used by the
NRSRO to determine credit ratings; the NRSRO's size; the NRSRO's (and
its affiliates') conflicts of interest; and the complexity of the
NRSRO's operations. The Commission believes that the information that
would be required in the report is the type of information a compliance
program would generate regardless of the specific design of a
particular program.
    More specifically, the amendments to Rule 17g-3 would include new
paragraph (a)(7)(ii), which would require that the report include:
     A description of any compliance reviews of the activities
of the NRSRO;
     The number of material compliance matters identified
during each review of the activities of the NRSRO and a brief
description of each such matter;
     A description of any remediation measures implemented to
address material compliance matters identified during the reviews of
the activities of the NRSRO; and
     A description of the persons within the NRSRO who were
advised of the results of the reviews.
    The first item the Commission is proposing to require in the report
is a description of any compliance reviews of the activities of the
NRSRO.\34\ One of the functions of a typical compliance department is
to proactively review business activities to identify potential
regulatory, compliance, and reputational risks and to design ways to
minimize such risks.\35\ The Commission intends that the designated
compliance officer would describe all such reviews conducted during the
most recently ended fiscal year. Therefore, this description would
provide the Commission with an understanding of the scope of the
designated compliance officer's reviews of the NRSRO's activities and
possibly highlight any areas that were not reviewed.
---------------------------------------------------------------------------

    \34\ See proposed Rule 17g-3(a)(7)(ii)(A).
    \35\ See e.g., White Paper on the Role of Compliance, Securities
Industry Association, Compliance and Legal Division (October 2005);
available at http://www.sifmacl.org/attachments/articles/8/
Role%20of%20Compliance.pdf.
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    The second item the Commission is proposing be included in the
report is the number of material compliance matters identified during
each review of the activities of the NRSRO and a brief description of
each such matter. The Commission preliminarily intends a ``material
compliance matter'' to mean a determination by the NRSRO or a person
within the NRSRO that there has been a violation of the securities laws
\36\ or the rules thereunder or a failure to adhere to the policies,
procedures, or methodologies established, maintained and enforced by
the NRSRO to, for example, determine credit ratings, prevent the misuse
of material nonpublic information, manage conflicts of interest, and
comply with the Commission's NRSRO rules.\37\ A material compliance
matter also would include a determination that there was a weakness in
the design or implementation of the policies and procedures of the
NRSRO.\38\ The proposed requirement to report a material compliance
matter would be designed to alert the Commission to issues identified
by the designated compliance officer that may raise questions about the
integrity of the NRSRO's activities and operations. It also could
assist the Commission's oversight of NRSROs to the extent a reported
material compliance matter is one that could arise in other NRSROs
because, for example, it relates to a new type of debt instrument that
is being rated by more than one NRSRO or involves potentially
inappropriate interactions with an issuer that hired several NRSROs to
rate its securities. Finally, the Commission preliminarily believes
that requiring the proposed report to include the number of material
compliance matters identified would provide Commission examiners with
an additional tool to assist them in identifying possible trends and
issues with respect to material compliance matters at an NRSRO after
the first year of reporting. For example, numerous material compliance
violations over a period of years could be indicative of possible lax
compliance at an NRSRO.
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    \36\ The term ``securities laws'' is defined in Section 3(a)(47)
of the Exchange Act.
    \37\ See e.g., 17 CFR 270.38a-1(e)(2). Rule 38a-1 prescribes
compliance procedures and practices for investment companies
registered with the Commission under the Investment Company Act of
1940. Paragraph (a)(4) of Rule 38a-1 requires the investment company
to designate an individual responsible for administering the fund's
policies and procedures to, among other things, prevent violation of
the Federal Securities Laws by the fund (the fund's ``chief
compliance officer''). Paragraph (a)(4)(iii) of Rule 38a-1 requires
the fund's chief compliance officer to provide a written report to
the fund's board, at least annually, that addresses, among other
things, each ``Material Compliance Matter'' that occurred since the
last report. Paragraph (e)(2) of Rule 38a-1 defines a ``Material
Compliance Matter'' to be, among other things, a violation of the
Federal Securities Law by the fund or its employees, a violation of
the policies and procedures of the fund, or a weakness in the
implementation or design of the policies and procedures of the fund.
    \38\ Id.
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    The third item the Commission is proposing be included in the
report is a description of any remediation measures implemented to
address material compliance matters identified during the reviews of
the activities of the NRSRO.\39\ The Commission preliminarily intends
``remediation measures'' to include changes made by the NRSRO in
response to the identification of a material compliance matter that are
designed to prevent the re-occurrence of a similar material compliance
matter. The reporting of these measures would assist the Commission in
evaluating the risk of re-occurrences. It also could shed a light on
potential ``best practices'' for mitigating the risk of future material
compliance matters. Further, it is designed to reinforce the discipline
of an NRSRO to review for potential material compliance matters and
take steps to address them when they occur.
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    \39\ See proposed Rule 17g-3(a)(7)(ii)(C).
---------------------------------------------------------------------------

    The fourth item the Commission is proposing to include in the
report is a description of the persons within the NRSRO who were
advised of the results

of the reviews. The Commission intends that the description of the
persons who were advised of the results of the reviews at the NRSRO
would include only key personnel, i.e., those who have the authority to
act on the results of the reviews or direct others to act. The
Commission does not intend that the persons advised of the results of
the reviews would be so broad in scope as to include persons such as
administrative employees, for example, who may have typed a report
related to a material compliance matter.
    The information with respect to those persons who were advised of
the results of reviews is designed to provide the Commission with an
understanding of how the NRSRO responds to material compliance matters
and the role and structure of the compliance program within the NRSRO.
For example, it would indicate whether the compliance officer reported
the matters to the NRSRO's board or senior management or only to the
business unit that underwent the compliance review. This is designed to
promote the appropriate escalation of compliance issues to the
management of the NRSRO. The Commission also believes that this
proposed information would be a useful tool for examiners to focus
examination resources on practices related to material compliance
matters reported and assist in making risk-based decisions on whether
to initiate an examination of a particular NRSRO. The Commission notes
that this information would only be one of many factors the
Commission's exam staff may use to determine the particular focus of an
exam.

C. Proposed Amendment to Paragraph 17g-3(b)

    The Commission also is proposing to amend paragraph (b) of Rule
17g-3 to create two subparagraphs, Rule 17g-3(b)(1) and (b)(2).\40\
Subparagraph (b)(1) would carry forward, unchanged, the requirement in
current Rule 17g-3(b). The current text of Rule 17g-3(b) requires that
an NRSRO must attach to each financial report furnished pursuant to
paragraphs (a)(1) through (a)(6) of Rule 17g-3 a signed statement by a
duly authorized person associated with the NRSRO stating that the
person has responsibility for the financial report and, to the best
knowledge of the person, the financial report fairly presents, in all
material respects, the financial conditions, results of operations,
cash flows, revenues, analyst compensation, and credit rating actions
of the NRSRO for the period presented. This requirement does not
specify who within the NRSRO should have responsibility for the reports
and for providing the required signed statement.
---------------------------------------------------------------------------

    \40\ See proposed Rule 17g-3(b)(1) and (2).
---------------------------------------------------------------------------

    Proposed subparagraph (b)(2) would establish a similar requirement
for a signed statement to accompany the report under proposed new
paragraph (a)(7) to Rule 17g-3, but would specify that the designated
compliance officer is required to provide that statement. Specifically,
proposed paragraph (b)(2) of Rule 17g-3 would require that an NRSRO
attach to the report furnished pursuant to proposed paragraph (a)(7) of
Rule 17g-3 a signed statement by the designated compliance officer of
the NRSRO stating that the officer has responsibility for the report
and, to the best knowledge of the designated compliance officer, the
report fairly presents, in all material respects, the information in
paragraph (a)(7)(ii) of Rule 17g-3 for the period presented. The
Commission preliminarily believes that the designated compliance
officer should have responsibility for providing the statement since
the information to be submitted in the report is directly within that
individual's statutorily mandated responsibilities under Section 15E(j)
of the Exchange Act; namely, to administer the NRSRO's policies and
procedures and to ensure compliance with the securities laws and
regulations.

D. Summary of Amendments to Rule 17g-3 and Request for Comment

    The Commission is proposing these amendments to Rule 17g-3 under
its authority to require an NRSRO to ``make and disseminate such
reports as the Commission, by rule, may prescribe as necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of [the Exchange Act].'' \41\
The Commission preliminarily believes these proposed amendments are
necessary or appropriate in the public interest, for the protection of
investors and in furtherance of the Exchange Act because they are
designed to further improve the quality of credit ratings and help
protect the integrity of the credit rating process by requiring that an
NRSRO describe the steps taken during the fiscal year by the designated
compliance officer to administer required policies and procedures and
to ensure compliance with the securities laws and regulations.
---------------------------------------------------------------------------

    \41\ See Section 17(a)(1) of the Exchange Act (15 U.S.C.
78q(a)(1)).
---------------------------------------------------------------------------

    The Commission preliminarily believes that requiring the designated
compliance officer to provide such a report would encourage a more
rigorous compliance program and, thereby, promote the identification of
compliance failures and weaknesses in the NRSRO's policies and
procedures. In addition, the reporting requirements may encourage an
NRSRO to promptly resolve compliance issues identified, and thereby
improve the quality and integrity of the NRSRO's credit ratings and
credit rating processes.\42\
---------------------------------------------------------------------------

    \42\ The Commission notes that this information would only be
one of many factors the Commission's exam staff may use to determine
the particular focus of an exam.
---------------------------------------------------------------------------

    The proposed rule amendments also would further enhance the
Commission's oversight of NRSROs by providing the Commission staff an
additional resource with which to evaluate the performance of the
designated compliance officers in carrying out their statutory
responsibilities prescribed in Section 15E(j) of the Exchange Act.
Finally, the proposed report would help identify areas within the NRSRO
that Commission staff examiners may want to include within the scope of
their examinations and that could be indicative of potentially broader
issues across NRSROs.
    The Commission generally requests comment on all aspects of these
proposed amendments. In addition, the Commission requests comment on
the following questions related to the proposal:
     Should the proposal require that the report be furnished
to the NRSRO's board or a body performing similar functions of a board
or to the NRSRO's senior management in addition to requiring that it be
furnished to the Commission or as an alternative to it being furnished
to the Commission? Could the requirement to furnish the report to the
Commission alter the way the compliance officer conducts compliance
reviews or reports the results of those reviews to others within the
NRSRO? Would the requirement that it be furnished to the Commission
potentially impact the designated compliance officer's incentive to
perform a comprehensive and in depth review of the NRSRO's activities,
policies, and procedures or to identify material compliance matters?
Would requiring the report instead be sent to the board, to a similar
body, or to senior management result in a more or less comprehensive
review?
     Should the Commission require other items to be included
in the report in addition to those prescribed in proposed paragraph
(a)(7)(ii) of Rule 17g-3? Commenters believing this

would be beneficial should specifically identify the additional items
and describe how the additional information would be useful to the
Commission or to the NRSRO.
     Should the Commission exclude any of the items currently
identified in proposed paragraph (a)(7)(ii) of Rule 17g-3? Commenters
believing this would be beneficial should specifically identify the
items to be deleted and describe why they would not be useful
information for the Commission or the NRSRO?
     Should the Commission define the term ``material
compliance matter'' in Rule 17g-3? If so, what should the definition
be? Alternatively, is the interpretation of the term ``material
compliance matter'' set forth in the release sufficient and
appropriate? Should there be limitations on what constitutes a material
compliance matter? If so, what should these limitations be? For
example, are there securities laws violations that do not rise to the
level of concern that they would need to be reported? If so, should
such violations be reported if the number of occurrences passes a
certain threshold? How should the Commission evaluate what that
threshold would be (e.g. taking into account the number of occurrences
and the severity of the violation)?
     As noted above, the Commission has proposed an
interpretation of the category of person that would trigger the
reporting requirement if such person were apprised of the finding of
the compliance officer. Is the proposed interpretation sufficiently
clear to indicate when the reporting requirement applies? For example,
should the rule specify that it is a decision maker, someone with
authority to implement remedial measures, or some other defined
category of person? How should that category be defined?
     Should the Commission permit or require someone other than
the designated compliance officer certify the report? If so, which
person(s) should it be?
     To what extent, if any, should the designated compliance
officer be able to rely on subcertifications? What purpose would the
subcertifications serve? In some cases, would the designated compliance
office not have all the relevant information in order to sign the
statement required by proposed Rule 17g-3(b)(2) without
subcertifications? If this is true, would this in some way negate any
of the objectives of the proposed amendments to Rule 17g-3?
     What effect would the proposed requirement to furnish the
report to the Commission have on the designated compliance officer's
duties? How could any adverse effects be addressed?
     Should the Commission as an alternative to the proposed
report from the compliance officer consider proposing a requirement
that an independent third party perform a review of the NRSRO's
adherence to its policies and procedures and its compliance with the
securities laws. Commenters who believe such a requirement would be
appropriate are asked to provide data with respect to the costs and
benefits associated with such a review.

III. Amendments to the Instructions to Form NRSRO

    The Commission is proposing to amend the instructions for Exhibit 6
to Form NRSRO to require a credit rating agency in an application for
registration as an NRSRO or an NRSRO providing its annual update to
disclose: (1) The percentage of the net revenue of the applicant/NRSRO
attributable to the 20 largest users of credit rating services of the
applicant/NRSRO; and (2) the percentage of the net revenue of the
applicant/NRSRO attributable to other services and products of the
applicant/NRSRO. In conjunction with this proposed amendment to the
instructions to Exhibit 6, the Commission is proposing to move the
definitions of certain terms currently included in the instructions to
Exhibit 10 to the ``Explanation of Terms'' section of the Form NRSRO
Instructions in order to make those definitions applicable to Form
NRSRO as a whole.
    A credit rating agency that seeks to register as an NRSRO must
furnish an application for registration to the Commission. Section
15E(a)(1)(A) of the Exchange Act provides that the credit rating agency
must furnish the application in a form prescribed by Commission
rule.\43\ After registration, the credit rating agency--now an NRSRO--
must publicly disclose most of the information in its application.\44\
Section 15E(b)(1) of the Exchange Act requires the NRSRO to promptly
amend the application if, after registration, any information or
document provided as part of the application becomes materially
inaccurate.\45\ Section 15E(b)(2) of the Exchange Act provides that the
information on credit ratings performance statistics required to be
disclosed in the application pursuant to Section 15E(a)(1)(B) of the
Exchange Act must be updated annually.\46\ In addition, Section
15E(b)(2) of the Exchange Act requires an NRSRO to furnish the
Commission with an amendment to its registration not later than 90 days
after the end of each calendar year (the ``annual certification'').\47\
This section further provides that the NRSRO must (1) certify that the
information and documents provided in the application for registration
continue to be accurate and (2) list any material change to the
information and documents during the previous calendar year.\48\
---------------------------------------------------------------------------

    \43\ 15 U.S.C. 78o-7(a)(1)(A).
    \44\ 17 CFR 240.17g-1(i).
    \45\ 15 U.S.C. 78o-7(b)(1).
    \46\ Id.
    \47\ 15 U.S.C. 78o-7(b)(2).
    \48\ Id.
---------------------------------------------------------------------------

    With respect to the contents of the application, Section
15E(a)(1)(B) of the Exchange Act prescribes certain minimum information
the applicant must provide in the application. Furthermore, Section
15E(a)(1)(B)(x) of the Exchange Act provides that the Commission can
require any other information and documents as the Commission, by rule,
may prescribe as necessary or appropriate in the public interest or for
the protection of investors.\49\ In the Commission's initial rulemaking
implementing the Rating Agency Act--which established the registration
and oversight program for NRSROs--the Commission adopted Rule 17g-1 and
Form NRSRO and its accompanying instructions.\50\ In February 2009, the
Commission amended Form NRSRO to require additional disclosures.\51\
---------------------------------------------------------------------------

    \49\ 15 U.S.C. 78o-7(a)(1)(B).
    \50\ See June 2007 Adopting Release, 72 FR at 33566-33582.
    \51\ See February 2009 Adopting Release, 74 FR at 6457-6460.
---------------------------------------------------------------------------

    Rule 17g-1 prescribes, among other things, how a credit rating
agency must apply to be registered with the Commission as an NRSRO,
keep its information up-to-date after registration, and comply with the
statutory requirement to furnish the Commission with an annual
certification.\52\ In particular, all of these actions must be
accomplished by furnishing the Commission with a Form NRSRO. As
described below, Form NRSRO requires information about the credit
rating agency applying for registration and, after registration, about
the NRSRO, including the information required under 15E(a)(1)(B) of the
Exchange Act and additional information prescribed by the
Commission.\53\
---------------------------------------------------------------------------

    \52\ See 17 CFR 240.17g-1.
    \53\ 15 U.S.C. 78o-7(a)(1)(B).
---------------------------------------------------------------------------

    Form NRSRO contains 8 line items and 13 exhibits. The line items
require information about the applicant/NRSRO such as its address;
corporate form; credit rating affiliates that would be, or

are, a part of its registration; the classes of credit ratings for
which it is seeking to be, or is, registered as an NRSRO; the number of
credit ratings it has issued in each class and the date it began
issuing credit ratings in each class; and whether it or a person
associated with it has committed or omitted any act, been convicted of
any crime, or is subject to any order or findings identified in Section
15(d) of the Exchange Act.\54\
---------------------------------------------------------------------------

    \54\ 15 U.S.C. 78o(d).
---------------------------------------------------------------------------

    The 13 exhibits to Form NRSRO elicit the information required under
Sections 15E(a)(1)(B)(i) through (ix) of the Exchange Act and
additional information prescribed by the Commission.\55\ Exhibits 1
through 9 require certain information about the applicant/NRSRO,
including credit rating performance statistics, its methodologies and
procedures used to determine credit ratings, its policies and
procedures designed to prevent the misuse of material non-public
information, its organizational structure, its code of ethics, the
conflicts of interest inherent in its business operations, its policies
and procedures for managing those conflicts of interest, summary data
about the qualifications of its credit analysts, and the identity of
its chief compliance officer. An NRSRO must make Exhibits 1 through 9
publicly available after it is registered.
---------------------------------------------------------------------------

    \55\ 15 U.S.C. 78o-7(a)(1)(B)(i)-(x).
---------------------------------------------------------------------------

    Exhibits 10 through 13 require financial information about the
applicant credit rating agency that the Commission evaluates in
deciding whether it can make the finding required under Section
15E(a)(2)(C)(ii) of the Exchange Act \56\ that the applicant fails to
maintain adequate financial and managerial resources to consistently
produce credit ratings with integrity and to materially comply with the
procedures and methodologies disclosed pursuant to Section 15E(a)(1)(B)
of the Exchange Act \57\ and established pursuant Sections 15E(g), (h),
(i) and (j) of the Exchange Act.\58\ These Exhibits are not required to
be publicly disclosed by the NRSRO after the applicant is granted
registration as an NRSRO. If registration is granted, the NRSRO is
required to furnish financial information to the Commission in an
annual report required by Rule 17g-3 that is similar to the information
required in Exhibits 10 through 13.\59\ The rules do not require that
the annual reports furnished to the Commission pursuant to Rule 17g-3
be made publicly available by the NRSRO.\60\
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78o-7(a)(2)(C)(ii).
    \57\ 15 U.S.C. 78o-7(a)(1)(B).
    \58\ 15 U.S.C. 78o-7(g), (h), (i) and (j).
    \59\ See 17 CFR 240.17g-3 and 15 U.S.C. 78o-7(k).
    \60\ See Rule 17g-3 and 15 U.S.C. 78o-7(k); see also June 2007
Adopting Release, 72 FR at 33590.
---------------------------------------------------------------------------

    The Commission is proposing amending the instructions for Exhibit 6
to augment the information about conflicts of interest currently
required to be disclosed in Form NRSRO. The Commission prescribed the
current requirements for Exhibit 6 to implement Section
15E(a)(1)(B)(vi) of the Exchange Act, which requires that an
application for registration contain information regarding any conflict
of interest relating to the issuance of credit ratings by the
applicant/NRSRO.\61\ The Exchange Act does not define or identify the
types of conflicts of interest that should be disclosed pursuant to
Section 15E(a)(1)(B)(vi) of the Exchange Act.\62\ The Commission, in
adopting Form NRSRO and its accompanying instructions, required that an
applicant/NRSRO provide in Exhibit 6 a list of the types of conflicts
of interest relating to its issuance of credit ratings.\63\ To assist
the applicant/NRSRO and promote consistent disclosures, the
instructions to the Exhibit contain a list of potential conflicts of
interest that may apply to an applicant/NRSRO based on its business
model and activities.\64\ The instructions further provide that the
applicant/NRSRO can use the descriptions provided in the instructions
to identify an applicable conflict of interest.\65\ An applicant/NRSRO
also can choose to provide its own description of the conflict or
provide further explanations to one of the descriptions in the
instructions.\66\ Finally, Exhibit 6 to Form NRSRO is one of the public
exhibits that the NRSRO is required to make readily accessible to the
public and to keep current through furnishing updated information on
Form NRSRO.\67\
---------------------------------------------------------------------------

    \61\ See 15 U.S.C. 78o-7(a)(1)(B)(vi); June 2007 Adopting
Release, 72 FR at 33577.
    \62\ Id.
    \63\ See Form NRSRO Instructions for Exhibit 6.
    \64\ Id.
    \65\ Id.
    \66\ Id.
    \67\ See Form NRSRO General Instructions.
---------------------------------------------------------------------------

    One purpose of the disclosure in Exhibit 6 is to alert users of
credit ratings to the potential conflicts of interest inherent in the
NRSRO's business model.\68\ The information also is designed to allow
users of credit ratings to assess an NRSRO's procedures for managing
conflicts by comparing the types of conflicts disclosed in Exhibit 6
with its procedures for managing conflicts of interest disclosed in
Exhibit 7.\69\
    The disclosure also is designed to assist the Commission in
evaluating whether an NRSRO has sufficient financial and managerial
resources to comply with the procedures for managing conflicts of
interest required under Section 15E(h) of the Exchange Act.\70\ Being
informed of the conflicts of interest identified by the applicant/NRSRO
in Exhibit 6 to Form NRSRO assists the Commission in evaluating whether
the disclosed financial and managerial resources of the NRSRO appear to
be sufficient in light of the magnitude and extent of any
conflicts.\71\
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    \68\ See June 2007 Adopting Release, 72 FR at 33577.
    \69\ Id.
    \70\ 15 U.S.C. 78o-7(h).
    \71\ See Section 15E(a)(2)(C) of the Exchange Act (15 U.S.C.
780-7(a)(2)(C)); June 2007 Adopting Release, 72 FR at 33577.
---------------------------------------------------------------------------

    The Commission is proposing to amend Exhibit 6 to require an
applicant/NRSRO to disclose information regarding the revenues it
receives from major clients as well as the revenues attributable to
services other than determining credit ratings. The proposed new
disclosure is designed to assist users of NRSRO credit ratings in
assessing the conflicts of interest, including the potential magnitude
of such conflicts, inherent in a given NRSRO's business operations. In
particular, an NRSRO's disclosure of information about revenues
received from major clients and revenues attributable to other services
provided to clients would allow users of credit ratings to have more
information about the dimensions of the conflict arising from NRSROs
being paid to determine credit ratings as well as the conflict of
offering other services to persons who pay for credit ratings. It would
also provide investors and other users of credit ratings more specific
information about the extent to which NRSRO revenues are from a
concentrated group of clients. Users of NRSRO credit ratings could then
use this information to evaluate the integrity of the credit ratings
issued by the NRSRO and whether they believe the NRSRO is effectively
managing these conflicts of interests. Also, an NRSRO's disclosure of
this information in Exhibit 6 to Form NRSRO would allow users of credit
ratings to ascertain the types and dimensions of a given NRSRO's
conflicts of interest. The ready availability of this information in a
single location would facilitate the evaluation by users of credit
ratings of the probability that the conflicts of interest could
adversely impact the integrity of the NRSRO's credit ratings

and credit rating processes. Users of credit ratings could then judge
for themselves whether they believe that certain conflicts of interests
are adversely impacting the integrity of an NRSRO's credit ratings and
credit ratings processes based on their evaluation of the information
disclosed in Exhibit 6.
    Because the proposed amendment would require that the information
be provided as part of the application to register as an NRSRO, the
Commission would be able to review the disclosures before they would be
required to be made public (ten business days after the credit rating
agency is granted registration).\72\ The information also would assist
the Commission in evaluating whether an applicant has sufficient
financial and managerial resources to comply \73\ with the procedures
for managing conflicts of interest required under Section 15E(h) of the
Exchange Act after consideration of the conflicts of interest
identified by the applicant, including the magnitude of such
conflicts.\74\
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    \72\ See 17 CFR 240.17g-1(i).
    \73\ 15 U.S.C. 78o-7(h).
    \74\ See Section 15E(a)(2)(C) Exchange Act (15 U.S.C. 78o-
7(a)(2)(C)).
---------------------------------------------------------------------------

    The Commission proposes dividing Exhibit 6 into a Part A and a Part
B. Part A would require an applicant/NRSRO to provide the information
on conflicts of interest currently required to be disclosed by Exhibit
6. Part B would require an applicant/NRSRO to provide new disclosures
relating to revenues from its most recently ended fiscal year. In
particular, Part B to Exhibit 6 would require an applicant/NRSRO to
provide the following disclosures, as applicable:
     The percentage of the applicant/NRSRO's net revenue
attributable to the 20 largest users of credit rating services of the
applicant/NRSRO; and
     The percentage of the applicant/NRSRO's revenue
attributable to services and products other than credit rating services
of the applicant/NRSRO.
    To perform the calculations to determine these disclosures, the
applicant/NRSRO would be required to use the definitions of ``net
revenue'' and ``credit rating services'' currently specified in Exhibit
10 to Form NRSRO.\75\ The Commission is proposing to move these
definitions from the instructions to Exhibit 10 to the ``Explanation of
Terms'' section of the Form NRSRO Instructions in order to make them
applicable to Form NRSRO as a whole, including the proposed amendment
to Exhibit 6. The Commission does not propose otherwise altering those
definitions. The Commission believes that it is appropriate to place
these definitions in the Explanation of Terms section of the Form NRSRO
Instructions because, in addition to the NRSROs being familiar with
these definitions, the definitions are appropriate in light of the
disclosure objectives of the proposed rule.\76\ Finally, the Commission
notes that using the same terms throughout the Form NRSRO Instructions
would promote consistency for comparison purposes with respect to the
financial information the applicant/NRSRO furnishes to the Commission.
---------------------------------------------------------------------------

    \75\ See Form NRSRO Instructions for Exhibit 10. The same
definitions also are used in Rule 17g-3 for purposes of calculating
the list of largest users of credit ratings to be furnished in an
NRSRO's annual financial report to the Commission. See 17 CFR
240.17g-3(a)(5) and accompanying note.
    \76\ See June 2007 Adopting Release, 72 FR at 33580-33581.
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    As defined in the instructions to Exhibit 10 of Form NRSRO, the
term ``net revenue'' means revenue earned by the applicant or NRSRO for
any type of service or product, regardless of whether related to credit
rating services, and net of any rebates and allowances paid or owed to
the person by the applicant or NRSRO.\77\ The Commission explained in
the June 2007 Adopting Release that this definition excludes revenues
received by affiliates that are not part of the credit rating
organization.\78\ Also, the intent in defining ``net revenues'' as
payables net of any ``rebates or allowances'' was to limit the
allowable offsets that reduce net revenue to items that directly reduce
a payable on the revenue side and to exclude unrelated payables (e.g.,
payables for utility bills).\79\ Finally, by using the term ``revenue
earned'' the Commission stated that the applicant/NRSRO must apply its
standard accounting convention for recognizing revenue as this will
make revenue calculations consistent across the various financial
reports required in Form NRSRO and Rule 17g-3.\80\ As discussed above,
the Commission is proposing to move the definition of ``net revenue''
from the instructions to Exhibit 10 of Form NRSRO to the ``Explanation
of Terms'' section of the Form NRSRO Instructions, making the
definition applicable to Form NRSRO as a whole, including the proposed
amendments to Exhibit 6.
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    \77\ See Form NRSRO Instructions for Exhibit 10.
    \78\ See June 2007 Adopting Release, 72 FR at 33580-33581.
    \79\ Id.
    \80\ Id.
---------------------------------------------------------------------------

    As defined in the instructions to Exhibit 10 of Form NRSRO, the
term ``credit rating services'' means any of the following: rating an
obligor (regardless of whether the obligor or any other person paid for
the credit rating); rating an issuer's securities or money market
instruments (regardless of whether the issuer, underwriter, or any
other person paid for the credit rating); and providing credit ratings,
credit ratings data, or credit ratings analysis to a subscriber.\81\
The Commission explained in the June 2007 Adopting Release that this
definition includes--along with persons that pay for credit ratings and
subscriptions--persons that are rated, or whose securities or money
market instruments are rated, but that did not pay for the credit
rating.\82\ Even though these persons may not have paid for the credit
rating, they potentially could have undue influence on the credit
rating agency if they provide substantial net revenue for other
services or products.\83\ The Commission preliminarily believes that it
is appropriate to include these persons within the definition to the
proposed amendment to Exhibit 6 to Form NRSRO. By applying the same
definitions, the proposed calculations in Exhibit 6 to Form NRSRO would
continue to be consistent across the various financial reports required
in Form NRSRO and Rule 17g-3. Also, as explained in the June 2007
Adopting Release, the term ``subscribers'' in the definition of ``net
revenue'' was intended to include persons who pay for credit ratings
data and the analysis behind credit ratings because it may be difficult
to separate these subscribers from other subscribers.\84\ As the
Commission has previously noted, credit rating agencies that make their
credit ratings publicly available for free sometimes offer
subscriptions to receive feeds of the credit ratings or to receive
reports detailing the analysis behind the credit ratings.\85\ The
Commission is proposing to move the definition of ``credit rating
services'' from the instructions to Exhibit 10 of Form NRSRO to the
``Explanation of Terms'' section of the Form NRSRO Instructions, making
the definition applicable to Form NRSRO as a whole, including the
proposed amendments to Exhibit 6.
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    \81\ See Form NRSRO Instructions for Exhibit 10.
    \82\ See June 2007 Adopting Release, 72 FR at 33580-33581.
    \83\ Id.
    \84\ Id.
    \85\ Id.
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    As noted above, under proposed amendments to the Instructions to
Exhibit 6, the applicant/NRSRO would need to make two new types of
disclosures. The first proposed new disclosure in Exhibit 6 would
require

that an applicant/NRSRO disclose the percentage of net revenue
attributable to the 20 largest users of credit rating services of the
applicant/NRSRO. The proposed instructions further provide that the
applicant/NRSRO would be required to calculate this ratio by dividing
the amount of net revenue earned by the applicant/NRSRO attributable
the 20 largest users of credit rating services by the total amount of
the four classifications of revenue of the applicant as reported in
Exhibit 12 to Form NRSRO or in the financial report furnished to the
Commission under Exchange Act Rule 17g-3(a)(4).\86\ As noted above,
Exhibit 12 and Rule 17g-3(a)(4) currently elicit information regarding:
(1) Revenue from determining and maintaining credit ratings; (2)
revenue from subscribers; (3) revenue from granting licenses or rights
to publish credit ratings; and (4) revenue from all other services and
products offered by the applicant/NRSRO.\87\ The proposed disclosures
would be calculated annually, as of the end of the fiscal year of the
applicant/NRSRO.
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    \86\ See Form NRSRO Instructions for Exhibit 12 and 17 CFR
240.17g-3(a)(4).
    \87\ Id. The Commission intends that an applicant/NRSRO apply
its standard accounting convention for recognizing revenue to make
revenue calculations consistent across the various financial reports
required in Form NRSRO and Rule 17g-3. The Commission notes it is
proposing to use the terms revenue and net revenue as originally
adopted by the Commission.
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    The Commission preliminarily believes that the proposed disclosure
of the percentage of net revenue attributable to the 20 largest users
of credit rating services of the applicant/NRSRO would provide
investors and other users of credit rating services with useful
disclosure, as explained below, related to a significant sample of the
largest users of credit rating services of the applicant/NRSRO. The
Commission preliminarily believes this proposed new disclosure would
assist investors and other users of credit ratings by providing them
with information concerning the degree to which revenues earned by the
NRSRO come from a concentrated base of customers. This could be useful
in understanding the conflicts inherent in the NRSRO's business.
Specifically, a large percentage of revenues attributable to a
concentrated group of clients could increase the potential risk that
those clients' contribution to the NRSRO's revenues could influence the
objectivity of its credit ratings. Making the degree of this
concentration more transparent in Exhibit 6 to Form NRSRO would allow
investors and market participants to take this potential risk into
account when considering the reliability of the NRSRO's credit ratings.
The proposed new disclosures also would assist users of credit ratings
in comparing concentration of revenues across all NRSROs.
    The second proposed new disclosure in Exhibit 6 to Form NRSRO would
require the applicant/NRSRO to disclose the percentage of revenue
attributable to other services and products of the applicant/NRSRO. The
proposed instructions to Exhibit 6 would provide that the applicant/
NRSRO must calculate this ratio by dividing the total amount of revenue
earned by the applicant for ``all other services and products'' as
reported in Exhibit 12 to Form NRSRO or as reported in the annual
financial report furnished to the Commission under Exchange Act Rule
17g-3(a)(4) by the total amount of the four classifications of revenue
of the applicant as reported in Exhibit 12 or of the NRSRO as reported
in the financial report furnished pursuant to 17g-3(a)(4). As noted
above, Exhibit 12 and Rule 17g-3(a)(4) elicit the same information
about revenues.\88\
---------------------------------------------------------------------------

    \88\ See Form NRSRO Instructions for Exhibit 12 and 17 CFR
240.17g-3(a)(4).
---------------------------------------------------------------------------

    The Commission preliminarily believes this information would be
useful to investors and other users of credit ratings because it would
provide information about the relative size of revenues an NRSRO earns
from providing services other than credit ratings. There is the
potential that an NRSRO that obtains substantial revenues from other
services might be inclined to favor a client that purchases those other
services when determining credit ratings solicited by that client.
Consequently, creating greater transparency about the revenues
generated from other services could provide increased information to
assist investors and other users of credit ratings in assessing the
potential risks to the NRSRO's objectivity.
    With respect to the two proposed new disclosures, the proposed
amended instructions to Form NRSRO would provide that an applicant must
provide the information for the fiscal year ending immediately before
the date of the applicant's initial application to the Commission. The
Commission is proposing this timeframe as it is consistent with the
current instructions for the financial information elicited in Exhibits
10, 12, and 13.\89\
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    \89\ Exhibit 11 requires financial statements for the three
calendar or fiscal years ending immediately before the date of the
application. This proposed timeframe also is consistent with the
requirements for the reports required to be published by NRSROs in
Rule 17g-3(a). 17 CFR 240.17g-3(a).
---------------------------------------------------------------------------

    Further, after registration, an NRSRO would be required to provide
the proposed information as of the end of its most recent fiscal year.
As such, the Commission is proposing amendments to the Instructions to
Exhibit 6 to provide that after registration, an NRSRO with a fiscal
year end of December 31 must update the information in Exhibit 6, Part
B, as part of its annual certification. Rule 17g-1(f) requires an NRSRO
to furnish the annual certification no later than 90 days after the
calendar year.\90\ This also is the time frame for NRSROs with December
31 fiscal year-ends to furnish their annual financial reports required
pursuant to Rule 17g-3.\91\ Moreover, the information furnished in the
annual reports would be needed to generate the proposed Exhibit 6
disclosures.
---------------------------------------------------------------------------

    \90\ 17 CFR 240.17g-1(f).
    \91\ 17 CFR 240.17g-3.
---------------------------------------------------------------------------

    Further, the proposed instructions would require that an NRSRO with
a fiscal year end that is not December 31 must provide this information
with an Update of Registration no later than 90 days after the end of
each fiscal year. These provisions would require the disclosure within
90 days of the closing of an NRSRO's books regardless of whether the
year-end is December 31 or some other date. This also is the time frame
for NRSROs to furnish their annual financial reports required pursuant
to Rule 17g-3.\92\
---------------------------------------------------------------------------

    \92\ 17 CFR 240.17g-3.
---------------------------------------------------------------------------

    The Commission is proposing these amendments to Exhibit 6 to Form
NRSRO to further implement Section 15E(a)(1)(B)(vi) of the Exchange
Act, which requires that an application for registration as an NRSRO
contain information regarding any conflict of interest relating to the
issuance of credit ratings by the applicant and NRSRO.\93\ It also is
proposing the amendments, in part, pursuant to Section 15E(a)(1)(B)(x)
of the Exchange Act, which provides that the Commission can require any
other information and documents as the Commission by rule, may
prescribe as necessary or appropriate in the public interest or for the
protection of investors.\94\ The proposed disclosures are designed to
increase transparency regarding sources of revenue that might create
conflicts of interest for an NRSRO, and, thereby, allow investors and
users of credit ratings to better assess these potential conflicts of
interest that could influence an NRSRO's objectivity in determining
credit ratings. Finally, the proposed amendments are designed to
enhance

the disclosures already made by NRSROs in Exhibit 6 to Form NRSRO and
to provide users of credit ratings with tools to compare concentrations
of revenues across all NRSROs. The proposed additional disclosures
would provide more detail about an NRSRO's conflicts of interest, and
thereby, allow users of credit ratings to better evaluate the potential
risk that an NRSRO's credit ratings could be compromised.
---------------------------------------------------------------------------

    \93\ 15 U.S.C. 78o-7(a)(1)(B)(vi).
    \94\ 15 U.S.C. 78o-7(a)(1)(B).
---------------------------------------------------------------------------

    The Commission generally requests comment on all aspects of these
proposed amendments. In addition, the Commission requests comment on
the following questions related to the proposal.
     Should the proposed disclosure of information about the
percentage of revenues attributable to the 20 largest clients use a
different number of clients? For example, should it be a lesser number
such as the 5, 10, or 15 largest clients or a larger number such as the
25, 30, or 35 largest clients?
     Are the revenues attributable to the 20 largest clients an
appropriate proxy for an NRSRO's ``major clients?'' Might there be
notable differences between the percentage of revenue attributable to
the largest client and the percentage of revenue attributable to, say,
the twentieth largest client?
     Would including revenue earned by persons directly or
indirectly controlling, controlled by, or under common control with,
the NRSRO (i.e., affiliates) in calculating revenues attributable to
the 20 largest clients, be useful information for investors and other
users of credit ratings?
     Should the proposed disclosure of information about the
percentage of revenues derived from services other than determining
credit ratings be expanded to include revenues earned by persons
directly or indirectly controlling, controlled by, or under common
control with, the NRSRO (i.e., affiliates)? If so, would it be useful
for investors and other users of credit ratings to have this
information?
     If the term affiliate was added to the proposed
disclosures in Exhibit 6 to Form NRSRO, should the Commission define
the term affiliate? For example, if an NRSRO controlled less than 51%
of an entity, should the entity be considered an affiliate? If a
natural person controlled or owned an NRSRO, should other entities the
individual owns or controls be considered affiliates of the NRSRO for
purposes of the proposed rule?
     For the purposes of calculating the percentage of net
revenue attributable to the 20 largest users of credit rating services
of the applicant/NRSRO in Exhibit 6 to Form NRSRO, should the
Commission only count ``users'' to be persons who paid for the service?
For example, if the payer of a rating is the underwriter, should the
Commission also attribute the payment to the issuer in calculating the
percentage of net revenue to the NRSRO for the purpose of showing how
much of the NRSRO's revenue is being earned from rating this particular
issuer's securities? Similarly, if the payer of the rating is an
issuer, should the Commission also attribute the payment to the
underwriter in the calculation for purposes of highlighting whether
this particular underwriter is a frequent or dominant underwriter that
is involved in many deals rated by that NRSRO?
     Would the proposed rule give investors and other users of
credit ratings sufficient information to assess the potential risk to
objectivity? If not, is there other information that would be useful
for this purpose?
     Is it appropriate to use existing definitions of ``net
revenue'' and ``credit rating services?''
     Do any other NRSRO services lend themselves more to
potential conflicts of interest that could influence the quality of the
rating?
     Will the proposed rule generate additional information
that is useful to users of NRSRO credit ratings?
     Is Exhibit 6 of Form NRSRO the most practical place for an
NRSRO to make the proposed additional disclosures? Are there
alternative places where an NRSRO could make these proposed disclosures
that would be more useful to an investor or other users of an NRSRO's
credit ratings? For example, would it be more useful for investors or
other users of credit ratings if the proposed amendments to Exhibit 6
to Form NRSRO were disclosed along with the information required in the
new Rule 17g-7?
     Is the most recent fiscal year an appropriate timeframe
for the proposed disclosure? If not, what should it be? For example,
would it be more appropriate to use the three, five or ten most
recently ended fiscal years to provide a trend analysis?

IV. New Rule 17g-7--Credit Rating Reports on Revenues

    As discussed in detail in Section VI below, at this time the
Commission has determined to defer consideration of action with respect
to the proposal, set forth in the June 2008 Proposing Release, that
would have required an NRSRO to publish a report each time the NRSRO
published a credit rating for a structured finance product. Under that
proposal, an NRSRO would have been required to disclose in the report
how the credit ratings procedures and methodologies and credit risk
characteristics for structured finance products differ from those of
other types of rated instruments such as corporate and municipal debt
securities. As an alternative to publishing the report, an NRSRO would
have been allowed to use ratings symbols for structured finance
products that differentiated them from the credit ratings for other
types of debt securities.\95\
---------------------------------------------------------------------------

    \95\ See June 2008 Proposing Release, 73 FR, at 36235. The
Commission proposed codifying these requirements in the Code of
Federal Regulations (``CFR'') as Rule 17g-7, which would follow
existing Rule 17g-6. As discussed in this section, the Commission is
today proposing that a different rule be codified as Rule 17g-7 in
the CFR. The Commission is proposing to use the title ``Rule 17g-7''
for this proposed new rule in order to maintain the numerical
sequence of the current NRSROs rules--Rules 17g-1 through 17g-6.
---------------------------------------------------------------------------

    Today, the Commission is proposing a new Rule 17g-7.\96\ This new
rule would require an NRSRO to make publicly available on its Internet
Web site a consolidated report containing information about the
revenues earned by the NRSRO and, if applicable, its affiliates as a
result of providing services and products to persons that paid the
NRSRO to issue or maintain a credit rating. This report would need to
be updated annually.
---------------------------------------------------------------------------

    \96\ Id.
---------------------------------------------------------------------------

    Specifically, proposed Rule 17g-7 consists of three paragraphs:
(a), (b), and (c). As described in more detail below, proposed
paragraph (a)(1) would require the NRSRO to include in the report: (1)
The percent of the net revenue attributable to the person that paid the
NRSRO that were earned by the NRSRO during the most recently ended
fiscal year from providing services and products other than credit
rating services to the person; (2) the relative standing of the person
in terms of the person's contribution to the NRSRO's net revenue as
compared with other persons that contributed to the NRSRO's net
revenues; and (3) the identity of all outstanding credit ratings issued
by the NRSRO and paid for by the person. Paragraph (a)(2) of proposed
Rule 17g-7 would exempt an NRSRO from publishing the reports if, as of
the end of the fiscal year, the NRSRO had no credit ratings outstanding
that the NRSRO issued or maintained as a result of a person paying the
NRSRO for the issuance or maintenance of the credit ratings. Paragraph
(b) of proposed Rule 17g-7 would provide that the NRSRO must
prominently include a generic disclosure statement each time the NRSRO
publishes a credit rating or credit ratings indicating where on its
Internet Web site the consolidated

report required pursuant to paragraph (a) is located. Paragraph (c) of
proposed Rule 17g-7 would contain definitions applicable to the
section. Specifically, paragraph (c)(1) would define the term ``credit
rating services'' and paragraph (c)(2) would define the term ``net
revenue.''
    The purpose of this proposed rule is to provide users of credit
ratings with information to assist them in evaluating the potential
risk to the integrity of a credit rating that arises from the conflict
inherent when an NRSRO is paid to determine a credit rating for a
specific obligor, security, or money market instrument. Specifically,
the risk that the revenue generated from the person soliciting the
NRSRO to determine the credit rating could compromise the NRSRO's
objectivity and cause the NRSRO to determine a higher credit rating
than it otherwise would have determined. Under such circumstances, the
credit rating may not accurately reflect the NRSRO's true view of the
level of credit risk inherent in the obligor, security, or money market
instrument being rated. Providing users of credit ratings with the
information in this consolidated report would enable them to better
assess the degree that a particular credit rating may be subject to
this risk.
    The increased transparency resulting from the proposed rule also
could have the ancillary benefit of helping to mitigate the possibility
that a large consumer of the services and products of the NRSRO and its
affiliates could successfully use its status to exercise undue
influence on the NRSRO. Specifically, by making the potential conflict
more transparent to the marketplace, the proposed rule could assist
users of credit ratings, market participants, and others in evaluating
how credit ratings solicited by large revenue providers are handled by
the NRSRO.

A. Proposed Paragraph (a) of Rule 17g-7

    Paragraph (a)(1) of proposed Rule 17g-7 would provide that an NRSRO
must annually, not later than 90 calendar days after the end of its
fiscal year (as indicated on its current Form NRSRO) make publicly
available on its Internet Web site a consolidated report that shows,
with respect to each person that paid the NRSRO to issue or maintain a
credit rating that was outstanding as of the end of the fiscal year,
information about the person as described in proposed paragraph
(a)(1)(i)-(a)(1)(iii) of proposed Rule 17g-7.
    Paragraph (a)(1)(i) of proposed Rule 17g-7 would require an NRSRO
to show the percent of the net revenue attributable to the person
earned by the NRSRO for the fiscal year from providing services and
products other than credit rating services to the person. Paragraph
(c)(1) of proposed Rule 17g-7 would define ``credit rating services''
to mean any of the following: ``Rating an obligor (regardless of
whether the obligor or any other person paid for the credit rating);
rating an issuer's securities or money market instruments (regardless
of whether the issuer, underwriter, or any other person paid for the
credit rating); and providing credit ratings, credit ratings data, or
credit ratings analysis to a subscriber.'' This is the current
definition of ``credit rating services'' contained in the instructions
for Exhibit 10 to Form NRSRO.\97\
---------------------------------------------------------------------------

    \97\ See Form NRSRO Instructions for Exhibit 10.
---------------------------------------------------------------------------

    Paragraph (c)(2) of proposed Rule 17g-7 would define the term ``net
revenue'' to mean ``revenue earned for any type of service or product
provided to a person, regardless of whether related to credit rating
services, and net of any rebates and allowances paid or owed to the
person.'' This definition mirrors the definition of ``net revenue'' in
the instructions to Exhibit 10 to Form NRSRO and in Rule 17g-3. This
information about the person set forth in proposed Rule 17g-3(a)(1)(i)
is required to be made publicly available in the consolidated report
posted on the NRSRO's Internet Web site and is designed to benefit
users of credit ratings by alerting them to the potential risk that the
revenues earned by the NRSRO could influence the objectivity of the
NRSRO in determining credit ratings paid for by the person.
    The method of calculating net revenue would be the same for the
requirements in Form NRSRO (existing and proposed herein), Rule 17g-3,
and proposed Rule 17g-7. Consequently, just as with the existing
definitions in Form NRSRO and Rule 17g-3, the inclusion in the proposed
Rule 17g-7 definition of revenues net of ``rebates or allowances'' is
intended to limit offsets that reduce net revenue to items that
directly reduce a payable on the revenue side and to exclude unrelated
payables (e.g., payables for utility bills). In other words, the
definition of ``net revenues'' is intended to be the same as used in
Form NRSRO and Rule 17g-3 in all respects.
    To generate the information on revenues earned by the NRSRO from
providing services other than credit rating services to the person that
paid for the issuance or maintenance of a credit rating, the NRSRO
would be required to undertake a number of steps, as described below,
no later than 90 calendar days after the end of its fiscal year or
prior to its registration as an NRSRO. These steps would be based on
the NRSRO's results for the most recently ended fiscal year, consistent
with other information disclosed on Form NRSRO or furnished to the
Commission under Rule 17g-3. In particular, under paragraph (a)(3)(i)
of proposed Rule 17g-7, the NRSRO would be required to take the
following steps, respectively, within 90 days of closing its books or
before its registration as an NRSRO:
     Calculate the net revenue attributable to the person
earned by the NRSRO for the fiscal year from providing services and
products other than credit rating services to the person;
     Calculate the net revenue attributable to the person
earned by the NRSRO for the fiscal year from providing all services and
products, including credit rating services, to the person; and
     Divide the amount calculated pursuant to paragraph
(a)(3)(i)(A) by the amount calculated pursuant to paragraph
(a)(3)(i)(B) and convert that quotient to a percent.
    These steps would generate the information the NRSRO would use in
the report on the percent of revenues attributable to providing non-
credit rating services to a person that paid the NRSRO for the issuance
or maintenance of a credit rating. The following is an example of how
the information would be generated for purposes of the proposed report
with respect to a hypothetical NRSRO, ABC Credit Rating Agency, and a
consumer of ABC Credit Rating Agency's services and products, XYZ Corp.
For the purposes of the first step, prescribed in paragraph
(a)(3)(i)(A) of proposed Rule 17g-7, assume ABC Credit Rating Agency
earned gross revenues of $220,000 from providing services other than
credit rating services to XYZ Corp. Assume further that ABC Credit
Rating Agency agreed to rebate $20,000 of that amount back to XYZ Corp.
because it exceeded $100,000. In this case the net revenue attributable
to providing services other than credit rating services to XYZ Corp.
would be $200,000.
    Next, for the purposes of the second step, prescribed in paragraph
(a)(3)(1)(B) of proposed Rule 17g-7, assume ABC Credit Rating Agency
earned gross revenues of $1,100,000 from providing all services to XYZ
Corp. Assume further that ABC Credit Rating Agency agreed to rebate
$100,000 of that amount

back to XYZ Corp because it exceeded $100,000. In this case the net
revenue attributable to providing all services and products to XYZ
Corp. would be $1,000,000.
    The next step, prescribed in paragraph (a)(3)(i)(C) of proposed
Rule 17g-7, would be for ABC Credit Rating Agency to divide $200,000 by
$1,000,000 to calculate the percent of the total revenues earned from
providing all services to XYZ Corp. attributable to providing services
other than credit rating services. Under the hypothetical, this
calculation would yield a figure of 20%. Consequently, for purposes of
the consolidated report, the NRSRO would need to indicate that 20% of
the net revenues earned from providing services to XYZ Corp. was for
services other than credit rating services.
    Paragraph (a)(1)(ii) of proposed Rule 17g-7 would require an NRSRO
to indicate in the consolidated report to be made publicly available on
its Internet Web site the relative standing of the person that paid the
NRSRO to issue or maintain a credit rating in terms of the amount of
net revenue earned by the NRSRO attributable to the person as compared
to other persons that provided the NRSRO net revenues. To compute this
information, the NRSRO would need to take the following steps not more
than 90 calendar days after the end of each fiscal year:
     For each person from whom the NRSRO earned net revenue
during the fiscal year, calculate the net revenue attributable to the
person earned by the NRSRO for the fiscal year from providing all
services and products, including credit rating services, to the person;
     Make a list that sorts the persons subject to the
calculation above in order from largest to smallest in terms of the
amount of net revenue attributable to the person, as determined
pursuant to that calculation; and
     Divide the list generated above into the following
categories: top 10%, top 25%, top 50%, bottom 50%, and bottom 25% and
determine which category contains the person.
    These steps would generate the information to indicate the relative
standing of each person that paid the NRSRO to issue or maintain a
credit rating that was outstanding as of the fiscal year end. The
Commission preliminarily believes that the proposed categories (top
10%, top 25%, top 50%, bottom 50%, and bottom 25%) would be helpful to
investors or other users of credit ratings because the rankings provide
insight into customers that--given the level of revenues they provide
to the firm--may be able to exercise greater undue influence.
    This calculation would be performed as follows. Assume the NRSRO
earned revenues from 1,000 clients during the most recently ended
fiscal year. Moreover, assume that the greatest amount of net revenue
derived from a client was $2,500,000 and that the 100th largest amount
of net revenue derived from a client was $900,000. In this case, using
hypothetical above, XYZ Corp.--from which the NRSRO derived $1,000,000
in net revenue--would rank somewhere between the largest and 100th
largest clients of the NRSRO. Consequently, because there are 1,000
clients total, XYZ Corp. would need to be classified in the
consolidated report as being in the top 10% of the persons that
provided the NRSRO with net revenue in terms of the amount of net
revenue.
    Paragraph (a)(1)(iii) of proposed Rule 17g-7 would require an NRSRO
to identify for each person listed in the consolidated report all
outstanding credit ratings paid for by that person, which the NRSRO
would need to determine in accordance with proposed paragraph
(a)(3)(iii) of Rule 17g-7. Specifically, the NRSRO would need to
identify by name of obligor, security, or money market instrument and,
as applicable, CIK number, CUSIP, or ISIN each outstanding credit
rating generated as a result of the person paying the NRSRO for the
issuance or maintenance of the credit rating and attribute the
outstanding credit rating to the person. For example, assume XYZ Corp.
had paid the NRSRO to issue and maintain credit ratings for three
different classes of debt instruments issued by XYZ Corp. and there
were credit ratings outstanding for each of these classes of debt
instruments as of the end of the NRSRO's fiscal year. In this case,
each of these debt instruments would need to be identified by name and
CUSIP number and associated with XYZ Corp. on the consolidated report.
    Proposed paragraph (a)(2) of Rule 17g-7 would provide an exemption
to the requirement to generate the consolidated report or to include
with the publication of a credit rating the statement required by
paragraph (b) of proposed Rule 17g-7 (discussed below) if, as of the
end of the fiscal year, there were no credit ratings of the NRSRO
outstanding that were issued or maintained as a result of a person
paying the NRSRO for the issuance or maintenance of the credit rating.
For example, a subscriber-paid NRSRO may be exempt from the
requirements of the proposed rule if it is not paid by obligors,
issuers, underwriters or investors to issue or maintain specific credit
ratings. This would mean that a subscriber-paid NRSRO would not need to
generate the report or make the generic statement, provided it only was
paid by subscribers to access its credit ratings. However, it would
need to generate the report if it was paid, for example, by an investor
to issue or maintain a credit rating on a specific debt instrument.

B. Proposed Paragraph (b) of Rule 17g-7

    Proposed paragraph (b) of Rule 17g-7 would provide that an NRSRO
must prominently include a statement that identifies where on its
Internet Web site the consolidated report required pursuant to
paragraph (a)(1) is located each time the NRSRO publishes a credit
rating or credit ratings in a research report, press release,
announcement, database, Internet Web site page, compendium, or any
other written communication that makes the credit rating publicly
available for free or a reasonable fee. Specifically, the NRSRO would
need to include the following statement: ``Revenue information about
persons that paid the nationally statistical rating organization for
the issuance or maintenance of a credit rating is available at: [Insert
address to Internet Web site].'' The proposed statement is intended to
be generic and, thereby, to minimize the burden of including it when a
credit rating (or credit ratings) is published. The proposal is
designed to simply alert users of credit ratings and others where they
can locate the consolidated report containing information about persons
who paid the NRSRO to issue or maintain a credit rating. This would
allow the users of credit ratings and others accessing the consolidated
report to research the persons who had paid the NRSRO for credit
ratings outstanding as of the fiscal year end. The researchers could
review the amount of net revenue earned by the NRSRO attributable to
providing services other than credit ratings to persons who paid for
specific credit ratings, the relative standing of the persons who paid
for the credit ratings in terms of providing net revenue to the NRSRO,
and the credit ratings that the persons paid the NRSRO to issue or
maintain.

C. Conclusion

    The Commission is proposing these amendments under authority to
require an NRSRO to ``make and disseminate such reports as the
Commission, by rule, prescribes as necessary or appropriate in the
public interest, for the protection of

investors, or otherwise in furtherance of the purposes of [the Exchange
Act].'' The Commission preliminarily believes these proposed amendments
are necessary and appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the purposes of
the Exchange Act for the reasons stated above and because they are
designed to provide investors and other users of credit ratings with
information to assess the degree of risk that a credit rating may be
compromised by the undue influence of the person that paid for the
issuance or maintenance of the credit rating.

D. Request for Comment

    The Commission generally requests comment on all aspects of this
proposed new rule. In addition, the Commission requests comment on the
following questions related to the proposal.
     Are the classifications in terms of revenue provided to
the NRSRO (top 10%, top 25%, top 50%, bottom 50% or bottom 25%)
proposed in new Rule 17g-7 appropriate? How uniform are the potential
conflicts of interest with respect to the clients within these
categories? Should there be more or less classifications? What should
they be? Should the classifications be defined differently, such as on
the size of the client, the total revenue, the types of other services
provided to the clients?
     How would investors and other users of credit rating
ratings use this information?
     Given the potential heterogeneity among clients in a
particular tier, how similar is the risk of a potential conflict of
interest with regard to clients within a given tier?
     Is being in a top-tier classification likely to create an
undue concern that suggests to investors that a rating is conflicted,
even if it is not? To the extent a negative connotation exists when an
issuer is in a top percentile, what risk, if any, exists that clients
will seek out those NRSROs for which their revenue contribution is less
significant? Does such behavior risk disproportionately impact smaller
NRSROs? If so, how? If not, why not? What other potential behavioral
changes might the disclosure induce?
     To what extent is the information in these reports already
observable? Can someone look at the information on rated bonds to
determine who an NRSRO's biggest clients are? Is there overlap between
the biggest clients for rating services and the biggest overall clients
of an NRSRO?
     Are there any potential unintended consequences of the
proposed disclosures?
     Is 90 days after the end of the fiscal year sufficient
time for an NRSRO to generate the information to be used for the next
twelve-month period?
     Would more frequent updates of the required information
provide more meaningful information to investors? Would the cost of
producing more frequently updated reports greatly increase the costs to
NRSRO?
     Should a newly-registered NRSRO be exempt from having to
generate the consolidated report and make the generic statement until
the end of its first fiscal year as a registered NRSRO?
     Would including revenue earned by persons directly or
indirectly controlling, controlled by, or under common control with,
the NRSRO (i.e., affiliates) provide a more enhanced disclosure of the
potential conflicts of undue influence, since the organization as a
whole may care about its revenues regardless of which part of the
business earned the revenues? If so, would it be useful for investors
and other users of credit ratings to have this information? Would it be
complicated and costly to do the calculations under proposed Rule 17g-7
if affiliates are included?
     If the term affiliate was added to the proposed
disclosures, should the Commission define the term affiliate? For
example, if an NRSRO controlled less than 51% of an entity, should the
entity be considered an affiliate? If a natural person controlled or
owned an NRSRO, should other entities the individual owns or controls
be considered affiliates of the NRSRO for purposes of the proposed
rule?
     How is the data to be reported currently entered and
stored at NRSROs, and would such data be able to be published on an
automated or nearly automated basis after a one-time systems
adjustment?
     Would it be useful for investors or other users of credit
ratings to require an NRSRO to calculate and disclose revenue
information with respect to other persons in addition to persons that
paid the NRSRO for services? For example, should the Commission
attribute underwriter-paid ratings to the issuer? In addition, should
the consolidated report provide for double counting of revenues earned
by the NRSRO if the Commission attributes payment to both the
underwriter and issuer so that users of a credit rating could more
easily evaluate whether a large percentage of the NRSRO's revenues are
attributable to particular issuers or underwriters or a concentrated
group of clients?
     Would it be useful to require another disclosure item in
the proposed consolidated report to show the issuer or underwriter who
did not pay for the service but was a party to a deal? If so, should
there be a particular order of disclosing this item to highlight the
frequency of this person's involvement in deals that are rated by a
particular NRSRO? For example, should there be a separate disclosure
item to reveal the percentage of net revenue earned by the NRSRO in
which the party who did not pay for the service was involved in the
deal?

Additionally, the Commission is soliciting comment from investors,
market participants, and others as to whether it would be appropriate
to require that specific information be reported when a credit rating
action is made publicly available (i.e., more than a generic statement
of where relevant information can be located). Specifically, the
Commission solicits comment on the following:
     Should an NRSRO be required to include the information
proposed to be included in the consolidated report about a person that
paid for the issuance or maintenance of a credit rating along with the
publication of the credit rating? If such a requirement were in place,
would it be more beneficial to users of NRSROs of credit ratings than
the requirements of proposed Rule 17g-7 discussed above? Would such a
requirement have higher costs than proposed Rule 17g-7?
     Should an NRSRO be required to disclose the principal
procedures and methodologies used in determining the credit rating?
Should this disclosure include information about key assumptions used
and the qualitative and quantitative models, if any, employed in
determining the credit rating? Should the level of disclosure be
sufficient so that ``outside parties can understand how a rating was
arrived at'' by the NRSRO? What would be the benefits and costs
associated with such a requirement?
     If an NRSRO should disclose information about the key
assumptions used, should an NRSRO also be required to disclose the
degree to which the NRSRO has analyzed how sensitive a rating is to
changes in these assumptions? What would be the benefits and costs
associated with such a requirement?
     Should an NRSRO be required to disclose if a rating action
is being taken as a result of a change to a procedure or methodology,
including a change to an applicable qualitative or quantitative model?
What would be the benefits and costs associated with such a
requirement?
     Should an NRSRO be required to disclose that a rating
action is being

taken as a result of an error identified in a procedure or methodology
used to generate the credit rating? What would be the benefits and
costs associated with such a requirement?
     Should an NRSRO be required to disclose information on the
limitations of the credit rating, including information on the
reliability, accuracy, and quality of the data relied on in determining
the rating? What would be the benefits and costs associated with such a
requirement?
     Would a statement on the extent to which key data inputs
for the credit rating were reliable or limited, including any limits on
the adequacy of historical data and limits on the availability and
completeness of other relevant information be beneficial? What would be
the benefits and costs associated with such a requirement?
     Should an NRSRO be required to disclose a description of
relevant data about the obligor, issuer, security, or money market
instrument being rated that was used and relied on for the purpose of
determining the credit rating? What would be the benefits and costs
associated with such a requirement?
     Should an NRSRO be required to disclose whether material
nonpublic information was used in determining the credit rating? Should
an NRSRO be required to disclose, in general terms, the type of
confidential information used and the impact this information had on
its rating action? What would be the benefits and costs associated with
such a requirement?
     Is the timeframe for disclosure (the NRSRO's most recent
fiscal year end) the best timeframe to evaluate whether a conflict
exists and the potential extent of the conflict? For example, should
the information disclosed be based on the results over a 3-, 5-, or 10-
year period in order to better capture longer term trends?

V. Technical Amendments to Form NRSRO Instructions

    The Commission also is proposing to make certain technical
amendments to the Instructions to Form NRSRO. The Commission is
proposing to amend the title to Exhibit 6 to read ``Information
concerning conflicts of interest or potential conflicts of interest
relating to the issuance of credit ratings by the credit rating
agency,'' rather than the current ``Identification of conflicts of
interest relating to the issuance of credit ratings.'' The Commission
is proposing this change to the title of Exhibit 6 to Form NRSRO to
better reflect the additional disclosures proposed to be required, as
described in Section III above. In addition, in the General
Instructions \98\ to the Form NRSRO Instructions, the Commission is
proposing to add ``Division of Trading and Markets'' and ``Mail Stop
7010'' to the mailing address for Form NRSRO. This is designed to
facilitate receipt of Form NRSRO by the Division of Trading and
Markets.
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    \98\ See Paragraph A.8. ``Address'' in the General Instructions
to the Form NRSRO Instructions.
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    Further, in the ``Instructions for Annual Certifications,'' the
Commission is prosing to clarify that the annual financial reports that
an NRSRO must furnish to the Commission pursuant to Section 15E(k) of
the Exchange Act and Exchange Act Rules 17g-3(a)(1) through (a)(6), as
applicable, should not be furnished as part of the annual certification
on Form NRSRO. The Commission also is proposing additional amendments
to the instructions to state that pursuant to paragraph (b) of Rule
17g-3, the NRSRO must attach to each financial report the certification
required by Rule 17g-3.\99\
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    \99\ See 17 CFR 240.17g-3(b).
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    There has been some confusion among some NRSROs on the requirement
to provide a certification for each financial report. The annual
certification is a statutory requirement set forth in Section 15E(b)(2)
of the Exchange Act.\100\ The Commission adopted Rule 17g-1(f) to
require that an NRSRO furnish the Commission with its annual
certification on Form NRSRO.\101\ The annual financial reports that an
NRSRO must furnish to the Commission pursuant to Section 15E(k) of the
Exchange Act and Exchange Act Rules 17g-3(a)(1) through (a)(6), are
separate and distinct requirements from the Form NRSRO requirements.
Consequently, the Rule 17g-3 reports should be furnished separately
from the Form NRSRO that is used to make the annual certification.
Therefore, the Commission is proposing this amendment to clarify the
distinct requirements with respect to Form NRSRO and Rule 17g-3(a)(1)
through (a)(6).
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    \100\ 15 U.S.C. 78o-7(b)(2).
    \101\ 17 CFR 240.17g-1(f).
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    The Commission also is proposing to correct certain typographical
errors in the Form NRSRO. The Commission is proposing to change the
phrase ``withdrawal of registration'' to ``withdrawal from
registration'' in the first sentence in the ``Instructions for Specific
Line Items, Item 5.'' to the Form NRSRO Instructions.\102\ In addition,
in the instructions to Exhibit 8 to Form NRSRO, the Commission is
proposing to delete the phrase ``(See definition below)''. In the
instructions to Exhibit 10 to Form NRSRO, the Commission is proposing
to change the word ``person'' to ``user of credit rating services'' in
the first sentence. Finally, the Commission is proposing to change the
paragraph heading for the section titled ``Explanation of Terms'' from
``F.'' to ``I.'' The corrected heading will read: ``I. EXPLANATION OF
TERMS''.
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    \102\ See Paragraph H in the ``Instructions for Specific Line
Items, Item 5.'' to the Form NRSRO Instructions.
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    The Commission generally requests comment on all aspects of these
proposed amendments to Form NRSRO.

VI. Differentiating Structured Finance Credit Ratings

    The Commission has adopted requirements that are designed to allow
investors and other users of credit ratings to better understand the
differences between structured finance products and their credit
ratings and other types of debt instruments and their credit ratings.
For example, the rules adopted in the February 2009 Adopting Release
and in today's Companion Release include requirements for specific
disclosures about the methodologies and procedures for determining
credit ratings for structured finance products and the public
disclosure of credit rating performance statistics and histories by
class of credit rating. For instance, the February 2009 Adopting
Release amended Exhibit 1 to Form NRSRO to require disclosure of
performance statistics for each class of credit rating for which the
NRSRO is registered with the Commission.\103\ Moreover, the Commission
amended the Exhibit to require that the performance statistics for the
class of credit ratings specified in Section 3(a)(62)(B)(iv) of the
Rating Agency Act \104\ include credit ratings of any security or money
market instrument issued by an asset pool or as part of any asset-
backed or mortgage-backed securities transaction.\105\ This was
designed to capture ratings actions for credit ratings of structured
finance products that do not meet the narrower statutory definition of
``issuers of asset-backed securities (as that term is defined is
section 1101(c) of part 229 of title 17, Code of Federal
Regulations).'' \106\ The amendment requires that an NRSRO registered
in this class of credit ratings must generate and disclose performance
statistics for this class, which includes all structured

finance products. As a result, these statistics can be compared with
performance statistics for other classes of credit ratings for which
the NRSRO is registered, such as corporate issuers.
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    \103\ See February 2009 Adopting Release, 74 FR at 6457-6459.
    \104\ 15 U.S.C. 78c(a)(62)(B)(iv).
    \105\ See February 2009 Adopting Release, 74 FR at 6457-6459.
    \106\ Id.
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    Similarly, the Commission adopted amendments to paragraph (d) of
Rule 17g-2, which require that an NRSRO make publicly available, on a
six-month delayed basis ratings action information for a random sample
of 10% of ratings documented pursuant to paragraph (a)(8) for each
class of credit rating for which the NRSRO is registered and has issued
500 or more ratings paid for by the obligor being rated or by the
issuer, underwriter, or sponsor of the security being rated (``issuer-
paid credit ratings'').\107\ This requirement will allow investors and
market participants to compare the rating action histories for an
NRSRO's issuer-paid structured finance ratings with the histories of
other classes of credit ratings where the NRSRO has 500 or more
outstanding issuer-paid credit ratings. In the Companion Release being
issued today, the Commission is adopting an amendment to Rule 17g-2 to
require the disclosure of all outstanding credit ratings initially
determined on or after June 26, 2007.\108\ This will further enhance
the ability of investors and other users of credit ratings to track the
relative performance of structured finance credit ratings as compared
with performance of other classes of credit ratings.
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    \107\ See February 2009 Adopting Release, 74 FR at 6460-6463.
    \108\ See Companion Release.
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    In the February 2009 Adopting Release, the Commission also adopted
amendments to Exhibit 2 to Form NRSRO requiring specific disclosures
with respect to the procedures and methodologies for determining credit
ratings for structured finance products.\109\ The amendments require,
among other things, that an NRSRO disclose: (1) Whether and, if so, how
information about verification performed on assets underlying or
referenced by a security or money market instrument issued by an asset
pool or as part of any asset-backed or mortgage-backed securities
transaction is relied on in determining credit ratings; and (2) whether
and, if so, how assessments of the quality of originators of assets
underlying or referenced by a security or money market instrument
issued by an asset pool or as part of any asset-backed or mortgage-
backed securities transaction play a part in the determination of
credit ratings.
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    \109\ See February 2009 Adopting Release, 74 FR at 6459-6460.
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    All these measures will assist investors and other users of credit
ratings in understanding the different characteristics and risks of
structured finance products and the credit ratings for those products.
The Commission, however, also continues to explore further ways to
increase investor understanding of the differences between structured
finance products and other types of debt instruments and the respective
credit ratings for those products.
    In the sections below, the Commission solicits comments on the
following: (1) How the goal of the proposed Rule 17g-7 set forth in the
June 2008 Proposing Release could be promoted through other measures
designed to enhance investor understanding of the differences between
the risk characteristics of structured finance products and other
classes of debt instruments and the differences between the risk
characteristics of credit ratings for structured finance products and
credit ratings for other classes of credit ratings; and (2) what
measures could be taken to facilitate the ability of NRSROs to
determine unsolicited credit ratings for existing debt instruments
issued by structured finance products. The goal of either initiative
would be to provide the marketplace and investors with information that
would allow them to differentiate structured finance credit ratings
from credit ratings for other types of debt instruments.

A. The Use of Different Symbols for Structured Finance Products

    In the June 2008 Proposing Release, the Commission proposed a new
rule--Rule 17g-7--that would have required an NRSRO to issue a report
with respect to a structured finance credit rating or, alternatively,
to use a distinct symbology to identify structured finance credit
ratings.\110\ Specifically, paragraph (a) of the Rule 17g-7 proposed in
2008 would have required an NRSRO to publish a report accompanying
every credit rating it published for a security or money market
instrument issued by an asset pool or as part of any asset-backed or
mortgage-backed securities transaction. The NRSRO would have been
required to describe in the report the rating methodology used to
determine the credit rating and how it differed from a rating for any
other type of obligor or debt security, as well as how the risks
associated with a security or money market instrument issued by an
asset pool or as part of any asset-backed or mortgage-backed securities
transaction are different from the risks of other types of rated
obligors and debt securities. Paragraph (b), however, would have
permitted an NRSRO to comply with the rule by distinguishing its rating